Why ESPN Is Willing To Pay UT $300 Million

It’s amazing the amount of dust that can be kicked up when a simple business deal is announced. Sailor wants to know just exactly what will this new UT channel be called. I kinda like BEVO-D on steroids, but I suppose that isn’t politically correct enough.

Our soon-to-be-gone neighbor to the North thinks Texas went too far this time.

Meanwhile miketag from I Am the 12th Man believes that the Longhorn channel will finally be the impetus for the Aggies to try and jump to the SEC.

Aside from the monetary gain, there has been a lot of talk about some of the other advantages Texas gets from this deal with ESPN. There is the recruiting advantage of having a platform for telecasting virtually all sports. Out of state recruits in the Olympic sports could find Texas more attractive since their families will have a way to follow their careers.

Others see the Texas-ESPN business relationship as especially unfair when it comes to some programming (high school football games involving elite recruits) and the general promotion of the Longhorns on the WWL.

ESPN has already announced that it will create and operate a broadband footprint established in high school sports. The plan is to live stream not just high school football games from around the state, but basketball and other centralized events such as track and field, tennis, soccer, etc.

In the NCAA rule book under “NCAA Rules for Media Relations” there is section 13.11.3 Radio/TV Show which states:

A member institution shall not permit a prospective student-athlete or a high school, college preparatory school or two-year college coach to appear, be interviewed or otherwise be involved (in person or via film, audio tape or videotape) on:

(a) A radio or television program conducted by the institution's coach;

(b) A program in which the institution's coach is participating; or

(c) A program for which a member of the institution's athletics staff has been instrumental in arranging for the appearance of the prospective student-athlete or coach or related program material.

It sounds as if this part of the plan will be a “stand-alone” aspect run directly by and through ESPN, but of course UT’s competitors will still see this as an unfair recruiting advantage.

There will only be one live football game telecast on this new channel, and some of our conference brethren point out that one game hardly makes it worthwhile. However there is another network already up and running that provides somewhat of a model Texas fans can expect during football season.

When you think of the new Longhorn Channel during football season, think NFL Network.

When the Texas game is being broadcast live by ESPN, ABC or Fox, there no doubt will be a live pre-game show on the Longhorn channel – along with a live post-game show.

There could be weekly “insider” shows, breaking down the previous week’s game. I would imagine that Bryan Harsin and Manny Diaz will have their own coach’s shows.

How about a live broadcast special on Signing Day?

There will also be a “UT Classic” venue available on the channel. UT has announced that they have acquired of all previous games that appeared on TV – no matter the network. The Big 10 has had great success with such nostalgic content, including past coaches shows from the likes of Woody Hayes and Bo Schembechler (my DVR will get a real workout if Texas follows suit).

There are lots of reasons for Texas to embrace this pact, but again you can find those who agree with miketag when he wonders, “why anyone except the most die hard of Texas fans would pony up extra money every month in order to watch women’s swimming and tennis.”

In other words, What’s in it for ESPN?

DUAL REVENUE STREAMS

When ESPN finally got a piece of the NFL TV pie, they agreed to pay $1 Billion a year to carry Monday Night Football. That was almost $300 million more a year than Fox is paying for the NFC ($720 million). CBS pays the NFL $620 million for the AFC games, and NBC throws in a little over $600 million a year for the Sunday Night Football package. While ESPN writes the biggest check to the NFL, they are left out of the play off and Super Bowl rotation, but they are still getting a lot of bang for their bucks.

If you are a basic digital cable subscriber you get channels in “bundles,” many of which you never watch. The cable (or dish) operator is paying a monthly retransmission fee to each of those channels. When ESPN was created in 1979, most channels were either carried by the distributors for free or the channels actually paid a small fee. As ESPN expanded its content to include college sports, they were instrumental in getting that template reversed.

Today the ESPN family of channels is the dominant force in pay TV. According to industry analyst SNL Kagan, the flagship network (ESPN) collects $4.58 per subscriber per month from distributors. That’s just the beginning. Other channels in the WWL family are also bundled to carriers – ESPN2 at 54 cents, ESPN Classic at 18 cents, ESPN News at 17 cents, etc. ESPN and ESPN2 are available in approximately 100 million homes across the U.S.

Currently ESPN collects over $550 million each month in subscription fees before selling a single advertisement.

That of course is just one of the revenue streams for ESPN. Ad revenue is expected to reach over $2 Billion in 2011. Total revenue for ESPN is expected to reach over $8.6 Billion this year.

The dual revenue streams of subscription and ad revenues will be in play for the new Longhorn channel as well.

For Texas, there is strength in numbers – or bundles – in joining forces with ESPN. The new Longhorn channel can be bundled with the other ESPN channels when negotiating with carriers. The channel can be a part of the basic digital cable package in Texas and Oklahoma, with ESPN charging just pennies per subscriber to add it to the bundle. One of the more pleasant consequences of this part of the agreement for Texas is that any Aggie, Sooner, Red Raider, etc in-state who has the basic sports digital package will be helping ESPN pay the $300 million to the Longhorns.

As for the out-of-region Longhorn fans who wish to get the channel it will be a premium buy. Generally the way those channels work is that the carrier and the content provider split the fee down the middle.

Based on the projected placement of the Longhorn channel on basic digital cable combined with selected premium buys out of state, those wondering who “would pay to watch UT women’s swimming and tennis” need not worry about ESPN eventually making back it’s investment.

”WE DON’T BUY GAMES – WE BUY CONTENT”

That is the quote from ESPN’s executive VP, John Skinner, and it helps explains why ESPN sees joining UT to create the channel makes sense. It is about getting as much content under the ESPN tent as possible, and distributing it throughout as many platforms as possible.

College football is a perfect example of how ESPN uses content to drive ad sales. As much as 75% of their college football inventory is sold in season packages before a single kick off. The rest of the commercial availabilities are basically divided up among the official BCS sponsors.

By controlling 33 of the 35 bowl games, ESPN worries less about lackluster matchups and sells its content as a total season package.

The deal with Texas is the first of its kind, but it may not be the last. ESPN can use such regional-centric agreements to help strengthen the sports tiers on digital cable. For instance, this past football season, ESPN unveiled ESPN Goal Line,” and has Buzzer Beater,” this basketball season. Both channels enable viewers to jump from game to game to catch as many highlights as possible. Negotiations for distributors to have the highlight channels will also include bundling other regional attractions, such as UT’s new venture.

”TV Everywhere”

A key component to this deal is the broadband rights that ESPN holds to UT events. ESPN plans to be at the forefront of another concept that could add another revenue stream –“TV Everywhere.” Time Warner Cable is a big proponent of the idea which means that your monthly cable bill will “bundle” services such as digital cable, digital phone and high speed internet, and would allow you to access television on any web-enabled device you have anywhere.

“TV Everywhere” is basically the reason ESPN360 became ESPN3 – in order to help brand it as an equal to its other channels. ESPN already has deals in place with major cable systems to pay a small fee for ESPN’s broadband content.

Much of the live contests produced for the new Longhorn Channel would not be available on the basic ESPN cable channels, but could be streamed on ESPN3.

For ESPN, the 20-year, $300 million deal with Texas works on many levels. It helps strengthen their regional “brand” while also expanding their control of BCS member TV rights. Having an independent channel was a strong factor in Texas not moving to the Pac 10 and becoming part of a conference network (probably run by Fox). With UT still in the Big 12-2 it slows down the momentum for any more expansion in the near future among the other conferences, which will help keep broadcast rights fees down for ESPN. It also gives ESPN another arrow in its cable, broadband and wireless quivor when it comes to negotiating fees with distributors.

But really, there is one basic answer as to why ESPN is willing to pay Texas $300 million.

BECAUSE THEY CAN