Expansion Project Vol I
Expansion Project Vol II
When comparing university athletic departments, few demarcation points are as cut and dry as the financial support that they receive. It is also one of the most important. In the past both Air Force and New Mexico have shied away from conversations of moving to the Power Five because they just didn’t have the resources to compete and while others made the jump to boost their revenues
Just boosting revenues isn’t enough, however, because even though Power Five media revenues are about two and a half times that of non-Power Five conferences, those revenues amount to only around 10-30% of total revenues within the entire athletic department budget. A big media deal may help keep you from borrowing more money, but it doesn’t fill seats. Attendance and fan support are the biggest drivers on the health of not only an athletic department, but also a conference.
There are two main factors that define the financial health of an athletic department; revenue and profit after subsidies. Revenue defines the pool of money the athletic department has to spend. Even without having a profit, an athletic department that has $100 million in revenue can spend more than one that has $40 million in revenue. It can fund more facilities, more sports, more scholarships, more upgrades and, perhaps most importantly, it can spend more on recruiting and coaching salaries. That matters a lot, so let’s take a dive into the Power Five’s finances.
The chart above shows us a snap shot of the information provided in USA Today’s 2014 athletic department financial database. (It should be noted it does not include private schools currently, which we’ll address a moment). The columns are Average Revenue within the conference, then the standard deviation between the members, followed by the maximum revenue in a conference and the minimum.
The Power Five conferences show why they stand above everyone else, but even within those five there are divisions. The Big Ten leads the way with an average revenue of $108 million per school. The SEC and Big 12 come in a close second, both averaging more than $100 million in revenue. These three conferences have the bulk of the financial strength in college sports.
The ACC and Pac 12 each average around $15-20 million less than the Big Ten, SEC and Big 12, but what really stands out is the amount of private schools within the ACC that are not reporting. Notre Dame, Syracuse, Miami, Pitt, Wake Forest, and Duke are not adding to the totals. This may increase the ACC’s average around $3-5 million, but probably not enough to push them into the next tier. The largest athletic revenue in the ACC, Florida State, is 17th (up from 24th last year) in total revenue; behind six Big Ten, three Big 12, one Pac 12, and six SEC teams. There isn’t enough revenue in those private schools to make that big of a difference. The Pac 12 is also missing USC and Stanford, which would drive up the average a couple million as well. However, the Pac 12 is getting a gigantic boost this year due to a $125 million donation to Oregon’s athletic department, up around $80 million from every year prior.
The maximums are basically (in order of the chart) Michigan, Alabama, Texas, Oregon, and Florida State (the only change from last year is Michigan replaced Ohio State). These are not the only large teams in these conferences, however, as evident from there being twenty two more teams in the Power Five that are higher than $90 million in athletic department revenue.
The number that is probably most important is the minimum number. All of these numbers have been rising and are prior to any of the new post season money. That means, outside Utah’s very low number, the low point of entry on revenue is probably going to have to be between $60 – $70 million for any school to be able to join a Power Five and compete. Both Louisville and West Virginia both had athletic department revenues in the $70-$80 million range when they moved. Not many non-Power Five schools can flaunt that same revenue.
As discussed when looking at how location factors into revenues, the Power Five have increased their revenues by $1.2 billion over the past five years or a 27.58% increase. However their expenses have increased by 31.69% over that time. This is the major benefit to revenue; spending those resources to increase branding. That is what is needed to win divisions, or conferences or championships. Those facilities and salaries do not come free, so how are the Power Five spending?
As you would imagine, most of what is raised is also spent. The Big Ten leads the way again with a whopping $103 million spent per school. Even the lowest non-private university in the Big Ten is spending $74 million a year. That is about the same amount spent as Clemson, the third highest spending school in the ACC.
This is a big deal. If universities are looking to get into the Power Five, they are not aiming at how much they’ll have to earn, they’re aiming at how much they’ll have to spend to compete. The cost of entry is very high.
However, what will set apart those who are trying to keep up and those who are doing it well, is how much more they make than they spend, e.g. profits. Doing that simple math we get the following:
When looking at profits we finally have our first change in ranking for the conferences.
The Big Ten falls to fourth, while the Big 12 and SEC pass them with average profits of $7 million. (You may think that this is the “Texas Effect”, but in fact all of the Big 12 schools are running in the black, with eight of them having profits in excess of $5 million.) The Pac 12 is an interesting jump, because it relies on Oregon’s $80 million in profit. If you take out the Ducks the Pac 12’s average drops to $1.4M. Still good, but closer to the ACC than the SEC.
Only the Big 12 had no schools in the red, and, of the rest, many of them were deeply in the red. These are schools that average $70+ million a year and they are in the red. That is not financially healthy and it is showing up at the top end of the college sporting world.
To make up this difference we come to the second bit of division within the Power Five; how much subsidies an athletic department has to receive in order to sustain these revenues. To note, subsidies are not a gift or donation or anything like that, it is the university transferring money to their athletic department or the university charging the students a fee to transfer to the athletic department. The best way to think of subsidies is running debt up on your credit card. In order to live like the “Joneses” you need to spend more than you earn and that difference has to be made up somewhere.
Some of these numbers are staggering. Rutgers, for instance, isn’t included in the Big Ten’s numbers yet, since they just moved this season, but to support their $76 million spend, they took $36 million in subsidies. Without the university floating the bills, Rutgers’ athletic department would have only earned $40 million; or about half of their revenue.
In terms of total subsidies the Power Five take a lot less than everyone else in the FBS, but within the Power Five the ACC and Pac 12 take nearly three to four times as much as the Big Ten, Big 12, and SEC. The ACC alone averages $9 million per school in total subsides to their athletic departments.
Ironically, current Big Ten member, Maryland, led the way in the ACC with $18 million in subsidies. That means in the latest round of realignment the Big Ten took in two teams who needed $54 million in subsidies prior to joining. If they were both in the Big Ten for these numbers, the Big Ten would show a $4 million dollar swing into the red when averaging across all fourteen teams.
Media rights, while a great resource, do not even begin to make up this phantom revenue in the Power Five. Many schools are simply unable to live within their means even after these new media deals. The lowest ACC school, Clemson, takes just $4.3 million in subsidies, or 5.85% of their total revenue the rest range from 7%-15%; excluding Maryland’s 24%.
By comparison the Big 12 takes very few subsidies as a conference. Combined they are half as much as Rutgers alone. Oklahoma State takes the most, at $7.5 million, or 6.38% of revenues. Most fall below 5% of revenue over all.
The Pac 12 shows why it is in the second tier of the Power Five conferences financially as six of their schools have more subsidies, as a percent of their revenues, than every Big 12 team; including Arizona (7.92%), Arizona State (13.48%), Utah (17.46%), Washington State (18.57%), Colorado (19.01%) and Oregon State (19.41%). This begs the question of how much universities are willing to fund athletics in an age where costs are increasing extremely quickly. What happens when they reach their breaking point?
A standard measure of financial health then, like your doctor taking your blood pressure, is looking at what an athletic department’s profit or loss is after you remove the subsidies. This will give us a glimpse of how hard the university has to work to sustain completion at the highest levels. In fact this also reflects how strong a university’s culture and brand are as the bulk of revenues come from fan support. If you cannot put butts in seats you’re going to have a hard time paying your bills. As you can see from the chart below, taking out subsidies changes the financial picture of the Power Five significantly.
Even with Oregon’s financial windfall this year, the Pac 12 is barely in the black when you take out subsidies. Without Oregon, the remaining Pac 12 schools were $8 million in the hole once you factor subsidies out of profit. That is very similar to the ACC’s average, highlighting that second tier status again. They are, quite literally, on financial life support. The public schools represented by the ACC wouldn’t have one school break even without subsidies. And this is within the Power Five.
To be fair, this is only a one year snap shot and things do change year over year. This is what all of these numbers look like for the five conferences since 2012:
The Pac 12’s numbers are an anomaly since Oregon’s $80 million in profit skew the year over year numbers considerably. However, it is interesting to note that the Big Ten, Big 12 and SEC have increased both their revenues and expenses over 10% over the past three years. At that rate, each will be averaging between $100 and $120 million in expenses by 2017.
The ACC, however, has only grown 6% in revenue over that time and 9% in expenses. That puts their average in 2017 at $81M in expenses, subsidies are going to need to continue to increase to keep pace. And, even with the Oregon anomaly, the Pac-12 is hemorrhaging money.
Looking at the numbers it becomes obvious that anyone who makes the claim that the Big 12 is going to fail to compete financially with ten teams doesn’t really have a clue what they are talking about. The Big 12 may be below the average revenue of the Big Ten, but they are far closer to the top earners than the bottom of the Power Five.
This brings us to the conversation of expansion. What separates the Power Five from the rest of the conferences is how much they spend on athletics. However, even within the Power Five there are many schools who are paying a steep price to remain competitive. A team moving between Power Five conferences isn’t going to have too much of a positive or negative in revenue, because the bulk comes from fan support. A media deal may stop some initial bleeding, but it isn’t going to revolutionize a Power Five school’s budget. The difference in media deals between the Power Five is so little that doesn’t even make a dent in these large budgets.
However, most of the schools discussed in expansion are not Power Five schools. They are schools outside the major conferences looking for their shot. These schools may get a boost in media deals, but they don’t have the fan support necessary to spend like a Big 12 school. As a benchmark, Iowa State, with the smallest budget in the Big 12, will spend over $70 million next year (it also runs in the black with few subsidies). Let’s take a moment and look at every conference’s average revenue and average revenue after subsidy:
From this chart you can see why the College Football Playoff is dominated by the Power Five and understand why they want autonomy. There are simply no equals to them any longer. It is the Big Ten, Big 12, and SEC in Tier 1. The ACC and Pac 12 in Tier 2. The AAC stands alone in Tier 3 then there are more than 20 conferences below them in Tier’s four and five who average less than $40 million per school.
Then look at Average Revenue after Subsidy. The AAC was averaging $60 million a year (with Louisville, who will be in the ACC’s reporting next year), but has to spend $22 million per school in subsidies to make that much. Without it they would average closer to $42 million in revenue, two thirds of what the Big 12’s lowest school makes after subsidies. Even with an increased media deal any non-Power Five school would still be struggling to compete with the resources of the schools in the Big 12 with the least amount of revenue, let alone go toe to toe with Texas, Oklahoma, Oklahoma State, and Kansas.
To compare teams viable for expansion I’m going to keep it simple; athletic department revenue and athletic department profit after subsidies. Other financial topics, like merchandising and attendance are going to be considered in other areas, so adding them here would be double counting. What needs to be evaluated is the financial strength of a school as needed to compete in all sports at the highest level. What I imagine will be shown is that very few schools fit that description.
If you have any questions or would like some numbers discussed, contact The Number Monkey on Twitter @TheNumberMonkey or via email [email protected]
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