B1G Finances: A Cautionary Note on Unbundling and The Future

Needs moar monocle. - Andy Marlin-USA TODAY Sports

It's no secret that Jim Delany's grand gambit of putting together the Big Ten Network has, to this point, been an unmitigated success. Through the first six years of its existence, the network alone resulted in distributions of approximately $40 million to each member, and the annual payout has grown in each year of the network's existence. The conference's total annual payout to each school (other than Nebraska, which I believe is still taking a smaller share as a condition of entry) reached the $25 million mark last year.

And those figures may only be the tip of the iceberg. Yesterday, the Big Ten took its next step towards invading the massive population of cable subscribers in its new territories on the East Coast. BTN president Mark Silverman announced that distribution agreements have been reached between the BTN and Time Warner and Cablevision, two of the three largest cable providers in the NYC/NJ area (Comcast is the third).

As the linked article above notes, even the BTN's modest $1 per subscriber fee per month will, conservatively, rake an additional $48 million per year- just from this deal. A similar arrangement with Comcast will presumably be in place in time for football season, and remember that this is only the NYC market. Philadelphia, Baltimore, and DC all remain to be harvested. Suddenly, the $200 million annual BTN revenue figure that Sports Illustrated predicted in 2012 doesn't look so absurd.

Even split 14 ways with the two new members coming on board to make the expansion possible, that comes to an annual distribution of over $14 million per school just from the BTN (for comparison's sake, BTN payouts in 2013 were less than half of that figure).

Before we head to the nearest hardware store for vault building materials, I have to be that guy for a hot second. Sorry, but I do. Thar be storm clouds on that thar horizon, pilgrim.

Depending on how closely you follow financial news, you may or may not be aware that over the weekend, news broke about two absolutely colossal mergers in the media world. Comcast and Time Warner are set to merge, as are AT&T and DirectTV. The latter deal, by the way, is valued at around $48 billion. That's billion with a 'B'. And you thought the BTN was playing with serious cash.

Those two deals, plus a proposed merger between Sprint and T-Mobile, represent an immense concentration of media distribution markets in a small number of hands. It's always a challenge to predict enforcement of antitrust laws (anyone with greater expertise on those issues, please do contribute in the comments), but these mergers and some other pending FCC developments could put substantial pressure on these companies to make some kind of offering to consumers, especially given that you might now be dealing with the same company for phone, internet, and TV services.

One way to placate consumers is by offering to unbundle services.

It's not a complex idea. As things are now, you don't really have much discretion in choosing the channels that flow into your TV. Sure, you can choose between packages, but if you only watch a handful of channels, good luck avoiding paying for the other 200 anyway. Unbundling would allow you to do that. Have no use for MTV? Away with it!

There's actually some logic to bundling a service like cable, as this article explains pretty well- the base costs of providing cable are high enough, and the duplicability of the service easy enough, that it probably won't save you much money to only pay for a few channels. Those service and connection fees ain't going away whether you have 3 channels or 3,000 coming through the cable. Regardless of the economics, though, it's not unreasonable to picture consumer pressure for more protection from the soon-to-be-even-more-giant communications companies to ratchet up until something is done about it, either by the companies themselves or by the government.

That would mean those millions upon millions of subscribers on the seaboard who (the idea is) will soon have no choice but to pay for the BTN would get that choice. How many of them will opt to pony up $12 a year for the BTN? I have no idea. Some will, sure. We've been reminded on many occasions of the substantial alumni bases that most B1G schools have along the seaboard. But given that our East Coast schools can't reliably fill their 55,000-seat stadia, I'd suspect the number of voluntary subscribers won't be high enough to cover for splitting the B1G's revenues an additional two ways.

What's more, as that NYT article notes, the content provider who is exposed to unbundling has only one choice if it wants to maintain its revenue levels in the face of large numbers of subscribers using their new freedom to walk away from channels they don't want. And that's to charge the remaining, most loyal consumers (that would be our East Coast alumni) enough to compensate for the lost volume of subscribers.

How much more? Hard to say until it actually happens, but at least one academic source (cited in that article) projects that carriage fees for sports channels would roughly triple in an unbundled world. It's easy to understand why that would be the case if you think about the market for sports viewing. Most people who have enough interest in sports to pay for the channels separately are avid enough watchers to endure a pretty high fee. But most people aren't like that, and would probably opt out of the sports channels, meaning ESPN et. al. need to get a lot more money out of their remaining subscribers.

The Big Ten isn't going to permit its expansion to cost it money. It just isn't. Which means, should unbundling become a reality, the onus for maintaining those payouts is going to be placed squarely on the backs of the most avid B1G fans, and not just the ones in these new markets we've acquired. Cable providers in State College, Lincoln, and everywhere in between will be obliged to do the same thing.

I should be clear here: if unbundling happens, it's not because of the B1G's expansion. But the pressure to provide not just steady, but increasing payouts for 14 athletic departments, most of which will likely come to depend on this money, will be inescapable.

All I'm trying to say here is this: the eye-popping figures we're currently rolling in are a great benefit to the conference as a whole, as well as each member school. But anyone assuming these numbers will continue to get larger ad infinitum is sorely mistaken. Between the unbundling issue, the rise of streaming, and threats to the distribution model such as the O'Bannon suit, the smart money is on a gravy train derailment in the not-too-distant future. We had all better hope our athletic directors have a plan for that future other than charging us enough to make up the difference.

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