Tuesday, December 11, 2012

The Big Business of College Sports and Especially Big Time Football, College Costs, TV Money and the Advertisers

The profit economics of big time college football are generally misunderstood.

The fact is that less than 20% of major universities make money on their programs. And even for that elite and small group that pays its own way, it's not much.

Financially, college football specifically and college sports generally are a losing proposition. Enter the taxpayer.

The taxpayers' contributions to the finances and operating budgets of public colleges and universities are huge. And they're in danger of being withdrawn in a major way as "government" money is becoming scarce due to our nation's financial situation. Meanwhile, the costs to individual students of attending college are increasing substantially.

What to do? Find a way to get more money from some entity other than government and students. At least that's the plan.

That brings us to the connection between big time college football and TV coverage.

College football and TV coverage have long joined forces, but they're getting even closer now as broadcast and cable outlets are desperately looking for ways to make money and keep their business models profitable. Appealing to advertisers with respect to more TV football coverage is thought to be the answer. It's a big risk, but it's one deemed worth taking. After all, there aren't any other good alternatives.

So if this all sounds confusing, it's because it is. Thus, let's get into some specifics and endeavor to understand what's going on between conference skipping, athletic budgets, college finances, TV and  advertisers. It's a rapidly developing story for sure, but it's a very interesting one as well.

College Football's Big-Money, Big-Risk Business Model lays out the story:

Texas A&M quarterback Johnny Manziel, above playing Alabama, won the Heisman Trophy on Saturday.
"The story of college sports in 2012 is the tale of an arranged marriage between two increasingly anxious kingdoms.

 On one side are the nation's largest universities, which face sharp declines in public funding. On the other, the cable and broadcast television networks, which are struggling to hold on to viewers and advertisers.

Like dynastic rulers desperate to protect their holdings, the two sides have engineered an alliance.

The schools have offered up their most marketable asset, college football. The networks have agreed to marry the sport to the most important segment of their audience: the millions of viewers across the country who can still be counted on to drop whatever they are doing to watch live sports.

As a dowry, TV has agreed to pump about $25.5 billion in rights fees into college conferences and their member schools over the next 15 years. That includes a recent deal for ESPN to televise major-college football's first playoff—a four-team bracket launching in 2014—that is valued at $5.6 billion over 12 years. The schools, meanwhile, are doing whatever is needed to maximize what they can command from TV: playing more games, jumping to new conferences, abandoning long-standing rivalries, dismantling the old system of postseason bowl games and, last June, approving that first-ever playoff.
Given the ever-rising costs of Division I college athletics, which at their current growth rate will increase some $12 billion over the next 10 years, this alliance represents one of the largest bets in the history of both these businesses: a $25.5 billion wager that college football, a quirky, tradition-bound game that used to be a regional fixation, can continue to draw large national audiences and, in doing so, help both the schools and the networks survive.

At stake for cable networks is their ability to keep subscribers happy and to continue collecting billions in subscriber fees. For colleges, the challenge is to figure out how to keep the money from undermining the integrity of the sport—not to mention their academic mission. . . .

Historically, only a fraction of college athletic departments support themselves. To break even, most rely on student fees and support from the school's general fund. Of the 120 athletic departments in college football's top division in 2011, only 19% reported a profit. The profitable schools generally have one thing in common: big-time football. Ohio State University's football team, for instance, earns more than 70% of the revenue generated by all the school's teams. (In most cases, those profits are spent solely on athletics, including others sports; very few schools divert football money to academics).

In recent years, however, the economic landscape for colleges has changed dramatically. The percentage of per-student funding that comes from state or local sources has fallen from 79.1% in 1980 to 56.7% in 2011, according to the State Higher Education Executive Officers.

As schools scrambled to cover the shortfalls and felt increased pressure to make their athletic departments financially self-sufficient, the network television business was having its own crisis.

Network ratings started to fall as viewers, many armed with DVRs, began recording scripted shows and watching them later, when they could blitz the commercials.

In response, networks homed in on the one form of programming TV viewers still showed up in huge numbers to watch in real time: sports. . . .
Even still, in the last five years the numbers have exploded: The average value of media-rights payments to the top conferences has tripled with the latest round of deals, to $1.25 billion from $326 million.

The money is having a profound impact on colleges. . . . Longtime fans of the Big Ten Conference scratched their heads when Maryland and Rutgers were recently asked to join—largely for their TV markets and not because of the quality of their teams.

As glamorous as richer conferences are, they also represent lifelines for overextended athletic departments. As University of Maryland President Wallace Loh said after the move, "Somebody has to pay the bills.". . .

At present, networks pay the conferences rights fees that they recoup through advertising and by charging cable operators a monthly fee for all subscribers who have the channel on their cable systems, whether they watch sports or not.

But cable bills continue to rise—as they will have to do to accommodate rising rights fees—and the average monthly cable bill in 2012 hit $135, according to SNL Kagan, the media research firm, up from $48 a decade ago.

David Tice, a New Jersey-based media analyst with market-research firm GFK, says that while there are about 100 million U.S. households with pay-television service, the percentage opting not to subscribe to cable is on the rise . . . .

Leaders of both entities see live sports as the levee against that tide. . . .

Another bet colleges and their TV partners have made is that college football, whose calling card is its heritage, will maintain its popularity even as it makes fundamental changes—such as eliminating traditional rivalries and conference groupings. Two century-old rivalries—Kansas-Missouri and Texas-Texas A&M—ended when the latter teams bolted for the Southeastern Conference this year. . . .

If this marriage between TV and college football works, the benefits for top schools could be significant. At Louisiana State University, where football is profitable and conference-rights revenue has surged, officials recently agreed to transfer $7.2 million a year from sports to academic programs hurt by budget cuts.

But for schools in the bottom half of college football's highest division, these payouts could spell doom. Notre Dame athletic director Jack Swarbrick says schools that fail to keep pace could ultimately be dropped to a lower level of competition with little hope for advancement. "The tension grows as the business models diverge," he says."

Summing Up

The big business of college football is profitable for only a relatively few institutions.

As a result, the financial squeeze is on both for college sports and colleges in general. In that respect, it's no different than all other taxpayer supported governmental bodies.

There's a whole lot going on in the business of financing college sports, college football generally, big time college football specifically, college finances, cable and broadcast TV, advertising and even the rising cost to students of attending college.

And lest we forget, We the People as taxpayers are at considerable financial risk and have a very big stake in the outcome of this "game," too.

One big wager on the future viability of big time college football concerns the viewing habits of college football's huge TV audience.

So now that the colleges have built this enormous financial and physical  infrastructure surrounding college football, will the TV audience support it to the point of its becoming profitable? And will the advertisers stick around until the bet pays off?

As in all market situations, the outcome will be all about what the viewing customers decide to do. Will TV pay the way? We'll see.

In sum, there's something very worrisome about all this big money and college sports. And where will it all lead?

I certainly don't know, and I don't believe anybody else does either. 

Thanks. Bob.

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