Three years in, are the Pac-12 Networks on the right track? That’s a complicated question, and one explored well in this detailed Sports Business Journal piece from Michael Smith and John Ourand. The networks (there’s one national network and six regional ones) have hit each of the three goals Pac-12 commissioner Larry Scott initially stated (boosting exposure for the conference’s teams, building a business the conference owns and controls, and returning a surplus to the schools), but distribution growth in particular has lagged and that surplus has been much smaller than what’s provided by other conference networks.

The conference engaged investment banking firm Lazard this year to determine a valuation for the networks and explore alternative business models, and that raises the key question of equity. Will the Pac-12 stick with their totally-owned model in hopes of reaping the long-term rewards, or will they take on investors or partners to try and improve things more quickly? From the SBJ piece, it doesn’t seem that any sort of deal is imminent, but the Lazard hiring may play a substantial role in shaping the networks’ future path:

The conference said it hired Lazard to determine the value of the networks after spending three years pumping millions into infrastructure and technology. When news of Lazard’s hiring began to spread over the summer, speculation centered on whether the Pac-12 was looking to sell all or part of the networks or possibly take on equity partners. Sources said that Fox and ESPN executives looked at the networks’ books, but neither made a move. Fox is already a partner in the Big Ten Network, while ESPN owns the SEC Network.

The Pac-12 and Lazard have an ongoing relationship, the conference said.

“After year three, which was our ramp-up, it was important for the business and the board to understand the value of the entity we created,” [networks president Lydia] Murphy-Stephans said. “Lazard was engaged to assess the value. Like any business owner, you want to know where we are. At this stage, we have a very predictable business. We know the costs, and we know the surplus. We have a three-year record.”

The reason this is provoking such discussion is that those costs are higher than what many competitors face while the revenues are lower, leading to significantly smaller surpluses redistributed to schools. SBJ reports that the Pac-12 Networks produced 850 events for linear TV in 2014-15, up from 450 in 2012-13 and 550 in 2013-14. By contrast, the Big Ten Network produced 500 this year and the SEC produced 470. Murphy-Stephens told SBJ most Olympic sports live events cost $15,000 to $25,000 to produce in HD for linear TV, so if we assume those are making up most of the gap and that the average cost is $20,000, that would mean the Pac-12 Networks spent $8,750,000 more on production than the Big Ten Network and $9,350,000 more than the SEC Network. (And that’s before you consider that the ownership and operation of those networks by Fox and ESPN respectively likely leads to production efficiencies the Pac-12 doesn’t have.) It’s not as simple as just axing events, though, as the current contracts with distribution partners require the Pac-12 to hit that 850 number and don’t have much flexibility.

Meanwhile, the Pac-12 Networks are also bringing in less revenue, particularly thanks to less distribution. SBJ reports that they’re only in 12 million households, compared to 60-plus million for both the SEC Network and the Big Ten Network. The crucial holdout there is DirecTV; there was optimism a deal would be worked out after the DirecTV-AT&T merger, but that hasn’t happened so far. That’s a huge part of why the Pac-12 Networks’ surplus payout to schools this year was $1 to $1.5 million (which doesn’t include revenue from the conference’s $3 billion regular broadcast deal with ESPN and Fox), not bad, but a long way behind the SEC Network’s $7.5 million to each school (and the Big Ten Network’s number is supposed to be even higher). That has some Pac-12 athletic directors wondering if they’re falling behind, and they’ve created two committees to study the network; a benchmarking one to see how it stacks up against rivals, and an expenses one to look at its budget. It’s going to be interesting to see what those committees decide.

There is a case for not changing the network model, though. Yes, taking on investors or partners might help end the distribution problems (but that’s not a guarantee), and it might lead to higher immediate payouts. However, the design of 100 per cent ownership was as a long-term play, and Pac-12 commissioner Larry Scott still seems high on that, from remarks he made at Colorado last month that SBJ quoted:

“In this world with the rapidly changing media landscape, and over-the-top options, technology companies getting involved, owning your own content will give us great advantages going forward,” Scott said last month on a visit to Colorado’s campus. “I think we’ll be sitting here five years from now with us having many more options than the traditional cable, satellite or telco companies. … It will open up more options for our fans to be able to access the Pac-12 Networks on whatever device they want.

“It’s one of the reasons I like owning our own network. We’ll be nimble, we’ll be flexible, we’ll have the ability to adapt.”

There seems to be no question that adaption of some sort is coming for the Pac-12 Networks. The question is if that will be adaption within the existing structure to try and provide better results while maintaining the long-term plan, or if it will be a more drastic partnership or equity move to try and improve things immediately. The key element there may be if the Pac-12 leaders feel they can eventually find substantial success with the current model, or if outside help is needed to elevate their networks to a level closer to their competitors. Whatever they decide is going to have a significant impact on the sports media world.

[Sports Business Journal]

About Andrew Bucholtz

Andrew Bucholtz is a staff writer for Awful Announcing and The Comeback. He previously worked at Yahoo! Sports Canada and Black Press.

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