Let's Talk about Larry Scott, the Pac 12 Network and Conference Realignment

If you were teased enough by the header to click through to this article and to read this far, let it be known that my commitment to you is that you will not hear me bitch about the Pac 12 Network.

At least not too much.

What I would really like to write about is the ongoing development of the enterprise that is known as the Pac 12 Conference and its magnanimous leader, Larry Scott.  Will I stumble into the topic of "the network"?  Well, yes, it will be impossible to avoid.  But if you keep reading, I promise that you will venture into a discussion that goes far beyond my incredulity over the fact that the DirecTV situation has not been resolved and one that focuses on the next gambit that will likely be played as the Pac 12 plans for its future.

In the interest of full disclosure, I continue to find it completely incongnizable that there has yet to be a deal struck with DirecTV.  As miffed as I continue to be by Larry Scott's sibylline motives, I will endeavor to carry on - with gusto, I might add - with this important contribution to the public discourse on the subject of college football conference economics.  I'm not obsessed.  I promise.

Let's get down to business here.  There has been much talk in recent days about a second wave of college football conference realignment.  Ryan fed the beast in his Dots piece the other day by posting this tweet from the true "Mouth of the South" Paul Finebaum.

According to @ESPN_Colin "The Big 5 in CFB is ready to be the Big 4... BigXII will evaporate, Oklahoma is SEC bound & the Pac12 wants Texas"

— Paul Finebaum (@finebaum) June 30, 2015

Normally, I'm not one to buy anything that the "F*Baum" is selling.  In this case, however, it is not unreasonable to presume that this particular bit of sports shock jock hysteria may have some legs.  The reason has nothing to do with preserving natural rivalries that may have been shaken by the last round of realignment or with seizing natural academic partnerships.  It also has very little to do with the huge bias that favors Power 5 teams in the new college football playoff system (although that is somewhat meaningful to non-P5 teams who may get invitations).

The driving force behind the next round of realignment, should it occur, is the asymmetry of economics that is being perpetuated in the various bonanzas associated with digital media rights.  Thus, if we are going to discuss "Conference Realignment, the Sequel" we must revisit the situation with conference networks.

And, no, this isn't just about the lack of a deal between the Pac 12 and DirecTV.  I already promised you that.

Most people have heard about the amazing success that the Power 5 media networks are having with their launches.  Back in May, Clay Travis of FoxSports published this little info-graphic on the most valuable sports networks in the US:

After just nine months of existence, the SEC Network is already the 5th most "valuable" media property in the category.  Remarkably, it is more valuable than the properties produced by other professional sports leagues including the NBA, MLB and NHL.

Just to be clear, "value" is in quotations here because the calculation above is simply a multiplication of the subscriber rate times the number of homes reached for each media property.  One could debate if that is a true measure of "value", but it is what we have at the moment and it is a useful starting point for this discussion.

The same list goes on to highlight the rest of the top 15.  Here are some notables:

6.  Golf Network ($332 M)

...

8. Big Ten Network ($290 M)

9. MLB Network ($222 M)

...

14.  NHL Network ($147 M)

15.  Pac 12 Network ($58 M)

Most people realize that the Pac 12 is different than the other major college networks in that they chose to privately develop their enterprise while the Big Ten, SEC and Longhorn Networks all went the route of doing joint ventures with major media partners.  Thus, the percentage of revenue from the list above that each of those conferences get to keep is a much smaller percentage than what the Pac 12 will redistribute to its schools.

Still, the SEC being 10x bigger than the Pac 12 in revenues after just launching is not irrelevant.  The fact that the Big Ten is 4-5x bigger than the Pac 12 is not irrelevant.  These discrepancies are translating into a massive difference in dollars available for reinvestment into the athletic departments of the member schools ... which is was the whole point of starting these ventures to begin with.

Per Jon Wilner of the San Jose Mercury News, the Pac 12 member schools are receiving on average a return of $1M per school from the Pac 12 Networks this year.  We know from South Carolina AD Ray Tanner that the first year return to SEC schools (remember, there are 16 teams in the SEC) will be in the range of $5M or greater per school.  just two seasons ago, the Big Ten, which did their media deal in a joint venture with both Fox and CBS, dispersed nearly $8 M per school.

There is a clear imbalance here.  With expenses related to things like increasing player safety, true cost of attendance, healthcare and player compensation all on the horizon, that imbalance will become a critical issue in the competitiveness of each program.  I do not believe that this is a remotely debatable point.  The fact that the other conferences will be in a better position to address these added expenses is a germane fact.

This is not to say that the Pac 12 is not ultimately better off in going it alone with their network.  It isn't like this is a publicly traded company that has activist shareholders to answer to.  They don't have any obligations to maximize revenues at all costs.  But they do have a responsibility to their members to generate the financial resources that allow the conference to maximize its competitiveness.  It is the sole reason for its existence.

And that is what ultimately brings us back to the issue of conference expansion and realignment.  If the Pac 12 is going to participate in this land grab again - and I think it is inevitable - it will be done with the lens of "value creation" firmly affixed to Larry Scott's spectacles.  I specifically mean "value creation" as it relates to enhancing the value that the Pac 12 Networks creates for its members overall, not just in revenue generation.

Fortunately, creating value with networks is a well understood business model.  Economists have long studied the phenomenon of "Network Externalities".  This principle simply conveys the point that the overall value of a network increases whenever there is a contributing component added to the network.  To put the idea into an example, think about the value of the first fax machine ever installed.  It was basically worthless given that there was no other fax machine out there for that first one to communicate with.  However, once the second fax machine was installed, the value of the first one increased.  Once the third one joined the network, the value of each of the first two increased.  And so on.

Media networks are a little different than fax networks, but the principle of Network Externalities still applies.  For the Pac 12 Network to increase its value, it needs more contributions from more nodes.  The higher quality the contribution, the more value created. This is the primary argument for expansion and, frankly, the only one that matters.  We can all spin our wheels all day about things like the size of the TV market or the academic synergies of prospective new members.  But those things are only minor considerations.  Larry Scott is in a race to increase the value of his network in order to close the gap on the enormous advantage that the SEC and Big Ten have established.  He has precious few options on how to do so.

Larry Scott is in his second act as the Pac 12 must re-establish its place in the college football conference pecking order.

Short of sports other than football and men's basketball suddenly becoming more popular or Larry Scott swallowing the bitter pill of withholding his best assets (USC vs UCLA, Oregon vs Stanford, Pac 12 BBall Tournament, etc) from licensing with the ESPNs and Fox Sports of the world, the only real option he has is conference expansion.

Clearly the Big 12 is a place to look to.  While not exactly in shambles, the challenges that they face are as daunting as those faced by the Pac 12.  Their premiere property, Texas, doesn't seem to understand the idea of Network Externalities and, instead, thinks that the market is more interested in their water polo and shuffleboarding teams than watching football and basketball games between all members of the conference.  With only 10 members, the Big 12 also has a limited amount of content that they can put onto a media network once the Longhorn Network and all of their other media deals are accounted for.  I would fully expect that the Pac 12 and the Big 12 will dance the same dance that they did a few years ago, but this time with a different sense of urgency.

I would also not discount the idea of the Pac 12 looking long and hard at other contributors of quality content like BYU, Boise State, Utah State and Colorado State.  Not only could members like these help to reinvigorate some natural rivalries, but their presence would increase the value of network through their TV markets (less important) and the volume of desirable content that they would contribute (more important).  Academics are not a consideration here.  The only thing that will matter is network value enhancement.

The last big question is whether or not Larry Scott would stick to his previous master plan of building a 16 team "super conference" or if, in fact, the conference could grow bigger.  That's a tough question to answer.  The externality model would suggest bigger is better.  However, there are other costs to consider - some of the "direct" variety and some of the "opportunity" variety.  The bigger the conference, the bigger the headaches that come with managing more ADs and Presidents.  There are also considerations around logistics and infrastructure costs.  All of those have to be accounted for in deciding who to invite and how big to grow.

Still, I think more realignment and expansion is inevitable.  There aren't any other legitimate options on the table for Larry Scott to grow the value of his network.  The situation in the Big 10 along with the presence of several high quality contributors in non Power 5 conferences make this a pretty decent moment in time to be exploring these opportunities.  The proverbial iron is hot and I suspect Larry Scott knows that it is time to strike.  It's no longer an "if", but a "when".