Could the Longhorn Network's deal with Time Warner Cable Hurt UT's Non-Profit Status?

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Right on the heels of Comcast's recent purchase of NBC Universal, the as-yet-unnamed Texas Longhorns television network may end up with some cable operator parentage of its own.

Sports Business Journal reported on Monday that Time Warner Cable is in talks to purchase as much as a 20 percent ownership stake in the new channel, set to launch in September. ESPN, which agreed to a 20-year, $300 million agreement with university will produce programming for the channel.

The announcement spurred huge reaction across the country with commentators wondering if this meant the beginning of the end of conference football as we know it or whether the school was running the risk of committing any number of potential recruting violations.

But a statement in the SBJ story may have an unintended impact on any similar deals going forward:

A deal with Time Warner Cable is essential for the unnamed channel’s distribution because TWC is the state’s dominant cable operator, with close to 2 million subscribers, according to Media Business Corp. In addition to being a UT corporate sponsor, TWC has wired the university for cable and broadband services, and it has a system that covers the state capital, Austin.

The immediate arguments are the complaints regarding lack of programming competition that many critics of the Comcast deal initially raised. Certainly with Time Warner Cable controlling such a large market share in the state of Texas and potentially having a vested interest in the success and visibility of Longhorn sports, there is reason for Texas A&M, Texas Tech and Baylor to be a touch worried about how much airtime they'll get.

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But a longer-term issue could be how the revenue gained by UT may be classified and whether it affects the school's nonprofit status. A May 2009 report by the Congressional Budget Office studied revenues earned by Division I universities - broken down in terms of commercial and non-commercial revenue and whether it came from inside or outside the athletic department - and aimed to determine whether the tax breaks many colleges received gave them an unfair advantage to pursue commercial interests.

The study concluded that at the Division I-A level, a number of athletic departments were closer to commercial enterprises than non-profit institutions of higher learning. However the CBO also stated that even though the continuation of such tax exemptions amount to a federal subsidy and could "encourage an 'arms race' between schools", most universities would be able to find loopholes that would enable them to avoid any real taxation through athletic department earnings.

Yet the CBO makes an evaluation that that might give pause to some ardent Bevo backers:

When athletic departments function primarily as a part of the educa­tional experience for students, they participate in that nonprofit market. However, highly competitive college sports teams with large-capacity stadiums and prime-time television events with advertising are more reasonably considered participants in the market for entertainment. They compete for entertainment spending with many other recreational options, but their most direct competi­tors are professional sports leagues.

UT has said its channel will feature non-sporting events like coverage of lectures and visiting speakers as well as commencement ceremonies. The same will likely apply to BYU's forthcoming network. While those academic appetizers provide some cover from critics, the main course that has networks and some cable operators salivating is football with men's basketball for dessert.

ESPN has already heard its share of criticism about becoming such a prominent partner with one school - a refrain the network has dealt with more often in recent years with their controversial coverage of supposedly "favored" athletes like LeBron James and Ben Roethlisberger. But with a cable distributor in the mix, the situation gets even stickier.

The Big 12 conference still has another year left on its deal with Fox Sports Net, meaning there will likely still be some even distribution amongst coverage of the competing schools. However, the ABC/ESPN contract runs through 2015-16. With ESPN and Time Warner being so closely tied to Texas, will fans of the rest of the conference see just enough of their teams to keep them from jumping to satellite?

If so, does that put Texas in direct competition with other university athletic departments? It's also a question that may be asked to a lesser degree of Notre Dame. Currently the Irish's deal with Comcast-NBC is for home football games only, but if the Longhorns' network proves to be profitable, you can bet Fighting Irish TV is sure to follow.

Here's the rub: Major League Baseball was granted an antitrust exemption allowing it to be a monopoly. The NFL enjoys a partial antitrust exemption. Still franchises in both of those leagues must still pay taxes. If a university is allowed to keep it tax exempt, non-profit status yet run its athletic department as a business it creates a competitive imbalance not just for the other schools in its respective conference or region, but for other entities competing for the same entertainment dollar.

If Texas, Notre Dame, BYU or potentially Oklahoma (which is reportedly pursuing its own TV deal) can claim much of the same advertising, ticket and merchandising revenue as the New York Yankees or Dallas Cowboys, should they also be able to solicit donations from boosters with the added incentive of making those donations tax-deductible?

I'm in no way advocating for Congress to get involved with legislating television contracts for college sports. Goodness knows they have far more important things they need to spend their time on. But with fans clamoring for the NCAA to take a closer look at its model of big revenue schools making billions off amateur athletes and consumers concerned about media consolidation narrowing wide market access, this could be a story to keep an eye on.