One major concept in business is that of first-mover advantage. It's fairly easy to understand: a company that comes to the market with a particular product or service first gets a head start on sales, becomes the first brand known for that product, builds up barriers to entry, and so on. It doesn't always work out for the first to market (there were several different brands of mp3 players before the iPod), but a lot of times it does.
When it comes to the latest round of TV and content deals, I would argue that the Pac-12 had a last-mover advantage. In hindsight now, it's easy to see that the ways the business and media environment changed in the past few years favored whoever among the major conferences was going last. To Larry Scott's credit, he appears to be taking full advantage with his plans for the new Pac-12 Networks (yes, plural) that follow the old ground that regional Fox Sports Net channels have trod for more than a decade.
Here are the main reasons why.
1. In the DVR and Netflix Instant era, live sports are the most valuable place for advertisers.
DVRs have been around for a while, and media companies have tried for years to come up with ways to keep people from skipping ads on them. Nonetheless people still do skip ads, and that makes advertisers unhappy. It also makes TV networks unhappy, because ad prices fall when fewer people actually see the commercials. The rising popularity of Netflix Instant streaming (which became unlimited in January 2008) exacerbates the problem. Instead of channel surfing through live TV for old shows and movies, you can now watch old shows and movies without ads streamed from the Internet.
So what's an advertiser to do? Flock to live sports, that's what. It's about the only programming on TV that no one generally watches later. Once you know the outcome of a game, it completely changes the viewing experience for the worse. Advertisers are paying more and more to get in on this live sports racket, which then allows networks to pay larger rights fees. That kind of change favors those who go last, not first.
2. Media consolidation created more competition for TV rights.
I went over this in detail before, but here's the Cliff's Notes version. The Comcast-NBC merger completed in January of this year. Not surprisingly given the first point above, Comcast decided to ramp up NBC Sports. The first big deal it was able to complete was to keep the Olympics, but that was just the beginning.
Comcast joined in the bidding war for the Pac-12 TV rights. It was the leader, in fact, until ESPN and Fox Sports uncharacteristically decided to team up make a joint bid to prevent Comcast from getting the rights to a BCS conference. The last thing they want is for a cable operator to get a bigger foothold in the live sports game, so the competition for the deal was always going to be high anyway. Once the two rivals banded together, the Pac-12 was able to come away with a stunning deal.
That stunning deal was not possible without the added element of Comcast getting in on the bidding war. That favors the Pac-12 because no other conference had Comcast as a potential bidder when they made their rights deals.
3. Each deal drives up the price of the next.
The first conference to do a major media deal recently was the Big Ten. A huge part of that deal was creating the Big Ten Network. When the SEC's deal came up, the main competition was between ESPN and Raycom for the regional syndication rights. The SEC was considering creating its own network like the Big Ten did, but ESPN put up an unprecedented amount of money (for the time) to dissuade Mike Slive from going in that direction.
Shortly thereafter, Fox decided to get more involved. That caused the ACC's annual payout to end up $35 million higher than it would have been otherwise according to one report. Dan Beebe cited the competition for the ACC contract as one reason he believed (correctly, as it turned out) that he could get more money than anyone had thought possible for the Big 12's second tier rights back in summer of 2010. The Pac-12 then had not just ESPN and Fox, but also Comcast and Turner battling for its rights. It's a snowball rolling downhill, and that favors those who go later. The Big East won't get Pac-12 money when its rights come up for negotiation in 2013, but it's sure going to get more than it would have a year or two ago.
4. The Big Ten Network's success gave the Pac-12 more leverage.
Though the Mountain West's channel came first, the Big Ten Network was the first major conference network to come into being. It had some issues getting off the ground, most notably in getting cable and satellite providers to carry the network in the first place. When the SEC announced its deal with ESPN on August 25, 2008, the Big Ten was only then getting its carriage ducks in a row. There was a lot of doubt at the time of how successful it would be, and it was designed in the first place as a joint venture between the conference and Fox to hedge the risk. To this day the Big Ten only owns 51% of the BTN.
We all know today that the BTN has exceeded expectations of what it could do for the Big Ten financially. The Pac-12 sure noticed that fact and used it to its advantage. It was able to line up four heavy hitters in cable (Comcast, Bright House, Cox, and Time Warner) to carry its networks before the they were formally announced yesterday. In addition, the BTN proved that the risk for a major conference network is much lower than previously thought. Therefore, the Scott decided to run the Pac-12 Networks entirely in-house without enlisting the help of Fox as the Big Ten did or CBS and NBC as the MWC did. That means Scott's league owns all of the network instead of just half (like with the Big Ten) or 30% (like with the MWC).
So what's next for the SEC?
The SEC's contract with ESPN allows for periodic evaluations that could lead to "adjustments", to use Mike Slive's word. Both Slive and Florida AD Jeremy Foley contend that the final 12 years of the SEC-ESPN deal matches up quite closely with the first 12 years of the Pac-12's contract. Slive says the league's contracts were designed to maximize exposure and provide security. CBS and ESPN provide the SEC with the largest national carriage for games of any conference, and the length and value of the contract do provide security.
Slive does leave the door open for making a real SEC Network that is its own channel rather than a brand for the regional syndication package. That certainly could happen with ESPN now in the private label network game via the Longhorn Network. The only school in the SEC that probably could consider its own network is Florida, as the state's population is nearly 19,000,000 and growing. However, that still puts the state over six million people behind the also-growing state of Texas. A conference-wide network is far more likely, though killing off the 12 schools' individual regional rights contracts gracefully is a task that would have to come first.
Someday, all television will be streamed from the Internet a la carte without what we now think of as channels. Between now and then, digital streaming rights will get more and more important and lucrative. It's no surprise that digital rights were mentioned throughout the Pac-12's rights announcement. The SEC gets most of its games streamed via ESPN3, which is a good thing, but the SEC Digital Network is very underwhelming. It's an area the conference has to work on.
With as quickly as the media environment is changing, it's impossible to say for sure what will happen when the next phase of negotiations happen a decade from now. What helps the SEC is that only the Big 12's second tier rights expire after the SEC's current deals with CBS and ESPN.
Next time around, the SEC will have the last-mover advantage. It will be up to Mike Slive's successor to make the most of it.