Much of the off-field conversation during this year’s college football season focused on the importance of media, distribution of content, and athletic department revenues. Regarding distribution, the Pac-12 Conference received a fair amount of criticism for its inability to strike carriage deals for its Pac-12 Network. We polled several industry leaders to get their view of the current state of the Pac-12. What follows are their responses to the same questions in a virtual roundtable.
What is your view on the Pac-12’s strategy to own their media company instead of partnering with another media company as peer networks have done?
Tom Stultz – President, JMI Sports, LLC: You have to go back to when the Pac-12 did its deals with ESPN & Fox. At the time that agreement was heralded as the largest conference deal in college sports, averaging $250 million per year, and it more than quadrupled what the Pac-12 had previously received from the networks. In addition, the Pac-12 kept the rights to all non-ESPN/Fox televised events so the conference could start its own linear network plus offer content via digital and mobile platforms. Launching its own network provided the Pac-12 the opportunity to own 100% of the network which gave the conference control of its future. At the time the Pac-12 Network was formed only the Big Ten had a network. Most thought it was a real coup for the Pac-12 that they were able to create their own network and retain 100% of the equity in it.
As it has played out, the Pac-12 Network has not met its expectations from a distribution or a revenue standpoint. In addition, since the Pac-12 launched its own network, the Big Ten Network has really caught on, ESPN has launched the SEC Network and is launching the ACC Network. To launch these conference networks the SEC and ACC had to extend their rights far into the future, unlike the Pac-12, as part of those deals.
There has also been a good bit of re-alignment of universities who are members of the Big Ten, the SEC and the ACC. For example, the additions of Rutgers and Maryland to the Big Ten had a major impact on Big Ten Network revenues because it allowed the Big Ten Network to charge “in-market” rates instead of “out-of-market” distribution rates for the New York, Washington DC and Baltimore MD metro areas. The same thing happened with the SEC’s addition of Texas A&M and Missouri. I don’t think anyone would argue otherwise. However, the true value of the conference’s strategy won’t be fully known until the next round of rights negotiations. The Pac-12 will have more options available to it than any other conference because of the rights it has retained. Whether or not that pays off will be clear once those negotiations occur.
AJ Maestas – Founder & CEO, Navigate Research: Although it may have made distribution more difficult, it perfectly fits their mission and charter. No one can predict the future, but no sports property I know of regrets their decision to take equity in their own network. I think it was very smart at the time and long-term will prove to be the right decision, even if they are feeling some short term pain. If the Pac-12 had followed the Big Ten/SEC model, it would have committed itself to a disadvantaged position in perpetuity.
The Pac-12 has inherent disadvantages – geography and time zones, fan passion levels, major markets that are traditionally pro towns – that are greater than any of the other Power 5 conferences. The Pac-12 could have taken the safe and easy route (partnering with FOX or ESPN) and avoided the near-term challenges it now faces around distribution, negative PR, and building a successful network. But the conference’s leadership took a bold and calculated gamble that owning its network outright would pay off in the long term, meaning over the next few decades, not just a few years.
Where do you see sports media rights valuations heading in the future, and how does that view impact your view on the best media strategy?
Stultz – The media rights landscape is an interesting one because it has become so complicated. On the one hand, I am concerned about the erosion of paid subscribers to cable and satellite services. With more people cutting the cord, the subscription funding model is becoming more challenging. As a result, the decline in subscription revenues may ultimately drive rights fees down and thus, put a real strain on the cost structures of major university athletics programs. At the same time, we are all watching carefully to see if there some of the tech companies or other new media companies who will begin to play in this space. If they do, rights fees could go through the roof. And one has to believe the networks have a vested interest in preserving the highly profitable status quo for as long as possible.
In addition, the changing viewing and media consumption habits of emerging fan bases makes the situation even more uncertain. As a result, if I base my answer on history, I would predict that valuations will continue to increase. However, I do believe the best media strategy is the one that provides each institution and conference with the most flexibility while still doing everything possible to maximize the value of the rights today and into the foreseeable future.
Hillary Mandel – Head of Media North America, Senior Vice President, IMG Media: In a shifting media landscape, demand for premium content is strong and steady. As evidenced by deals done over the last 12 months, both traditional and newer digital platforms are willing to invest at significant increases. These include MLB’s renewal on FOX, MLB on Facebook and DAZN, Thursday night NFL package on FOX and Amazon and more. Interest in college content remains strong and ticks important digital boxes in terms of volume and demographics.
Maestas – I am confident the market price of quality content will grow, and grow at a rate well above inflation. If this proves to be true I would want to be a producer and/or owner of quality sports media rights, and I would want to retain as much flexibility as possible on how and when I sell those rights.
How has the emergence of OTT technology, and media consolidation such as AT&T/Time Warner merger, in the past few years changed your view of the value of sports media rights?
Stultz – The full impact is yet to be felt or known. Clearly the media consumption habits have changed dramatically over the past few years and I expect that to continue. Mergers like AT&T/Time Warner create new opportunities to partner with very large companies who will be hungry for exclusive content. Sports content is still appointment television. Sports highlights and features are in huge demand. And most of the new media and technology companies considered most likely to enter the sports live event and feature content space are extremely well-financed. All this provides new opportunities that hopefully will more than offset the erosion of the traditional paid subscription cable model.
As it relates to the Pac-12, the spinoff of the RSNs by Disney could provide interesting opportunities for the Pac-12 Network. The buyer may want to expand and thus seek to acquire or partner with the Pac-12. Or, an unsuccessful bidder may become enamored by the business and seek to use the Pac-12 Network as a platform for entering the sports network business. Time will tell.
Mandel – OTT technology and desire for media companies to have a direct relationship with the consumers is driving up demand for live sports content so prospects for rights holders remains strong. Interestingly the consolidation of ATT/Time Warner, and even Disney and FOX, has not had an adverse effect or constricted the marketplace.
Big media companies seem intent on diversifying and investing in multiple platforms to capture the viewer whose consumption pattern is changing. Turner’s BR Live, ESPN +, NBC’s Gold pass, CBS All Access and the launch of Perform’s DaZN are evidence that this is a ripe, competitive marketplace. As premium properties like the NHL, PGA Tour, NFL etc. come to market over the next few years – we will see if the FAANG will follow suit.
Maestas – On one hand, consolidation is bad for sports media rights because it means less bidders and bidders who have more buying and distribution power. Media consolidation should be offset at least partially by the new OTT players, and as consumers have more and more options to leave the traditional bundle, the value of content comes down to two questions: 1) Will people pay for it in some form or fashion? 2) Will people still watch it live? The first question is the most important, but if you can answer yes to both – and live sports is one of the few content types where that is true – you’re in good shape no matter how the landscape unfolds.
Come 2024 when the Pac-12 media rights go back to market, what are your thoughts on the position they will be in?
Stultz – The Pac-12 should be positioned very nicely to capitalize on a changing market that should be much clearer by then. My guess is the Pac-12 will begin negotiations earlier than 2024 and will do so with a better understanding of what the other conference deals look like and with far more content and flexibility to offer a bidder or multitude of bidders than any other conference. In addition to the rights currently granted to ESPN and Fox, the Pac-12 will have all the content it has kept for the Pac-12 Network, and even individual university multimedia rights, to include in the overall negotiations to help the conference maximize value for its member institutions.
In addition, the Pac-12 will have the option of rolling the Pac-12 Network into a larger network deal, continue to operate it “as is,” partner with another network, tech company, investment fund, etc., and/or sell to a media company and distribute the equity value to its universities. The Pac-12 will have the deepest, broadest, most comprehensive package of content, sponsorship and media rights ever assembled to offer potential suitors. Unless there is a major disruption in college athletics, the Pac-12 should come out of these negotiations in a much stronger position.
Mandel – The fact that Pac-12 controls its rights will give them flexibility and optionality when they come to market. Owning their own network has allowed them to collect crucial data on their fan base and audience which will be important in those future digital conversations. Their batting position in the lineup of deals that come up over the next years will allow them to take advantage of both traditional and new platforms that will be hunting for premium content to build their networks.
Maestas – They will be in a very strong position given the flexibility and ownership they control. Their deals are all lined up to expire at the same time as well which allows for a lot of room for creativity across their entire portfolio of inventory. They only fear I might have is mostly out of their control – the marketplace. Most major rights deals (major pro sports leagues and other collegiate conferences) expire before the Pac-12 window.
What is your assessment of the drivers behind the current difference in revenues among the Power 5 conferences as it relates to fan bases and other factors?
Stultz – Timing is the first factor. Remember, when the Pac-12 did its last TV deal it was the most lucrative in the country. Since then, the Big Ten, SEC, ACC and Big XII have added schools and negotiated new contracts. Thus, one could expect the Pac-12 to get a big increase in its next round of negotiations but for now, they are lagging behind because of the timing of its current agreement.
Other factors include fan passion, share of voice versus competition which is much greater in smaller markets without professional sports teams, time zone, and competitive success. For example, a university can be a large national collegiate brand but not own its own local market if the professional teams overshadow the collegiate in media exposure and value locally. Market dominance by a brand or university is a key factor in creating value for a network. If the fans cannot live without the content they will demand distribution and create great value for the network by pressuring distributors. If the fans feel they have other options then the network will have less impact because the fans may opt for pro sports coverage, etc.
Mandel – Inherently the Pac-12 has some challenges – time zone for games which doesn’t allow them to take advantage of ratings on the east coast, competitive sports landscape in cities in which the schools are based which impact school revenue on tickets, sponsorship etc. In terms of media deal revenue, other conferences decided to extend current deals and increase annual license fees while Pac-12 has opted to go shorter, maintain flexibility and look to optimize revenue and market share in this new emerging media landscape.
Maestas – The Pac-12 has sacrificed some revenue to serve their charter and greater mission with the Pac-12 networks, but I don’t think it’s as much as people think. The reality is that the Pac-12 doesn’t have the affinity, ratings, attendance and other key variables to justify Big Ten or SEC money. Don’t get me wrong there are extremely attractive things about the Pac-12 footprint. They are also serving a different mission or at least a different set of priorities in achieving that mission. In short this is the natural economic order and to expect the Pac-12 to earn SEC or Big Ten revenue is naive.
What do you make of the expense and revenue comparisons between conferences and how to do value the networks?
Stultz – I don’t have enough information on conference expenses to really comment here. Obviously there are cost differences based on the size and scope of each conference, its geographic location, size and passion of its fan base, competitive success, ownership versus partnership on network, etc. The Pac-12 is the only conference that owns and controls its own network and thus, is the only conference that reports network revenues and expenses. As a result, it is difficult to make an apples to apples comparison of expenses with other major conferences. From the published reports, schools in the other conferences are currently receiving more dollars annually than schools in the Pac-12 from their conference TV deals. The annual financial filings do not capture the value of the significant equity the Pac-12 believes it has developed through its investment in its own network. That is why the next round of TV negotiations are so important to the future of the Pac-12.
Mandel – I haven’t seen these reports but conceptually it would be difficult to compare Pac-12 to other networks if Pac-12 financials include all revenues and all expenses of their wholly owned network which is not the case for any other conferences.
Maestas – To produce a fair comparison you would have to add up the salaries and expenses of the other conference networks and add that to the spending of the conference offices. It might not look so bad if an apples to apples comparison was conducted. I would add that the Pac-12 is located in expensive major markets. LA is the obvious alternative for media and tech talent, a central location and a Pac-12 home market, but it’s not much cheaper than San Francisco.
As far as valuing the networks, there are some simple benchmarks one could use to assess fair market value of the Pac-12 networks and that math indicates that the equity they have retained is worth far more than any lost revenue over the past six years. Going forward is difficult to predict, but, as previously mentioned, I can’t think of a case study where a sports property regretted retaining equity.
The Pac-12 has received a fair amount of criticism across a number of fronts of late. Your views on the fairness of these critiques?
Stultz – If you let the facts speak for themselves, then you have to admit that Pac-12 universities receive less per school from the conference TV deals than universities in the other Power Five conferences. And, the Pac-12 is the only conference that is operating its own network. The current economics on the Pac-12 Network are not meeting expectations. These facts alone give room for armchair quarterbacking and second guessing which is appropriate given the public nature of what conferences do. At the same time, any evaluation should look at the situation and measure success not only by comparing the results to competitors but within the context of what is possible for its individual markets and circumstances.
In 2011, the Pac-12 signed the largest TV deal in the country. However, that deal has not held up over time. The Pac-12 launched its own network. Did the Pac-12 have any other options at that time? Did ESPN offer to launch a Pac-12 Network under terms similar to what it offered the SEC and now the ACC? Was Fox willing to help launch a Pac-12 Network like they did with the Big Ten? If so, were the media companies wanting too much in return? Would the Pac-12 members be happy if every other conference had its own network except the Pac-12? And, what has the conference done to bridge the gap in network TV dollars versus the other conferences? For example, a few years ago, Larry Scott hired our company, JMI Sports, to create and offer a new university-by-university multimedia rights option. The motivation was to provide the universities with 100% of the profits from their multimedia and sponsorship rights so they could increase school revenues from these rights.
While the option did not receive wide enough support to merit implementation, many Pac-12 universities used the local option to negotiate larger rights fees from other rights holders, such as Learfield, IMG College and Fox College Sports. And, the schools were able to get these increases, often with signing bonuses, well in advance of the normal contract renewal cycle. While the MMR initiative did not make up the full difference in conference revenues, it did help close the gap and provides additional revenues to the schools to help while the conference waits for the 2024 TV negotiations to be completed.
Mandel – I think they are aligning themselves for success when they come to market because premium college content will be in demand. Take a step back and you look at where the Pac-12 was before the current deal you have to them credit for a very significant uplift in revenues but the business is cyclical and the benchmarking changes at any given point in the cycle. It’s too early to pass judgement as to whether their strategy is going to pay off.
Maestas – For the most part the critiques in our areas of expertise are not fair. Turn back the clock to the previous era and ask these same questions and I think you will see a conference that has made great progress. The Pac-12 made a full leap forward with the last TV deal, conference rebrand and creation and launch of a wholly owned network. I’ve read a number of critiques about revenue holding back performance, but athletic department revenue is not a driver of on field performance as much as one would think and the revenue is a result of the audience and fan affinity. The Pac-12 is even doing just fine in an objective measure of attracting and retaining coaching talent and athletes. West coast fan affinity is just not the same as in the Midwest or southeast for college football. The Pacific time zone and Pac-12 footprint vs. the rest of the U.S. population is a curse, a blessing and a reality they will have to learn to live with. No one is perfect, but innovative organizations make mistakes while pushing the envelope and making progress.
For the factors they control, I see progress and smart investments from athletic departments all the way through the Pac-12 office. Most larger companies in major markets (San Francisco, New York and Chicago) have had to either relocate offices from the suburbs to the city or put satellite offices in the city in order to attract and retain talent. The best and the brightest coming out of elite schools don’t want to live and work in Walnut Creek; they want to live and work in the city. That’s just one example, but I think it generally speaks to the recent criticism.