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April 24, 2023

Athletic Departments Exploring Alternative Revenue Models

College athletic departments have long sold them themselves short by taking guaranteed payments in exchange for the right to commercialize their multimedia rights (MMR), as opposed to trying to maximize the value of those assets and sharing in the upside.

“They believe in the [future] growth of college athletics and live entertainment,” Christy Hedgpeth (president, Playfly Sports Properties) said. “With the many pressures they face, they [just] often reflex to taking the sure thing; [even though] there is ultimately a cost to them.”

But with it becoming apparent those dollars are less certain than they might have once appeared, administrators under pressure to outpace rising costs, and an influx of ‘outsiders’ coming into positions of power across the collegiate landscape, colleges and universities are increasing open to exploring alternative MMR structures and new revenue models that align rights owner and rights holder incentives.

“When the right model is established –and both parties are equally incentivized to think creatively and aggressively target new opportunities– the up-side for athletics departments can be significant,” LEARFIELD said in an email.

Historically speaking, colleges and universities have sold their MMR to the highest bidder. The minimum annual guarantee (or MAG) would typically climb annually over the life of the deal.

The rights holder would then work to monetize the school’s assets and generate a profit margin above the guarantee. An economic split would often occur if/when the rights holder reached a predetermined threshold.

The fiscal certainty of the MAG helped schools from budgeting perspective. 

It also provided some downside protection. Remember, collegiate athletic departments are not typically structured, or staffed, to monetize commercial assets. 

“During my time running ISP and IMG, virtually every school received both a guarantee, as well as some upside over a certain performance threshold. My view is that it was kind of like having your cake and eating it, too,” Ben Sutton (founder, chairman and CEO, Teall Sports & Entertainment) said.

But industry-wide thinking that rights fees should always increase has led to some rights holders being under water on select contracts, and the industry at-large evaluating alternative long-term solutions. 

“It’s not a sustainable practice to assume that every business will grow its top-line revenue by a significant percentage every year over a 10-15 year term," Hedgpeth said. "However, that has been the prevailing theory in the industry and it has led to pain points on both sides in the partnerships between athletic departments and MMR companies who are subject to normal ebb and flow market forces.”

As business savvy executives increasingly take positions of power in college athletics, the number of programs opting for growth focused revenue models is rising.

“Diversity of thought brings about new ideas and fresh perspectives in any industry, particularly in a traditional space like college sports,” LEARFIELD said. 

To be clear, the majority of the schools still prefer the old guarantee model. 

“Risk tolerance [tends to be] very low because AD's report to Presidents of a college, and not a [profit-driven] team owner,” Doug Fillis (founder, Accelerate Sports Ventures) said. 

However, there are several new structures with varying risk profiles percolating in the marketplace.

Some schools will forego a guarantee in hopes of capturing a greater share of the growth..

LEARFIELD said that has become one of the most popular alternative models.

“As our landscape continues to rapidly reshape –and costs and responsibilities within athletics departments continue to rise– we’re certainly seeing bolder perspectives from administrators and aggressive pursuits of new opportunities,” the company stated.

The approach appears to be paying dividends, at least in some cases.

“Ohio State University [recently] became [our] first partner to surpass $30M in property revenue in fiscal 2023,” LEARFIELD said.

Other schools still want a floor that they can budget against. 

‘We are starting to see success in innovative contract structures where we give our schools a figure that adjusts annually based actual historical property performance," Hedgpeth said. "This aligns everyone to drive as much value as possible rather than tie in obligations for 10-15 years that may exceed property performance. College athletics is evolving so rapidly with developments like NIL, transfer portal and media rights–we want to be a long term partner to our Colleges.”

There are a select number of schools in existing long-term MMR deals with MAGs greater than what they bill. While those institutions may not be inclined to renegotiate, there’s an argument to be made that doing so would be in their best interests. In a money-losing scenario, the rights holder is not going to be incentivized to grow the property, or create new assets for the school, which limits brand growth and the future value of the rights for the owner. 

“But if [a rights owner] were to have meaningful skin in the game and it were more of a true partnership, [the value of the rights] actually could flourish and the entire pie could grow to the benefit of both rights owners and rights holders,” Hedgpeth said.

For example, the rights holder may be inclined to invest in new revenue generating assets. 

“We put CAPEX dollars to work to drive incremental revenue,” Hedgpeth said. “We’ll invest in high-end hospitality and experiences. We’ll do stadium enhancements or buy tv-visible signage.”

The school not only gets to share in that revenue, but should also enjoys the benefits of an improved in-venue experience.

And then there are a “fair number” of schools weighing whether to align with a rights holder or simply bring their MMR operations in-house. 

“For them, it’s a question of who do I want to bet on—my team or someone who didn’t think enough of my program to take the risk themselves and maybe isn’t as tuned in to the sensitivities and needs of my campus,” Sutton said. “Marketplace tension is a primary driver of the evolution of the market. That’s the chapter this particular space seems to be entering now.”