The Confidential

Conference De-Alignment–Part I of II

We may be at a point where there is a several-year “cease fire” with respect to conference realignment.  The leading blog on conference realignment, Frank the Tank, certainly thinks that it plausible.  With all conferences other than the SEC signing Grant of Rights agreements, there is solidarity across the major conferences.  The cost of adding schools will simply be too great to justify a return on investment.  One question that must be posed, however, is whether we will see conference “de-alignment,” that is–a conference parting ways with a parasitic school.  It has happened only once in recent years–with the Big East and Temple.  Will it happen again?  With revenue such a central part of the conference alignment reality, the Confidential thinks it is inevitable.  Part I will discuss the conference landscape.  Part II will look at the targets for de-alignment.

Part I: The Conference Landscape

First, we need to revisit what has transpired in the past few years.  We have had numerous schools switching allegiance, ostensibly to secure their financial future.  The commentariat over in Big 10 country will tell you that the Big 10 is looking at per school distributions of $40M in the next several years.  Whether that is accurate is anybody’s guess.  But what IS clear is that nobody was talking TV revenue when considering expansion before Frank the Tank clarified just how important than criteria was.  And, while the Big 10 ended up taking Nebraska, they also took Rutgers and Maryland because of the impact on television dollars.  With Big 10 schools currently making $25M a year, it was plausible that these schools could still increase the per-school distributions.

Second, as the TV revenue increases, the value a new school needs to add in order to justify expansion also increases.  See discussion of Texas and the Grant of Rights.  At some point, further expansion may be blocked simply because there are no longer any schools that can cause an increase.  As an example, if we assume that the Big 10 will get to a point where it is distributing $40M in revenue to each of its 14 schools, that will mean overall revenue of $560M.  In order to justify going to 16 schools and not losing money in the process, the two new schools would have to each contribute $40M per year, right?  If the two new schools contributed $30M per year, that would mean a net TV revenue of $620M, or per school distributions of $38.75M.  That does not make sense.  To be sure, the Big 10 appears to be using phased in distribution of TV revenue to help balance that out.  For a school desperate to get to the Big 10 due to concern about a present conference, like Nebraska or Rutgers, that works out.  But the Big 10 is gambling that all added schools will ultimately at least pay for themselves.  Otherwise, they will drag down the per-school revenue distributions once they are entitled to that equal share.

Of course, the ultimate goal is to add members that will actually increase the per-school distributions using an equal share distribution philosophy.  And here is where the math gets crazy.  To actually cause an increased distribution such that all 16 schools could see a 10% increase–i.e. get to $44M apiece–the two new schools in a $40M/year per school distribution model would actually have to contribute $72M per year.  That would increase the TV revenue to the $704M necessary to get to $44M per 16 schools.  The question that begs is what schools can add $72M per year?  Texas?  Notre Dame?  Florida?

This does not just apply to the Big 10.  Take the Big XII at 10 teams.  With $24M in distributions annually, to get to 12 teams and not lose money requires that each of those teams add at least $24M.  The Big XII currently does not see any schools out there that are available and can do that.  Otherwise, they would make the move, right?  And the Big XII being at 10 teams means that a jump to 12 teams would add a lucrative conference championship game, perhaps more than $1M per team.  So it can take a school that simply can earn at par with the rest of the schools and generate a revenue increase for the rest.

Maybe it is an over-simplification, but it appears that the more success a conference has financially, the harder it will be to justify adding new schools.  The odds of these schools contributing enough goes down.  It is just easier to find value-adding schools when making $25M per school than it is when you are at $40M per school.

Third, as it becomes harder to find schools that add value, the inevitable result will be that conferences begin to look inward to those schools that are not contributing to the current distribution.  Take the Big 10.  Will there ever be a point in the future of the Big 10 where Purdue will be contributing to the Big 10 more than it receives?  If the Big 10 is at a $40M per year payout per school some day, will that be despite Purdue or because of it?  With Indiana already contributing the “Indiana market,” a compelling argument will be made that a school like Purdue is taking more than it receives and always will.  At $40M per year, that subsidy from Ohio State and Michigan will be even greater.  Stated otherwise, if Purdue decided to leave to the Big 10, would the per-school payouts actually increase?  Somewhere between perhaps and probably.

Will there be a point where the only way a lucrative conference can increase its per-school payouts will be to jettison those schools that are taking significantly more than they are receiving?  Given what we have seen in the past few years, one can only suspect that the resentment of revenue-parasitic schools will increase.  Tradition will delay the discussion until the numbers are meaningful and significant, but the discussion is inevitable.  As TV revenue grows, the Confidential thinks that we may see de-alignment in the future–conferences getting rid of schools that underperform financially.