Podcast Alert: Ryan McCarthy – Virginia Tech

Transcript

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Ryan McCarthy: [00:00:00] The money that can come from the television rights and the private sector, financial institutions entering into agreements with universities to buy percentage stakes of athletic programs, that if these aren’t managed well, it’s gonna be what makes or breaks countless universities in this country.

AJ Maestas: Welcome to the Navigating Sports Business podcast, where we uncover insights from the most prominent leaders in our industry. Today, I’m joined by Ryan McCarthy, who is, among many things, a board member at Virginia Tech. We’ve had the good fortune of working closely with Ryan as Virginia Tech has been preparing for this new and uncertain future of college athletics, and we thought it’d be insightful for you all to hear from the perspective of a college board member who is driving change.

We have a past episode with Whit Babcock, the Virginia Tech’s athletic director, if you wanna go deeper on Virginia Tech athletics. But from the b- board perspective, today, again, Ryan McCarthy, thank you for joining us. [00:01:00]

Ryan McCarthy: Good to be here. Thanks, AJ.

AJ Maestas: Yeah. I appreciate what you do, and I appreciate you giving us your time, ’cause I know you’re a very busy man.

So if you don’t mind me jumping right in, the Sports Business Journal quoted an anonymous Big 12 president recently saying that he spends 90% of his time on athletics. From your perspective, is that an outlier, or is that reflective of your reality these days?

Ryan McCarthy: I think it’s definitely trending in that direction.

Some schools are greater percentages than others, but if you look at the fundamentals of every college balance sheet, especially major state universities, athletics is a key financial driver, not only from the standpoint of revenue, but also from marketing to increasing and improving the brand of the universities.

AJ Maestas: Yeah, I agree, and I know we’ve shared a lot of data on that front, so I don’t expect you to recite it or anything, but just off the top of your head, is it fair to say you see what athletics does for universities as a critical asset in marketing, [00:02:00] attracting students, staff, faculty, et cetera, et cetera, or is it, how would you frame it, basically?

Ryan McCarthy: I would say that it’s essential. There’s no other mechanism where you can get more attention to send a message of the type of university you have through than through an athletic lens. There, you’re gonna get millions of people to be able to see your campus on television, to be able to see that brand for three hours, to get 80,000 people to show up in one place on a weekend.

So it’s an opportunity to bring the community closer together, to have the students come and congregate to one place and get excited about their community

AJ Maestas: Yeah, we very much agree with that. And these are some just rough statistics. Don’t take these as gospel, but I’m trying to average major universities.

But we look at this for our clients, how much exposure are they earning? And I’m not talking about the big, puffy, fake earned media number. We’ve all kind of heard of those, exaggerated statistics. We discount it down to [00:03:00] what it would really cost for you to buy that exposure.

Because we know if a football game’s on, it’s not 100% Virginia Tech. It’s not always 100% positive sentiment, right? So discounting all that advertising value down to realistically, what would you have to pay in measured, paid media to get this kind of coverage and exposure, and it’s always more than the athletic department’s total budget, right?

And I don’t mean the subsidy of athletics, the total budget. It it’s somewhat correlated. It can be two or three X when someone has great success or great storytelling. But but just to reinforce what you’re saying, that we do believe it’s an advertising department that mostly pays for itself.

It gets even more lucrative when you start to look into things like applications from out-of-state students, from young men who are less likely to go to college these days and what have you. We typically talk to our clients about it being about an, a billion dollar incremental impact, right? If you significantly and perpetually elevate athletics versus have an average, department, program, or conference, or what have you.

So I, I only quantify that just to share in case your peers out there end up listening to this [00:04:00] to say what is the business case on athletics?” We think it’s pretty clear. But investing doesn’t guarantee success. So we’ve loved working with you, and I think a lot of people know this already, but just for those who might not, our work has led to this sort of initiative, this Invest to Win initiative at Virginia Tech, which is roughly a $200 million commitment over the next four years to elevate athletics.

So-

Ryan McCarthy: $200 million a year we’ll make we’re gonna increase the budget. We were at $144 million for athletics, and we increased it to 191 for the first year, and then we’ll be roughly around 206 to 209 in the out years. So it was an increase of about 25 to th- plus percent for the, or almost 30% year one, and then that will be sustained in the out years unless a- an adjustment is made by the board of visitors.

But you’re right, cumulatively 200, but you just wanna make sure people understand the budget each year will put you on par [00:05:00] with most Southeastern Conference schools and and the Big Ten.

AJ Maestas: Yeah. And it’s pretty incredible. It’s… There’s a handful of stories like this out there, but what we also believe is that these are wise investments.

This money’s gonna be allocated in a way that leads to sustainable winning and brand and other, benefits that accrue to a university that makes these kind of investments. But incredible. So you’re one of the architects of this, right? Do you mind sharing-

Ryan McCarthy: Jay Harrison and I my counterpart on the board of visitors, partnered together to drive this process, and ultimately we were the ones who co-sponsored the resolution that we passed in the board of visitors last last year.

AJ Maestas: Yeah. And Jay has been great to work with as well. I… and I emphasize this so much because what I’m picturing is athletic directors, university presidents, other board members listening to this conversation and saying, “How did they do that? Why did they do that?” “How can they justify that?”

So if I could drill down into that, what do you think made this level of investment necessary?

Ryan McCarthy: We did, we [00:06:00] went and did the homeworks with Babcock at the time and realized that our budget was roughly around 13th or 14th in the Atlantic Coast Conference. And when you marry that up against what we’re– has become, the highest standards of the Atlantic Coast Conference for state schools like a North Carolina, like a Clemson, they were in the 190s.

Initially Clemson was the only one at 190. North Carolina’s made a lot of moves in the last two years in particular. And in order to have the resources required just to be competitive so that you’re not gonna be in a position where you don’t have the resources, the coaching staff required to build a program, recruit the best athletes, retain them and put your best foot forward when you have to cross the chalk on Saturdays, in particular with football.

But I would also say in men’s and women’s basketball is also critical as well. When those three sports in particular are [00:07:00] successful, the revenue and the roll– the trickle down for all the other sports programs is they’re all benefit- benefiting from that. So when our equation, when we looked at the increased investment was necessary, we had to make sure we could be successful, in particular in those three sports.

But obviously men’s wrestling, we’re a national caliber program. Our women just lost by one run in the ACC softball tournament. We are, we’re making the resource investments required to be successful in all sports, but there are three in particular that are key revenue drivers. And they– in order to understand the equation, you have to really look at the key variables.

And and that’s how we built our pro forma and got to 191 million for this next athletic year, and we’ll grow steadily as we go through– on the out years.

AJ Maestas: Yeah. Yeah. And I appreciate you saying, these are SEC levels of funding, which is basically saying as competitive as one can be.

And Big Ten. Yep, yeah, for where– in [00:08:00] Big Ten for where you are in the world. So what if we’re right? If we’re right, what does Virginia Tech athletics look like in 2030, let’s say?

Ryan McCarthy: 2030, y- it’s a program that can compete every year for an ACC championship. It’s a y- it’s a team that’s gonna make the national playoffs.

And then, what, when you kinda go from winning nine to 10 games, and you know this better than I do, AJ, you’re talking about maybe a little more depth, one generational player. That’s the difference between nine and 10 games.

AJ Maestas: Yeah.

Ryan McCarthy: All those teams have great conditioning. All those teams are well-coached.

All of the, it’s y- it’s coming down to a handful of plays in a game, and one kid makes a great play and that’s it, right? And so to me, if a team consistently is winning eight to nine games a year, they’re in the playoffs, they’re going to bowl games, you’re a successful program, revenue is flowing [00:09:00] into the university and everyone benefits.

AJ Maestas: Yeah.

Ryan McCarthy: Same thing with college basketball. We make the NCAA tournament, revenue flows into the university. It is, this is a business. Yeah. We’re paying players. There’s no doubt. And when we try to say, I know we say student athletes and I know we try to put on the best face possible, but when you’re paying a kid a million dollars to play basketball, he’s an employee now.

Yeah.

He goes to class too. He gets an education as well, but there’s an expectation now, a big one.

AJ Maestas: Yeah. There’s people who freak out hearing you say this ’cause they’re so scared of the thought of em- employment and what that means, and collective bargaining, what have you. But I won’t even…

Forget it. Forget me even saying that.

Ryan McCarthy: And that’s all gonna play out in the courts, and it should.

AJ Maestas: Yeah. ‘

Ryan McCarthy: Cause it’ll bring order to this system.

AJ Maestas: I appreciate you talking about the downside and upside, ’cause that’s right. How are these dollars gonna be allocated? It’s one of our big fears at Navigate, right?

That these universities are asking for and getting more funding, because no one wants to fall behind in this moment in [00:10:00] time. But,

Ryan McCarthy: We put together a special subcommittee of the board of visitors and leaders within the administration to have oversight. We had a massive infusion of capital-

AJ Maestas: Yeah

Ryan McCarthy: that we put into the system, and we’re watching every penny that goes through that, ’cause I work for the taxpayers of the Commonwealth of Virginia, and that’s my job.

AJ Maestas: Yeah.

Ryan McCarthy: And, the more I can do to make the pronounced brand of Virginia Tech, more kids are gonna wanna go to the school.

More people are gonna recognize it is an extraordinary institution for research to support the federal government and business. We produce a tremendous product that go into computer science and engineering and they can feed all these amazing companies in Northern Virginia in particular, and other places in the country.

But it’s– this is the, there’s a fight in the world for talent at the university level, at businesses, and we just need to keep our brand out there [00:11:00] and prominent so that we can have people wanna come to school. We can have people that wanna do research with us and work with us.

AJ Maestas: I appreciate you saying that, just because Virginia Tech listeners might not know this, but it doesn’t really have a– the demographic cliff that is affecting so many universities, especially in the north and northeast, hasn’t shown up at Virginia Tech yet.

A lot because of these great engineering and technical programs. The challenge with young men going to college hasn’t been a major issue yet for Virginia Tech, and yet they’re still making this investment, still believing in… When I say billion-dollar incremental impact, that’s my attempt to put it into today’s dollars, the not athletics revenue, but the total benefit to the university over time.

It’s essentially saying, will a university not make at least 100 million more per year between donations, enrollment, out-of-state, international students, et cetera, et cetera, et cetera, on a truly incremental basis, and then, treat that like an annuity and saying, “Great. Building a great program puts you on this tier,” et cetera.

But v- again, Virginia Tech not even feeling those pains yet, and yet still making these investments. And I know you have [00:12:00] a broad perspective here, so just to share with our audience, your background’s different than most of our guests. You’ve served our nation as an Army Ranger. Thank you for your service.

That’s pretty badass. In foreign affairs in the Defense Department as Secretary of the Army. I’m assuming you’ve gone to War College. You’ve done all this unbelievable strategic planning. Some of the greatest minds in our country support military leaders like yourself. Can you share a bit about how your time as Secretary of the Army introduced you to college athletics, how this whole thing happened?

Ryan McCarthy: Sure. As Secretary of the Army and Under Secretary of Army, it’s the number one, number two jobs for the entire US Army. One of the countless responsibilities I had was obviously Fort West Point. So you’re the one responsible for certifying the curriculum and setting all of those measures in place.

The superintendent reports direct– three-star general reports directly to you, who is the president of the college. And then obviously professional military development from [00:13:00] a soldier from when we recruit them off the street all the way to become a sergeant major or a four-star general. We have to educate them at every level, whether that starts with university or basic training, and then all the way through their lives until they retire as a sixty-year-old man or woman.

I had been– We have a system within the US Army which is like a university system, organic to the institution, as well as our relationships with universities all over the United States, where we send thousands of our soldiers to go to fellowship programs, master’s degree programs, PhD, et cetera. So I had college presidents coming through my office on a loop because they also– they want research dollars.

Which we would distribute roughly two and a half billion dollars a year in research grants to the university systems in the United States on a host of different types of [00:14:00] work, whether that’s engineering projects for weapon systems, healthcare. I was intimately familiar with it. I was recruited to– for a vice chancellor post of a major university for a southern school that ultimately I did not select, but would have loved to.

Really big football program at that school as well. But but so I, I had a tremendous familiarization with it. So going onto the board of visitors of a university was seamless for me

AJ Maestas: Does this college athletic stuff seem small time then compared to these roles, compared to what you’ve done?

Ryan McCarthy: No, because I think it’s incredibly important because if the NCAA doesn’t manage it it will be an existential threat to the business models of universities all over this country. And so if it isn’t governed right, and if it isn’t managed accordingly, it can create tremendous problems for universities because they all have to be competitive.

But the money that can come [00:15:00] from the television rights and the private sector, financial institutions entering into agreements with universities to buy percentage stakes of athletic programs, that if things aren’t managed well, it’s gonna be what makes or breaks countless universities in this country.

And education is the escalator of the middle class. It is the reason why the United States of America beats everybody. We have the most educated population in the world. We have extraordinary talent in this country, and it stems from our ability to educate our population

AJ Maestas: I’m really glad to hear you say that from your perspective.

I’ve always felt our top point of diff– There’s some natural advantages we have. If you’ve ever read The Accidental Superpower and what have you, there’s some energy independence and the world’s largest breadbasket and what have you. But I’ve always thought it was our military, and obviously that’s no small part of our budget or commitment, and our education system.

It’s a global brain drain for talent around the world. It is where inno- [00:16:00] so much innovation is born and comes from. It is it serves… Yeah I’m happy to hear you see the marriage of those two things. That is yeah, I agree. I very much agree. I’d love to pry some advice out of you for others.

Again, I’m hoping peers of yours get to hear this. Given everything that’s going on with budgetary pressure, NIL and the compensation of these athletes conference realignment, I think most people expect some kind of conference realignment to happen yet again around the next set of TV deals that could be, just here in the next few years.

What should schools be– What kind of actions should schools be taking basically to address these challenges generically? So not Virginia Tech, just generic.

Ryan McCarthy: So the first thing I think they, they need to make sure they’re watching the regulatory stuff. I’m sitting in an office building in Arlington, Virginia, so I can look out and see the river and look across the sea, Washington, DC.

AJ Maestas: Yeah.

Ryan McCarthy: And I’m just visiting a company that I– or investment firm that I advise and looking at some companies they wanna buy. So regulatory. [00:17:00] You hear the President of the United States specifically say he doesn’t like streamers. He doesn’t like the streaming firms. Okay? You see he’s met with Nick Saban and a bunch of leaders from the athletics, in particular college football, and talk about how can we look at managing NIL in particular.

So every board of dir- visitors, regents, whatever you wanna call them, board of directors in this country, they better be paying attention to that ’cause it’s a moving target. And that’s not just the Trump administration. It is bipartisan in nature. I deal with Congress a fair amount in what I do for a living, and they all talk about it because they all have the same concerns that I do about the existential threat it brings to universities.

So regulatory, the government always plays a role, definitely at the federal level. Second, if you just start at the macro, now we’re down at the university level, what do these [00:18:00] board of visitors do to bring the resources to bear? Do they understand all the mechanisms and authorities under their purview?

But what do I need is can I use maximum amount of fees and student tuition to finance athletics? Do I do that or I have somewhere lower? You wanna make sure you keep kids competitive and you’re not driving kids away from going there to school. But how do I use every penny I can to make the investment off of my own balance sheet?

And then what private sector mechanisms do we put in place? Do we have an external entity that helps us interact with the business community, like an athletics foundation that can help me go out and meet with corporations or financial firms to come up with interesting investment ideas to bring off-balance sheet dollars to invest against the university’s athletic program [00:19:00] And then how do I manage the NIL in such a way that you don’t get into trouble, but you can present opportunities for these athletes over and above whatever the revenue share is?

So I think there’s the, that’s the second line of effort I would say is that athletics domain. The third was you probably wanna hire a firm or hire a law firm, whatever it is, that can help you truly understand how to posture yourself To put the best face forward for when if they, when and if they do conference realignment, how do you explain your university’s value?

Because when they do these TV deals, they’re gonna look at where are all the eyeballs in the country and who watches these teams, and who cares about these teams. Now, the advantage Virginia Tech has, we’re in the Mid-Atlantic, North Carolina, Virginia, the DC metro area. That’s about [00:20:00] 25 million eyeballs, and it’s…

I- if you look at the demographics economically, there’s people that are middle, upper middle class to the top five percentile in the country, so there’s a lot of money there.

AJ Maestas: Yeah. Yeah.

Ryan McCarthy: Disposable income that could go to football games and basketball games, and they could watch parties at their home on weekend, and they all put on their gear and they get to watch games.

That will also be important to how you present yourself and your university in such a way that I’m a key variable in your pro forma for you to make money, Southeastern Conference, Big Ten, ACC. So when that shakes out, where are you? Can you manage the regulatory fallout? Have you done everything possible to raise every penny that you can?

And how do we present ourselves in such a way that we make the cut?

AJ Maestas: Yeah.

Ryan McCarthy: And then the fourth thing, win.

AJ Maestas: [00:21:00] Yeah. Yeah. Sure makes a… For sure does give you some tailwinds. That’s right. I appreciate you talking about the regulatory environment. We’re repeatedly finding potential clients, friends of ours that we’re having these introductory conversations with skating to where the puck is right now as opposed to where it’s going.

There tends to be this recency bias and oh, this is the new world, this is what we have to do, without enough, in our opinion, consideration for optionality, flexibility, and what’s gonna come next. ‘Cause we’re clearly not in a mature state as an industry. It’s clearly not fully settled.

So I appreciate that. I super appreciate you emphasizing governance and incentive structures as you have throughout this conversation because we believe, we could be wrong at Navigate but we believe that is one of the biggest challenges, right? The alignment of incentives, the oversight, the governance, what have you.

It’s the reality of being in a really complex organization like a university, but it creates some perverse incentives and it leaves a lot on the table and what have you. So I like your order. I like your order of priority. I’m gonna wrap up here with some rapid fire type questions. You ran the Army, I figured you had that kind of depth and range.

Okay then, your favorite Virginia Tech tradition? [00:22:00]

Ryan McCarthy: Enter Sandman. It’s like the place shakes. It’s just it’s hard to beat. But I did get to… I have experienced some really interesting things with the Corps of Cadets, which is near and dear to my heart. But Enter Sandman is hard to beat.

AJ Maestas: Yeah, and I love that y’all brought Metallica back to play there, and just that was smart. That was cool.

Ryan McCarthy: It registered on the Richter scale. Did you know that?

AJ Maestas: Really? Yeah. No, I did not. That’s cool. It did. I’m taking a note. Yeah. That’s cool. Best game day atmosphere you’ve ever experienced?

Ryan McCarthy: Army, Navy.

I love my Hokies, but come on. Okay. It’s the only college football game in America that

AJ Maestas: day. Yeah, and the ratings and, and- Yeah … it says something.

Ryan McCarthy: Because it’s not a football. It’s about the two institutions- … of good. Last line of defense, everything we hold dear, so that’s…

And, before I get crushed on the social media now by Hokie fans, that’s what that game’s about.

AJ Maestas: Yeah, of course. My father served in the Army. Just as a heads-up, by the way, he almost reached your rank and level but [00:23:00] fell a smidge short. There’s a civil war, and Army faces off against the Navy.

Who wins?

Ryan McCarthy: People live on the land, so we’re gonna win.

AJ Maestas: Yeah, I love that. I like it. Yeah, there’s so many counterarguments, but I’m so glad you went with Army. Favorite book of all time?

Ryan McCarthy: Probably Team of Rivals about President Lincoln’s cabinet. Doris Kearns Goodwin wrote it. She’s tremendous presidential historian.

What I like about that book is it talks about his cabinet, and, essentially two of his cabinet members he actually ran against for president. His secretary of war and his secretary of state both ran for president against him, and they ultimately joined his cabinet, and it was a way for him to hold his party together, and he showed tremendous humility in doing that.

But they’re also brilliant, very capable men, and he ultimately held the Union together.

AJ Maestas: Yeah, that’s right. And I think that’s a story that’s told so often. By the [00:24:00] way Seward’s Folly was the purchase of Alaska, so-

Ryan McCarthy: Yeah …

AJ Maestas: I’m grateful for that since I was born and raised there, and I don’t know what that story would’ve been otherwise if not there.

Thank you for your recommendations, your predictions, your ideas, and for being an example that I think other board members can look to and ask themselves, “What’s my real responsibility? What is the tide of this? Why are we doing this?” ‘Cause quite often athletics can be this very scary problem that lands on their plate, and these are often very political positions.

It’s scary to make tough calls, but you have made tough calls. Clearly you come from a deep leadership background, but I appreciate it because I don’t believe Virginia Tech is going where it’s going, and I believe it’s going somewhere very good, if not for your leadership. You and Jay and key board members, key executives, Whit really put his heart and soul into this search and process and what he desires for the future of Virginia Tech athletics and the university and Tim Sands.

If not for great leaders that are willing to take risks and to basically, plan for a future, we aren’t in this [00:25:00] spot. ‘Cause what had been a few decades that Virginia Tech had not quite been where people would expect it to be from the Frank Beamer era. So thank you. Thank you for giving a university a chance, and what I would say is almost a certain future that is very bright, and it might not have been that way.

So thank you for your time, and thank you for your wisdom.

Ryan McCarthy: I’d just say one thing real quick. Please

AJ Maestas: do, yep.

Ryan McCarthy: I’m really grateful for your firm’s support that in the process with us. Of course. Of course … you guys were great and very helpful for everything from benchmarking to understanding all of the dynamics in various conferences and then throughout college football.

In particular for board of visitors members, what I would tell people, it’s, it is a privilege and a responsibility that you have to sit over top. You are making those calls. You have gotta get those university presidents and that staff to drive towards a set of objectives that’s gonna strengthen the prowess of that degree [00:26:00] and that experience to prepare young people to go out and enter the workforce and enter life, enter the military.

So it’s a tremendous responsibility. It’s not just sitting in the sky box and eating shrimp and having a good time. That’ll come But you gotta sit there and you gotta make the calls, and you gotta endure the scrutiny because it’s the responsibility. And what I would tell anybody, you get that opportunity like that, it’s precious.

And there’s, there’s 30, 32,000 students that are dependent on you and their families. Obviously we made some tough calls, but we didn’t sit still. We took it head on, and we’re trying to do the best we possibly can for those outcomes.

AJ Maestas: I appreciate that. I think our country appreciates it.

Virginia Tech appreciates it. I think university leaders who get to hear your perspective will appreciate this because it absolutely matters. I… as I feel just as you do, as this is these two [00:27:00] critical institutions for our country, our military and our university system. So thank you for your service, and thank you for your time.

For folks listening, if you have any questions or comments, feel free to reach out to us. I’ll pass this on to Ryan, anything you need to ask him. My email is AJ@NVGT.com, and you can also connect with us on my personal LinkedIn page or the Navigate LinkedIn page. But again, this is AJ Maestas with Navigate, joined by Ryan McCarthy, board member of Virginia Tech.

Thank you for joining us on Navigating Sports Business.