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College Hotline - Larry Scott on the Pac-12 Networks: “Optimal model for us”

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    Part two of the Hotline’s look at hot-button issues in the Pac-12 takes us to the hottest-button issue of them all: The Pac-12 Networks, which are, depending on your view, a success, a failure, an epic failure or a fireable offense.

    Yes, there are those who consider the Pac12Nets a success, and it’s not an insignificant contingent. How many? Impossible to say, except we should keep in mind that the frustrated are always more vocal than the satisfied.

    Those satisfied with the Pac12Nets are divided into two groups:

    1) Fans with no distribution problems, the HD option at minimal/zero additional cost, and (in some cases) a passion for Olympic sports.

    2) Enough presidents/chancellors to ensure that the Pac12Nets are not, in fact, a fireable offense for the man in charge.




    The state, and future of the Pac12Nets was the second topic I discussed with commissioner Larry Scott during our recent chat.

    (Disclaimer: As with all previous and forthcoming installments in this series, the goal is not to defend or lambaste the conference.

    (First and foremost, the Hotline always strives to inform the public discussion. In regard to many Pac-12 issues, there are gaps in the narrative. This series is an attempt to fill in some of those gaps — not all, but some — based on my 45-minute conversation with Scott on a variety of topics.

    (Hopefully, readers will come away with a bit more insight into the league’s inner-workings. If that changes your opinion on certain issues, fine. If it doesn’t, that’s fine, too.

    (Scott on Asia/Pacific Rim initiatives can be found here.)

    Before we get to the details of the conversation, here’s the key quote from Scott: “I look at my role as the steward of the value of the content for the members.”

    We’ll get back, because it’s worth repeating.

    *** With nothing new on the DirecTV front – “We keep working,” Scott said, “but I can’t promise something will happen” — we delved into the topics of greatest interest to me:

    Has the conference seriously considered selling equity in the Pac-12 Networks? If so, what is the status of that endeavor? And if not, are Scott and the presidents/chancellors willing to accept a significant revenue gap with the SEC and Big Ten for years to come?

    Scott’s response: No equity sale in the near future:

    “After year two, we were getting frustrated with DirecTV’s response and decided to step back and evaluate whether there were other options to consider, whether there was a possible partner to consider.”

    Over the course of 18 months, he explained, the conference talked to many of the major players in the content delivery business, including Twitter, Hulu, Amazon, Apple and Facebook, along with the traditional partners (ESPN, Fox, etc.).

    In addition, consultants retained by the conference determined an asset value for the Pac-12 Networks “because we wanted the CEOs to understand there was significant value.”

    (Scott didn’t say what that asset value is. More below.)

    “We looked at the landscape, weighed the pros and cons and decided to remain independent. We concluded” — the issue never came to a vote — “that we had the best model knowing it’s a very dynamic market.

    “We believe it’s the optimal model for us.”

    *** How can it be the optimal model when the subscriber and revenue figures lag far behind those of the SEC and Big Ten networks? When there is no distribution on the major sports delivery system in the country (DTV)? When many fans in the footprint cannot get the Pac12Nets for free on HD and some fans in the footprint can’t see all the football and men’s basketball games?

    Many industry analysts with zero stake in the race have told me in recent years that the Pac12Nets are, at best, a mild success.

    So why does Scott consider the current model optimal?

    Because of these seven words:

    “We are taking the longer-term view.”

    And because of this:

    “I look at my role as the steward of the value of the content for the members.”

    Scott is aware of the fan (and campus) frustrations with Pac12Nets distribution and revenue. But whether you agree or not, his priority is the long haul – and the presidents and chancellors support that approach.

    Scott believes the windfall worth waiting for, even if it means the Pac12Nets distributions lags those of the B1G and SEC networks by $50 million (or more) annually.

    *** What does the long haul mean?

    It could mean up to eight more years. The current Tier 1 deal with ESPN and FOX expires in the summer of 2024. When that happens, the conference will take everything it owns to the market.

    In Scott’s view, the confluence of rising demand for live sports (good insight here) … and changes in media landscape … and demand for Pac-12 content … will work to create a bonanza for the conference at the negotiating table with fill-in-the-blank (ESPN, FOX, Hulu, Facebook, Google, etc).

    “We want to create the most long-term value,” he said. “That’s the mission.”

    Is that the right move? Scott and his consultants believe it is. There’s no way to know for sure, of course. One could argue that an unforeseen development in the ever-changing landscape could leave the Pac-12 in a sub-optimal situation.

    If the winds change, the conference could always move to sell 49 or 51 percent of the Pac12Nets.

    But at this point, it appears the current model will remain in place for years … that means current distribution and revenue trends will likely remain, as well … and the presidents/chancellors are fine with that, he added.

    *** Why are they fine with that?

    Scott told me during our discussion — and has said this periodically over the past few years — that the CEOs simply like the idea of owning a media company. (All the better that it has a rising valuation.)

    As we’ve seen repeatedly over the years, the presidents and chancellors take a far different view of the landscape than fans and athletic departments. (That doesn’t mean their view is correct, by the way.)

    Scott also believes, based on feedback from consultants and discussions with other media companies, that there will be new distribution options for the Pac12Nets in the next 12-to-18 months.

    “There will be very dramatic changes, more opportunities for fans to access the Pac-12 Networks.”

    *** Those are the highlights of the conversation with Scott. But I wanted to take a quick stab at valuing the Pac-12 Networks in order to add context to the conference’s reasoning.

    This is an extremely rough approximation, but several industry sources have estimated in recent years that a multiplier of 7x revenue seems reasonable for the Pac12Nets.

    Based on $116 million in revenue in FY15, the entity would be worth more than $800 million.

    (You can be sure the presidents and chancellors like hearing they have 100% ownership of a media asset worth high-nine figures, and perhaps more, on the open market.)

    We don’t know if the conference would sell 49 or 51 percent ownership, so let’s just assume an equity sale would produce half the total valuation, or $400 million.

    That’s $33 million per school.

    And that’s a whopping figure, except when you compare it to the cost of staying the course.

    Staying the course means a per-school deficit of at least $5 million annually, over the next eight years, when compared to the per-school distributions provided by the SEC and Big Ten networks.

    Then again, we don’t know the valuation growth rate of the Pac12Nets, and the potential premium on the open market due to multiple bids.

    xxxxxxxxxxxx

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