The Longhorn Network: A Business Model For The Future?

AUSTIN, TX - SEPTEMBER 3: Commentator Lowell Galindo of the Longhorn Network Game Day talks with former Texas Longhorns basketball players and current NBA stars T. J. Ford (C) of the Indiana Pacers and Kevin Durant of the Oklahoma City Thunder before the Texas Longhorns' NCAA game against the Rice Owls on September 3, 2011 at Darrell K. Royal-Texas Memorial Stadium in Austin, Texas. (Photo by Erich Schlegel/Getty Images)

For the sports fanatic, it's a Brave New World out there in video land. Technology and market forces are changing at such a rapid rate that the only stable content for both providers and distributors is live sports. It has a short shelf-life and can be best enjoyed in the moment. You are a coveted audience, and reaching you - on any video platform - is a goal of every media outlet today.

We have seen sports programming move progressively from over-the-air to cable and now increasingly to the regional sports networks. Media analyst SNL Kagan reports that sports programming accounted for 46% of the pay-TV industry's programming costs in 2011.

Also according to Kagan, sports programmers saw $9.5 billion in revenue in 2001, with regional sports networks (RSN's) accounting for $4.5 billion of that amount.

All the big boys, ESPN, Comcast/NBC Universal, Time Warner, Fox, et al, are trying to tap into the new platforms (iPads, iPhones, gaming systems, computers, etc) while also keeping cable and satellite subscriptions at an acceptable rate.

It is all moving so rapidly that figuring out the next move is creating massive angst among industry members.

If anyone tells you they know exactly what the sports media landscape will look like in five years they are lying.

They can make an educated guess, where theses regional sport networks are going, but that's all it is - a guess.

The biggest guess is just what kind of business model works best with a RSN. It's a major part of the protracted negotiations between ESPN and distributors over the Longhorn Network. Both sides think they know the best way to approach distribution, and both sides are not willing to give in just yet.

Getting the Longhorn Network wide distribution has obviously been a frustrating problem. The delay is a direct result of the ESPN business model. It is one of three basic models being used for RSN's and it's one ESPN is eager to establish for future use.

The Longhorn Network - A "Turn Key" Operation

When DeLoss Dodds arrived in 1981, UT's media rights system was a mess. Basically, there was no system. Both the football and basketball coaches had contracts that gave them authority over their TV and radio shows and they were in charge of selling them. It not only was inefficient, it was rife with potential conflict of interest. The coaches spent part of the off-season shilling for their shows because they had to cover production and distribution expenses and then keep what was left over.

Coaches aren't media salesmen, so they ended up hitting the same wealthy supporters and alumni that the athletics department was, and that led to misunderstandings and bad blood.

Dodds moved to take all media rights out of the department and turn it over to a third party, one who would pay the coaches a flat fee and take over all aspects of the shows. He partnered with Host Communications which eventually folded into IMG College.

The system helped Texas become the top money maker in collegiate sports.

When Dodds first studied the idea of a Longhorn Network, he assumed it would be a loss leader or at best a minor financial boost. It was designed to be a home for the occasional football game that wasn't picked up by the networks, and a place for UT's Olympic sports.

Then ESPN dropped in with an Offer Texas Couldn't Refuse.

The Advantages of ESPN Ownership

It's another turnkey operation, with UT outsourcing all production and distribution to ESPN. IMG College still manages the rights and gets 17% of the deal as the sales and marketing director. Texas has no ownership in the network; they are just obligated to provide content. No risk and a guaranteed $300 million over 20 years. Texas sees it as a fundraising tool that is also profitable. It's spreading the brand while encouraging alums to give back. Long term the Athletics Department believes that it will be more than a sports network and will highlight other aspects of the University.

Regional networks are so attractive to programmers because they reach the dedicated fan who not only wants to see events live, but wants the "insider" information from coaches and players that can only be seen on an RSN (such as practices or game tape breakdowns).

For ESPN it locks up one of the top brands in the game, and it gives them programming to test their new business model that includes the "TV Everywhere" concept. They want to give the fan base the opportunity to access games and insider information on digital WatchESPN through their iPhone, iPad, and computer or gaming system while acting as an incentive to not cut the cord of cable TV.

The Disadvantages of ESPN Ownership

Texas has little say in how negotiations for distribution go. ESPN is convinced that regional networks, available on multiple platforms, are a revenue stream of the future. They also believe that keeping it tied to a cable or satellite subscription is essential for the time being.

While the $300 million over 20 years is a small piece of change to ESPN, the production values of the network do not come cheap. They have 30-40 employees in Austin, they hire freelancers and they bring in directors and producers and even some other production employees from Bristol to work specific shows. If they are going to run a regional network, it must have the ESPN look and that costs money. The best way to get back that investment is through cable and satellite subscriptions AND having the LHN on basic cable in Texas.

Verizon FIOS is the only major provider that is carrying the LHN. There are several small cable systems that have the channel, but Time Warner Cable is the big dog in this fight.

Time Warner simply will not pay 40 cents a month per subscriber for basic cable. It's a standoff that threatens to again stretch into football season, although ESPN is hopeful that a deal with another carrier, such as AT&T U-Verse, might put enough pressure on Time Warner to bend.

As hard line as Time Warner has been at the negotiating table, they understand the value of regional networks - enough to begin acquiring sports programming, thus putting them on the same side of the table as ESPN (more on that later).

Pac-12 Networks - The Anti-Longhorn Network

On Aug. 15th, the Pac-12 will debut not one, not two, but seven total networks - one national and six regional. It's the polar opposite model of the Longhorn Network. Pac-12 Commissioner Larry Scott convinced league members to accept an NFL-style media rights package.

Just as Pete Rozelle convinced the NY Giants, Chicago Bears and Washington Redskins that it was in their best interest to have financially healthy franchises in Green Bay, Buffalo and St. Louis, Scott sold USC, UCLA, Washington and Oregon on the idea that Oregon State and Washington State needed to be financially stable as well.

The Pac-12 controls all media rights for every member, even their digital rights. Scott sold a $3 billion, 12-year contract to ESPN and Fox to broadcast 44 games a year. There will be 35 live football games on the Pact-12 networks. Every home basketball game for every team will be broadcast on one of the networks.

There are three different "zones" for carriage of the networks. Zone 1 will be the home markets (Los Angeles for both UCLA and USC). Portland was designated the home market for Oregon and Denver is Colorado's home market. In the Zone 1 markets, the national Pac-12 network and the specific regional network will be on basic cable.

Zone 2 markets are those in the Pac-12 states without home teams, which will have the Pac-12 network on its digital tier (markets such as San Diego and Sacramento). Zone 3 is anyone else across the country who can offer it on the premier sports tier.

Scott believed that by making the "hyper-local" regional networks, he would be able to have an easier time of getting distribution than the Big 10 did when it started.

He was right. The Pac-12 already has distribution deals in place with Time Warner, Comcast and Cox, and will be available in over 40 million homes the day they sign on. The Pac-12 networks, combined with the national contracts are expected to generate almost $30 million a year for each school over the life of the contract.

Not bad for a league that was the worst of the major conferences in media rights deals just a couple of years ago.

Time Warner - Cutting Out the Middleman

As rights fees have skyrocketed distributors such as Time Warner and Comcast have grown tired of paying higher rights fees (and then passing the cost on to their customers), so they have decided to work both ends of the business model.

Comcast plans to launch its 12th regional sports network this fall, in Houston. It will broadcast Rockets basketball games, with Houston Astros baseball games to follow next year.

Time Warner is the largest cable provider in Southern California (with over two million subscribers) and they now want to become the top programmer in the region. TWC has joined with the Los Angeles Lakers to create two RSN's that will hit the air in October. Time Warner Cable SportsNet and Time Warner Cable Deportes will be built around the Los Angeles Lakers, but also include soccer and other regional sports. Cable systems in the L.A. area will be charged $3.95 per customer for each of the networks, while outlying cable outlets - including all the way to Hawaii - will be charged $1.95.

The Los Angeles Dodgers media rights will go up for bid sometime next year and TWC is expected to be a major participant.

All this double dipping makes the negotiations over the Longhorn Network even more interesting. There are new reports that TWC wants to try again to buy into the Longhorn Network.

Could it be that part of their reluctance in making a deal with ESPN would be to put pressure on the WWL to sell a portion of the network to them?

Like I said, there are some very smart people who are making educated guesses as to where this will all lead, but nobody knows what the landscape will look like a year from now, much less five years.

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