Pac-12 Networks: Media industry report shows steep drop in subscriber fees (but don’t hit the panic button just yet)

Every so often, we’re able to remove the shroud from the Pac-12 Networks and examine the conference’s wholly-owned, controversial, hugely-expensive, modestly-successful media enterprise.

The last such instance came in September, when the Hotline acquired closely-guarded TV ratings that showed Olympic sports broadcasts — the object of so much network investment — were watched by friends and families and very few others.

Well, another morsel of information has surfaced to help fill in one pixel of the Pac-12 Networks’ financial screen.

It comes in the form of a report by SNL Kagan, the highly-respected media research firm that has been tracking audience data for a half-century.

The report, obtained by the Hotline from a source (and published below), lists the average subscriber fee for dozens of national sports networks — from ESPN to the World Fishing Network, from the SEC Network to the Outdoor Channel.

The numbers are hardly flattering for the Pac-12, but the issue is complicated and requires extensive context.

Kagan’s research shows that, in addition to its well-documented limited reach (i.e., households), the Pac-12 National network generates a dramatically lower average subscriber fee than the SEC and Big Ten networks.

Perhaps more surprising is that the Pac-12 National’s subscriber fee has dropped over the years — and not by a few cents, either.

It has plunged.

According to Kagan, the Pac-12 National network received an average of $0.30 per subscriber (coast-to-coast) when it was launched in 2012.

That number accounts for the higher fees paid by subscribers inside the conference’s home markets and the lower fees paid by out-of-market subscribers (i.e., viewers from Topeka to Bangor to Miami).

To be clear: That tiered fee structure is standard practice for college networks. The SEC’s subscriber fees are higher in Birmingham than Billings; the Big Ten doesn’t command the same fee in Albuquerque as it does in Ann Arbor.

But here’s where the situation gets interesting.

Kagan’s research listed the average national subscriber fee in five-year increments:

* In 2012, the Big Ten commanded $0.37 per sub, while the Pac-12 National network received $0.30.

* By 2017, the Big Ten’s average sub fee had jumped to $0.48, an increase of 30 percent, while the Pac-12 fee had dropped to $0.11.

That’s right: From $0.30 to $0.11 in the five-year span.

Of the 24 networks listed in the research report that existed in both 2012 and 2017, the Pac-12 Network was one of the few that experienced a drop in sub fees over the span, and the Pac-12’s decrease was, by far, the largest.

On the surface, that would be cause for panic in the athletic departments and presidents’ offices across the conference. But as noted at the top, the situation requires a bit of context, and into that realm we shall dive …

After obtaining the Kagan report, I asked the Pac-12 for an explanation. The response came in the form of a statement:

“We do not comment on the details of our distribution arrangements, but we can tell you that our contracted rates increase annually, as is common in the industry, and these reported estimates are not an accurate reflection of our economics.”

I then went back to Kagan, whose research is used throughout the media and entertainment industries, and asked for a response to the Pac-12’s response.

Not surprisingly, Kagan stood by its research.

After digging into the numbers and discussing the situation with numerous sources, I determined that both sides could very well be right.

How could that be?

First, let’s parse the Pac-12 statement (italics are mine):

“We do not comment on the details of our distribution arrangements, but we can tell you that our contracted rates increase annually, as is common in the industry, and these reported estimates are not an accurate reflection of our economics.”

*** Our contracted rates:

Kagan isn’t reporting the terms of the Pac-12 Networks’ carriage contracts. It’s reporting the average fee for subscribers across the country.

I have no reason to doubt the conference on the matter of its rate increases with, for example, Comcast or Cox:

An uptick of three or four percent annually is industry standard.

But the average fee for subscribers coast-to-coast depends, to a certain extent, on the breakdown of the audience:

Increase the number of subscribers paying the lower out-of-market rate, and the average fee drops.

*** Not an accurate reflection of our economics:

The conference isn’t disputing the specific Kagan estimates, it’s pivoting to the macro level.

And here again, I would agree. The economics are better than the plunging sub fees indicate.

The Pac-12 Networks are stable at worst and growing, slowly but steadily, at best:

— The number of subscribers has increase significantly, from about 12 million soon after launch to the current tally of 19 million (Kagan’s estimate).

— Moreover, the networks are expected to distribute $2.75 million to the campuses (approximately) in fiscal year 2018.

So how do we account for the apparent contradictions, for the contract increases and the lower fees, for the added eyeballs and stable economics?

In the fall of 2016, Dish Network expanded its agreement with the Pac-12 and moved the National network from a sports tier to a more accessible basic tier.

(The arrangement came soon after the Pac-12 struck a deal with Sling, which is owned by Dish.)

By moving to Dish’s basic tier, the Pac-12 Networks added 4.5 million out-of-market subscribers, according to Kagan.

Millions more out-of-market subs paying a much lower rate — estimated to be $0.05, which is standard — had the effect of lowering the average subscriber fee.

Just as Kagan reported.

In one regard, it seems, the development is encouraging for the conference: The National network gained eyeballs.

“They took lower revenue in order to reach more homes,” said Adam Gajo, a Kagan analyst who covers regional sports networks.

That piece, admittedly, is a tad fuzzy:

Did the conference drop its out-of-market rate (to $0.05 per sub) in exchange for moving to a more widely-accessible tier on Dish?

Did it drop the out-of-market rate in response to another development?

Did it drop the rate at all?

(Changing the rate for Dish would force the networks to change the rates for all distributors, according to the terms of its carriage agreements.)

Kagan believes the rate drop is exactly what happened:

With millions of out-of-market subscribers added to the audience pool, and with the lowering of out-of-market rate, the average sub fee plunged from $0.30 to the estimated $0.11.

(If there was an out-of-market change in the new or revised contracts, then the conference’s claim that its contracted rates include annual increases could still hold true: There could be increases in the revamped deals.)

Details aside, the Kagan estimates show just how far the Pac-12 Networks lag behind their peers at the SEC and Big Ten in subscriber fees and, in a larger sense, how the conference might have overreached its audience in creating six regional networks in addition to Pac-12 National.

What if the Kagan numbers are wrong?

Well, we should assume less than 100 percent accuracy, because 1) Kagan doesn’t have access to the contracts and 2) the fees are presented as estimates by Kagan itself.

But how wrong could the estimates be? Could the drop only be to $0.25 … or to $0.20?

Is it really all the way down to the $0.11 range.

“Kagan takes great pride in their accuracy,” an industry source told the Hotline. “I’m certain they would not have published a rate with such a dramatic swing if they weren’t comfortable with it.

“It’s not good for their business to miss that badly.” Related Articles Pac-12 Networks president Mark Shuken: On equity options, the secure “fortress,” AT&T negotiations and looming Tier One deals

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Pac-12 Networks: Assessing the short- and long-term options for the conference’s prized media company

The source added that fee estimates typically bring a margin-for-error of five to seven percent — and that margin increases for college sports networks because of the complication caused by the tiered fee structure (i.e., Ann Arbor vs. Albuquerque).

But let’s view this hypothetically:

Even if Kagan’s estimates for Pac-12 National are off by 25 percent — a complete whiff — the network would still be generating an average of just $0.14 per sub.

That’s in line with the Tennis Channel and the World Fishing Network but nowhere close to the Big Ten or SEC networks.

To reiterate: The fee drop doesn’t mean the Pac-12 Networks are cratering.

They aren’t.

But the Kagan estimates are more evidence of a lagging business … another nugget to help fill in the pixels … to help us gain a slightly better understanding of the finances.

After all, the Pac-12 Networks are a nine-figure annual enterprise owned by 10 public (and two private) universities.

Pulling back the shroud, whenever the opportunity arises, is important.

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