Finance Schminance – The Big 12’s Expansion Revenue

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Finance Schminance

The Big 12’s Expansion Revenue

This has been a rough six months for the Big 12 as they’ve basically been playing a game of damned if you do, damned if you don’t.  If they expand, there will always be second guessing about which candidates to take and if you go to 12, 14, or 16.   If you don’t expand you have a subset of the fandom who will take it to their grave that they passed on a sure thing.  Unless Alabama and Ohio State were moving, this was really a no win situation for the Big 12.  (However you’re more than welcome to look at the Expansion Project put together over the past year or so on each candidate)

I’ve written enough articles about all of that however, including looking at the business side when I mentioned from day one that this wasn’t about expanding, it was about leverage against their media partners.  Now that expansion is pretty much dead (Big 12 dead at least, who knows what tomorrow will bring) there was a question on our boards asking what this decision would do to the Big 12’s revenues.

Considering that over the past three months we’ve heard about pro rata contract clauses, the value that a school could bring to a media deal, the population of markets a team may reside, or even the fervency of their fan base, there has been a lot of anecdotal information floating around to make this even more confusing.  So let’s boil it down to a few key facts and assumptions for the rest of this article:

– With the pro rata clause in the Big 12’s contract, any team the school added would bring in revenue equal to a full share for a current member for the rest of the media contract.  It doesn’t matter if it was Michigan or Memphis, only bringing in one or bringing in six, that clause counted.

– The NCAA allowed teams with less than 12 members to hold a conference championship game and the Big 12 was starting one again, regardless of expansion, in 2017.   This championship game, like the pro rata clause, was already within the Big 12’s media agreement.  It will air on Fox on odd years and ESPN on even years and is worth around $27-28 million a year.

With these two bits of information, we can pretty much forecast what expansion was worth to the Big 12 if we know what the Big 12 is worth today.  Thankfully, we do.
The following chart gives the projected revenues for the Big 12 schools for the next year:

nmfin1There are several factors that make up the revenue the Big 12 provides its schools.   While the media contract is the largest part, it is not the only part.   The four biggest pieces are the media contract, playoff revenues, post season football revenues (e.g. bowl games), and money from the NCAA, which pays out based on the conferences performance in the NCAA Men’s Basketball Tournament.   Unlike the other four Power Five conferences, the Big 12 also has a clause in its media deal which allows schools to retain a certain amount of rights to sell on their own called “member controlled rights”.   You’ll also hear this called “Tier Three” deals.   The media deal provides an option to sell those games to Fox, which many have done, but some have used it to build their own regional channels, like the Longhorn Network.

Due to the Tier Three money, all of the Big 12 schools make different amounts from each other with the same amount of money sold.  As you’d expect, due to their brands, Oklahoma, Texas and Kansas make the most, while Baylor and TCU, with their smaller fan bases, make the least.   Adding it all up, however, and every school will be making more than $30 million this next year and should be closer to $32-$33 million.

As discussed in those earlier articles, the Big 12 opened up the expansion talk to try and gain the money in the pro rata clause.  All of that flows into the conference, who can then split it however they like.  If they made $50 million more for adding two AAC teams, they could pay those AAC teams $10 million each and give every current Big 12 member a $3.75 million raise and call it a day.   The Networks would have to pay a lot more for those two teams, however, and once that pro rata clause was done it isn’t known if those schools would provide any more benefit.   Schools like Texas and Oklahoma provide the lion’s share of the value in the contract and there were no teams of that caliber moving.   Even Missouri joining the SEC was just valued at “revenue neutral”.  Due to this the networks are likely going to concede to a boost to revenues in order to remove that clause from the Big 12’s deal for good.   The question then becomes, how much is that worth?

At most it would be an even payout.  If the conference was pro rating at $25 million per team, the max would be $50 million for 12 teams or $100 million for 14.  Fourteen seems a bit of a stretch so I capped the ceiling at $50 million.  The Big 12 is also not wanting to make enemies of their partners, so it likely won’t be the cap, I’d guess somewhere closer to $35-40 million.   I like to be conservative, so for this exercise I took it down even further to $25 million.  With that, our chart above changes to the one below in 2017 with this pro rata negotiation and the introduction of a championship game:

nmfin2This additional revenue, without adding any other teams, drives each team in the Big 12 up to around $40 million a year and Texas is closer to $50 million a year.  If you wonder why Texas doesn’t show a lot of desire to move conferences, outside being able to play all the Texas teams in all the sports, there’s your answer.  No conference would allow them to monetize their inventory in that way or for that value.   Alabama has to share its value with the SEC.   Texas shares most of its value, but keeps all of it where Alabama doesn’t for the SEC Network.

None of these contracts is static, however, they are based on the length of the deal.  If you hear conference say they are earning an average of $300 million over 20 years, they don’t make $300 million until around the tenth year.   It is really an adjustment clause to keep up with inflation not that they are really more valuable per year.   If we plot these out over the full course of the Big 12’s contracts, you get a pretty good picture on how much these two changes (adding a conference championship game and buying out the pro rata language) affect the Big 12’s revenues over time:

nmfin3Now, as a disclaimer, in order to track revenues for the Big 12 over the years, I had to normalize the Tier Three Revenue.  To do that I took the total amount earned and just divided by ten.   This then isn’t what Baylor nor Texas will earn, but is an average of all the schools.

As you can see from the graph, the Big 12’s revenues have had a major boost since 2011, primarily due to two factors; the new playoff set up and the Sugar Bowl agreement with the SEC.   That jump placed the Big 12 on a new trajectory indicated by the purple line.  If the Big 12 didn’t gain anything from the pro rata expansion clause and only added a championship game, that is represented by the blue line.   The yellow line represents the increase in revenues if both are included.

That’s a pretty sizable increase in revenues for basically doing nothing.  It also puts them on basically the exact same financial path as the SEC and the Big Ten.   The only thing different is that Texas and Oklahoma will make more than those conferences and schools like Baylor and TCU will make less.   I would doubt any of them care that much about it, however.   This isn’t 2009 when one school is making $20 million in media revenues and another is making $9 million.  We’re talking a marginal difference at major sums.

All of this just answers the question of what the Big 12 is projected to earn.  The real question is did the Big 12 leave money on the table?

There are many who likely believe that the big money available to the Big 12 came from the growth of the conference, regardless of teams.  However, the way the Big 12’s revenue streams are set up, only some of them increase with additional teams.  The Big 12 makes the same amount as the ACC does in regards to playoff revenue, but it has four less teams.   The Big 12 makes the same as the SEC on the Sugar Bowl, but, again, has four less teams.   That is the hidden benefit the Big 12 has right now.   Due to sharing more with less the Big 12 has been able to patch the issue of having older, undervalued, media deals than the other Power Five.

Expansion, due to the pro rata clause, provided a boon to the media contract and, prior to the NCAA’s rule, it allowed additional money due to the championship game.   Outside Tier Three revenue, which is institutionally based, every other revenue stream would decrease with expansion.   Thankfully, they decrease in a way that can be easily forecasted.  Here is a graph showing the Big 12’s potential revenue per school based on the decisions it was facing:

nmfin4There are four possible paths for the Big 12’s revenue in this graph; everything staying the same, expanding with two teams, expanding with four teams, and not expanding, but adding a championship game and receiving the pro rata increase described earlier.

What I found most interesting is that the current revenue path of the Big 12 equated almost exactly to expanding by four teams.   At that point the benefit of the media contract offset the amount each team was losing by sharing other revenue streams with more members almost exactly.   Along this line, expanding with two teams provided revenue growth from the Big 12’s current path.  This is likely what started the expansion talk in the first place as there is a benefit to undertaking it.   However, it doesn’t provide the greatest benefit for the Big 12.

With the NCAA adding a rider for the Big 12 to host a championship game with ten teams, a large benefit from expanding disappeared.  And, if the Big 12 can receive a pro rata benefit equal to just one expansion team, the revenue benefit to not expanding is significantly larger than expanding.   In a sense, they receive the revenue from expanding and still do not have to share the rest of the revenue streams with anyone else.

This pro rata bonus that I added to the mix is likely the bottom end of the negotiation, coming out to be around $25 million, which is only a 10% increase to remove that language and future threat of expansion for the networks.  While it is possible the Big 12 could receive no consideration that is highly unlikely.   That language is powerful and until it is out of the contracts the Networks will always be at risk.   Additionally the longer it drags out the more it will end up costing the Networks as these agreements increase yearly.

The point is I went conservative.  The negotiation to remove the language could actually end up higher, which would increase that gap between expanding to 12 and staying pat.  I’m quite confident this has been the Big 12’s plan all along and that is why expansion never had a chance.

It makes a lot of sense why some are upset if they wanted a specific team to join the Big 12, but if we are equating stability with revenue, expansion is a bad move for the conference.  The amount of revenue the Big 12 will receive to not expand is far and away the best option available to them for now and the long term.

 

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].