The Media and Intercollegiate Sports



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Chapter 7


The Media and Intercollegiate Sports
Coaches get put under the pressure of not graduating ...players ... but then you're going to play during the week .... the NCAA wants to talk about ... graduation rates, but they allow — and TV dictates it — that kids go out and miss classes due to games during the week.

— Randy Edsall, Head UConn Football Coach


The financial stake in television revenues of those colleges and universities with big-time programs has become enormous, …even those schools with Division III programs share modestly in the revenues generated by the NCAA contract to televise “March madness.”

— James L. Schuman and William G. Bowen



7.1 Introduction

As noted in earlier chapters, network contracts provide the NCAA and its members with hundreds of millions of dollars in annual revenue. CBS’s deal to broadcast the NCAA basketball tournament games will pay the NCAA $6 billion over an 11-year period. In the final year of the contract, 2013, CBS is scheduled to pay $764 million (Jacobson, 2006). During the 2006-07 college football bowl season, 64 teams (over half of the Division I-A teams) played in 32 games, splitting nearly $120 million in bowl revenue. The largest payouts, $17 million per team, went to schools in the elite conferences that have agreements with the organizers of the five BCS games (“College football 2006-07,” 2006). FOX Sports holds exclusive rights to broadcast all BCS bowl games, except for the Rose Bowl, through 2010, and the BCS National Championship game from 2007-09. These rights came at a cost to FOX of $320 million (“BCS coordinator,” 2007). ABC has the broadcast contract for the Rose Bowl.

In this chapter we look at the relationship between the media and college sports. We first look at how media coverage has expanded in recent years. Next we examine the questions of whether and why the media and college sports think they need each other for their economic well-being, and how media coverage has changed college sports. Finally, we look beyond the media and colleges to assess the wider impacts on the economy and society.
7.2 Recent Expansion of Sports Media

For many years the college sports fan would turn to the major networks (ABC, CBS, NBC) for coverage of games. One or two games on a Saturday were the most one could hope for, except for special events like the college football bowl games on New Year’s Day. The first network devoted to sports programming, ESPN (Entertainment and Sports Programming Network), began broadcasting on September 7, 1979. Fans could now watch sports programming twenty-four hours a day, seven days a week, but expansion of the sports media did not stop there. Since 1979, ESPN has added new television networks (including ESPNU, ESPN2, ESPNEWS, ESPN Classic, and ESPN International), digital television channels ESPN Now and ESPN Extra, ESPN Radio, ESPN The Magazine, the website ESPN.com, and multiple sports-based entertainment venues called ESPN Zone. ESPN programming is now available in more than 80 million U.S. homes, which represents 78 percent of all American homes owning a television. (hearstcorp.com, Nov. 10, 2006)

CSTV (College Sports TV) was the first network devoted exclusively to college sports. CSTV debuted in early 2003, and launched its first full season of programming in August 2003. Its first fall lineup included the usual fare of college football games, preview and highlight shows, but CSTV also provided regular coverage of soccer (men’s and women’s) and volleyball (“CSTV kicks off,” 2003). While the primary focus remains on football and basketball, CSTV, along with its website, CSTV.com, now covers virtually every college sport, from baseball to wrestling, bowling to ultimate Frisbee. Purchased for $325 million in November 2005, CSTV is now a division of CBS Corporation (“CBS officially acquires CSTV,” 2006).

ESPN, wanting its piece of the college-only sports market, launched ESPNU on March 4, 2005. ESPNU programming and content appears not only on television, but across the range of print, internet, radio and mobile media offered by ESPN. FOX College Sports, a third entrant into the college sports broadcast market, is part of the FOX Sports network of stations. FOX College Sports is separated geographically into FCS Pacific, FCS Central, and FCS Atlantic, with its programming coming from the 20 FSN and FSN affiliated regional sports networks. Like CSTV, ESPNU and FOX College Sports cover a wide range of college sports, and all three networks also provide limited coverage of high school sports, mainly to give college sports fans a taste of what is to come.

Sports broadcasting occurs in an oligopoly market, that is, one with a relatively small number of producers. Depending on their structure and the number of firms involved, oligopolies can be more or less competitive. As we’ve just seen, the number of networks has grown over recent years with the additions of FOX, ESPN, and CSTV. While this has worked to make the market appear more competitive, this is deceiving given that ABC owns 80 percent of ESPN, and CSTV is now owned by CBS (Hiestand, 2005). Mergers and buyouts of the networks are examples of horizontal integration, a strategy of acquiring multiple firms at the same stage of production in an industry that can effectively limit competition, to the benefit of the remaining firms.

New competition in the sports broadcasting market may now emerge from the conferences themselves. In summer 2006, the Big Ten conference signed a deal with FOX Cable Networks to create the Big Ten Channel. Scheduled to debut in August 2007, the Big Ten Channel will feature sporting events of the eleven member schools, as well as non-sports programming. Each university will be allowed to provide 60 hours of programming each year. In the view of Big Ten Commissioner James Delany, “this will create enormous opportunities for journalism, film, and other academic programs and provide the ability to highlight academic achievement throughout the universities” (“FCN to create the Big Ten Channel,” 2007). The other conferences will follow the progress of the Big Ten Channel closely, and if it succeeds, expect to see a proliferation of conference-specific channels over the next few years.



An interesting component of the Big Ten Channel is that in keeping with conference branding standards, the channel will present no alcohol or gambling-related advertising (“FCN to create the Big Ten Channel,” 2007). Given the prevalence of beer advertisements in sports broadcasts, this will likely affect the marketing strategy of beer producers. Likewise, the Big Ten Channel will likely receive less revenue from advertisers, as demand for advertising slots will be lower than for broadcasts on other networks.
Fast fact. Offered through major cable companies such as Time Warner, Insight, and WOW, ESPN and ESPN2 are available in more than 80 million U.S. homes. ESPNU, however, is generally only offered through satellite companies like DirecTV or The Dish Network, or through premium cable packages. The result is that ESPNU can only be seen regularly in 8 to 9 million homes. In fall 2006, the Disney Corporation, parent company for both ESPN and ABC, stepped up its efforts to make ESPNU part of standard cable packages. Holding the rights to broadcast Big Ten conference football games, Disney opted to show the October 19 game pitting number-one ranked Ohio State v. Indiana on ESPNU, effectively shutting out hundreds of thousands of angry viewers in Ohio. Earlier in the season, Penn State’s season opener was also shown on ESPNU, much to the chagrin of Nittany Lion fans. Disney’s strategy has been to apply pressure on the cable companies by having disgruntled fans complain to their cable providers and threaten to switch companies. At the time of this writing, Disney and various cable companies were still negotiating the inclusion of ESPNU into standard cable packages. Meanwhile, the Big Ten has been working with FOX to create the Big Ten Network, to keep fans happy and avoid being caught in what they see as “Mickey Mouse” negotiating tactics.
As the list of ESPN “channels” revealed, expansion of the media is not limited to television broadcasts. In September 2005, for example, CSTV.com and ESPN.com combined reached over 26 million Internet users. (USA Today, Nov. 4, 2005, C3) CBS offers web broadcasts of NCAA men’s basketball tournament games through CSTV.com. (Janoff, Brandweek, April 2005, 18) ESPN offers access to sports information through mobile phones (“FCN to create the Big Ten Channel,” 2007). In 2005, Smartphones Technologies, Inc. and Collegiate Images joined forces to provide officially licensed college sports content from more than 30 colleges and universities. The content is available to mobile customers for downloading (“Smartphone Technologies,” 2005). As the technology allows, media providers adapt the sports broadcast product to reach every potential revenue-generating fan.
Fast fact. In the 1930s, while other schools were selling their radio broadcast rights, the University of Notre Dame gave theirs away to anyone wanting to broadcast Notre Dame Football. Notre Dame claimed it was acting in the spirit of both amateur sports and its religious convictions, but the end result was a huge financial payoff. Notre Dame built a nationwide fan base and is now the only major college football team with its own network contract (currently with NBC for $45 million over five years).
Why would Disney, which owns ABC and ESPN, offer so many channels and means of delivering content? Obviously Disney believes that such expansion will increase profits, but let’s look a little deeper to see how that might work. On the surface, one might question the proliferation of channels, given that they are all substitutes for each other. Except perhaps for at a sports bar, or using “picture in picture,” one can only watch one station at a time. All television channels compete with each other for viewers’ attention; they simultaneously compete with other delivery methods such as radio and internet broadcasts. There are a limited number of both potential viewers and advertisers, so to the extent that ESPN competes with ABC, ESPN2, ESPNU, etc., Disney is fighting with itself over limited potential revenue. In earlier chapters, we introduced the concept of marginal revenue product (MRP). The MRP for additional channels in the sports market is relatively low, but Disney is betting that it is sufficiently positive to cover the costs of providing new channels.

What makes Disney’s expansion of channels and media viable is that it can do so at a relatively low cost. In the language of economics, Disney is able to exploit both economies of scale and economies of scope. Economies of scale exist when a firm is able to lower its per-unit production costs by producing a large amount of the good it sells. Economies of scale extend over a large range of output when there is large and expensive capital used in production, and when firms can achieve extensive labor and managerial specialization, such as in the production of automobiles, software, or pharmaceuticals. In creating the college sports product, production facilities (studios, communication equipment) are large and expensive forms of capital. As long as it doesn’t push past the existing capacity, a network can produce additional programming with those facilities at relatively little cost. The cost of facilities and management gets spread out over a larger quantity of sports content, lowering the average cost of each sporting event produced.

Economies of scope exist when a firm can reduce the cost per unit (and/or expand revenues) by using its resources more efficiently to produce a wider range of products. For example, in filming movies and television shows (sports or otherwise), there are often “out-takes,” parts cut out because the performer misspoke a line or couldn’t keep a straight face during a serious scene. These out-takes, also referred to as “bloopers,” are a by-product of the process of filming. Over the years studios and networks have learned that this “waste” can have economic value if turned into its own programming. Use of by-products in this way creates economies of scope. Most of the costs have already been incurred; the cost of collecting and editing the out-take footage is relatively small. For the sports product, such by-products include highlight reels, used in end-of-the day sports news shows, or sometimes as a stand-alone show of great plays with additional commentary to provide context or other important information.

Another way for companies like Disney and FOX to achieve economies of scope is through re-broadcasting events, or broadcasting over different media. Once a network has purchased the rights for and produced an event, the cost to re-broadcast or send it in a different form (over the internet as well as the television) is insignificant. ESPN Classic, for example, shows replays of particularly memorable championship or rivalry games. ESPN and ESPNEWS often replay the day’s sports highlight shows multiple times, keeping costs lower and giving viewers numerous opportunities to catch up with news on their favorite teams.

ESPN’s new line of networks and platforms is an example of brand proliferation. By dramatically expanding its product line, ESPN is attempting to fill as many niches in the market as possible. Economies of scope facilitate this process by expanding, at relatively low cost, the content available for broadcasting. Brand proliferation creates a barrier to entry, as potential entrants into the market will have trouble finding areas of service where they can establish a foothold with consumers. It also helps ESPN exploit economies of scale in production and advertising. Programming and advertisements can be transferred easily among the various channels and media, dropping the per-unit cost of each show or commercial produced. These economies of scale serve as another barrier to entry, as new firms find it difficult to achieve or compete with the lower per-unit production costs enjoyed by established firms.

Economies of scale and economies of scope help media providers maximize profits by getting the most out of their production efforts. There are limits, however, to the economies that can be achieved, and whether or not Disney has extended the ESPN line too far remains to be seen. Clearly their expectation is that this expansion will be profitable, but even if Disney is overproducing, it may be a profitable strategy in the long run. As noted above, these various sports media products are substitutes for each other; if the market becomes saturated it may weaken the profitability of other networks, potentially driving them out of the market and discouraging new firms from entering, all the while boosting Disney’s long-run profit potential.


7.3 The NCAA and Media Providers: Symbiotic Relationship or Mutual Addiction?

Mutually beneficial exchange is a cornerstone of market-based economies. Sometimes however, as in the case of the NCAA and the media, these transactions are criticized for their negative impacts on society, or for disrupting the more noble pursuits of the institutions involved. Is the relationship between the NCAA and the media just another series of economic transactions made in an effort to better satisfy wants, or are the two institutions intertwined in a relationship of unhealthy codependence? We explore their interdependence here, on our way to deciding if the relationship is, on balance, beneficial for the participants and society.


7.3.1 Why does the media need intercollegiate sports?

For media providers, intercollegiate sports are a vital source of revenue. Advertisers shell out billions of dollars for television, radio, and internet ad slots during college sporting events. From 2000 to 2005, advertisers spent more than $2.2 billion on the NCAA basketball tournament alone (Jacobson, 2006). In the three television seasons spanning 2001-2004, ABC had the highest weekly ratings amongst the four major networks (ABC, CBS, FOX, and NBC) only seven times. Three of those weeks saw ABC broadcast BCS bowl games (the other four were the 2003 NFL Super Bowl and three years of Academy Awards shows) (Frank, 2004).

In addition to direct revenue generated from advertising during the event, media providers use sports broadcasts to promote non-sports programming. During the NCAA Basketball Tournament, for example, CBS promotes upcoming episodes of primetime shows like Survivor and CSI. By increasing the number of viewers (and thus ratings) for their non-sports programs, television networks charge more for ad time and generate additional revenue. Even if the media provider pays more for the broadcast rights than is earned from advertising during the actual event, the gains from non-sports programming generally result in a net profit.

Sports-based stations like ESPN can benefit by promoting future sports broadcasts, but also from ancillary programming. Examples of ancillary programming include the NCAA basketball tournament selection show, ESPN’s “College Football Game Day,” and pre- and post-game shows for the BCS title game. Ancillary programming that directly precedes or follows a major event is also referred to as shoulder programming. Ancillary programming serves two purposes. First, it helps stimulate demand for the main event by educating and exciting fans with everything from player injury reports to analysis of intriguing match-ups (games within the game). For some fans this ancillary programming is not simply added entertainment, it provides information that might be helpful in winning the office pool or otherwise profit from gambling on the event.

The second purpose of ancillary programming is to generate additional revenue by essentially expanding coverage of the actual sporting event. If a major college sporting event is expected to attract, say, 100 million viewers, even a small percentage watching the hour-long pre-game show can provide strong ratings for a sports network. Advertisers will be particularly interested in slots appearing in the minutes approaching the event, as viewers turn on their sets early in preparation for the big game.
7.3.2 A simple model for TV and other broadcasting contracts

How does a media provider determine how much to offer the NCAA for the rights to broadcast college football games? Like any firm, it must weigh the cost of buying the rights (the TV contract) and airing the event against the revenue earned from advertisers and selling access to local affiliates. If the revenue earned is projected to exceed the cost, then the media provider should buy the rights. Equation 7.1 below represents a simple model for determining the maximum a media provider should be willing to pay for broadcast rights to an event.


(7.1)
MCO is the maximum contract offer the media provider is willing to make; ERs is the expected revenue generated from advertising shown during the sporting event; ERa is revenue anticipated from ancillary programming; ERn is the boost to revenue generated from non-sports programming promoted during the sporting event; EC is the explicit cost of putting on the event (camera crews, announcers, etc., not including the contract cost), and IC is the implicit cost of airing the event, including forgone profits from the next best programming alternative. The maximum the media provider should be willing to pay is the positive difference between the expected revenues and the expected costs.

Example: Suppose that the CBS contract with the NCAA to broadcast March Madness is up for renewal. If CBS were to continue the relationship, it would expect over the life of the contract to generate $2 billion in revenue from sports programming (including ancillary programming), and another $500 million in revenue from the boost to non-sports programming shown by the network. CBS estimates that it will have explicit costs of $400 million, and implicit costs of $1.5 billion from sacrificing their next best alternative. Under these circumstances, the most CBS should be willing to pay the NCAA is $600 million [$600m = ($2b + $500m) – ($400m + $1.5b)].

Sometimes in the bidding process for these contracts, networks are so anxious to secure the programming (sometimes to keep competitors from securing the contract) that they will overbid for the broadcast rights. This phenomenon, introduced in Chapter 5 as the winner’s curse, can occur if networks overestimate the revenue or underestimate the cost of programming. The winning bidder ends up losing money, hence the curse.

Notice in our example that if we exclude the revenue from non-sports programming, the maximum CBS would be willing to pay is $100 million. If CBS were to pay $200 million, it might appear to the untrained eye that CBS bid themselves into a winner’s curse, but with the additional revenue generated from non-sports programming, CBS would actually realize an economic profit of $400 million ($2.5 billion in revenue minus $2.1 billion in implicit and explicit costs, including the $200 million contract). The difficulty for economists is determining how much of the revenue generated from non-sports programming is the direct result of following or being promoted by the sports programming.


7.3.3 The impact of time on the contract value

Many media contracts, such as the CBS contract to broadcast the NCAA basketball tournament for $6 billion over 1l years, extend for more than one year of the particular sporting event. In these cases the model presented above becomes a bit more complex, as firms must consider the expected stream of payments (revenue and costs) over the life of the contract. Economists measure the present value of these anticipated benefits and costs, based on the notion that payments received in the present are worth more than those received in the future.

As a simple example, suppose that you are given the choice whether to receive $100 now or $100 one year from now. All else equal, economists would expect you to choose the $100 now, with the cost of waiting depending on the interest you could have earned over one year. If the interest rate is 10 percent, you could invest $100 today and have $110 after one year ($100 principal plus $10 interest — 10 percent times $100). We would say that $100 is the present value of $110 received one year from now. To find the present value of a future payment, we use the following formula:
(7.2)
where PV is the present value, FV is the future value (the amount you receive at some future time), i is the interest rate (determined in the market), and t denotes time (t =1 would represent a payment received at the end of one year).

At an interest rate of 10 percent, our $100 payment received one year from now would have a present value of $90.91 [= $100/(1+.1)1]. This means that if you start with $90.91 today would earn enough interest in one year to end up with $100. If we change the time period we can see how the present value changes. If t = 0 (we receive the $100 now), equation 7.2 tells us that the present value is $100 (no big surprise). If instead we have to wait two years to receive our $100, the present value of that payment is only $82.64 [= $100/(1+.1)2].

Applying the concept of present value to our media contracts, and recognizing that there will be a series of revenue and cost payments, we can re-write the simple model presented in equation 7.1.
(7.3)
Example: Big Time Network (BTN) is considering a bid for the rights to broadcast the Humungous Corporation Bowl for three years. BTN estimates that it will receive the earnings and incur the costs identified in Table 7.1 below:
Table 7.1: Hypothetical expected revenues and costs from broadcasting the Humungous Corporation Bowl (amounts in millions)
Year 1 Year 2 Year 3

ERs $200 $250 $300

ERa 50 50 50

ERn 100 110 120

EC 150 180 210

IC 100 120 140


If the interest rate is 5 percent and expected to remain at that value over the life of the contract, and if the payment for the rights must be paid at the signing of the contract (t = 0), what is the maximum contract offer BTN will be willing to make? Plugging these amounts into Equation 7.3 we get:
MCO = [(200 + 50 + 100 – 150 – 100)/1.05 + (250 + 50 + 110 – 180 –

120)/1.052 + (300 + 50 + 120 – 210 – 140)/1.053]

= $298.68 million
The present value of the expected revenue minus the expected costs, and the maximum BTN should be willing to bid, is just under $300 million. For a bit more of a challenge, see if you can calculate the maximum contract offer if the rights will be paid for in three equal installments from t = 1 to t = 3. The answer appears in the footnote below.1



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