Tuesday, October 25, 2011
Finding proper alignment
By Kelly McBride Poynter Review Project
As the big college athletic conferences trade members the way middle school girls trade friends, many fans, bloggers and other journalists have questioned whether ESPN's influence over this process is appropriate.
It's easy to see why they'd ask.
ESPN recently launched the Longhorn Network, a $300 million, 20-year-deal to distribute University of Texas sports programming (OK, and cultural programming, but it's mostly about sports.) That makes the network financially vested in the success of a single school's athletic program.
ESPN also has big money for contracts with the Atlantic Coast Conference and the Southeastern Conference, and recently made the Pacific-12 Conference media rights contract the most lucrative package to date in college sports.
A lot of money is changing hands in college sports and it's safe to say that ESPN is the biggest player, by its own design. The network's brand is built in part by ruling the college football market with coverage of games, shows devoted to college football as well as significant reporting on college sports.
After interviewing executives who negotiate these growing contracts for ESPN, key officials of athletic conferences, NCAA officials and outside analysts, this much is clear: ESPN is acting like the big business it is, strategically locking up its market whenever it makes financial sense. Could that be a problem for the network's credibility as its reporters independently gather information about schools and conferences? Yes.
In fact, ESPN's role in the past year's unprecedented reshaping of athletic conferences epitomizes why even some of the network's executives call the company "a walking conflict of interest."
Given the high-stakes money involved, how ESPN navigates this particular conflict of interest will have a profound impact on its credibility with its audience.
To outsiders, ESPN looks like a queen bee, behind the scenes whispering in the ear of this conference and that school, wielding power for its own benefit, or even worse, just because it can.
On Monday, at a hearing by the Knight Commission on Intercollegiate Athletics, Louisiana State University Chancellor Michael Martin quipped "I think we could end up with two enormous conferences, one called ESPN and the one called Fox."
Two weeks ago, Boston College Athletic Director Gene DeFilippo, a member of the ACC's expansion committee, told the Boston Globe, "TV -- ESPN -- is the one who told us what to do." DeFilippo retracted his statement the next day, issuing a short apology that included, "I spoke inappropriately and erroneously regarding ESPN's role in conference expansion."
We'll come back to that. But first, in researching this topic, we talked to several academics who teach the business of sports. None of them faulted ESPN. All them pointed out the instability among football schools right now and the forces that are causing that tumult, including:
• College football ratings have increased significantly in recent years, suggesting increasing demand from fans.
• The television audience for live sporting events grows more valuable to advertisers every day, as viewers watch entertainment programming via DVRs or downloads, skipping over the commercials. Few do that with live sports. As a result more broadcasters are jumping into the bidding wars for sporting events.
• Schools are looking to capitalize on an NCAA rule allowing conferences with 12 teams or more to hold a playoff. That means more games and more TV money for the conferences that exceed 12 teams. Who wouldn't want to get bigger?
• Conference commissioners and athletic directors have recently recognized they could charge more for the rights to college sporting events, hence the millions and even billions spent on the likes of the Pac-12 and Longhorn Network. In fact the Pac-12 contract, like most media rights contracts, involves a second network, Fox. And the conference is starting its own network to make even more money off its sporting events. For a great explanation of how these contracts work see this May installment from blogger Kristi Dosh, who is joining ESPN to cover sports business.
• Those two deals, as well as ESPN's deals with the ACC and the SEC, set off a flurry of scrambling as colleges look for the most lucrative conference to join.
• The Bowl Championship Series (BCS) itself is a flawed process, concentrating power among the schools in the member conferences, making them the place to be if you want your football program to get big TV money.
• The Big East Conference reportedly turned down a contract worth more than $1 billion from ESPN, hoping for something more on the open market. That prompted Pittsburgh and Syracuse to seek admission to the ACC, where they will get more money rather than risk staying in a conference with no TV contract and the possibility of losing its membership in the BCS.
ESPN sits in the middle of all this, developing strategies to increase its dominance in college football. The network does this to create a package of entertainment and information around college football to deliver to its audience. Then it uses that audience to make money from advertisers and from fees paid by cable providers. That's the business model.
"I don't lay the blame at ESPN's feet," said Andrew Zimbalist, the Robert A. Woods Professor of Economics at Smith College. "They are trying to be a successful sports channel. If ESPN disappeared tomorrow, this process would still go on."
In a capitalist system, strong brands associate with each other for mutual benefit. Thus the best conferences and the best schools want a contract with ESPN, or Fox Sports, said Dave Carter, a professor of sports management at USC and a sports marketing consultant.
ESPN's loyalty is to its audience, shareholders, conference partners and advertisers, said Carter, adding "I see them balancing all that as they put together something like the Longhorn Network. Then, the creation of the Longhorn Network suddenly drags every other college president and athletic director over the line in the race to commercialization."
ESPN is hardly a bystander in this process. The increasingly huge amounts of money the network spends on college rights are a primary driver of the domino effect in conference realignment. Is that inappropriate? Only if you think ESPN should be responsible for preserving the traditional values of collegiate athletics.
We'd suggest there should be a lot of other defenders of student athletes in line to do this work before ESPN, starting with college presidents.
But this new influx of money will widen the gap between the schools with athletic departments that make a profit and those that don't, said Dan Fulks, director of accounting at Transylvania University. Every year he helps the NCAA analyze revenue and cost of the athletic programs at the 1,100 member schools.
Among the 120 large football schools, only 22 of them made a profit in 2010, Fulks said. The rest needed money allocations from the general university fund or government to cover their expenses. Fulks noted that athletic revenue currently comes from three primary sources: Ticket sales account for 29 percent, booster donations 26 percent and redistribution of television revenue 20 percent.
When this new round of TV contracts kick in, that formula will turn on its head, Fulks predicted. TV revenue will likely become the overall No. 1 source of revenue. And that will likely double the number of schools making a profit.
Isn't that a good thing?
Only if you're one of those schools, Fulks said. The rest of the schools get further and further behind, and the consequences for that spiral out of control. The more money you make, the more you can invest into your athletic program, the easier recruiting becomes, the better your teams become, and the more exposure your school gets to a national audience. That exposure pays off in ways that go far beyond the dollars and cents.
The other group that suffers is the student athletes who must now play more games and travel further in order to play. It's hard enough if you're a football player playing one game a week. But other sports, like basketball and volleyball, play up to three games a week.
"I don't fault ESPN, they're in the business to make money. I don't fault the conferences, they're in the business to make money for their schools," Fulks said. "But when I look at Longhorn Network, I think that's the worst of it, because all that money goes to one school at the expense of other schools."
It's no surprise that Larry Scott, the new commissioner for the Pac-12 who came in and tripled TV revenue, isn't as worried. He said his conference stopped at 12, rather than go to 16, to get the benefits of a more lucrative contract yet still minimize the impact on student athletes. As for the have-nots of the college system, he said that's unavoidable.
"There is great disparity historically, just like a lot of things in life," he said. "In the business world strong brand tends to get stronger."
But these schools are non-profit educational institutions, as are the athletic conferences, whose primary job is to bring in money for their member schools. ESPN and other media partners are the only for-profit businesses in this rights conversation.
A lot will be lost as schools continue to realign. Traditional rivalries will disappear. Scott believes the ratings for college athletics are still undervalued, and if he's right, then more consolidation is coming -- and the money networks pay for rights will only grow.
"The fragmented nature of college sports is not a good way to maximize value," he said. "Think about it: if you have one seller and lots of bidders, like the NFL, you can command a price. But if you have lots of sellers and fewer buyers, like college sports, you can't get as much money."
Maybe the idea of two TV-powered super-conferences isn't so far-fetched. So, was ESPN whispering in Scott's ear, telling him how to make the Pac-12 more valuable?
"We talk to our partners all the time," he said. "That means we talk to ESPN, we talk to Fox."
The Pac-10, for instance, had schools in only four states, reaching 16 percent of households, he said. Research showed that if the league added two states, the conference would reach 20 percent of households. Before he finished negotiating a new television rights contract, Scott convinced Colorado and Utah to join his conference. Did that come from ESPN?
"I'm sure someone at ESPN could have told us that, but I did a lot of research before I was even hired to come up with a strategy," he said, of his interview process with the then-Pac-10.
John Wildhack, ESPN executive vice president for programming acquisitions and strategy, oversees all rights negotiations at the network. He said that after the first round of discussions with the Pac-10 were unsuccessful, Scott came back to him with a proposal that included 12 schools and added nearly 200 hours of annual programming in time slots that didn't compete with other contracts.
Wildhack admits close contact, as well, saying, "We work with all our partners. We worked with the Big 12 last year when Nebraska and Colorado left to make sure (the rest of the league) could stay together. We worked hard with the Big East to provide a contract that would provide a solid foundation for them."
So what was Boston College's DeFilippo referencing when he said that as the ACC expanded, it was just following ESPN's wishes?
"I don't know," Wildhack said. "The last time I talked to Gene was May."
DeFilippo's full retraction/apology offered no explanation as to how he could have possibly been mistaken about whether ESPN was or wasn't telling the ACC what to do. He wouldn't talk to Poynter, and his media liaison wouldn't offer further clarification.
After hearing both Wildhack and Scott describe the relationship between the Pac-12 and ESPN, it seems reasonable that members of the ACC expansion committee were routinely bouncing information off the network.
But the dangerous conflict of interest is not that ESPN is inappropriately throwing around its money and weight. It's that while journalists at ESPN are ferreting out the latest tip about conference realignment, the network's programming people are sitting in another part of the Bristol campus with inside information -- details of which they must keep to themselves in order to honor the business relationships.
ESPN serves its audience with one team and its business partners with another. The network navigates this world by being so big that Wildhack's business team members rarely cross paths with ESPN's journalists. And if they do, they know they're not supposed to exchange information.
The journalists often report information, to which ESPN's business partners object. Just last week, ESPN reported that the University of Texas paid $400,000 to settle a lawsuit filed by a woman who claimed she was sexually assaulted by an assistant football coach.
"There's no better way of signaling that your first obligation is to the audience than by reporting on stories that may portray a business partner in a negative light," said Vince Doria, ESPN senior vice president and director of news.
It's a tenuous balance, reinforced every time ESPN's journalists prove their loyalty to the audience -- but undermined every time the veil is pulled back on the contractual process. As the money in college football increases, the reasons for the audience to question ESPN's loyalty will grow. As long as ESPN maintains its journalistic standards and increases reporting resources devoted to college sports -- even as its business interests in colleges grows -- the network should assuage most of its understandably skeptical critics.