SEC Expansion To 14 Goal: Its Own Network

Published Sep. 28, 2011 1:00 a.m. ET

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The SEC has always protected its local multimedia rights packages. That's why comparing television revenue was always comparing apples and oranges. The SEC sold its tier one and tier two television rights to CBS and ESPN, but all the schools retained their tier three -- or local multimedia rights -- packages. That means that every year when you see the announced television revenue comparisons between the SEC and the Big Ten, for instance, what you're seeing is an uneven comparison. Because unlike the Big Ten and the Pac 12 -- which specifically give over all rights to the league -- every SEC school has retained the rights to sell its local multimedia packages.

So has every Big 12 school. Indeed, that's the hang-up with Texas, the Longhorn Network is a third tier rights package paid for by ESPN. While the $15 million a year has gotten a lot of attention, Texas's deal isn't astronomical relative to other SEC schools. For instance, the Florida Gators receive somewhere in the neighborhood of $10 million a year from the Sunshine Network for their local multimedia packages. The issue with the Longhorn Network was what it did -- take the local multimedia rights and make them national. See, no one had really thought that the value existed for games like these prior to Texas's deal with ESPN.

The money for the Longhorn Network was why Texas didn't fit in the Pac 12.

Those local multimedia packages have different values but the Big Ten and the Pac 12 distribute all monies evenly. While the SEC distributes all of its tier one and tier two -- CBS and ESPN -- money evenly, the tier three rights are left up to the individual schools.

Now the tier three football games are not spectacular games in the SEC. Lots of times, in fact, those games are sold on pay-per-view by the individual schools. Often, as anyone who watched UT-Montana realizes -- those games are of awful production quality. The business model doesn't even make sense -- charge a pay-per-view inside the state's borders, but if you live outside the state you can watch for free as part of the ESPN Gameplan model. The SEC has a Rolls-Royce tier one and tier two rights package and a horse and carriage when it comes to tier three rights.

Lost amid the expansion debate has been this question -- why does going to 14 teams make blockbuster financial sense for the SEC? (I've already written that 16 teams is the ultimate destination and explained why that makes sense).

Most have pointed to the renegotiation that will occur in the CBS and ESPN contracts. Indeed, there will be an increased rights fee paid for Texas A&M and the 14th team's addition to the league. And that increase may well be substantial. But that's not the only motivation behind expansion.

I talked with SEC commissioner Mike Slive in detail at the SEC spring meetings in Destin and again at SEC media days. He told me then that he had a couple of revenue producing ideas that he'd formulated. I asked him if he'd be willing to share those plans then and he wasn't.

But I think I know one of them -- Slive is going to pool the local multimedia rights for SEC schools and create an actual SEC Network when he gets the chance to reopen the CBS and ESPN contracts.

Let me talk about why.

1. The individual SEC schools retain the rights to at least 14 football games.

I'm saying 14 because this SEC expansion wave is going to take us to 14 teams and each team retains at least one game. That is, every SEC football game is available on national television except one. (I believe Missouri will still be the 14th team and I'll tell you why later this week. That is, if word hasn't already leaked out by then). Let's return to the Longhorn Network. One of the things I've made fun of about the Longhorn Network is how crappy the programming is.

There are 8,760 hours of programming.

But how many of those hours are going to be must-see? Only football, really. (Men's basketball would be the second most desirable, but ratings for regular season men's basketball games are minimal). This explains why there hasn't been a groundswell of indignation in Texas over the vast majority of cable providers not yet carrying the Longhorn Network. Even Texas fans aren't missing much.

But let's return to the SEC local multimedia package -- there are 14 football games dangling out there.

And if Texas is worth $15 million a year for one -- and potentially two -- football games, what are 14 SEC football games in eleven different states worth? You can make an argument that every school, at minimum, would be worth $12 million a year. (If I was the SEC I'd make the argument that it's actually worth much more than this). But $12 million per school would bring in an additional $168 million a year just off the tier three rights.

2. This is why the Texas and Missouri markets matter and make sense.

There has been lots of media talk about markets and television footprints, but this makes less sense right now for the SEC. Why? Because the games are already nationally distributed on CBS and ESPN. Ratings may well increase now that a team from Texas -- and potentially Missouri -- is in the SEC, but the actual market availability doesn't change. If you wanted to watch the SEC game of the week in St. Louis, you already had CBS. Same with the night game on ESPN in Texas. Now you may watch more if teams from your states are in the conference, but the markets and television footprint argument makes more sense in the cable subscription context. Why? Because when you add a new market you get to increase the amount of subscription fee that you can charge cable operators to carry your network in those states.

The more states you have teams in, the more money you make. As an example, the Big Ten Network makes around .90 cents per subscriber in the eight states where its teams are located. What does it make per subscriber in the other 42 states? Try .05 cents.

Given that most of the SEC states view college sports as the primary sporting focus -- unlike the Big Ten where pro sports still dominate -- the SEC per subscriber carriage fees would be higher.

So expanding into Texas and Missouri makes tens of millions -- if not hundreds of millions in the case of Texas -- of dollars and sense using the network model.

The SEC would be able to charge premium carriage rates in eleven states: Florida, Georgia, South Carolina, Mississippi, Alabama, Arkansas, Louisiana, Tennessee, Kentucky, Missouri, and Texas.

Adding Missouri and Texas -- a combined population of 31 million -- would move the SEC's population footprint in its states from 50 million to 81 million.

3. The SEC has learned from the Big Ten.

Mike Slive and other high-ranking SEC employees told me that the reason the league partnered with CBS and ESPN was because they believed it was less risky than starting their own network. In particular, Slive worried about the battles that might ensue to get cable carriers in the SEC footprint to carry the network. If those cable carriers were particularly difficult, he believed that SEC fans would be furious over not being able to watch their teams play and that fans would blame the SEC for being greedy.

But the Big Ten network has been a tremendous success and its battles, after a fractious start, have been muted.

How much of a success is the Big Ten Network? Each school received $7.9 million in distributions last year. That might not sound like a ton, but it represents a 21% increase over the previous year. Already the Big Ten Network is poised to distribute more money to Big Ten teams than ESPN. How much better could it get?

"Estimates by SNL Kagan suggest the network will continue to be a boon for the Big Ten. By 2015, the BTN is projected to generate $333 million."

That's an insane growth rate.

Put simply, the Big Ten Network is kicking ass. And many of the issues that the SEC worried about materializing, haven't. So the Big Ten, which owns 51% of its network with Fox retaining 49%, has blazed the network trail. Mike Slive has told me that he hopes by the time the SEC's television contract comes up for rebid in 12 years that the SEC's own digital network is a competitor with ESPN, CBS, Fox, Comcast/NBC, and which ever other bidders are out there. But what if the SEC created its own actual network too? Wouldn't that strengthen the network's competitive hand even more?

Keep in mind that the SEC retains the copyright to all the archival footage created of its games. Can you imagine how popular an SEC Network would be in the South? Especially the on-demand function? Want to watch any game featuring your favorite team over the past several decades? Pick up the remote. Want to watch an SEC-centric pregame show that doesn't spend time on other conference games? Pick up the remote.

The sky is truly the limit with the SEC Network. (Right now ESPN uses the name SEC Network, but the league is just syndicating programming. There is no actual SEC Network. Indeed, there have been reports that the SEC doesn't have the right to create its own tier three national network under existing contracts. If true expect for that to be revised in renegotiations).

4. The SEC is expanding the number of conference basketball games it plays.

I just want to toss this in there because men's basketball is the second most valuable property for a network to have. Right now the SEC plays 16 games, but the league will be playing 18, 20, or 22 in the future. That means there are more games that it can get on its own network.

5. There are more bidders for SEC rights now.

In our spring meeting interview Mike Slive remarked that the Pac 12 had a much more robust bidding environment for rights fees than the SEC did. In particular he focused on the three bidders that the Pac 12 enjoyed: Fox, ESPN, and Comcast/NBC.

Don't underestimate Comcast/NBC/Versus as a competitor. Fox and ESPN were so worried about Comcast that they put in a combined bid to ensure that Comcast didn't walk away with the Pac 12 rights. Other conference commissioners took note of the Comcast impact on rights fees.

In fact, if I was at Versus, I'd have Mike Slive on the phone right now trying to get him to put together a package of tier 3 games that I could bid on.

If you're ESPN and you're nervous about your competitors and you're also nervous that the SEC might make the same move as the Big Ten and partner with Fox to create its own network, might you be willing to make a pitch to create a partnership with the SEC on an actual cable network? Especially if, as I've written before, you're terrified that your business model is in trouble because if the leagues all create their own networks they don't need you any longer.

A rights fee increase is important, but I think the SEC is looking much beyond an increase in the CBS and ESPN television deals, this is about the future, not reworking the past.

ESPN, CBS, Fox, and Comcast/NBC would all compete to partner with the SEC on a network. The benefit to doing a deal with ESPN would be the same as for the Longhorn Network. ESPN could move more of its current SEC rights to the SEC's new network. That would drive demand and ratings for the SEC Network even higher.

6. Selling the tier three rights as a group forestalls a Texas problem in the SEC.

Mike Slive cares deeply about the SEC's legacy. One of the reasons the SEC has been so successful is because of the equal revenue distribution model. But that model only exists for tier one and tier two rights. What if down the road a Florida or Alabama decided to create its own tier three national network like Texas has done? What if Florida had an individual deal with ESPN and wanted to show state of Florida high school highlights on its network?

You think that wouldn't piss off the rest of the SEC schools?

Slive has told me that the biggest threat to the SEC's future doesn't come from outside the conference, it comes from inside.

The Longhorn Network provided a scary future scenario for the SEC -- what if every big state team in the SEC did what Texas did with its tier three rights, sold their egalitarian soul for the most money it could?

The unique fabric of the SEC would be threatened.

The SEC can make sure a Texas problem never emerges in the league by selling tier three rights. Yep, in essence the SEC can protect itself by making more money.

7. What I want you to keep in mind as these contracts are reopened is this: the SEC is incentivized to carve out space for its tier three rights.

Most media covers commissioner Mike Slive by remarking upon what he's saying or doing. That's far too late for someone as smart as he is. By the time Slive lets the media in, the narrative arc has already advanced anew. You can't cover Mike Slive or the SEC by thinking about what they've done, you have to think about where Mike Slive is looking next.

My bet is that his focus will not be on how much more money the SEC gets from ESPN and CBS. He already knows that. I think he's already looking ahead to the reopening of the existing contracts -- will the SEC fight to create its own tier three network that could grow to include tier two game as well in 12 years?

It sure as hell will.

Bottom line: The addition of Texas A&M and probably Missouri is all about future contracts, not the currently existing ones.

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If you're interested in FSU, Clemson, Oklahoma, Oklahoma State, Texas Tech, Texas, Georgia Tech, North Carolina, Duke, N.C. State, Maryland, Virginia, Virginia Tech, et al. basically we've talked about how conference realignment impacts all these schools in the below articles. Just scroll through and you'll be entertained and informed. I promise.

Read all of OKTC's conference realignment stories here.

SEC expansion candidates and discussion of why league won't expand in existing markets.

Why ESPN Is Dead Wrong: FSU and Clemson have no shot at the SEC.

How ESPN is Complicating Texas A&M to SEC

North Carolina and Duke, the SEC's expansion homerun

ESPN's contract issues complicate all realignment

The ACC and Big East battle for conference survival.

Is Arkansas in play for the Big 12?

Big 12 Bylaws Are Complicated, Weak

Why a 13 Team SEC Schedule Is a Mess

Missouri in play as SEC's 14th

Why Baylor's claims against the SEC have no merit