The devil is in the details guys!

May 12, 2012, 5:54 PM

A Texas friend of mine emailed me his opinion.... [2]
Posted: May 12, 2012 11:50 AM
Reply

Since it seems that there are tons of internet / message board
rumors going on about realignment, I figured that I would start a thread
where we could all post everything together instead of having a lot of
threads about the same topic. There are huge threads on
FSU/Clemson/Texas sites across all the competitors (Rivals/Scout/247),
to go along with everyone and their brother that has a blog with those
associated schools.

I hope everyone joins in bringing info to this, as this should keep us
busy during the offseason. It feels really good to be on the other side
of the fence this year, as compared to last year. Since I'm starting
this I guess I should be the first one to put some info into it. I got
this from a Baylor fan on one of the other sites, there is a ton of info
(if all true) but I think we all know that everything needs to be taken
with a grain of salt. Anyways enjoy/discuss:

There are a lot of moving pieces to conference realignment, and even the
most knowledgeable posters don't know all of them. I've been lucky
enough to have had a number of clients that are directly or indirectly
involved with conference realignment on the side of Texas, Oklahoma,
ESPN, and others, share a little insight. I'm by no means an expert, but
I have a pretty strong understanding of some of the dynamics that you
won't see in print.

First, at this point, everything is a guessing game as to whether the
ACC is or isn't raidable. It's going to come down to their final TV
payout.

Tier 3 Programming & Payouts

Where the ACC is severely limited is that their ESPN contract is for
Tier 1, 2, and 3 programming, which leaves no sports programming for
teams like FSU, Clemson, and VA Tech to sell to regional and national
carriers. Shared Tier 3 payouts isn't a bad thing if you're getting a
strong payout on Tier 1 & 2. But, when you're a team like FSU or
Clemson, which has a strong following, your "value" is being used to
subsidize teams with lesser value. So, your take home is much lower than
if you controlled your own Tier 3 rights.

Unfortunately when it comes to Tier 3 payouts, most don't understand
exactly what Tier 3 refers to, how the contracts differ from school to
school (and conference to conference), or the various levels even w/in
Tier 3 contracts. The numbers most like to throw around aren't even Tier
3 payouts. Tier 3 refers to ONLY those sporting events which the
conference's network partners have opted not to televise in any
capacity. Yet, most of the numbers tossed about included everything BUT
actual Tier 3. Most of the ISP, IMG, Learfield Sports, etc contract
numbers tossed around are nothing more than payouts for coaches shows,
radio broadcasts, stadium advertising rights, website operation rights,
and various other marketing & advertising related enterprises.

First things first, think of ISP, IMG (ISP's parent corp.), and
Learfield, etc as pimps. They don't actually provide a service. Rather,
they connect universities to various services, and act as the go-between
in exchange for a fee (generally a percentage of the take home). Let's
use ISP and Florida as an example. ISP negotiated and handled the 10
year/$82M Sun Sports contract for Florida. They also negotiated all of
Florida's radio contracts. They sell the advertising in their stadium,
produce their game day programs, establish endorsements for the coaches,
manage the Gator's website, and advertising for it, etc. So, Florida
gets $8.2M/yr from a hybrid-Tier 3 package from Sun Sports + another
$2M+/- from ISP for advertising and management related services, for a
total annual payout in the $10M range. But, not all of that is Tier 3,
only a small piece.

One of the other issues is most don't understand that the true Tier 3
figures teams have gotten in the past are going the way of the dinosaur.
Texas reset the bar on true Tier 3 payouts (not to be confused w/
contracts that include "other" services). Most quote Texas as receiving
$15M/yr for Tier 3. And, that's true. But, what made Texas' deal such a
landmark is that is ON TOP of their IMG contract, which pays an
additional $9.4M/yr for radio, stadium advertising, game day programs,
website rights, etc. Texas is actually getting $24.4M/yr for their
all-in package, not $15M. Now, compare that to Florida's $10M and
Florida State's $6.6M. The reason this is important to note is b/c the
numbers discussed for Florida (which are most often mentioned in these
discussions) are from 4 years ago. It's a whole new world from a
financial perspective, and when their contract expires in a couple of
years, they'll resign for $15M - $20M for their all-in package (my
opinion).

FSU currently gets $6.6M/yr from their ISP package, which includes
coaches shows, stadium advertising, radio, etc. The issue with the ACC's
ESPN deal isn't that it costs a team like FSU the measly $3M-ish
difference between what they get and what Florida gets from true Tier 3
production currently, but that it costs FSU a much larger sum that is
now available on the market. The SEC doesn't allow standalone networks
like the LHN. That's what makes the Big XII such a strong entity from
the standpoint of true Tier 3 earnings. Oklahoma, for instance, is about
to sign the 2nd largest true Tier 3 deal here shortly. A school like FSU
should have no problem getting an additional $5M - $8M in today's market
on top of their radio, coaches shows, advertising, etc package they're
getting from ISP (potentially more).......especially if they can put out
a really strong season before signing. And, in the right conference,
that amount could increase even more.

Also, the SEC's TV deal allows for "up to" 1 football game a year for
Tier 3 broadcast, but it doesn't guarantee it. Last year, CBS televised
15 SEC games, and the ESPN network televised the other 75 games. So, no
SEC football games made it to Tier 3 distribution. Thus, the Florida
deal is not only undervalued from a time/inflation standpoint, but also
from an inventory standpoint. There is a big difference between network
contracts that leave NO football inventory and the Big XII's which
guarantees at least 1 per team, and allows you to purchase your OOC home
games for Tier 3 distribution (the same as how Versus purchases Big XII
games from ESPN/FSN for Tier 3 broadcast). Plus, the Big XII's contracts
allow for more basketball games for Tier 3 as well. Texas, for instance,
had 12 Tier 3 basketball games last year. The Big XII's current
contracts are only for 59 of the 75 Big XII home football games, which
leaves more inventory for sale by every team.

Tier 3 is a much bigger monster than everyone realizes, b/c everyone's
going off of the meager contracts that were signed 2, 3, 4, 5 years ago.
And, in the past, ISP, IMG, Learfield, etc largely reached out to
regional players for broadcast arrangements. Now, there is an
established market (and vision) for larger scale Tier 3
deals.........deals that will make the old PPV ways of the past look
downright laughable.

Big XII's Tier 1 & 2 Payouts

It's been leaked that the Big XII is at the cusp of signing an extension
with ABC/ESPN that will pay the conference just shy of $20M/yr for Tier
1 & 2 programming, beginning in 2016. However, that number was leaked
with the purpose of driving the price higher, the same as what the Big
XII did to drive their FSN contract 50% higher when it was signed in
April 2011. With Fox now working to share a split contract with ABC, the
number is expected to push closer to $21M for Tier 1 & 2, possibly a
smidgeon higher.

Beyond the Big XII's payout for Tier 1 & 2, I can tell you they were
wise enough to build into the preliminary ABC contract an escalator that
will increase their payout a fixed amount if at least 2 teams are added
to produce a championship game. The exact "per team" increase is
dependent upon the total teams added, but will be in the $1.5 - $2.5M
range.

In addition, there are out clauses in both contracts that will open them
up for renegotiation at market value should the Big XII expand further.
Much of what's said about the Big XII's contracts as far as certain
teams being on the "list", etc are message board fiction. But, there is,
from what I've been told, an understanding as to potential ranges with
certain teams added to the Big XII. So, while it isn't in print, it is
understood.

ACC's Payout

Much has been made about the article that estimated the ACC's payout
would be in the $15M/yr range once it's reworked. I think most at ESPN
are expecting that number to be higher, but not nearly high enough to
stave off any expansion threats from neighboring conferences. Many have
asked why ESPN wouldn't simply pay them enough to prevent poaching. The
answer is, it'll likely cost them more to prevent it than otherwise.
Think about it. In order for the ACC's 2 y/o ESPN contract to go from
$13M/yr to the $25M/yr they'd need to prevent being raided, ESPN would
have to increase their annual payout $168,000,000. On the flip side, if
the best teams are picked off the ACC and added to the SEC or Big XII,
it will not cost them $168M in escalations. And, they still get a huge
inventory to broadcast, while cutting out a lot of the weaker teams that
don't draw on TV: ala BC, Syracuse, Wake, Duke (football), Maryland,
etc.

Also, ESPN's contract w/ the ACC is for a fixed amount of inventory. For
their contract to increase at a high rate, ESPN has to buy more
inventory than they're getting. And, as it stands, the ACC's available
inventory to sell is only increasing 16.7%. Plus, if football drives the
boat (and it does), then to presume that 2 lackluster football teams + 2
years of inflation could drive up a contract $100M+ (which is what would
be needed to hit $20M/team), then you would have to kiss the thought of
Notre Dame joining a conference goodbye. Because.......if you can get a
$100M bump from 2 middling teams & 2 years of inflation, then what is
Notre Dame football worth on the open market? And yes, I realize ESPN is
getting football, basketball, and baseball, as well as Olympic sports
from the ACC, while NBC is getting just football from Notre Dame. But, I
think it's safe to say football at the very least, accounts for 50% of
the ACC's contract (if not 75%). So, even if football is only half of
the $100M bump, you're essentially saying Pitt football is worth
$25M/yr. So, what's Notre Dame football worth then?

That's why in many respects, the numbers through around for pay
increases are absurd, b/c people are saying Pitt & Syracuse are each
worth $50M/yr each out of one side of their mouth, but NBC may not want
to pay Notre Dame $15M out of the other. SMH.

An Add'l Big XII Angle

Another wrinkle the Big XII has that isn't set in stone, but has been
discussed is the possibility of opting for an 8-team conference slate in
a 12-team or 14-team conference. Why would this be beneficial in their
pursuit of any high-value ACC teams? B/c when the ACC switched from an
8-game to a 9-game conference schedule, it cost each school 1 home game
every other year. At FSU or Clemson, based on attendance, a home game is
worth around $8M in terms of gate receipts, concessions, etc. Switching
from a 9-game slate to an 8-game slate would afford each school an
additional $8M+/- every other year in additional revenue ON TOP of the
additional revenue they'd pick up in TV payout.

Plus, it would mean that those teams wouldn't have to cancel their
higher caliber OOC games, like Clemson had to do with Georgia, and is at
risk of having to do with Oklahoma State & Ole Miss in coming seasons.

Now, in fairness, the ACC's schedule hasn't definitively cost each team
1 home game every other year. But, in order to continue having the 7-8
home games a year most teams prefer, it means high quality OOC games
like Clemson/Georgia have to be axed in favor of scheduling a "buy" game
against a cup cake. Just looking at the numbers, it would appear there
is about a $3M swing in revenue in switching from a traditional home &
home series against a quality OOC opponent to paying a lesser team to
come to your house to get whipped.

Adding it All Up

Obviously, we're talking hypothetical's here, but there is a very real
possibility that by switching to the Big XII, a team like FSU, VA Tech,
or Clemson would be able to make:

$20M - $25M/yr on Tier 1 & 2
$3M - $10M/yr on true Tier 3 (not including radio, etc)
$1.5M - $2.5M on a CCG
$3M - $8M every other year from an additional home game

When the dust settles on the Big XII's contracts, most of the teams will
be making $25M - $35M annually on true Tier 1 ? 3 payouts. And, that
doesn't include escalations from a CCG or the bump in payout that would
result from procuring 2 or 3 high-level teams through expansion.

For the ACC to keep up, they're going to have to double their current
contract, b/c otherwise, it will be very easy to offer FSU, VA Tech, or
Clemson a $10M+ increase in annual TV take home.

I've heard many say that's not that big a deal. But in reality, it's
actually a bigger deal than most realize. FSU & Clemson specifically,
compete annually against Florida, Georgia, Alabama, Auburn, Tennessee,
and South Carolina for recruits. Each of those teams (aside from USC)
has a significant edge in attendance at games. Why is that important?
Because TV money aside, if you assume every fan in attendance is worth
$100 to the athletic department's coffers, the difference in per home
game take home between an FSU and an Alabama, is about $2.4M. Add that
up over the course of a season and you're talking about an $18M
shortfall in revenue vs a regional competitor. Now, add an additional
$10M - $15M in TV revenue shortfall, and you can see that it won't be
hard to fall behind significantly.

Sadly, IMO, college athletics is looking more and more like professional
baseball, where money drives success. But, if that doesn't change, a
program like FSU, Clemson, and VA Tech cannot operate and compete at an
annual $30M revenue shortfall to their competitors. At some point,
something has to give, b/c coaching salaries are going to push beyond
many teams' ability to compete and pay......as sad as that may be. So,
while geography or travel may not make sense, their hand may be forced
if (and that's a big if) the ACC contract does not come back at a
competitive rate. And IMO, that will have to be around $25M.

And, before anyone says travel will eat up a lot of the extra $.....the
Big XII has an option to offer an adjusted payout based on annual travel
miles. So, there are opportunities to make FSU, Clemson and others
wholes in that respect."