Ask the Monkey – Why Expansion

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Why Expansion?

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monkeylogoDear Monkey,

Honestly, what is up?   One minute the Big 12 isn’t expanding and they are professing undying love for each other, now they are looking at expanding with anything that moves.   What the hell is their deal?

Dave in Des Moines

Dear Dave,

I touched on this back during the Big 12 Meetings, but there is more at play here than the Big 12 appearing like it doesn’t know what it wants.   It does.  It wants to stay at ten and play its own championship game and keep all its goodies for itself.

That’s what the Big 12 wants, which is why that’s what was happening in the spring.  And then the Big Ten ruined everything.

The Big 12 doesn’t really care about having the most media revenue, because the largest teams who compete for national titles have the resources they need to do just that.  And those who are not quite there yet are running programs in the black and gaining steam at an incredible pace.  They do care about unfair valuations, however.   And currently the Big 12 is in the midst of one.

Back in 2010 when everything was crazy, the Big 12 extended its Tier One deal to maintain stability and not lose money after the loss of two schools.  This extension was not a revaluation, so it remains one of the oldest contracts still around in college sports.  Since that time the rest of the Power Five have all revaluated their deals in new contracts or extensions.  The Big 12 was able to do this with their Tier Two deal with ESPN when they extended it from 2017 to 2024, but the Tier One deal is lagging behind.

This likely wouldn’t mean a thing if it were a Tier Three deal, which are worth pocket change, but it is a Tier One deal which involves the most valued games in the inventory.  The funny thing is, most people spend all their time talking about conference networks, but this is the part of the equation that is holding the Big 12 back more than anything else.

When news spread of the Big 12’s network partners coming to an agreement with the Big Ten for a gigantic number within the Big 12’s current contract that shook things up.  The Big Ten sold two deals, both with 25 football games in it.   The best 25 games sold for $250 million a year on average over six years, while the next 25 sold for $190 million.  That’s just for the inventory not put on the Big Ten network and it is over twice as much as the Big 12 is paid for its inventory.  However, that is also an over simplification of the media contracts.  In order to figure out how much of an issue it really is, we need to break down what inventory everyone has sold and what they make for it.

For this to be relatively apples to apples we need to do a few things to adjust the numbers.  First, I’m removing any tier three inventory since it is unrelated to this issue and is sold differently by everyone.   The second thing that needs to happen is that we cannot use the reported averages of the Power Five media deals, except for the Big Ten’s, if we compare them over the next six years.   All of the deals run for different lengths of time, so we need to calculate what each year should pay out for the entire contract, then only average what is paid in the next six years.  Contracts that go out longer will be less and those that end more quickly will look larger, due to where the next six years are within the contract.  Additionally, to factor in the yearly growth I’m using a 4% annual contract increase to counter inflation adjustments.

Throwing all of this into one chart may shed some light on the major issues:

atm why expHere are all of the Power Five conferences, the amount of teams in each conference currently, and the total amount of football games that are on the contract in any given year.   As you can see, the Big 12 used to have the most overall, but the Big Ten will surpass that, while the ACC has the least amount of games on Tier One and Two channels.

The difference here is what the percent of total games comes out to be.   This shows you how much of the total inventory is currently utilized.  The Big 12 is giving up 65% of its inventory currently on those 42 games, while the Big Ten will only be giving up 55% of its games, and it has a lot more games to work with due to having 14 teams.   The SEC and ACC have 40% or less on Tier One and Two channels.  However the SEC has 45 games on the SEC Network, while the ACC has games over the Southeast on Raycom or ESPN3.  Those are the games that will eventually turn into the ACC Network.

The Big Ten is able to make this deal and still have 45% of its inventory lined up on the Big Ten Network.   The Big 12 is missing that flexibility, so mark that down as a potential issue or a potential strength, depending on how the revenue works out.

The next column, “Avg. 6yr Media” estimates what each conference will be paid for their Tier One and Tier Two on average for the six years of the Big Ten’s new deal.  The Big 12 and the ACC come in dead last, but that shouldn’t be too surprising in the Big 12’s case, as they have four less members, but what really matters is how much each conference is being paid per game.  This is the issue that the Big 12 is facing, not a conference network.

As you can see, with this new deal, the Big Ten is making nearly $3.5 million more per football game.   Some of this is just total volume.   Since the Big 12 is selling deeper into its inventory it is including lower priced games that other conferences dump on their network.  Because of that the lower priced games will bring down the average somewhat, but even compared to the Pac 12 and the SEC, the Big 12 is making about $2 million less per game and that’s a big deal.

The Big 12 is still making a respectable amount on its per team revenue, but is falling behind both the SEC and Big Ten due to not making as much on each game and not having a conference network to dump the low valued games.  The benefit to the Big 12’s approach is more people will see those low end games than will tune in on a conference network, but the downside is they are valued individually, as opposed to just being filler on a channel that makes money by carriage.

This is what is driving the “Don’t Expand, No Wait, Expand!” confusion in the Big 12.  They have to get more money per game and there are only two ways of doing that:

  1. Expand and trigger the clause in the contract that pays the conference pro rata for every team added. This could add nearly $100 million a year by the time it goes into play and will only increase until the contract ends.  If you pay the new teams 30% of that amount and bring them up as the contract grows, that means you can give the other $7M per team to the current schools.  In effect this would make it seem like the Big 12 was being paid $7.14 million per game sold, even if it came off the backs of new members.
  2. Threaten to expand as a way to force the networks to increase the per game payout. If anyone thought the Big 12’s network partners wanted them to expand with non-Power Five schools and be paid the same, they don’t understand business or math or maybe both.  Triggering this pro rata clause would make the networks pay 667% more for properties they already own.   That makes no sense.   It would cost less for the network partners to just pay the Big 12 $70 million more for their current inventory than to have them expand.   This would also raise the per game sold to $7.14 million, put them in the ball park with the rest of the conferences, and not have to deal with excess inventory they don’t want. (Note: All of the AAC’s games are not televised, the Big 12’s move would change that for those four teams)

So, this is why everything shifted 180 degrees in the span of about 24 hours this week and sent the sports world into a tizzy during the off season.  To be clear, the Big 12 does not want to expand, it wants to increase its Tier One value to match the other Power Five.  If it could get its per game numbers up to around $7 million it wouldn’t exceed the Big Ten or SEC, but it would be closer.   Add a new championship game and continue to split the post season with less members, which means higher per team payouts, and the Big 12 is financially on par with the Big Ten and SEC.

This is what I believe will still ultimately happen and likely before the start of this football season.   How much ESPN and Fox are willing to come up to remove that pro rata clause will dictate if the negotiation worked or not.

If it doesn’t, look for four AAC schools to be added in major markets the Big 12 currently does not reside since the time to lure Power Five schools isn’t available like it would be if expansion waited until the end of this contract.  This will not only allow the Big 12 to boost their short term per game deficiencies, but also allow them to build a conference network with more states than they currently reside to dump the excess inventory.  However, and this is key, expansion is Plan B.  More on that plan, however, in future articles.

 

If you have any questions or would like some numbers discussed, contact The Number Monkey via “Ask the Monkey” in our forum, on Twitter @TheNumberMonkey or by email [email protected].

 

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