I personally like the idea of 4 4-team pods rotating every two years to become new divisions, so I am going to use that as my setup. Just realize that no matter how many teams you have in your two divisions, you could use this system in the same manner.
Ok, so we have 4 divisions: A, B, C, D. Each team has 3 protected rivals. In Michigan's case this would be OSU, MSU and either ND or Minnesota depending on whether ND joins the Big16. Those 3 rivals are spread across the other 3 divisions. So, Michigan is in A, OSU is in B, MSU is in C, ND/Minn is in D.
In this particular year, A and B get paired together to make Division 1 and C and D get paired together to make Division 2. Every team plays every team in their conference and one game against either rival in the other division. This makes for 9 games.
At the end of the season there is a pseudo tournament in each Division between all bowl eligible teams to determine the winner. The seeding is determined by the number of points that you have from your cross-division rivals. For each win against your cross division rivals, you get (9 - N) / M points where N is your rivals rank in their division and M is your rank. This makes it extremely important for you and your rivals to be ranked highly and for you to beat your rivals each year. Once the brackets are set, the bracket is simulated by the outcomes of the actual matchups throughout the season. The winner in each division plays in the championship game. The division which accumulated the most rivalry points in the above method gets homefield advantage.
So, lets say that Michigan is #2 in the division, OSU and ND are #1 and #2 in the other division and Michigan beats them both. Michigan gets 4 points for OSU and 3.5 points for ND. The #1 in our division beats both of their rivals which were ranked 4&7 in the other division giving them 7 points. Michigan would then get the #1 seed in the playoff.
I like this format because, like I said, it puts an enormous amount of pressure on teams to win the division and to beat rivals. Rivals being bad in a particular year won't necessarily hurt you (especially if you win all of your games in the division). It also possibly hurts teams like OSU who beat everyone, except that low team like Purdue. If they were matched up in the playoff, Purdue would have taken OSU out of the tournament and a team like Iowa or PSU could be given a chance at the championship game, which means beat ALL teams and you won't have to worry about it. It also only takes 9 games during the regular season, adds the benefits of a playoff without adding any more games, and adds some of the randomness of the playoffs.