John McCain is trying to force cable tv providers to unbundle their channels, either into much smaller packages or even individual channels. A lot of powerful people make a lot of money on cable bundling, and McCain has tried a similar bill in the past, so it’s unlikely that this piece of legislation will the cause unbundling of TV. However, it seems only a matter of time until unbundling happens, either due to market pressure from consumers who would rather cut the cord than pay for channels they don’t watch, or from legislation like the bill McCain proposed.

As the linked AllThingsD article mentions, such unbundling will have wide reaching effects on the economics of content providers. The Big Ten is one such content provider [1], and to understand just how much unbundling could hurt the Big Ten, we need to take a look at the most recent conference realignment.

We just finished the largest college sports conference realignment in history. The reasons for it are unsurprising: money and football money. But for conference expansion to work (i.e. be profitable for the existing member schools) the addition of an institution has to result in more revenue than the average existing member produced prior to the expansion. This can happen by bringing a larger, higher revenue-generating program into the fold, or by taking advantage of the “whole is greater than the sum of its parts” activities. In this light, the Big Ten’s addition of Nebraska in 2010 makes perfect sense - Nebraska’s football product is historically better than the average Big Ten team [2], their fan base (and as a result the number of television viewers they bring to any given Big Ten matchup) is larger than the average Big Ten school, and with the expansion from 11 to 12 schools, the Big Ten was able to sponsor a football championship game [3], which is extraordinarily lucrative for conferences [4].

But what about the Big Ten’s more recent additions of Maryland and Rutgers? On the surface, they don’t provide any of the benefits that a school like Nebraska does - relatively small fan bases, historically less than stellar on-field performance [5], and no new events to air. The real key to understanding the addition of Maryland and Rutgers lies in understanding TV bundles.

The Big Ten created the Big Ten Network (BTN) in 2006 to air Big Ten events that didn’t make it to air on traditional broadcast or cable networks. Market economics would suggest that if these events were popular enough to be on the air they already would be - but market economics hardly touches an oligopoly like cable TV. Instead, the Big Ten demonstrates to cable TV distributors that in a particular market, like Chicago/Cleveland/Columbus, a certain percentage of their clientele are Big Ten fans and would like access to BTN. The cable network then puts BTN into their basic or expanded basic package, and BTN takes a cut of every subscriber (about $0.70 - $1.00) [6]. For subscribers outside of areas where the Big Ten has a large presence, BTN takes a much smaller cut (about $0.05 - $0.10) [6], and only of subscribers to a premium sports tier.

BTN has shown itself to be a huge moneymaker for the conference [7]. But based on the math of their subscriber fees, they stand to make a lot more money if they can get television markets outside of the 8 traditional Big Ten states to include BTN in the basic or expanded basic package - a huge boost in the number of subscribers, as well as the per-subscriber fee. The only way to convince cable providers to include BTN is to expand the Big Ten’s footprint into new, populous television markets.

That’s where the Rutgers and Marlyand expansion comes in: they give the Big Ten access to the lucrative New York and DC television markets [8]. Neither Rutgers nor Maryland are the dominant college sports team in those cities (if there even is one), but they allow the Big Ten to turn a small number of premium sports subscribers, at $0.10 a pop, into a huge number of basic cable subscribers at $1.00 each. And so the Big Ten’s pie is expanded before being sliced for the new members.

Problems for the Big Ten, however, lurk just around the corner; if cable unbundling happens, either due to legislation or market pressures, and BTN is sold a la carte, they lose the vast majority of the premium sports subscribers in markets outside the 8 Big Ten states, and in the newly expanded markets like DC and New York, they only have access to subscribers who are huge Marlyand or Rutgers fans - a tiny fraction of the number of basic cable subscribers. It’s unclear whether the BTN would even be profitable under an a la carte system, let alone the cash cow it’s proven to be so far.

And so Jim Delany finds himself with an unlikely foe; if John McCain’s bill passes, the economics of the BTN, which were the underpinnings of conference expansion, stop working, and the newly added members of the Big Ten only serve to dilute the quality of the football product of the nation’s oldest conference.

Even if content providers like the Big Ten get their way and defeat this bill, which is likely, it seems to be only a matter of time until cable unbundling happens. When it does, we’ll likely be in for another round of conference shuffling as schools try to figure out how to finance costly cross-country sports programs that rely on huge payouts from conference TV networks.

[1] The Big Ten is not alone here, they were just the primary instigator of the conference expansion. Both the Pac-10/12 and SEC are trying a similar play, with the Pac 12 creating their own television networks while cutting out a large equity partner like Fox.

[2] 5 national championships, 10 undefeated seasons, 43 conference championships, 53 consensus All-Americans.

[3] NCAA rules stipulate that a conference has to have at least 12 members to have a championship game

[4] According to ESPN, Fox is paying $145m over six years for the Big Ten football championship game alone

[5] Rutgers is 5-8 in bowl games,and has never gone to a major bowl. It won a Big East Championship in 2012. Maryland is 1-4 in major bowls, and 11-11-2 in all bowls, with 2 national championships.

[6] Reported figures vary, and probably fluctuate by television market and provider, but the figures I’ve seen are $0.88 and $0.05, $0.70 and $0.10, $1.10 and $0.10

[7] It has contributed $42.5m to each member school since its inception in 2006

[8] #1 and #8, respectively. Baltimore (#27) and New Jersey are also contributors.