Both yesterday's lead story from Sprints and an emailer Garie Ray got me thinking about the economics of conference realignment.
The lead story from Sprints was about the marginal value of a team added to a conference. The SEC paid out $220 million this year from TV payouts ($144.1 million), shared bowl payouts ($31.3 million), NCAA championships ($24.3 million), the SEC Championship Game ($15.3 million), and the men's basketball tournament ($5 million). That comes out to an average of $18.3 million per school.
For a new team in 2012 to pay for itself, it would need to add about $19.3 million in value. That figure being higher is to account for a five percent increase over this year, which is what this year's payout was over last year's. The SEC title game and men's tournament payouts are unlikely to be affected. If the new team is a perennial bowl team, then that adds a small amount of money to the bowl pool. If it's a perennial March Madness team, that adds a small amount to the NCAA championships pool.
Most of the new value would need to come from television rights, which is why everyone focuses so much on new markets when talking about realignment. Due to the sheer number of people in Texas (the Houston metro area alone has more people than the whole state of Alabama), Texas A&M can probably pay for itself. A&M can probably more than pay for itself actually, which would allow the conference to take a less lucrative school for No. 14.
Whether the SEC can get a TV contract at or above Pac-12 levels probably depends on whether it merely renegotiates its deal or tears it up and throws open the bidding. This is a point I've harped on before, but a huge reason why the Pac-12 got $3 billion is because it had more competition for its TV rights between ESPN, Fox, and newcomer Comcast/NBC. If Comcast could get into the bidding for SEC rights, that would drive the final price upwards. Whether or not the conference wants to start its own network like what the Big Ten and Pac-12 now have would be a large consideration.
That's what it looks like from the vantage point of a conference looking for schools. What about a school looking for a conference?
That's the situation that Texas is staring at right now. It wants to hold onto the Longhorn Network because it believes it can be a significant money maker down the line. Once ESPN's original investment gets paid off, Texas will receive 70% of the network's net income. Should it really take off, that's not an inconsiderable amount of money.
It won't starting printing Benjamins just yet, so Texas needs to get a hefty conference payout to afford its massive athletic budget in the meantime. Thanks to the Big 12's unequal revenue structure, Texas is set to get at least $20 million per year from the conference's TV rights. That figure would get larger if the conference somehow keeps the Oklahoma schools and survives long enough to get a new contract for its first tier TV rights in 2016. The Longhorns are going to be looking for a big, big payout from a new conference should the Big 12 crumble.
The Pac-12's new payout is $21 million per year per school for the first and second tier TV rights. That is on par with what Texas is supposed to get from the Big 12's first and second tier rights. The Pac-12 would get the job done, but Larry Scott won't allow Texas to keep the Longhorn Network for its third tier rights. Currently all Pac-12 third tier rights must be assigned to the conference for the Pac-12 Networks, and that's not going to change.
The other option being floated for Texas is the ACC. It, like the SEC and Big 12, currently allow the individual schools to do whatever they want with their third tier rights. In other words, a Texas in the ACC could keep the Longhorn Network.
The catch is that the ACC is well down the conference pecking order. The ACC signed its new deal after the SEC's big contracts raised the bar for TV deals, and it only gets $155 million per year. That comes out to about $13 million per year for each school.
Now, Texas obviously would bring a large amount of new value to the ACC. The question is how much? Let's say the ACC somehow ends up at 16 schools by also taking Texas Tech, who might be tied to Texas, and two other schools (you pick who you think is most valuable). Supposedly the ACC in its talks with Texas has floated a pod system to make scheduling easier, and all proposed pod systems that I've seen have been in connection with 16-team conferences.
In order to secure Texas its $20 million per year, the four new schools would have to add $165 million in value. That is $10 million more than the 12 current members are getting now! The four new schools wouldn't really need to bring in that much, as the inflation in the rights market likely has made the value for the current 12 schools higher than what they signed for a couple years ago. However the new guys would have to pull in something in that neighborhood, which is an extremely tall task.
You can probably understand now why Texas is so desperate to keep the Big 12 together. Keeping the conference together is likely the only way it can still get $20+ million a year while waiting for the Longhorn Network to hit the point where the university gets the 70% of net income. There also is something to be said for keeping history and rivalries together in the region, but we all know that isn't what is driving this bus.
Oklahoma has pondered its own network, but it hasn't actually got one up and running yet. That's why the Sooners are keen to jump to the Pac-12; they get the same money as now (they also get an increased cut like Texas does) while finding more stability. They don't have a network to try to preserve, so nothing is holding them back other than tradition and rivalries.
Aside from the quest for money and stability, none of the big realignment players have completely matching incentives. Texas A&M wants to get away from Texas at all costs. Texas wants to keep its LHN baby. Oklahoma just wants finality. As long as their incentives aren't aligned with each other, the Big 12 is in serious danger of falling apart.