Expansion: The Dollars and Sense

Some say that money is the root of all evil. Recently, some have surmised NCAA conference realignment to be pure evil. So putting two and two together, inevitably using some algebraic property I learned in school, we can safely suggest money is the root of expansion.

See what I did there?

College expansion is undoubtedly on its way. It's really not if, but when. In the meantime, we must wait patiently as we watch conference commissioners entertain us in a rousing public game of Pinochle. And absolutely: conferences will ante up because of money.

Ever since rumors of expansion heated up in December 2009, Big 12 czar Dan Beebe has watched helplessly as his conference slowly crumbles. Though he pulled a rabbit out of his hat last summer when Fox Sport stepped up with a television deal reportedly worth $90 million a year, which temporarily saved the league from extinction, Beebe's pointed ultimatums and untimely lectures have done little to mend irreparable relationships.

Tuesday, in an interview with the Dallas Morning News, Beebe stoked the fire a little bit more, urging Texas A&M to expedite their decision whether or not to change conference zip codes.

"We can't operate with an institution waiting to decide if it wants to remain in the conference. There has to be a very short time for an institution to commit," he said with seemingly some agitation in his voice.

Therein is the rub. If it were up to Texas A&M, they'd already be in the SEC. But Beebe's public posturing, veiled threats and the constant chatter from in-state rival Texas has caused hesitation by both the SEC and A&M legal representation. No one is concerned these idle warnings will be a road block to expansion, but Beebe's own words have been the reason for due diligence.

As the Big 12 continues on the defensive and the collective sports nation sits on the edge of their seats waiting for a move, other conferences have likely been brushing up in preparation for round two of expansion. Combing through financials, agreements, television ratings and other relevant documents, commissioners have calculators on 24-hour standby.

It was Big Ten Commissioner Jim Delany's outside-the-box thinking that has us in wait-and-see mode.

Back in 2006, Delany took a calculated risk, launching the Big Ten Network. Many skeptics argued at the time that a conference-specific television channel would not survive, much less add to the long-term success and stability of the entire league. Fortunately for Big Ten institutions, Delany has never been one to listen to critics.

Saving the conference capital, the Big Ten turned to News Corp., parent company of Fox, to front the initial $80 million investment. In exchange, the Big Ten offered 49 percent of the newly-created L.L.C in a 25-year partnership.

Since launching in August 2007, the network has grown to 45 million subscribers - 18 million within the league's nine-state footprint and 27.5 million without - and is projected to run over $250 million in operating revenue this fiscal year. According to figures from the fiscal research firm SNL Kagan, the network is bringing in about $45 million in advertising, meaning the rest is coming from subscriber fees.

When a network is placed on cable, it negotiates with carriers for the highest possible price. Cable and satellite operators pay the network a fixed rate for every subscriber they have. Ideally, the network would like the channel to be placed on a basic cable package, meaning every customer would be paying for the channel.

When the Big Ten Network is placed on a package within the current geographical region, the network earns an average of 80 cents per month for each cable subscriber of any tier the network is placed. Outside the region, the current average is roughly 5 cents per month, and in many markets the network is an optional add-on through a sports tier. SNL Kagan figures from last year show the network to average almost 40 cents a month nationally.

It's for this reason the Big Ten set out to expand last year: by growing the conference footprint, it increases the number of homes the network appears, thus raising revenues.

The network turned a profit in 2009, just its third year in existence. The conference is guaranteed rights fees by the network that escalate an estimated 3 percent each year. This year, the conference is expected to receive roughly $80 million for broadcasting live and syndicated programming.

What's important, however, is that once News Corp. receives a full return on investment, they and the conference will begin sharing operating profits. Reportedly, they have already recouped this investment and the Big Ten member institutions will start receiving profits above and beyond the minimum rights fees as soon as this season.

Though Delany continues to be coy in regard to additional expansion, it remains a huge long-term priority in the Park Ridge, Ill. offices. And for that reason, Mike Slive and Larry Scott won't soon sit tight in the SEC and Pac-12 domiciles.

The three men all have very different needs to consider.

For the Big Ten, the math is simple: add a greater share of the current 115.9 million television households that currently exist. The larger number of cable-ready houses the network penetrates, the more money it will receive. The Big Ten's research arm, the Committee on Institutional Cooperation, is a secondary factor as the conference presidents would also like to continue to increase the academic profile and grow research R&D.

Mike Slive, meanwhile, is simply looking for teams that will give him the most bang for the buck. The conference's primary rights-holder, ESPN, now is on in over 100 million homes. Since ESPN has distribution agreements with every major conference, the footprint is less of a factor for the SEC as is adding teams that will cater to ratings. Being a flagship university in the state of Texas, TAMU is a solid first step if it comes to fruition.

For the Pac-12, both ratings and footprint matters. Scott has been busy for the past year readying to launch his own network. Unlike the Big Ten, the Pac-12 Network will fly solo without investors. On one hand, this means keeping all the profits. On the other hand, it means more costly startup and the burden of negotiating with cable operators. Scott will attempt to find a happy medium in future expansion between ratings and growing their channel.

The dynamic of expansion is simple: football is the conversation starter. Over the last 10 years, analyzing direct revenues generated by each school, bowl revenues including the BCS accounted for over $270 million in present dollars (before bowl expenses). Further, according to a 2008 study by the Center for Media Research, over $450 million is paid during the regular season annually by advertisers for college football games. In contrast: the NCAA Tournament paid back $160 million to the men's basketball fund and just shy of $200 million in advertising generated during the regular season. That means football is responsible for almost 86% more revenue over the last 10 years.

On a per-game basis, advertising is earned at an average rate of nearly $700,000 per each of the seasons 650-700 football games. Meanwhile, with roughly 1,300-1,500 of the season's 5,500 basketball games televised, each is worth about $150,000 in advertising.

This is corroborated by the average ratings. According to the Sports Business Daily, of some 200 major games broadcast in 2010 by CBS, ABC, ESPN, ESPN2, NBC and Versus, the average rating was an estimated 1.9. Meanwhile, according to ESPN figures, the average men's basketball game received a 1.1 rating or otherwise 1.1 percent of some 115.9 million households tuning in. The average ESPN2 game, however, was a 0.4 rating or roughly 450,000 households.

What this means is that in the nearly billion dollars of rights fees that will be paid to member conferences going forward, basketball is a huge portion of the pie but not the part it was baked for.

When expansion rolls around again soon, we'll be looking at teams that can get viewers to tune in; exist, ideally, in larger markets; and, unless they can provide an uncanny share from basketball (Duke or North Carolina), teams will certainly need to be at least adequate football programs.

Now that we've discussed the evils, stay tuned for part two. We'll look over the prominent names in expansion talks all over the country, and analyze what the numbers say about the revenues they're bringing to the table. I'll also throw out a crazy expansion idea that is off the wall, but not necessarily unheard of.

Until then, I'll wait with Beebe for an absolution.