Wilner Hotline – Pac-12 Networks analysis and media strategy

*** Second in a series examining the financial state of the Pac-12 and its media strategy …

In recent years, the Pac-12 has become significantly more transparent about its finances. Whereas it once refused to disclose any expenditures not required by law, it now releases line-item revenues and expenses for both the conference and media divisions each spring along with its 990 tax filings.

The offerings only go so far, however: The equity value of the Pac-12 Networks has never been revealed.

But thanks to a development thousands of miles away, we finally have a sense for the value of the Pac-12’s floundering, wholly-owned media company created a decade ago by former commissioner Larry Scott.

According to a report last week in USA Today, the Big Ten in 2021 “exercised a pre-existing option to sell 20% of its interest in the Big Ten Network to Fox … The deal put about $100 million in cash or receivables on the Big Ten’s books.”

The Big Ten schools own half of the Big Ten Network (BTN); the other half belongs to Fox.

So the conference sold 20 percent of its 50 percent stake and received $100 million in exchange.

That suggests a $1 billion valuation for the BTN and gives us a rough framework from which to assess the equity value of the Pac-12 Networks.

The BTN has approximately 50 million subscribers, based on pre-pandemic Nielsen tracking data (and accounting for the secular decrease in pay-TV subscribers).

Meanwhile, the Pac-12 Networks had 14.8 million subscribers at the end of 2020, according to estimates provided to the Hotline by S&P Global Market Intelligence.

The affiliate fees follow a similar pattern:

Thanks to the distribution leverage provided by its partnership with Fox, the BTN generates 59 cents per subscriber per month, compared to 13 cents per subscriber per month for the Pac-12 Networks. (Both figures from S&P Global.)

So the Pac-12 Networks produce approximately 30 percent of the carriage and 22 percent of the affiliate fees of the BTN.

If the BTN is worth $1 billion, that indicates an approximate valuation of $250 million for the Pac-12 Networks.

However, our estimate doesn’t account for the quality of the content, which favors the BTN.

As one industry analyst explained: “The BTN value is derived not just by game counts but by quality of games … The Pac-12 Nets don’t have the same quality-game pick structure as the BTN.”

Why the disparity in content available on the respective networks?

The BTN’s partnership with Fox “incentivized the media company” — Fox — “to maximize the channel’s value,” the analyst said.

“The Pac-12 Networks did not have that special co-owner relationship between channel and media partner, so negations with FOX and ESPN involved a different set of strategy considerations.”

A second analyst offered the following after reviewing our market valuation estimate:

“Big Ten Network still has a contract for programming for another 10 years and maybe longer. The Pac-12 has (two years) of programming. Any value comes from the commitment of programming.”

At $250 million, the Pac-12 Networks would be valued at slightly more than twice their last reported revenue in a non-pandemic year: $118 million for the 2020 fiscal year, which included the fully-played 2019 football season.

At $250 million, the Pac-12 Networks would have a lower valuation than the $291 million due the conference in a single year (FY22) from the Tier 1 contracts with ESPN and Fox.

And at $250 million, the market valuation would be substantially lower than what the conference envisioned when Scott launched the networks in 2012.

Back then, Scott provided campus officials with a range of annual payouts, according to sources who attended the presentation.

The estimates presumed carriage on DirecTV and pegged the middle range of payouts at $6 million per school per year — or $72 million per school over the lifetime of the Pac-12 Networks’ distribution contracts.

Instead, each school will receive approximately $25 million from the Pac-12 Networks over the entirety of the 12-year cycle, according to Hotline research and figures provided by the conference with the annual tax filings.

(That translates to 50 percent of Scott’s own compensation over the course of his tenure as commissioner — compensation that was based on his dual roles as commissioner of the conference and chief executive of the networks.)

With two years remaining in their contract cycle, the Pac-12 Networks face a murky future as a linear media company with a smattering of subscribers outside the conference footprint.

Despite their high production quality, they are essentially a Regional Sports Network.

They could be sold to a larger media company for use on its direct-to-consumer platform (e.g., ESPN+ or CBS’s Paramount).

Or they could exist as a stand-alone streaming service that airs only the Pac-12’s Olympic sports events.

Because whatever the future, the football and men’s basketball games currently shown on the Pac-12 Networks will undoubtedly be sold to a media company that provides broader reach and more cash.

“The Pac-12 needs to put its inventory where the eyeballs are,” another analyst said. “The Regional Sports Network business is rough right now.”

*** Previously in this series:

Power Five revenue projections over the final years of the Pac-12’s current media rights cycle

*** Next in this series:

Estimating the value of the Pac-12’s next media right contract

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