Saturday, November 27, 2010

Pac 10 Faces Both Revenue and Expense Pressure

With his recent decision to suspend Tennessee Head Men’s Basketball Coach Bruce Pearl eight games, Southeastern Commissioner Mike Slive demonstrated once again why he might have the most powerful job in college athletics. We would be remiss though not to include Jim Delaney, Commissioner of the Big 10, as a part of any conversation about power and college athletics; even Big 12 Conference Commissioner Dan Beebe, who has survived a tough fall, would still have a seat at the table of any major decisions in college athletics. Let’s not forget, though, their counterpart to the West, Pac-10 Conference Commissioner Larry Scott, who in just over a year on the job has positioned his conference as a major player in conference realignment, recreated a brand that was in need of a transformation, and now appears to have set up the Conference for a major television rights deal. The question is can Commissioner Scott not only generate new revenues, but create an environment of fiscal responsibility among future Pac 12 members? These days both sides of the equation must be met for him to be considered among the most powerful people in college sports. This is no simple task, however, because his efforts to move the Conference forward and restore the Pac-10, has been slowed by a number of recent challenges.

In Scott’s short time at the Pac-10 he has witnessed one of its most powerful members, USC, get knocked around by the NCAA, the dream of a super conference Pac-16 get temporarily shelved and reestablished as the Pac-12, and the University of California drop athletic programs. Perhaps no one in intercollegiate athletics is dealing with the volatility of the industry more than Larry Scott. With the Pac 10’s past accomplishments and the current football success of the University of Oregon it is easy to become very optimistic about the prospect of making the future Pac 12 a nationally known brand. Certainly the idea of a strong, vibrant conference with incredible financial potential is possible. Nonetheless, not all may see the addition of Utah and Colorado as beneficial but rather as a compromise to the failed attempt to add six Big 12 schools. In fact, when taking a closer look at the Pac 12 Conference, it appears that many schools are state universities struggling to overcome major budget deficits. Thus, it might be wise to hold off on our judgment of Mr. Scott and his place among the heavy hitters in college athletics until we see how he and the conference members handle the potential financial windfall.

Judgment of his vision of the new Pac 12 should not be based merely on the ability to market a new brand in order to increase television revenue but on how the additional television revenue will be spent. More specifically, a positive rating for the Pac 10 Commissioner should be given when the new monies obtained help the budgets of its poorest members and possibly create a new level of financial efficiency in college athletics. A closer look at the issues of the Pac 10 membership indicates that the members are collectively headed to a financial crossroads and are in need of strong leaderships at the institutional and conference levels.

The Television Deal

The television deal is obviously very important and has the opportunity to be extremely lucrative. Recently, Bruce Pascoe of the Arizona Daily Star provided projections by Navigate Marketing of Chicago that suggested if the Pac 12 incorporated a television media rights model similar to the Big 10, revenue could be as high as $172 million dollars, more than triple what the conference earns now.

A new television deal, along with the new conference split and the promise of shared television revenue, should help schools such as Washington State, Arizona and Arizona State, with a major boost to the athletic department revenue. Ideally, these decisions would put all of the Pac 12 schools in a stronger financial position. However, television revenue sharing cannot be the only solution to digging the membership out of financial debt. A collective attitude change toward financial spending needs to happen, and now presents a perfect opportunity.

Back to the Future (2006)

Television money, although getting much recent media attention because of the major jump in revenue, is not new found money. In 2006 the Pac 10 signed a 6 year contract that pays the conference $125 million for football and $52.5 million for basketball from ABC/ESPN and $97 million from Fox for football. At the time, this was a television deal that was certainly competitive and should have helped the conference membership with a much needed revenue boost. Yet, during this time period expenses have increased at a rapid rate and many schools in the Pac 10 have not been able to operate in the black. A quick reaction might be to blame the recent recession; and although that has had a major impact on college athletics, it is not the sole problem. The major problem that has been consistent in college athletics is that as schools bring in more, administrators spend more. The Chronicle of Higher Education’s Libby Sander's blog entry addresses the long history of athletic departments’ pattern of using new revenue sources to bail programs out of a financial deficit, rather than adding to a financial surplus. In the article, Bob De Carolis, Athletic Director at Oregon State, highlights this point by saying, “I got in this business in 1979. Cost containment was on the table then, and it’s on the table again [now]…Every four or five years,” he said, “we [athletic departments] find some sort of revenue nugget that helps us.” In this case, the nugget appears to be television revenue.

Around the same time the Pac 10 was signing the current television deal, an interesting and still relevant article appeared in the August 2006 CFO Magazine. The article discusses the business habits of athletic directors and quotes Iowa State's Athletic Director Jamie Pollard about the environment in which decisions are made:

"In college sports, the bottom line is a championship, and everyone else goes home unhappy." He says this drives athletic departments to spend everything they can to further that goal. "They could stand up and say, 'This is insane, I'm going to stop it,' but they would get fired." College ADs are under pressure to do everything they can within the rules to win, says Pollard, including spending all of their resources. Anything less means they didn't try hard enough.

Spending all of the resources to remain competitive would explain how Pac 10 programs find themselves in the current financial deficit. Take for example two Pac 10 programs, the University of Washington and University of California at Berkeley, were listed in the 2006 CFO Magazine article as 2 of the least profitable athletic departments in the country (Washington was running at a deficit of $2.2 million, and Cal had almost an $8 million deficit). Over the last 5+ years, many Pac 10 schools, including Washington and Cal, have not been able to take advantage of increased revenue earned via television contracts, BCS Bowl payouts, and other additional sources of revenue, and thus, remain in debt.

Still in Debt

The end result is that the past Pac 10 television deals, although not as lucrative as a new Pac 12 deal, did not create a financial surplus for most members. In August, Jon Wilner of the San Jose Mercury outlined the necessity of increasing additional revenue through a new media rights deal in order to support struggling athletic departments’ budgets. He states that the additional dollars from a new television deal could bring much needed revenue to the Olympic sports and stabilize the growing debt. Wilner writes, “That windfall, while generated by the football programs, won’t be used specifically for the football programs. Rather, it will bolster ailing athletic department budgets and preserve that which the conference holds near and dear to its heart: the so-called Olympic sports.”

Skeptics might find it hard to believe that the additional monies would go toward digging out Olympic sports. Assuming that a television deal does happens and schools are able to increase revenue, it is likely that expenses at each school will increase just as quick, if not quicker. The bottom line is that although the television deal would be a significant increase, it will still leave a revenue shortfall when compared to other BCS conference television deals such as the Big Ten or SEC. One would have to assume that the conference expansion and the ongoing arms race is going to cause all Pac-10 schools to spend more than what they currently have, especially when competing for BCS Championships. Washington athletic director Scott Woodward summed up this thought in the Wilner article by saying:

“We cannot compete with the Big Ten and the SEC if we don’t close that gap. We cannot afford to pay top coaches, or build facilities. All this emphasis on souping up our brand — it’s all about staying competitive.”

Interestingly enough, it sounds like the anticipated television money is already earmarked for increasing coaches’ salaries and building new facilities. Recent history suggests that additional dollars generated have not gone to reducing the debt of the Olympic sports, but rather to increasing budgets of the potentially profitable sports, football and men’s basketball. Supporting the revenue generating sports such as football and men’s basketball only makes financial sense, as Woodward states, in order to stay competitive. From a broader athletic departmental point of view, the majority of the Pac-10 schools have struggled financially to maintain the heavy burden of the arms race in football and basketball, in addition to the growing expenses in other nonrevenue Olympic sports. Even if additional monies come into the department, there will most likely still be a financial shortfall at many Pac 12 schools, unless major financial restraint is implemented or athletic departments continue to rely on state money to reduce annual debts. This thought may explain why the Chancellor’s Committee on Intercollegiate Athletics at Cal Berkeley made such drastic decisions.

Chancellor’s Committee on Intercollegiate Athletics

The Chancellor’s Committee on Intercollegiate Athletics chose to eliminate sports and put a limit on future institutional dollars used to support athletics, rather than wait for the television pot of gold that appears to be coming to Berkeley and other Pac 12 campuses. The reality is that Cal, like many other schools, has been at these crossroads before, as recently as 2006. Increased dollars from a new and exciting revenue source, especially a source as public as television revenue, typically will raise expectations of success at these campuses, forcing an increase in expenses to keep up with the Arms Race, only to realize later that the department has far outspent revenues.

Examining the Report of the Chancellor’s Committee on Intercollegiate Athletics, the decision to become more fiscally responsible by cutting sports, placing a limit on future institutional dollars, and holding the Chancellor and athletic director personally responsible is unprecedented, considering all of the recent publicity highlighting the future revenue that is just around the corner. These cuts may indicate the only realistic decision for Cal if they hope to remain competitive in football, basketball and what is left of the prestigious Olympic programs. The members of the Committee made a clear decision not to wait for the anticipated television revenue to address the financial debt, because they do not believe it will address the problem.

The report states:

“However, notwithstanding the possibility of substantial new revenues beginning in 2013, we note that the general upward pressure on costs, the scope of the program, and the increased operating costs of the retrofitted and improved stadium (estimated at an additional $2.4M) will result in a significant short- and probably intermediate gap between costs and revenues. Indeed, an expanded Pac 10 could lead to increases in travel costs, as well as further fuel for the arms race, discussed below; the rumored division into North and South groups could also make ticket revenues more volatile.” (p.4)

The report also indicates that the financial problems of the athletic department should not be solved with the continued reliance on student fees and institutional dollars. One very important solution the Committee provides, among others, is a very specific order calling for “Chancellorial leadership in the Pac 10 and NCAA.” Specifically, the Committee is calling on University of California at Berkeley Chancellor Birgeneau to assume a major leadership position not just on campus, but within the Conference and even within the NCAA to reduce spending. However, rather than ask Chancellor Birgeneau to be a part of change, the Committee wants him to lead the change, even if it means he would act alone.

“Chancellor Birgeneau can and must be the first move in an attempt to slow athletics spending. He is exceptionally well-positioned to do so, first, because of the national leadership for which he is so well recognized; second, because of his membership on the Executive Committee of the Pac 10; and third, because he has already, through appointing this Council, taken significant steps to unite his local constituencies behind him.” (p.11)

But Cal is not the only Pac-10 school that is facing financial scrutiny, perhaps just the most recent and public. Arizona State athletics is also facing a multi-million dollar deficit. The University of Oregon’s expenses are rapidly increasing and Oregon State was close to $6 million dollars in debt. Washington State athletics, operating with the smallest athletic budget in the conference, is falling further behind the larger budgets in the Pac 10 and the University of Washington athletics made adjustments to respond to the massive state cuts.

Fast forward to 2015 and perhaps we will be able to read about how the Pac 12 Conference television revenue and the fiscal responsibilities of leaders such as Chancellor Birgeneau and Larry Scott allowed the Pac 12 to become a model of good business practices. At that point, maybe we will read articles labeling Larry Scott as the most powerful man in college athletics, not because he negotiated the largest television contract but because he directed the Pac 12 Conference into financial security.


This posting was authored by Tony Weaver, Assistant Professor of Sport and Event Management at Elon University. Tony has agreed to occasionally provide research summaries. Prior to teaching at Elon, Dr. Weaver was an athletic administrator at Iona College, Siena College and the University of North Carolina at Greensboro.

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