SBJ/February 21 - 27, 2005/SBJ In Depth

A marketing slam dunk?

The future of an industry, like the outcome of a game, can often be traced to a single moment. The University of Kentucky and Host Communications combined last October to create what could become a watershed with a 10-year, $80 million deal that established a new gold standard in college sports marketing.

Kentucky and Host, both based in Lexington, had a business relationship dating to 1974. But school officials wanted to test the waters by rebidding the business. So last June, the school asked for proposals, bundling all of its multimedia rights with the notable exception of signage at Rupp Arena, which has a contract with Action Sports Media.

Host wanted to remain the school’s partner and was willing to pay for that right.

“Kentucky has almost been unprecedented over the years with the revenue potential of the property, much less what they’ve generated,” said Steve Angelucci, Host vice president and general manager.

The new deal, which takes effect April 15, guarantees the school $7.275 million in the first year, a figure that increases to a high-water mark of $9 million in the deal’s final year. Host previously sold only radio and TV rights for Kentucky men’s basketball and football, paying an average annual fee of about $4 million.

While the school budgets off the guarantee, the agreement with Host also includes a “hurdle” or revenue threshold beyond which all subsequent profits are evenly split. Set at $11 million to start, that benchmark will rise to $13 million in the final year of the contract.

The eye-popping agreement catalyzed an outsourcing trend in college sports marketing, but not everyone is jumping on the bandwagon.

For major schools, the promise of guaranteed revenue must be weighed against the worries of losing institutional control and seeing sales efforts for secondary sports neglected in favor of BCS-friendly football, as well as men’s basketball.

Why outsource?

Quite simply, the lure of guaranteed revenue is what leads schools to outsource their sports marketing.

Robert Zullo, an instructor and doctoral student in the University of Georgia Sport Studies program, polled athletic directors at 117 Division I-A football schools last year (see chart, p. 19). Of the 90 schools that responded, 54 said they use outsourced marketing (42 Bowl Championship Series schools and 12 non-BCS schools). Of those 54 schools, 47 said their primary reason for using outsourced marketing was guaranteed and additional revenue for their athletic departments.

Marketing firms know that sponsors are easier to land for major universities, so they’ll offer schools steep guarantees for their business.
At the University of North Carolina at Chapel Hill, a nine-year deal with Learfield (running through 2010-11) contains a guaranteed rights fee of $2.5 million annually and a hurdle of $5.5 million after annual gross receipts.

Norwood Teague, associate athletic director for marketing and promotions at North Carolina, cited benefits other than the guarantee.

Teague said unrelated business income taxes (UBIT) are chief among his reasons to outsource. The taxes are imposed on nonprofit organizations including state schools for conducting regular business that is deemed unrelated to their mission of educating students. They allow the institutions to maintain tax-exempt status and provide the IRS with a way to levy a “corporate” tax on colleges.

“If we did this ourselves, we’d be taxed 30-40 percent on what we generate,” Teague said. “The UBIT tax allows for, when you have an outsourced situation, the taxes are nowhere near as aggressive as it would be if we were doing it internally.”

Outsourcing also affords a state school like North Carolina enhanced flexibility in the areas of personnel and purchasing. Teague said it is “nice to have an outsourced group that can move a little quicker, be a little bit more nimble, as far as purchasing and paying employees than doing it internally. We have so much red tape when it comes to purchasing, anything over $5,000 we have to bid out. And we don’t pay commission, so it’s difficult to create a commission structure for a sales person within a state agency.”

Scott Farmer, interim athletic director at Troy State,

Troy State handles marketing in-house but is thinking about outsourcing the work, seeking guaranteed revenue of at least $500,000.
oversees a program that has been in NCAA Division I-A for only four years and still does everything in-house. Troy State has had preliminary talks with ISP Sports, however, and Farmer said guaranteed money was a factor in his decision to entertain proposals.

“We wanted to get a feel for what number they would throw out to us,” said Farmer, who said he was looking for an initial guarantee of at least $500,000. “We feel like we’re doing a pretty good job, but this is just a way we can kind of get a little measuring stick out. At the same time, we’re extremely understaffed.”

Kyle Moats, senior associate athletic director at Marquette, said his school’s deal with Nelligan Sports Marketing was born out of necessity. “We just didn’t have the bodies from a financial and expense standpoint,” Moats said. “We didn’t have the ability to hire two or three or four more people. By doing it this way, we reduced our expenses and we gained in revenue.”

Moats would not divulge financials, other than to say his school did not receive an upfront guarantee. In addition to selling some of the traditional assets — radio, TV, print and promotions — Moats said Nelligan provides a business-to-business component “different from what other outsourcing groups have done.”

Nelligan President and COO Tim Hofferth, athletic director at Villanova from 1997 to 2000, said the company has “quadrupled revenue in a little over six months” at Marquette by focusing on categories such as health care in which relationships might already exist.

“That’s where the real opportunity is,” said Hofferth, who cited the company’s continuing three-year relationship with Louisville as another example. “That’s why we can go from $400,000 to better than $6 million [in revenue] in three years. The other companies, none of them are doing that.”

Bigger is better?

Host, ISP and Learfield –- with more than 50 college properties between them — have established themselves as major players in an industry that continues to evolve, but with very few breakthrough companies.

“A lot of schools, when they have done this over the

Related information:

 

Marketing in Division I-A athletic programs

 

Key players in college sports marketing

 

last 15-20 years, really use other institutions as kind of test cases and examples,” said Teague, who previously worked at Viacom Sports, which is perhaps the biggest new player to emerge after last year’s 10-year, $75 million pact with Louisiana State University. “So it’s hard for a new player to really come on to the scene if they don’t have a proven track record.”

Angelucci noted the dramatic escalation of rights fees in recent years and added, “If you weren’t already on the treadmill of the multimedia rights business, then it’s pretty tough to get into it right now because it is a very high-risk business. If you don’t already have a business plan and a model in place that takes advantage of efficiencies, then it’s pretty tough to suddenly jump in and go guaranteeing one school a whole lot of money and hoping you can make it back.”

After gaining a foothold, and in some cases stranglehold, in the marketplace, firms continue to find ways to make bigger even better. Learfield in January bought Bethesda, Md.-based Team Services LLC, a company that specializes in naming-rights deals.

Gary Sobba, general manager of Learfield’s Tar Heel Sports Marketing, said the acquisition gives Learfield another valuable point of entry with schools looking to generate additional revenue with a stream that is expected to flow on campuses across the country. “We’re a little bit ahead of the curve and we see that as a wave of the future,” Sobba said.

Potential pitfalls

Institutional control has become one of the biggest concerns in college sports, and losing it invariably means front-page headlines, investigations and possible sanctions. As a result, outsourcing requires a new level of trust on the part of schools.

“The biggest thing for athletic departments is to get over the fear of not having control,” said Rick Thompson, associate athletic director at the University of Kentucky.

Whether you’re an elite sports program or competing as a mid-major, control is always a concern. Said Moats: “Regardless of the school, regardless of the company, those are the issues you have to look at it. Does it make more sense to have outsiders, if you will, representing the university’s best interest and the athletic department’s? To me, that’s the first hurdle you have to get over. If you’re comfortable with that, based upon how you’re set up and how your control mechanisms are, then you move on to the next step.”

Angelucci, who assumed his new post with Host on Dec. 15, is now a regular at Kentucky’s senior staff meetings, which are also attended by the school’s compliance director. Angelucci said cooperation and due diligence now extends even to his hiring practices, as all prospective candidates are filtered through the compliance department to avoid potential pitfalls.

Teague said he is on the phone repeatedly every day with Sobba, who is based in Chapel Hill. “I don’t think our athletic director [Dick Baddour] feels a lack of control because we’re so on the same page,” Teague said.

Contracts help govern control as it relates to sales activities, specifically who is selling what and to whom, especially when outsourcing is augmented by in-house sales.

Teague said North Carolina’s only internal efforts involve selling smaller sponsorships to local companies for posters and schedule cards in the category of sports known as “Olympic,” often considered secondary. Learfield does not sell Olympic sports under its contract with North Carolina.

“The one reason why we didn’t want them selling that is because we didn’t want them to push it aside,” Teague said. “They’ve got such bigger issues on their plate when it comes to sponsorships with Dodge, Federal Express and Wachovia. I didn’t want them to have the burden, or just the job of going down the street and selling something to a local vendor to sponsor our women’s lacrosse schedule cards.”

Zullo’s study found that of the schools that outsource their marketing, football, men’s basketball, women’s basketball and baseball are the focus of sponsorship efforts, while golf, track and field, swimming and tennis usually are ignored by the agreements.

Teague said of Olympic sports, “They benefit from the larger revenue that is generated out of football and men’s basketball.” His school’s policy dictates that no party can sell permanent signage at Keenan Stadium or the Smith Center, although Teague noted that Learfield sells five integrated videoboard features, such as “Play of the Day,” for the latter.

Such differences illustrate potential gray areas when it comes to institutional control. ISP President and Chairman Ben Sutton Jr., whose firm has deals with 22 universities including Syracuse and Pittsburgh, said, “You need to know on the front end what you’re getting into. The contract document certainly provides governance, but it’s also really a guide to what the school’s tolerance level is for commercialization.”

Will the trend continue?

Outsourcing clearly has a place in the world of college athletics, and many expect schools to keep ceding sales efforts to outside specialists, for a variety of reasons.

“The university’s mission is to educate students, and corporate sales doesn’t necessary align with that,” Sobba said. “This is the one piece of business that university administrators may not have as much knowledge of. They also just don’t have sheer space to be able to house the head count to run this operation.”

Moats agreed, saying, “Do you want to increase your staff size with salaries and benefits or outsource and let someone else take care of those responsibilities?”

The University of Kentucky’s deal turned heads, but many in the business don’t expect it to force guarantees upward on the same scale. “I think that would be a tough putt,” one source said. The source said Kentucky’s higher guarantee was largely the result of one deal point that allows remarketing of men’s basketball telecasts, something uniquely born out of the power of basketball in the Bluegrass State.

Zullo’s study found that most BCS schools using outsourced marketing received annual guarantees of $3 million or less, while for non-BCS schools the annual guarantee was just $750,000 or less.

Still, Angelucci, caretaker of the deal that perhaps signaled a sea change in the marketplace, expects the Kentucky deal to be a sign of things to come.

“The Host-UK deal kind of got everybody’s attention,” he said. “Five, six years from now, I’m not saying we’re going to look at Kentucky like it’s a good deal or a steal, but in the major college business it will become a commonplace agreement by that point.”

Kris Johnson writes for sister publication The Sports Business Daily.

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