The Hidden Losses in Conference Realignment

Editor’s Note: Christian Jensen is a member of SMBA ’13 who now works as a contract coordinator at Upper Deck. He helped the SDSU team win the eighth annual SDSU International Sports MBA Case Competition last month.

For college presidents and conference commissioners, winning does not equal pride or accomplishment: winning equals money. And for the one team that captures the “one shining moment” come April, it means roughly $1.5 million for each one of their six NCAA tournament victories. I could go on talking about how much money is at stake for each conference but I will let Chris Smith of Forbes explain those numbers for me here and here. The past few years, these payouts have become much more intriguing due to conference realignment. As Smith explains, each game played is worth approximately $1.5 million to the school’s conference, paid out over 6 years, which means the more teams a conference has in the field, the more money they make. The conference soon to be formerly known as the Big East made $27 million last year thanks to 9 teams in the field of 68 and one team making the Final Four (Louisville).

I had the chance to communicate with Smith and we had an interesting conversation about what happens when these teams leave the conference. We focused mainly on Louisville, who also happens to be the most valuable college basketball team in the nation, according to Forbes. They are expected to leave the Big East for the Atlantic Coast Conference starting in 2014. Louisville made the NCAA Tournament the past 6 years which means the money they earned the Big East in 2007-08 is still being paid out in 2013. This leaves partial payments for their Elite Eight runs in 2008 and 2009 as well as the Final Four run in 2012 still to be paid until 2018. If you are like me, you must be wondering where those units are going once Louisville leaves. The NCAA has laid out guidelines for how teams and conferences handle realignment but these can be negotiated.

A. If an institution leaves a conference and realigns with another and its original conference remains in operation, the units it earned remain with the conference that it left.

B. If an institution leaves a conference to become an independent, the units that institution earned are retained by the conference that it left.

C. If an independent institution joins a conference, it retains the unit(s) it earned as an independent prior to the date it elected to join the conference; any units the institution earns subsequent to that date accrue to the conference.

D. If a conference disbands, each institution retains the units it earned in the basketball fund.

E. If an institution leaves a conference and the conference falls below the six-member requirement, the units remain with the conference for a one-year period; however, if the conference then later disbands, those units return to the basketball fund.

F. If fifty (50) percent or more of the member institutions in a given conference leave the conference simultaneously and the remaining conference membership falls below six member institutions, the conference shall be considered disbanded and each member institution shall retain the units it earned in the basketball fund as if the conference had in fact disbanded (for the purposes of the basketball fund distribution).

Smith pointed out that the Catholic Seven have retained their units through negotiations with the current Big East while Louisville will end up losing theirs as stated in line A. Although the current Big East will lose 50% of its current members simultaneously, they will not dip below 50% since they are adding new teams before the next athletic season. Ultimately, the Catholic Seven are creating a new conference with the same name while the remaining schools will still be in the Big East but have to take on a new moniker.

The remaining members of the Big East are receiving between $100 and $110 million of the reserve fund which makes each unit that more valuable to the Catholic Seven. I did some research to see how much these units are actually worth. Of the seven members, only four of them made the NCAA tournament the last six years but that did include a Final Four appearance and a few runs to the Elite Eight. This will roughly net them $39.5 million to be distributed in the new Big East. I have this broken down below:

 

Catholic 7 NCAA Tournament Games Played

2008

2009

2010

2011

2012

2013

Total

DePaul

                          –  

Georgetown

2

1

2

3

1

  $13,226,117.17

Marquette

3

3

3

  $13,537,099.54

Providence

                          –  

Seton Hall

                          –  

St. John’s

1

    $1,484,239.45

Villanova

3

5

2

1

1

  $11,311,191.18

$39,558,647.33

On the other side of this are the schools that are in the conferences welcoming new members. The ACC is accepting four new schools: Louisville, Syracuse, Pittsburgh, and Notre Dame. All of whom are losing units in the move. Louisville will end up losing approximately $25 million from the 15 units they had accumulated to the old Big East and will not see any of that money since the Big East is still a six-member conference. Below is a breakdown of the money being lost for each school:

 

New ACC NCAA Tournament Games Played

2008

2009

2010

2011

2012

2013

Total

Louisville

4

4

1

1

5

3

  $25,503,303.56

Notre Dame

2

1

2

1

1

    $9,973,027.12

Pittsburgh

2

4

2

2

1

  $15,590,472.78

Syracuse

3

3

2

4

3

  $21,425,168.38

$72,491,971.84

The good news for the schools switching conferences is that each one has the right to choose how it wants to distribute its earnings. In the past few years however, the BCS conferences have all taken on similar approaches. The Big 12 used to have a proportional system in place where the highest earning schools received the most money. Smith noted that this likely had an impact on the exodus from the Big 12 a few years back. The ACC does not have a proportional system set up and according to Smith; each of the schools entering the ACC will receive a full distribution upon arrival. Smith thinks this helps attract top programs since the losses they might incur are softened. As with any negotiation, each one is different and some schools do not get as lucky as the four joining the ACC. Nebraska, which moved from the Big 12 to the Big Ten in 2011, is not getting a full distribution until 2017.

For the teams switching conferences, losing upwards of $25 million seems like a big hit but when you factor in the uptick in television revenues and the chance at better BCS Bowl payouts, these moves seem like a no-brainer even with all of the exit fees and lost revenues. As with any business deal, time will tell and in five years we could be having this same conversation.