The second of back-to-back Hotline posts on news from late last week examines the conference’s business affairs. It was spurred by two developments, one a head scratcher, the other a jaw dropper.

* The head scratcher: Comments by outgoing Pac-12 Networks president Lydia Murphy-Stephans.

* The jaw dropper: Big Ten conference distribution projections for FY18.

Yes, the items are related. Both are about money.

Yes, the Hotline keeps close track of Pac-12 money, for three reasons:

1) It’s all about the money.

2) Even when they say it’s not all about the money, it’s all about the money.

3) The conference itself, so transparent and proactive on so many issues, is extraordinarily guarded about the finances of its operations.

It only provides what federal law requires it to provide, and not a nugget more.

Consider how many resources (people power, money, etc.) have been plowed into the Pac-12 Networks over the years to promote thousands of athletes at public universities, and the costs are treated like nuclear codes.

(Does the conference have something to hide? Would it be more forthcoming if the cash flow were better? At least one set of numbers is not good and getting worse, as we’ll see below.)

First, the head scratcher: Murphy-Stephans, who’s leaving her post at the end of this month, did a Q&A with Cablefax, an industry website.

As noted previously, she has been unfairly criticized for the Pac-12 Networks’ modest distribution nationally and the DirecTV impasse. The obstacles — specifically, the cost and structure of the P12Nets — were in place before Murphy-Stephans (or her predecessor, Gary Stevenson) took over

But three comments jumped out from the Cablefax Q&A, and all three speak to the heart of the frustration fans and campuses have experienced with the P12Nets:

*** Murphy-Stephans says that “no athletic director or administrator was ever told the Pac-12 Networks would deliver the same or more revenue than what its peer conferences are currently getting from their networks.”

My understanding is that this is essentially true: Commissioner Larry Scott sold the idea of the P12Nets to the presidents/chancellors as a means of: gaining exposure for the Olympic sports; guaranteeing all football and men’s basketball games would be available nationally; and creating a long-term investment that would return money to the campuses.

Becoming a Big Ten Network-esque cash cow? That was not promised, as far as I know.

However, the assumption on both the conference and campus sides was that the P12Nets would be significantly more profitable than it has been to date. So the comment, while true, belies a greater failing

*** Murphy-Stephans says the P12Nets were “profitable in year one.”

While the networks may have turned a slight profit from operations — and Scott has said as much — it doesn’t begin to tell the full story.

Prior to the mega-deal with Fox/ESPN in 2012, the schools owned the rights to Tier 3 programming: Football or basketball games that weren’t picked up by national networks were instead owned by the schools and sold, through multimedia partners, to local carriers for broadcast.

In order to maximize the inventory for ESPN/Fox and the creation of the P12Nets, the conference pooled the broadcast rights to all games, including the Tier 3/local rights.

The Tier 3 /local inventory became, essentially, the Pac-12 Networks inventory — the games you see now that ESPN and Fox don’t want.

Well, that meant the schools had to buy back the Tier 3 rights from multimedia partners that brokered the deals (i.e., Learfield and IMG).

The Hotline has addressed this matter several times in past years but it’s worth repeating: Many schools owe $1 million (+/-) annually to IMG and Learfield for many years.

From the standpoint of gross dollars, Murphy-Stephans is correct: The P12Nets were profitable in Year One.

From a net dollars standpoint — when you include the $1 million/yr owed by schools for the Tier 3 buyback used to create P12Nets inventory — then the P12Nets were absolutely not profitable in Year One.

*** In response to a question about the profitability of the P12Nets relative to its Big Ten and SEC counterparts, Murphy-Stephans places a significant amount of responsibility for the revenue on the schools:

“There are other sources of revenue. There’s revenue from the NCAA based on the revenue-generating sports and how well each university performs in the football postseason and men’s basketball postseason. That’s a significant source of revenue for universities.

“If the universities are not performing well in postseason play compared to other Power Five conferences or other conferences in general or other schools, there will be a revenue gap. If ticket sales are less than other conferences, there will be a significant gap. Then there’s merchandise sales and there’s multimedia rights with third-party rightsholders. So, all of those contribute to the gap.”

It strikes me as odd that any conference official would ever criticize the campuses for lagging ticket sales.

After all, one gigantic reason for any lagging ticket sales is the immense challenge posed by the kickoff/tipoff times that were SET BY THE CONFERENCE 1) in its contracts with ESPN and Fox and 2) in the programming selections for for the P12Nets.

One could take the comments as such: We’re going to create a problem for you and then blame you for not solving the problem.

Murphy-Stephans added:

“Yes, Pac-12 Networks is one factor. It certainly shouldn’t be called out. I don’t think it’s fair in any way to call out Pac-12 Networks as the source of the deficiency the universities or maybe those particular athletic directors or administrators are citing.”

One could make that case, I suppose, but remind me: Which revenue stream has increased by the greatest percentage over the past decade?

It’s the media rights — the one revenue stream controlled by the conference.

The jump in the value of live sports far exceeds the jump in value of, say, merchandise sales or multimedia rights, and it’s not even close.

And the conference created a business model for the P12Nets that is generating far less revenue than the models used by other conferences.

That’s why the P12Nets are being “called out.” Because media rights is where the money is … and where the Pac-12 money isn’t.

(Not only is distribution lagging without the leverage provided by a partner, but the expenses for operating a wholly-owned, seven-feed network are extraordinary. Those expenses, in turn, helped establish the initial subscriber fee that DTV refuses to pay.)

All of which brings us to the jaw-dropping news from last week: The report that Big Ten will send $51.1 million to each campus starting in 2018.

That’s not speculation, folks.

That figure came from a respect journalist (Angelique Chengelis) working for a respected publication (Detroit News) having obtained documents from Michigan itself, in the form of a FY18 budget presented to the university’s regents.

The only issue, it would seem, is whether Michigan’s estimate is correct.

I did some digging and found that past UM budget projections of Big Ten payouts were accurate to within $100,000.

Which means they were pretty damn accurate.

Which means that we’ll assume the Big Ten will send $51.1 million to its members in FY18.

Which means the Hotline needs to update the FY18 distribution projections made last month:

Big Ten: $51.1 million

SEC: $45+ million

Big 12: $37.5 million (does not include Tier 3 rights)

Pac-12: $32.5 million

That’s not a pretty sight for the Pac-12, which is getting lapped even by the Big 12 when Tier 3 rights are added to the mix.

The dollar disparity is crucial from a competitive standpoint (recruiting budgets, coaching staffs salaries and capital expenditures).

In regard to the Big Ten specifically (Pac-12 presidents/chancellors view the B1G as their one true peer/rival academically and through the Rose Bowl relationship):

The distribution gap is essentially $19 million per school, or a $228 million, single-year conference-wide deficit.

Tally that up over the lifespan of the current Tier 1 contract — we’ll assume, for this exercise, that the rates of increase are equivalent — and the Pac-12 will lag the Big Ten in distribution to campuses by $1.6 billion over the sweep of the next seven years.

Now, Scott has been fairly adamant that the P12Nets business model is right for the long haul, because 100 percent ownership of content 1) allows the conference to “be nimble” (his phrase) in a rapidly-changing landscape of technology and consumer behavior, and 2) will provide great flexibility when the Tier 1 deals expire.

In the meantime, it appears, the Pac-12 will get flattened in the revenue game — unless something changes.

The Tier 1 deals can’t change. The only thing that can change is the P12Nets business model.

Will seeing the whopping numbers … the Big Ten handing out $51.1 million to its campuses … the $19 million/per year/per school disparity in distribution … prompt the Pac-12 chancellors/presidents to insist on an equity sale?

(And would an equity sale in the next two or three years bring maximum value for a network that is viewed as less than a roaring success?)

It’s far beyond my scope to guess what the bosses might be thinking.

But this much seems clear: If those numbers … $51.1 million payout/$19 million annual per-school gap … don’t prompt a change, nothing will.

For the next seven years.

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