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Dr. Dan Sutter: Television contracts and cooperation

College football illustrates many economic concepts. A dispute over the Atlantic Coast Conference’s (ACC) television deal illustrates one way we use contracts. The controversy also highlights the challenge of long-term deals in a rapidly changing economic landscape.

The ACC contract runs through 2036 and pays the 14 conference members around $30 million per year, with about $10 million available in performance bonuses. Florida State and Clemson complain that this amount is insufficient to compete for national championships. The SEC and Big 10 TV deals will soon pay schools around $70 million annually.

Florida State and Clemson have won national championships in the past decade and can generate tens of millions in revenue annually from fans, alumni, and boosters. But so can top SEC and Big 10 schools. A $40 million TV revenue disparity will affect coaching salaries, facility funding, and NIL dollars.

Florida State President Richard McCullough recently stated that the school may be forced to leave the ACC. FSU and Clemson have data showing that they generate far more than 1/14th of ACC TV audiences and deserve a larger share of the contract.

Both law and economics study contracts. Contracts are the foundation of commercial law. Economics focuses on the value created by and impediments to cooperation. Often people recognize the benefits from cooperating. Clemson willingly pays Coach Dabo Swinney’s $10.5 million annual salary because of the value creates for the University and because Coach would quickly find another job if Clemson stopped paying him.

Many business arrangements build off the above logic of repeated dealings and are largely self-enforcing. In such cases, written contracts are relatively unimportant. The desire to maintain cooperation leads to accommodation of unforeseen events not covered in the contract.

Sustaining cooperation is sometimes more challenging. The dual interest of teams in sports offers one example. Teams want to win all the time. Yet many fans are only interested in competitive contests. Strong teams can be more profitable if their opponents are also good.

For college football the relevant factor is the strength of conference foes. The champion of a weak conference earns little credit. Top teams want their conference rivals to invest and field strong teams.

The wave of conference realignment around 2010 revealed a challenge. Long-term TV contracts help smaller revenue schools improve their facilities. They can borrow against TV revenues to pay for upgrades today. Conference realignment created the potential for TV revenues to drop significantly, creating a financial risk. Top programs must promise not to walk away during the contract. A solution emerged: grant the conference the school’s TV rights for the duration of the contract.

Conferences also instituted exit fees. The resulting commitments have been strong; recent moves by Oklahoma, Texas, USC, and UCLA coincided with the end of TV deals.

The ACC negotiated a twenty-year deal beginning in 2016, creating a lengthy stream of revenues for conference members. Florida State faces a $120 million exit fee and no broadcast rights for their games until 2036. Although rights grants have not been challenged in court to date, FSU seems to have a weak case.

Many business relations allow one party to take advantage of another. The party with this ability often wants to credibly commit to not do so. Contracts allowing self-constraint facilitate many business investments.

Self-constraint explains how seemingly one-sided contracts benefit the party whose hands are tied. Consider non-compete clauses in employment contracts. Businesses might insist on such clauses before providing training so that an employee does not take this knowledge to a competitor. The big company is not exploiting the employee; the clause enables access to training and likely a promotion and raise.

The ACC contract’s weakness is its length during a period of significant change in college football economics. Does this make the deal a mistake? I suggest not. Market economies involve numerous discoveries of previously unknown things. Conferences devised contracts to address a dilemma created by realignment and now realize a contract can be too long. Discovery through trial and error is our only viable option.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H.
Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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