Some of you may have seen the numerous articles over the past year discussing the Big Ten Conference’s Big Ten Network (BTN) and its public battle with cable companies over distribution. This past fall fellow Ross MBA-candidates Matt Mace, Guangcheng “Gary” Dong, and I worked on a project investigating the BTN’s distribution strategy and making recommendations. What we discovered was pretty interesting – especially since we were able to confirm why some cable companies did not want to add the network under BTN’s current terms, and why BTN was pursuing a strategy that was causing so much conflict.
The Big Ten Network (BTN) is a television network primarily covering college sporting events of schools within the Big Ten Conference (BTC). It provides national broadcasts of college football, basketball, and other sports content for cable and satellite television subscribers. Besides sports programs, BTN broadcasts academic programming from Big Ten Conference universities. Most of the content is exclusive, meaning it will not be shown live simultaneously on other television channels. The BTN is a joint venture between the BTC and Fox Cable Networks.
Although most BTC athletic events will exclusively be shown on the BTN, the Big Ten Conference did recently renew their contract with ESPN/ABC Sports, owned by the Walt Disney Company. This contract is a $100M/yr, 10-year deal that includes rights to show 25 football and 56 men's basketball games per season as well as 100 women's basketball and volleyball games over the 10-year period. It also includes rights to show the championship games of the Big Ten and the Big Ten women's basketball tournament.
Big Ten Member Universities value the BTN as a marketing and recruiting tool for new students. Along with a $1B agreement with ESPN and ABC to broadcast games, the BTN will allow BTC Universities to promote themselves to a nationwide audience and increase awareness among possible academic and athletic recruits. The proceeds from the BTN are divided equally among the 11 BTC member universities. Additional funds for athletics, enables other money to flow to research, the arts and other scholastic endeavors. These schools are seeing some big money.
The BTN, launched in August 2007, has had a significant amount of success achieving distribution deals with both satellite and smaller, local cable companies. However, it has struggled forming agreements with large cable distributors like Comcast. The main argument from these cable companies is that the BTN is trying to sell its content to a national audience, when it might be better received by a more-regional audience in the Big Ten states. To understand their side of the argument, we contacted the alumni associations of the eleven BTC universities and discovered close to 87% of Big Ten alumni live in the U.S. live in Big Ten states. Interesting.
Another beef the cable companies have with BTW is the network requests subscription companies to pay average subscriber fees of $1.10 for customers within the eight Big Ten states, and $0.10 for all other customers. Since not all cable television subscribers will want Big Ten programming, it is not in the best interest of cable network to bill their customers for fees demanded by the BTN. On the other hand, it will hurt the cable company’s bottom line to simply absorb the fees BTN is requesting. Cable companies like Comcast that refuse to pay across the board subscriber fees to BTN are asking for the flexibility to add BTN to a special sports tier, for which subscribers could request as an optional package for additional fees. Through absorbing BTN fees, cable companies stand to lose out on millions of dollars. For example, Comcast has around 4 million cable television subscribers in Big Ten Conference states. The BTN fees for these subscribers would cost Comcast $4.4 million per month, or $52.8M per year. Comcast earned a net income of almost $2.5B in 2006, so the $52.8M subscribe fee to BTN would reduce net income by almost 3% for BTC states alone. Another issue raised by cable companies against BTN is the amount of the fees compared with other content providers. BTN requires an average fee of $1.10 per subscriber, the third highest fee on basic cable today. Only ESPN at $3.00 per-subscriber and TNT at $1.26 per-subscriber have higher fees. The high subscription fee is in question since BTN has a much more limited fan base/lower demand than ESPN and TNT.
Another reason why many subscription television distributors have not welcomed putting BTN on their expanded basic packages is a question about the value and quality of the sports programming being delivered by the BTN. Some sports analysts believe the BTC is weaker, or not as competitive, as other major college sports conferences. They argue more powerful conferences include the Pac-10 on the West Coast, the SEC in the South, or the ACC in the East. Why? Through October 17, 2007, the BTC only had two of its football teams in the Top 25 national rankings, although historically the BTC has five or six of its football teams in the Top 25 rankings. The commission of the BTC has even suggested adding additional universities to the BTC to help make the conference more competitive, ultimately helping market the BTN. It’d be interesting to investigate how this would bring more revenue to the network and whether or not this action would have each BTC school seeing even less money from the BTN.
Subscription providers are not the only channel members who are experiencing conflict with the BTN. The end customers (fans) are becoming disgruntled with BTN since some BTC football games are being carried exclusively on its network instead of allowing local channels to carry regional events. This creates a channel conflict for some Big Ten Sports fans. Many Big Ten fans subscribe to cable television systems who have not agreed to distribute BTN programming. These fans have missed some historic football games such as the upset of the University of Michigan by Appalachian State at the beginning of the season. This conflict is similar to other exclusive sports content providers such as the NFL Network.
After better understanding why there is so much channel conflict when it comes to BTN offerings, our team created some recommendations for the BTN. We determined BTN needs to change its subscriber fee practices to build a better relationship with its distributors and end customers. Consumers who are missing game broadcasts are upset with cable companies and the BTN for not resolving subscriber fee issues. The loss of brand equity among these sports fans is potentially outweighing any revenue gain that BTN and BTC schools might receive from the holdout with cable companies. The public battle between BTN and Comcast may also be discouraging potential students from attending Big Ten schools or convincing parents a Big Ten school is not where they want to send their child. Would you want your kid to attend a member school of the BTN after witnessing such a public pissing match between the network and cable companies?
Distribution Channel Alternatives/Recommendation
Currently, the Big Ten Network is receiving around $111M annually through its deals with various satellite and cable television distributors. However, due to the channel conflict –and- not obtaining some key deals with large providers, BTN needs to determine if their current strategy is the optimal one. How many subscribers can it realistically expect to obtain? How do you resolve conflict within your distribution network to ensure relationships with future business partners and potential school recruits are not compromised. One option for the BTN to resolve channel conflict with distribution providers is through changing its practice of across-the-board fees for all subscribers. The BTN could reduce the cost so cable companies could easily absorb the additional fee. Making this change would require BTN to redo multi-year contracts that have already been established, but the benefits of signing up 100% of available cable systems could outweigh that lost revenue. In looking at this financially, if BTN were to lower its cost per month per subscriber to $.03 and $.37 respectively to garner deals with Comcast and Charter Communications, it would lose out on $35M per year from its current deals.
A second option is for BTN to change its fee structure from a per-subscriber model to an active-subscriber model (i.e. allow subscription providers to offer BTN on a separate sports tier). If the BTN offered optional programming to consumers, instead of $1.10 per subscriber in BTC states, the fee might be four or five times that amount. For the purpose of analysis, we investigated what BTN would bring in if they were to charge $5/month to active-subscribers. Based on the number of Big Ten Conference alumni living in the U.S. as well as potential Big Ten fans who did not attend a BTC school, there might be a subscriber base of less than 1 million. Note, this does not include businesses that might be interested in carrying the network. Based on 803,473 subscribers at a $5 per month subscriber fee (i.e. $60/yr), the BTN stands to earn $63M less than it is presently earning through subscription T.V. deals.
A third option for the BTN is to bypass the cable and satellite companies and broadcast all their content through the Internet. Consumers could purchase content directly through BTN, with a fee structure for unlimited annual, unlimited monthly, or game specific content options. Cable companies would be in favor of this option, since consumers would need to purchase high-speed cable service in order to view BTN content in this model. BTC universities would favor this option as well, since games could be featured on a global basis instead of limited to a U.S. based audience. However, this option is unlikely to add the revenues BTN requires given the number of high-speed cable subscribers that are potentially BTC sports fans. We discovered the estimated revenues for Internet subscribers are $7M, far below anticipated revenues of $110M for cable television subscribers. Also, this revenue number does not account for the fact BTN would need to invest monies into its website in order to be able to support showing live games, subscriber fees, etc. BTN may want to investigate offering limited content on its website to drive consumer traffic from the sports enthusiasts and fanatics. They could also use the website to drive additional revenue through online ads/sponsorships. However, they should not rely on this as a primary income source.
One final alternative would be for the BTN to offer Pay-Per-View for each of their games. Based only 9.9% of adults in the U.S. watching college football games on television and only 5.5% of adults in the U.S. watching college basketball on T.V, we believe pursuing this strategy would only limit distribution of the channel and minimize revenues. After analyzing various distribution options, it appears the Big Ten Network is presently pursuing a revenue maximizing strategy. Thus, reducing its requested subscription fees or offering the network as a separate sports tier is not recommended as revenues would be drastically reduced.
Our recommendation to BTN is to maintain current deals with subscription T.V. services. We also advise them to end their public battle with Comcast (and other large providers) to earn a more positive reputation. The negative press from this fight only frustrates fans and paints a poor picture of the network with other distributors and potential Big Ten Conference recruits. Also, based on our analysis, if Comcast and Charter Communications never sign up to carry the BTN, the BTN is still better off sticking with their current strategy rather than reducing its rates and renegotiating agreements. Although not all BTC fans currently have access to all BTN games in their homes, in our opinion, those who desperately want to see a game and don’t have the Big Ten Network will go to a local bar or a friend’s house. Additionally, some die-hard fans may even switch subscription television providers in order to have the convenience of the BTN at home. As a result, we do not see a large amount of conflict occurring with fans. As a future solution, BTN may want to investigate offering games on its website on a subscription basis for fans wanting to view games at home without access to BTN carriers. This would only enhance the BTN’s relationship with end consumers and offer an additional distribution channel solely controlled by the BTN.