Will the Recession Lead To Pac-10 Expansion?
University endowments nationwide have plunged an average of 23 percent since last July, the worst drop since the 1970s, according to the National Association of College and University Business Officers.
State subsidies for higher education are being slashed drastically as many states have severe budget deficits.
The State of California has a $23 billion shortfall, while nearly every other state is trimming budgets, with the big-ticket item of university subsidies being near the top of their lists.
Tuition rates are being increased all over the country. The University of California (Cal-Berkeley and UCLA being the two largest campuses) regents recently passed a revolting 23 percent increase in tuition in response to the above budget cuts.
According to Time magazine: "From 2002 to 2006, the share of educational costs represented by student tuition rose from just over one-third to nearly one-half at public four-year institutions across the country."
How will this affect college football? Well, each athletic department has to "pay" for the scholarships of its athletes. Increases in tuition mean an increase in expenses for the athletic department, and we are talking millions of dollars at each university.
Donations to universities have dropped as many Americans have tightened their belts. This impacts the growth of their endowments, their operating budgets, capital construction projects, and athletic departments alike.
So what does all of this mean for collegiate athletics and the prime cash cows of football and basketball?
It means that one of their main expenses (scholarships) is going to increase significantly, while simultaneously, the revenues (in the form of donations, tickets, etc.) will decrease significantly.
Specifically looking at the Pac-10 Conference, the average published cost of academic scholarships for the athletic departments is $6.4 million (USC and Stanford do not report their figures publicly) per school. An increase of 20 percent on just that one line item would cost the athletic department $1.28 million annually.
It would require an endowment of approximately $25 million in assets to generate that $1.28 million on an annual basis, during normal economic times. The conference would need to generate an additional $15 to $20 million in revenues or reduce other costs to offset that amount.
Recent news out of Stanford University and the University of Washington shows that those athletic departments are already facing large budget cuts. Stanford is cutting $3.1 million in 2010 from its athletic department budget and $4.5 million in 2011. Washington ended its men's and women's swimming programs to save $1.2 million and still have that much more to cut.
Oregon State recently reported a drop in donations to their athletic department of $1 million. Washington State regularly receives between $2 and $3 million a year from their school's general funds.
"We're looking at multimillion-dollar deficits. The old adage of 'just make more money' through better development and fundraising won't help. The problems are too big to just be able to fix on the revenue side," University of Arizona AD Jim Livengood stated. "What's going to happen in 2012 when all the stimulus money is gone? That's when the rubber hits the road. It's scary."
In order to pay for that increased cost, they would have to either raise ticket prices, solicit more in donations, liquidate endowment funds that would harm the long-term future of the department, or cut programs. Many universities across the country are doing some combination of all those actions, but few are successfully able to do these in the current economic climate.
While there are certainly wasteful expenses in every athletic department that can be eliminated, taking too many drastic cuts or making the wrong financial decisions can only lead to long-term problems for many of the athletic directors and the programs.
Increasing revenue from traditional sources is nearly impossible in an environment where ticket sales are dropping, boosters are scaling back donations, and corporate sponsors' advertiser budgets are also shrinking. It will be difficult enough to maintain even the "status quo" by solely focusing on these sources of revenue.
The Pac-10 needs to explore non-traditional sources of revenue in order to make it through the new economic climate, and other major conferences have paved the way for them to do this.
The critical components in this strategy should be to:
1. Add two teams
2. Stage a conference championship game
3. Secure a new television broadcasting contract
4. Possibly form their own television network
Adding two teams to the current alignment doesn't bring in any new money in and of itself. In fact, there is a good chance that it might increase costs (beyond the obvious "retooling" costs of the conference) due to travel costs and an expected one-twelfth sharing of conference revenues as opposed to a one-tenth sharing formula.
The benefits would have to be realized in increased marketability (public relations), potential ticket sales, improved positioning in television contract negotiations, and in securing guaranteed bowl game contracts in football. It is proven that a 12-team conference stands a much greater chance of landing a coveted second "BCS" team and the subsequent $4.5 million payout.
Choosing the schools to invite to the conference is always the tricky part. For the Pac-10, the choices are fairly limited. The schools need to be top-flight academic research institutions with substantial assets, prestige, and national marketability. In regards to the benefits to gain in TV revenues, the largest media markets would need to be considered front-runners.
New Pac-10 Commissioner, Larry Scott, was hired specifically to address the TV revenue issue. He has no previous college administration experience, no "apprenticeship" as an associate commissioner for any conference in college sports, and his background in college football is "just a fan" as he tells it. But he has been successful at negotiating media rights contracts for WTA Tour (that's Women's Tennis Association).
When asked about expansion, Scott had this to say; "First and foremost, the presidents look at it from an academic perspective. ... There's a certain prestige and status about the conference that's of utmost importance to our presidents and chancellors. Then, from a sporting perspective, a commercial perspective, there's all sorts of considerations, TV and all of that."
Within the existing Pac-10 footprint, few schools fit those criteria. However, neighboring states in the western U.S. provide several candidates:
The University of Colorado at Boulder is a top-flight institution that is a member of the Association of American Universities, a "Public Ivy" school, that can tap into the 16th-largest media market in the nation (which would rank fourth in a "new" Pac-10).
The $850 million endowment for the university would rank firmly as the sixth-highest in the expanded conference. CU would rank as the sixth-best program academically according to U.S. News & World Report.
Why would CU move from the Big 12 to the Pac-10? The CU Buffs are currently members of the Big 12 conference but are facing similar financial pressures to those that many Pac-10 schools are dealing with. As one of the top three academic institutions in the Big 12, CU has higher admissions standards than most of the conference and therefore has a more difficult time qualifying prospective student-athletes.
The political dominance of the Texas schools has caused rifts in the membership of the conference, specifically when it comes to sharing the TV revenues. While the Big 12 distributed $113.5 million to member schools in 2008, only $8.6 million of that found its way to CU (10th in the conference). Approximately $3.6 million of that was "guaranteed" sharing from conference bowl contracts and championship game revenues, leaving $5.0 million coming from the conference's TV contract. While this is certainly fairly lucrative, this is the best that the Big 12 can offer with a 12 team alignment. The benefits to CU in an expanded Pac-10 will be outlined below.
CU has traditionally had one recruiting leg in Texas and one in California. Recently that leg in Texas has been weakened severely. CU's admission standards for student-athletes is at the top of the Big 12 and is partly responsible for the Buffaloes failure to "Return to Glory". Academically, only the University of Texas and Texas A&M are in the same ballpark as Colorado in the Big 12; and those schools are sitting on top of recruiting gold in a state that is football-crazy.
Aligning with the Pac Ten, and the greater emphasis on academics for student-athletes, CU would fit into the middle of the pack in regards to admission standards. The recruiting playing field would be much more level and the conferences ideals would be much more inline with the university's. The fans in Boulder and out-of-state alumni would be reinvigorated by aligning with the West Coast schools. The State of Colorado has been undergoing a "Californication" over the past three decades; it might be time to formally acknowledge that relationship at the collegiate level.
Why should the Pac-10 invite CU? CU is a top-notch academic university and has a storied athletic tradition as well. Adding the metro Denver media market would greatly increase the marketability of the conference. CU also has a great many alumni in all the traditional Pac-10 markets that would increase exposure, ticket sales, and TV ratings. There are more CU Alumni clubs in California than there are in Texas.
The University of Utah is located in the second-largest media market available in the West, as Salt Lake City ranks 31st in the nation. Utah is a large public research institution (Carnegie classification as Research/Very High, similar to all Pac-10 teams, except for Oregon, which is listed as Research/High) that ranks closely to Washington State, Arizona, Oregon, and Oregon State according to U.S. News & World Report.
The $500 million endowment for the university would put it in the same mix as Arizona, Oregon, Oregon State, and Arizona State.
Why would Utah join the Pac-10? It's an obvious step up for a program that is increasing its national exposure every year. The step up into a bigger conference would increase its athletic department revenues by at least $6 million per year, and that is a very conservative figure.
Gaining access to higher profile bowl games in football, increased exposure in basketball, and an increased recruiting pool (for students, not just athletes) are all easily identifiable gains for the school.
Why should the Pac-10 invite the Utes? Again, adding the next largest TV market (Salt Lake ranks 31st, Las Vegas 42nd, Albuquerque 44th, Honolulu 71st, Colorado Springs 92nd, El Paso 98th, Reno 108th, and Boise 112th) is another factor that will help the Pac-10 to negotiate a more lucrative TV contract.
Adding the quality athletic programs that Utah has proven in football and basketball would also increase the prestige of the conference in the national media (this pays off in rankings, RPI, etc. for selection in postseason play). No other school in the region combines the academic background, athletic success, and financial security that the Utah Utes do (sorry BYU).
The debate about Brigham Young is a valid one, and it would be extremely tempting to add a combination of Utah and BYU. Basketball travel pairs and in-state rivalries would provide synergy with the rest of the conference, and both schools would be competitive in many sports.
However, the "overlapping" of TV markets that the conference currently possesses by having two teams that draw from each major market is the primary reason that the TV contract was not as lucrative as other conferences. This can only be overcome by luring the two biggest markets to the table in Denver and Salt Lake City, not just one of them.
As a backup plan to successfully convincing Colorado to join the Pac-10, there would be several schools with slight advantages over others, but no clear-cut front-runner.
Brigham Young University is a private RU/H institution with a $300 million endowment. U.S. News & World Report ranks BYU as No. 71 in the nation, and athletically BYU has outstanding facilities and fields extremely competitive teams in many sports. The only drawback would be the above-mentioned TV market "overlap."
BYU also is a very strong traveling team for away games and would form instant rivalries with many Pac-10 schools. Sunday sports scheduling and academic research could be the tipping point on how eager the conference would be to invite BYU.
The United States Air Force Academy is a Federal institution that is considered to be one of the top academic programs in the nation (No. 5 according to U.S. News & World Report, one spot behind Stanford). The local TV market in Colorado Springs is ranked as the 92nd-largest in the nation (Spokane is 75th), and the facilities at the school are fairly good
There would certainly be a concern that Air Force would not be able to compete week in, week out against top-notch athletes. This point is certainly open for debate as AFA has proven that they can compete at a high level in the past. The Falcons would also be able to draw a national following, being a military service academy with members of the Air Force spread all throughout the country, including Pac-10 country.
The University of Hawaii is RU/VH school with a large endowment ($3 billion system-wide) but is not considered a top-flight academic institution. The distance from other teams would mean extraordinarily high travel costs. The TV market would be ranked 71st in the nation (behind Tucson at 66th), and the facilities are above-average compared to the other candidates.
The University of New Mexico is also a RU/VH classified university with a moderate endowment $386 million (Arizona State is currently the lowest in the Pac-10 with $407 million). UNM is not considered a top academic school. The TV market ranks 44th in the nation, however, and is a growing metro area. The Lobos field a competitive basketball team but have struggled on the gridiron.
UNLV is only a RU/H (same as Oregon) classification, with a $568 million endowment, and would bring the 42nd-largest TV market in Las Vegas. The basketball program has a history of success, but the football program and facilities are lacking institutional support. Travel costs would be much more manageable with UNLV compared to any other option.
The two in-state schools (Fresno State and San Diego State) would be tempting but are very limited when it comes to resources and academic programs. Adding too many "California" eggs into the conference basket would be a very risky move as well.
Boise and Nevada-Reno are located in markets that are too small, and they do not have a large national following to justify that. Both schools are limited when it comes to financial resources, academic standing, and facilities despite their on-field performance.
If Colorado cannot be invited to the conference, which is a very likely scenario, then the best option would be to have Utah and BYU. None of the other candidates could bring the prestige and marketability that BYU could, as well as competition on the fields of play.
Adding only the Salt Lake City market would certainly reduce the value of the expansion, but this would also prove to be a "preemptive strike" strategy to derail any potential that the Mountain West Conference could gain automatic qualification to the Bowl Championship Series.
Now that the school options have been explored, let's examine the financial impacts on the rest of the conference.
Adding a conference championship game in football can net the Pac-10 anywhere from $5 million to $12 million annually (we'll use a conservative estimate of $8 million). It would also be an additional "nugget" in the TV contract negotiations, which cannot be measured singularly. The cost to host the game would be approximately $1 million, but the opportunity for high-grossing ticket sales, naming rights, sponsorships, and advertisements would clearly result in a net gain.
Learning from the successes and failures from the SEC, Big 12, and the ACC, it seems clearly best to choose one host site that is a destination location to host the game on an annual basis. It is best if the venue is an NFL venue, as opposed to a college stadium, and that the community can create a surrounding atmosphere of celebration similar to a bowl game.
The sites that fall within the expanded Pac-10 footprint that fit these criteria would be:
San Diego, CA—Qualcomm Stadium
Phoenix, AZ—University of Phoenix Stadium
Oakland, CA—Oakland-Alameda County Coliseum
San Francisco, CA—Candlestick Park (or a planned new stadium in 2014)
Seattle, WA—Qwest Field
Denver, CO—Invesco Field at Mile High
Many of those stadiums are outdated for the NFL and have issues with owners trying to obtain a newly built stadium (San Francisco, Oakland, and San Diego). Denver is too far from the traditional Pac-10 fanbase and therefore should not be considered. Phoenix and Seattle are the remaining two stadiums that fit the criteria, until a potential new 49ers stadium is built.
Of those two, Phoenix has the tourism base and past bowl experience to host such an event as an annual affair. The proximity to southern California and the two Arizona schools, the favorable weather to attract participant fans, and the relatively cheap airfare available to fly into Phoenix all make this location the best possible option as host to a conference championship game. That is, until an NFL quality stadium is constructed in the Los Angeles area.
Dividing up the new 12-team conference into two six team divisions would surely elicit complaints from any quarter, no matter how it would be accomplished. Using a Big 12 model (North vs. South) could result in a similar imbalance down the road, if six teams were limited in their access to the main recruiting pipeline (the state of California).
Using an ACC model to split traditional rivals and balance the geographic effect (Atlantic vs. Coastal) could also have a similar effect in a lack of identity with the division.
Using an East vs. West model (as the SEC has done) would create a split in the access to California, as well as form divisional identities and retain the importance of the main rivals in the final week of conference play.
Colorado (or BYU)
Currently the Pac-10 television contract is outdated, at best, and horribly uncompetitive at worst. TV revenues drive big-time college sports and have done so for the better part of three decades, yet the Pac-10 lives in a bygone era with its current patchwork TV programming.
Needless to say, the members of the Pac-10 benefit the least of all the major "BCS" conferences, outside of the Big East, from their TV contract. It can be argued that the Big East gains more exposure via their deal, however.
Rarely are the Pac-10 games on national TV, and even more frustrating is the lack of regional access. Eastern and Central time zone college football fans have to work pretty hard to even watch a Pac-10 game on TV.
The money that flows into each team from the conference contracts is approximately $4.3 million per team (it isn't divided up equally, however). The new commissioner should have no problem leveraging an expanded Pac-10, with a conference championship game for football, into an increased package that pays at least $75 million (and that is an extremely conservative figure) annually.
"This whole TV discussion is going to be as important a strategic and business issue as I deal with in my career at the Pac-10," Scott said. "Whatever we decide is going to be a 15-, 20-, 25-year deal."
An equal revenue sharing model needs to be approved within the current Pac-10 government. The current hybrid model exists only within the Big 12 and the Pac-10, the two major conferences with the weakest overall TV contracts. The SEC, Big Ten, ACC, and just recently even the Big East; have all adopted a flat sharing agreement amongst their members.
Implementing this policy change in addition to acquiring the improved TV contract would net member schools nearly $7 million each before other revenues (like bowl payouts and licensing/royalties fees) are distributed. An average increase of nearly $3 million to each university currently in the Pac-10, a major upgrade for expansion target Utah, and still a $2 million gain to attract the CU Buffs.
Adding the University of Colorado would be crucial to this part of Pac-10 revenue growth, as the Denver TV market would be a major selling point to go alongside major markets of L.A. (second), Bay Area (sixth), Phoenix (12th), Seattle (13th), Sacramento (20th), Portland (22nd), and San Diego (28th).
Major college athletic departments are facing a "perfect storm" of increased expenses and decreased revenue sources due to the effects of the financial crisis. The most conservative estimate for the impact on the Pac-10 schools is that expenses for scholarships would increase by $15-20 million in total. Additional budget deficits can be expected to match that from reduction in ticket revenues and donations to increased operating expenses.
By playing a conference championship game, the Pac-10 can reasonably increase revenues by at least $8 million per year. In order to do this, it would need to expand by two more universities. Adding the Universities of Colorado and Utah would create the prime conference alignment for continued growth and development of both academics and athletics.
This would benefit both the conference and those target universities in multiple ways. The addition of those schools would boost conference coffers with additional licensing opportunities, increased exposure, and through a better paying TV contract of at least $25-30 million more per year, easily offsetting the increased travel costs and negate a dilution effect of 12 teams sharing revenues instead of 10.
Financial solvency will dictate the next round of conference realignment in major college sports, and the Pac-10 needs to be the first domino to fall or risk being left to compete with a surging Mountain West Conference for dominance in the western United States and in the national spotlight.
A coordinated effort with the Big Ten to invite the University of Nebraska (or Missouri) and similarly host a championship game in football could successfully result in CU leaving the Big 12 for the Pac-10. A weakened Big 12, or a more Texas-centred Big 12, would ensure greater market value for the TV package of the Pac-10 sports broadcasts in comparison.
The window of opportunity for the Pac-10 only exists until the Big 12 renegotiates its own TV contracts and creates greater value for its members.
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