Thursday, May 24, 2012

TV Rights Q&A with sports lawyer Timothy Epstein

There has been so much speculation on the ACC TV contract, that ESPN felt the need to post a press release explaining and defending the deal. BC guy Tim Epstein specializes in sports law. He is familiar with standard TV rights deals and has some knowledge of the ACC TV deal. To get a better understanding of the situation and the ACC's options, I asked him the following questions. His answers follow.


1. Why would the ACC give the Commissioner the right to agree to a deal without their approval? Is this common among college conferences?

Tim Epstein: With the TV deals, these were unanimously approved by the schools. There is an ACC television committee among the members. There is no carte blanche given to the Commissioner to get a deal done. When expansion was agreed upon in September, this was done by the school presidents. They agreed upon the expansion knowing that money would be adjusted relative to the existing ESPN deal. Any specific details get floated to the television committee after the big picture is decided by the presidents (in consultation with the ADs, financial consultants, and legal).

2. Do the schools have the right to veto the agreement? Is a simple majority needed to ratify the deal?


Tim Epstein: I am sure that the response from both the ACC and ESPN would be that a right to veto is moot here since there was unanimous approval on the initial deal. Each conference has voting procedures set out in its constitution or bylaws, but these are not usually readily available to the public, so it is difficult to know what is “common” amongst the conferences in terms of voting. Since the ACC Bylaws are available for purchase, but not for free viewing, it would be inappropriate for me to cite to the specific bylaws. One example that has been brought out in public by ESPN is the Big Ten’s process of voting in Nebraska a couple of years ago. Pursuant to Big Ten Bylaws, acceptance of Nebraska into the Conference required an affirmative vote of seventy percent of membership, voted on by the presidents and chancellors of the member schools. You could extrapolate something similar for TV revenue.

3. Even though the ACC is in a long term deal with ESPN that includes "look ins" why can't they sue ESPN for bad faith? This deal is clearly undermarket but because the ACC doesn't have a true out, they can't shop their rights to NBC/Comcast, FOX, or CBS.

Tim Epstein: While there may be disappointment in the deal, there were financial consultants involved who would place the ACC deal above true market. There are timing aspects of other deals. This is undermarket relative to Pac-12, but again this is not necessarily apples to apples. The Pac-12 might actually be an overpayment. Keep in mind that course of dealing with ESPN has been good for the ACC. The ACC hired multiple financial consultants on this deal, so it was not done without knowledge.

Even though some may view this deal as disadvantageous to the ACC and its member schools, the ACC probably does not have a valid claim for bad faith against ESPN for a number of reasons. Primarily, while this contract (15 years, $3.6 billion) may fall short of the other four power conferences’ TV deals; it is by no means unfair or unconscionable from a substantive perspective. As the examples of Syracuse and Pittsburgh demonstrate, the ACC is still an attractive location for schools, in large part due to its television revenue. Just because the contract is not ostensibly on par with the Big Ten, SEC, Pac 12 and Big XII does not mean that the ACC is getting an unfair shake here. Revenues upward of $17 million per school per year would have been unheard of just a few years ago.


From a procedural point of view, a bad faith or unconscionability claim is equally weak. ESPN has broadcast ACC content since its inception in 1979, and the two entities have maintained a strong relationship since that time. This relationship hurts the ACC’s chances of proving bad faith, because the network has historically proved quite advantageous to the Conference, and the working relationship creates a presumption that the dealings were conducted at arms-length. It is not at all uncommon for business entities that have contracted for a long period of time to pay for goods or services slightly below market rate in order to maintain the strong relationship. Moreover, as was stated in the question, ESPN does not have a monopoly on the broadcast of collegiate athletics. The ACC could have looked to NBC/Comcast, FOX, or CBS as an alternative to the contract it signed with ESPN. The Conference chose not to do so, and instead, signed this deal.


I think that people are focusing on the additional members being a change in material circumstances as a reason to renegotiate the deal. That is true, which is why different numbers are in with the entrance of new members, but people simply want these numbers higher. That brings us to valuation, which intelligent minds will differ on whether the new numbers on the May 9th ESPN deal are at, below, or above market.


4. Why are we still at the stage where the conferences allow ESPN to poach member schools? I know the ACC has been guilty of it in the past, but I could never understand the ESPN angle. For example, ESPN was paying $7 million for the rights to Syracuse Football. Now they will pay $17 million. Florida State is getting $17 million but might get $25 million in the Big XII. ESPN knows this and knows what it will pay in the new conference. Shouldn't the conferences build in some sort of protection so their main supplier doesn't manipulate membership?


Tim Epstein: This question requires a few separate responses that may be a bit disjointed. Initially, I think ESPN's influence on conferences is a bit overstated. The conferences surely recognize that bigger is better, and conference realignment is a direct result of the drive to increase television revenues, but to suggest that ESPN is actually dictating the movement of institutions is misguided. At most, ESPN can say, “if you add member school X, we will pay you Y.” While money talks, conference affiliation is still a decision made by university presidents and chancellors, and one would hope that academic and non-football considerations still come into play. Also, the Syracuse example focuses too much on the small picture. Syracuse may be earning a greater share of revenue as a result of its move, but ESPN is not paying the school $10 million more per year just so it can broadcast Syracuse football. ESPN and the ACC are looking at the big picture -- ESPN is paying this sum for the rights to broadcast all ACC football, and the Conference is undoubtedly more attractive as a fourteen team conference than the current Big East is as a cross-continental amalgamation of schools. This, and an academic upgrade, is why Syracuse left, and this is why ESPN is paying.


One must also not forget that Syracuse and Pittsburgh make ACC basketball all the more attractive as well because the schools will play regular matchups with traditional powerhouses like UNC and Duke. Obviously football reigns, but in the ACC especially, basketball cannot go unnoticed. Finally, the conferences do have some level of protection against schools exiting in the way of exit fees and waiting periods. The Big East, for example, just voted to raise that fee from $5 million to $10 million. Again though, this protection is more against schools leaving in general.


While ESPN has a great deal of market power, it is not the sole supplier of college football, and cannot really manipulate schools other than by offering economic incentives. From the ACC’s point of view, its strongest protection against departure of member institutions could be more success on the field. Its traditional top football programs ( Miami and Florida State ) have not faired well on the national stage, and this has hurt the Conference’s attractiveness to its suppliers (read ESPN). This perceived weakness has only exacerbated the problem, as now, schools like Florida State are worried that the ACC will no longer be viewed as a “top-tier” conference, and thus, the Big XII has become a viable alternative from a football-centric perspective. So for Florida State, it has really made its own bed by underperforming as a national power in football, thus potentially adversely affecting the price ESPN was willing to pay for the ACC as a whole.


Finally, $25 million is not something that I have seen justification for. The only fact out of the Big 12 is that the average of the deal comes out to $20 million per year. This does not start until 2015. These are graduated deals. For the ACC, the whole length of the deal is $17 million plus, but a different formulation puts the ACC at $19 million. So, you could really be talking about another million per year if a school went to the Big XII. ESPN has no interest in creating a have-not conference when they have created a have in the ACC. The ACC is probably the most balanced from markets, geography, sports, and academics. My read is that TV values are maybe 30% of athletic budgets at this point. It is big, but not everything. The SEC gets more than the ACC, and deserves more for football. The Big 10 got a big investor at the right time, and you could say the same for the Pac-12, so timing factors in. Those conferences also get more rights from their members than the ACC gets from its membership in areas to monetize. I love BC, but in terms of football, the ACC does not have the same value from a branding standpoint, particularly with FSU and Miami being down recently.

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12 Comments:

At 10:17 PM, Blogger chicagofire1871 said...

Great post.

Am I understanding it correctly that the definition of the ACC 17+ deal means that each school gets 17 million a year initially and then it goes up from there or about 19 million if you average the total payments over the 15 years?

19 million a year on average would be pretty darn competitive,no?

 
At 11:15 PM, Blogger ATL_eagle said...

I don't think that is competitive. We are behind all the current deals and all the others are up for renewal in the coming years. The SEC and Big Ten might have double our revenue by 2016.

 
At 1:27 AM, Blogger mod34b said...

Forget who can score more points, who can provide a better education for student athletes; etc. Now its who can score more $$. Some find it all very fascinating. I find it Sickening.

Personally, i would welcome FSU and their horrible attitude toward college athletics, departing the ACC, and, yes, then let the chips fall where they may. If the ACC falls apart, a new league of like minded schools will form and BC will find a new home with values compatiable with BC values

 
At 7:35 AM, Blogger Erik said...

FSU's actions this May will make beating them on the field all more satisfying (some day?)
(and that goes for everyone not just BC)

 
At 9:40 AM, Blogger bostonfoodie said...

I'm with Mod34b. I love BC first, BC athletics second. If this is the future of college athletics, I'm growing in increasingly uncomfortable with the notion of keeping up with this race at the potential expense of the overall mission of BC. Our long term goal should be to produce the best college graduates in the country, acedmically and professionally. Some schools have pared this with college athletics well (Stanford, Northwestern, Notre Dame). Some schools have benefitted from the removal of college athletics (Chicago). Once these ESPN/ACC/television rights issues begin getting in the way of our academic mission, I'll be the first to propose an end to our football program. I don't miss a home game, but I'll find something else to do on fall saturdays.

 
At 10:35 AM, Blogger Knucklehead said...

I don't see where the Athletic Department at Boston College is getting in the way of academics at Boston College. I do not even see that as an issue on the horizon.

Boston College is not the school publicly looking to leave the conference. I don't think the other schools in the conference should give up TV money to FSU. I think ESPN may want to think about paying FSU more than the other schools though.

The lack of good football recruiting in the offseason, the average results in 2011, and the mediocre coach do not make for good football conversation right now.

Basketball is rebuilding hopefully.

Hockey is great as always. There is not much info on recruits. The program is great hands now under Jerry and will be in the future be it with coach kavanaugh or coach brown.

The ACC television deal is interesting in terms of the possibilities going forward with realignment/playoff and how they impact Athletics at the University.

 
At 11:09 AM, Blogger NEDofSavinHill said...

Is Epstein on ESPN's payroll? The ACC tv deal stinks. If the Big 12 is going to get $200 million ( 20 per team) for it's primary rights and millions more for it's own networl what additional value will FSU and Miami add? Two stiffs in football Pitt and Bernie Fine took a 13 Million deal up to 17. FSU and Miami plus the 3rd tier rights would insure a 6 to 8 million dollar increase per year for FSU. What ACC cshool would turn down that money. 2. Epstein suggests that ESPN didn't tell the ACC who to add in it's expansion. Is he unfamiliar with Gdf's assertion " ESPN told us what to do".Maybe the ACC's tv consultants were the Fenway Group. The ACC is on the road to oblivion. 3. When venal or corrupt people lead an organization ( Madoff or Corzine) it invariably fails. Does Swafford have his son working at Raycom that broadcasts ACC content? Does Gdf have his daughter at the Fenway Group? Conflict of interest ot just nepotism.

 
At 11:12 AM, Blogger Tim said...

mod/ foodie,

Don't you think that $20mil per year might benefit the University as a whole (academics, clubs, scholarships, buildings, initiatives, service trips, etc. etc. etc.)?

 
At 12:22 PM, Blogger Tim Epstein said...

Great comments, everyone.

Ned - I am not on ESPN or the ACC's payroll. I am looking at the ACC deal based on my work in the sports space trying to be as candid as possible. Thanks

 
At 3:28 PM, Blogger bostonfoodie said...

Tim,

Great question. You need to start with the balance sheet of the athletic department, and, further, what percentage of university funding goes to the Flynn fund, and what percentage of university real estate is exclusively devoted to our D1 athletic programs. First, as a former club officer and board member of an athletic club, I can assure you clubs receive no funding from the flynn fund. Actually, the flynn fund takes funds from the alumni donations for clubs and redirects it to varsity athletics, which is why men's rugby and crew developed their independent 401(c)(3) boards.

Boston College collects $14.7M from undergraduate student fees in order to fund the differences between revenues and expenses. While they do show a balance budget for all sports but football (and a $2M profit on football) that $14.7M is not coming from ticket sales or TV, its coming from all students. So, in short, our greater undergraduate body supports the athletic program, not the other way around.

A second question is how much of our very valuable real estate is exclusively devoted to our varsity athletics. That could be devoted to labs, an engineering school, or some other endeavor that would increase our school's profile.

Again, I greatly support our athletic program, and part of this is playing the devil's advocate, but I'm not going to blidly follow it for the sake of support Gene or the idea that college athletics (specificaly FB)makes for a better institution.

The best support I can give for athletics is that it brings our university together. Current and former Eagles have a reason every Saturday (and in the winter, 4 times a week) to come together and root for our team, and, by extension, ourselves. It develops a great community which leads to greater reinvestment in all parts of the school and it bridges generations.

 
At 5:16 PM, Blogger LES said...

The problem with these deals is that they are ultimately a risk hedge (derivative-esc). As a result, they very much depend on the timing of the negotiation against the ebb and flow of atheletic departments.

Sadly, teams that excel and appear on tv more than others, do not get appearance bonuses. Instead income is shared relatively evenly. I can only assume that this is designed to create parity and broaden the overall appeal of the sport (by creating an environment that encourages equal exposure among member teams). However, the length of the contracts does not allow for teams that are not consistently at the top to benefit from occasional Cinderella runs. In other words, it disincents athletic departments, at non-power schools, to spend money to move up the ladder.

Ultimately, this model encourages conferences to seek the membership of consistently good teams(powers) in an attempt to maximize their brand appeal when contract renegotiation occurs. In the end, as tv revenue/exposure continue to grow in importance, it will lead to two vastly seperate tiers in D1 athletics. Fundamentally, that is what is happening.

 
At 7:50 AM, Blogger http://sportsfunia.com said...

very nice work

 

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