Under Armour, Learfield, and the great college athletic cost correction
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Hey, speaking of money,
Every college athletic department is about to have less of it
You’re probably familiar with many of the reasons why. If stadium capacity is limited, your ability to sell tickets (and parking spaces, beer, commemorative programs, etc) will also be limited. If a fall sports season is delayed or canceled, a program might not get any television revenue. Canceled or postponed “buy” games mean schools aren’t getting game guarantee checks. And a postponed or canceled season, combined with an economic slowdown, can limit revenue from donations.
All of those sources, plus revenue generated from student fees (also at risk if enrollment declines or campus is closed), make up quite a bit of money for your typical athletic department.
But those aren’t the only sources of revenue. Most programs also get real money from a variety of vendor contracts. And right now, it looks like COVID-19 might accelerate significant readjustments in some of those contracts.
One of the most significant vendor contracts an athletic department has is their apparel contract. One of the majors players in that space is dramatically readjusting.
Let's check in on Under Armour
Earlier in July, the LA Times reported that Under Armour is trying to get out of its massive contracts with both UCLA and Cal. Both schools have indicated they’ll fight UA on this, so it seems reasonable to expect some sort of negotiated settlement.
Those might not be the only contracts Under Armour tries to revisit. The Capital Gazette reported that UA may tweak their contract with Navy.
On June 30, Sportico reported that at least a few of Under Armour’s large college clients said their relationship remains the same:
This report from the Lubbock Avalanche-Journal, would indicate that Texas Tech believes they’ll be with Under Armour for the duration of their current contract.
But even schools that maintain their relationship with Under Armour might have lost some money. Sportico also reported that the value of Auburn’s contract with Under Armour is down over $8 million, because the school elected to take equity instead of cash for part of their fee. Notre Dame took a similar deal, although it isn’t clear how much money, if any, the Irish might have lost.
If Under Armour decides not to get out of the rest of their deals, they’ll still have several FBS institutions under contract, like Cincinnati, Maryland, Hawaii, Colorado State, and Kent State. Those aren’t especially large deals, so it isn’t clear if Under Armour would have the same incentive to try and wiggle out of them. The total value of UCLA’s deal, for example, is $280 million. Cincinnati’s deal is worth a hair under $50 million. Georgia State is just under $3 million. If you’re trying to save money by essentially getting out of the big-time college athletics business, there just isn’t as much to be saved by nuking contracts with the Kent States of the world.
Is that what is Under Armour trying to do here? Get out of college sports? And why does that matter?
I don’t know exactly what Under Armour is hoping to do beyond getting their costs under control. But if they were trying to eventually get out of big-time college athletics, I’m not sure their strategy would look any different. The bulk of Under Armour’s major college deals are set to expire in the next four years. Their ability to chase other premium brands, even if they’re willing to overpay, would almost certainly be compromised.
Howe Burch, the President of TBC Advertising, told JohnWallStreet, “if you’re an athletic director and saw what they just did [to UCLA and Cal], would you [trust they would honor a long-term agreement]?”
Whether Under Armour is trying to eventually exit the industry altogether, or just substantially scale back their ambitions, the impact will be felt by programs beyond those who are currently Under Armour clients.
Everybody needs an apparel partner, after all, and there just aren’t very many serious competitors in the marketplace. If anybody exits or scales down, that just removes another competitor to bid against Nike or Adidas. I’d be worried about most school’s ability to command the same contract in 2025 that they might have hoped to sign in, say, 2018.
That’s not just about money, by the way, but also about the type and quality of services provided by the apparel company. I’m told one of the biggest appeals of signing with Under Armour several years ago was that they offered greater customization options compared to Nike or Adidas. If you’re a smaller brand, and you wanted multiple alternate uniforms, or a closer connection to your apparel reps, it’s easier to get that if you’re client #9 instead of client #90.
Could another company enter the marketplace?
That seems unlikely, since there’s an awfully high cost to enter the on-field apparel industry. You’d need a robust retail infrastructure, and the cash to allow you to overpay on a few entry level deals. From asking around, the only apparel company that popped up as even having the potential to do that was New Balance.
But just like athletic departments hope that FANG companies will try to enter the media rights marketplace to drive up prices, there’s at least a theoretically possibility that decreased competition could entice a wild-card to enter the apparel space. Two wildcards that came up were Fanatics, the licensed apparel giant, and Amazon, the company that has the supply chain and cash to basically enter any industry they want.
Would either of them actually want to get involved? Right this second? Probably not. In 2025? Who knows.
But there’s another potential concern for everybody, beyond just decreased competition on price.
Maybe Nike or Adidas could try to get out of their deals too
If you’ve been following the conversation around canceled football games, you’ve probably heard the phrase force majeure. That’s the clause that may allow parties of a contract to get out of the contract obligations if an Act of God makes fulfilling the contract impossible. Depending on the state and the specifics of the contract, force majeure may allow a team to get out of paying a cancellation fee for a COVID-related game cancellation.
Under Armour is claiming that they can get out of their UCLA deal because UCLA has failed to deliver marketing benefits that Under Armour is paying for. If those Under Armour claims those benefits are related to canceled sporting events, then theoretically, a Nike or an Adidas might be able to do the same thing. After all, Nike and Adidas schools lost baseball seasons too.
Nike and Adidas aren’t facing the same company-specific problems that Under Armour is right now, and as far as I know, nobody has reported that either of those companies are working to terminate or rework any of their current college deals. But if Under Armour is successful at extracting themselves from UCLA or Cal, I’m sure everybody is going to take a second look at their own contracts.
You know who else is looking to renegotiate some contracts? Learfield IMG
Another crucial vendor contract for an athletic department? Multimedia sales.
That’s not the same thing as broadcast rights sales because schools have other things to sell. They have their radio broadcast rights. They have the signage in and around their stadiums. They have ad space in their programs.
Many schools work with a third party to help sell all of that inventory, with the dominant player in the space being Learfield IMG. As of January of last year, Learfield had an 83% market share among power conference schools.
These deals can be worth big money. On average, power conference schools make $6 million a year from their multimedia rights, and G5 schools make over $1.5 million. Many G5 programs make more money from their multimedia rights than they do their actual broadcast rights.
Working with a company like Learfield can give an athletic department security and stability. These are often long-term deals with annual guarantees, so an AD could simply plug in their multimedia rights money into their budget, and not worry about it very much.
But now Learfield wants to renegotiate many of these deals
Learfield’s situation isn’t exactly the same as Under Armour, but there do seem to be a few similarities. The company might have overpaid a bit for some long-term deals a few years ago, and now, after COVID threatens revenues across the sector, and a merger brought in new pressures to cut costs and deliver profits, the company may need to extract itself from earlier commitments.
It might make sense for a school to renegotiate, agree to revenue-sharing proposals, or make other concessions to maintain their relationship. After all, COVID isn’t projected to last forever. But there are other possible solutions as well.
One possible solution? More schools could take their multimedia sales in house
In fact, one mid-major AD told me he almost hopes he’s asked to renegotiate his multimedia rights deal, because he believes his program could make substantially more money selling in-house.
Another AD, in a different part of the country, explained why he imagined more schools would pursue bringing their multimedia sales in-house. The potential for increased revenue, potentially substantially increased revenue, is absolutely there, especially if your school sits in a larger market. You also have total control, which can be very attractive if you’re a smaller program that might not get the same attention as a client as an Ohio State or Michigan. Central Florida is an example of a school that decided to recently manage their own multimedia rights. Stanford also manages its own rights.
But there’s a reason that so many schools partnered with Learfield, or similar companies. You don’t have to spend as much money on staffing and supporting your own sales force. Your budget projections also get easier, because your licensing revenues become predictable. You know you’re making X dollars each year of your deal. Managing your own rights is risky and uncertain, like selling a home without working with a real estate agent. Sure, you can come out ahead, but you better know what you’re doing.
But more simply, selling your multimedia rights simply means you don’t have to think about it. Managing your own rights was described to me as a pretty involved process. If you don’t want to have to think about radio rights or signage sales every day, then sure, outsourcing might be really attractive, especially if you’re an AD that didn’t come from the revenue side of administration before becoming an AD.
But in 2020, not having to think about external revenue generation may be a luxury that few ADs can afford.
If virtually everybody is facing projected revenue shortfalls, perhaps massive ones if football isn’t played, then everybody is going to need to find creative ways to raise revenue.
Whatever budget shortfalls happen over the next six months almost certainly will be too large to fill with just budget cuts. There will be increased pressure to grow revenues, a pressure that will be complicated by the fact that most vendors in the college athletics space will also be feeling squeezed.
The only constant forces in college football right now? Expect change, and for billable hours to remain undefeated
It’s hard to feel completely confident in any revenue source over the next year. Ticket revenue is going to crater in even the best case scenario. Broadcast revenue and conference distributions are not completely set in stone. Anybody depending on guarantee games for their budget has made a series of calls to their lawyers.
But just about every other contract, from apparel, to multimedia rights, to licensing, to even food and beverage, could require additional scrutiny and renegotiating as well. The sooner the college athletics establishment knows whether they are going to play this fall (or how), the sooner that haggling can commence, and the work towards some level of budget clarity can really begin in earnest.
I don’t know what the vendor marketplace is going to look like in 2025. If I did, this newsletter would be a lot more expensive.
But I feel comfortable guessing it won’t look exactly the same as it does now.
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