Fox Sports and ESPN vs. Cox in Carriage Fee Feud (10-8-2003)

Enjoyed those dozen Divisional Series games last week? Like Sunday Night Football? Care for NBA and NHL? How about getting a converter box to watch them from now on?

Sound silly? It could happen as long as the greedy villian corporate conglomerates Disney and Fox literally play hardball with some cable companies over the rising carriage fees that they demand year to year that are ultimately passed on to the subscribers.

One of the nation's largest cable operators says the sports channels have become too expensive for its basic packages and should become premium content.

Cox Communications, which had ESPN on its system from the very day it was launched on the old cable channel position of 18 in 1979 (whoa, that's a generation ago), may be deciding to balk at the prospect having their customers paying Disney, the current owner of ESPN (and ESPN2), $2.61 a month just for the privilege of having those two channels on their cable system. Most cable channels charge less than $1.

Cox, which also refused to carry Fox Sports Net 2 because the carriage fee couldn't justify the expense of carrying a channel full of programs they cannot carry because of MLB territorial restrictions, may also decide to drop Fox Sports Net (on cable 29, formerly Prime Ticket) for the same reason: escalating and out of control cable carriage fees.

Come next year, channels 3 and 28, which currently have the two ESPNs on, may see a message instead of the channels: "Disney has taken ESPN away from you. Please call the Disney offices and demand that they return ESPN back to you" or something like that. Fox Sports, which broadcasts the Lakers and Kings games, may be replaced with other programming while the three sports networks are relocated to digital cable (like ESPN Classic and most other sports channels are), or scrambled and marketed as pay channels on the analog tier.

Cox chief Jim Robbins wants to get a reign on the rising costs of carrying cable programming, which have caused the cable bills for the consumer to be about $40 a month instead of $30 just seven years ago.

Robbins said last week Cox won't pay what he called the exorbitant rate increases sought by the two channels. According to Cox, Fox Sports Net wants to raise its rates 35 percent and ESPN wants 20 percent more when their contracts come due. "We are simply not going to be able to support those kinds of increases," Robbins said.

With rates jumping far faster than the rate of inflation, the cable operators are answering angry cries from their subscribers who complain about the rising cost of channels they don't bother to watch by playing tough with a threat to pull their expensive channels off their cable systems nationwide. Cox, the number four cable operator in the USA, has the collective power to tell Disney and Fox that the customers are mad as hell and they're not going to take it anymore!

The high cost of the operation of the sports channels are due to the high cost of acquiring cable broadcasting rights to several major sports league packages from MLB, NFL, NBA, and the NHL. With Disney paying high fees for the programming as demanded by the corrupt major league organizations who can't contain their own costs of doing business, they're getting Disney to put a bandage on their problems with high priced contracts, which are passed on to the cable companies, which pass it along to the consumers whether they watch any games from the four major leagues or not. That is the problem with the sports channels; they're freely spending money on expensive packages, then making the cable subscribers pay for their mistakes through higher cable prices. Disney and Fox are just plain stupid. The major league organizations are corrupt with the high cost of tickets, declining interest, escalating rookie salaries (no rookie is worth $10 million), and just plain bad marketing.

Cox estimates its customers pay $2.61 a month just for ESPN, which is more than they pay for the seven top-rated networks combined.

Last week, Cox CEO Jim Robbins said the rising cost of sports programming continues to damage profit margins. Robbins said fees paid to ESPN comprised 18 percent of the company's programming costs, while the network was responsible for only 4 percent of its viewing.

While ESPN and Fox Sports Net account for just 8 percent of viewers, Cox says the channels account for 32 percent of its programming costs. It would make perfect sense to put the sports channels on the digital tier, group them with the sports package, and charge the viewers extra just for the channels they want to watch. Jim Robbins, chief executive of Cox Communications, says his customers are ready to embrace the change. "We're a company that is very customer-focused," Robbins said Monday. "We wouldn't be doing what we were doing unless we were fairly certain it would meet with our customers' satisfaction."

The president of the Walt Disney Company, the stupid greedy idiot Robert Iger, said Robbin's claims are laughable and said that ESPN generates local ad revenute for cable operators. If that's true, then why can't that cover the $2.61 a month fee just to carry the two ESPN channels? If it's the number one brand comsumers think of when ordering basic cable service, then why do only eight percent of the cable subscribers care about the channel enough to watch it everyday?

Some analysts speculated that Cox is merely posturing in its negotiations with Fox and ESPN. Cox is the nation's fourth-largest cable operator. The company's contract with Fox Sports expires at the end of the year, and its contract with ESPN runs through the first quarter of 2004.

But Cox said it is serious, and it is pushing for a pricing model in which ESPN and Fox Sports Net would no longer be included in a basic cable package. Subscribers who want those channels would then have to pay extra for them, as they do with movie channels like HBO and Showtime. That type of tiered pricing, as it is known in the cable industry, is opposed by ESPN and other sports channels because it would hurt its audience size and advertising revenue. Well, if you want the audience size, then you're going to have to either put ESPN on a low-powered free TV channel, or get the montly costs to carry the channel, based on the over 90 million cable homes ESPN is in, down to ZERO!

Fox Sports programs specialty channels for other markets and regions, tailored to their markets, such as Fox Sports Net, which is basically a Los Angeles channel airing Lakers and Kings games (Cox has to black out the Angels games on FSN due to MLB demands). Cox can do without the FSN by creating another locally-based sports channel to go with its Channel 4 San Diego, which shows games from the local baseball, college football, hockey, soccer, and basketball games and are not available on satellite. Cox could program its second local sports channel on 29, using it to acquire sports packages from the Lakers and Kings networks on its own in a deal with the NBA in the future.

Also competeting with Cox's possible decision to drop the three sports channels are the satellite companies, which could see a rise in male subscribers if their sports channels are dropped from Cox or moved to a digital tier.

In an appearance at the Goldman Sachs Communacopia Conference in New York, Jim Robbins, CEO of cable operator Cox Communications, complained about the double-digit fee increases that some cable networks, particularly ESPN and the Fox sports networks, have sought in current carriage renewal talks.

Robbins and his peers have promised all year to stand firm on programming fees, which are among the biggest cost factors for cable firms and threaten their ability to finally produce free cash flow.

Still, last week's conference put a spotlight on the mounting tensions over program fees as News Corp. president Peter Chernin and Walt Disney Co. president Bob Iger, whose conglomerates operate the Fox and ESPN sports franchises, respectively, felt compelled to make rebuttals.

"Tensions are obviously 'boiling over,' which I think sets the stage for ESPN and Fox to suffer being dropped by Cox, if they don't reduce their pricing demands or agree to be placed on a digital tier," says Rich Greenfield, managing partner at Fulcrum Global Partners.

Some analysts predict that such a showdown could affect industry dynamics overall.

"Sports programming is a hot battle front and a leading indicator that could affect the overall balance of power between content and distribution companies," says Kim & Co. founder and analyst Paul Kim.

Interestingly, both sides could lose out if their dispute goes too far, Wall Street observers say.

Dropping a cable network or putting it on a higher-price cable tier "would likely be bad for Cox, as it could drive subscribers to (satellite TV providers), which would be offering the sports networks on expanded basic," Greenfield says.

At the same time, he points out that Cablevision Systems lost a relatively minor number of cable subscribers after dropping the YES Network (a cable channel broadcasting the Yankees games). Concludes Greenfield: "Our sense would be that dropping or tiering would be more negative for the programmers (Disney and Fox)" than the cable operators.

Though ESPN and Fox officials insist they will not allow their content to be placed in premium packages, Robbins predicts other cable operators will follow the Cox lead unless the sports channels "can somehow get the costs down to some reasonable level."

"The price of ESPN today is more than the top seven-rated (advertising based) networks combined," Robbins said. "This is one area where we think we have got to take a stand."

Robbins proposes moving the sports channels out the list of expanded basic channels and into a premium tier of channels.

Sean Bratches, ESPN's senior vice president of affiliate sales and marketing, insists the sports networks, which also include ESPN News, ESPN2 and ESPN Classic, will not become premium tier content.

"I don't foresee a scenario where we would permit the distribution of ESPN service in a manner Cox is suggesting publicly," Bratches said. "Clearly we prefer to have those discussions take place in the board room as opposed to the press."

Bratches said customers would pay more in monthly service and equipment fees if ESPN's channels were marketed as premium offerings. More customers would have to lease cable converter boxes as well as pay extra fees for the premium channels.

Robbins said Fox is requesting a 35 percent increase in its current rates and that ESPN wants a 20 percent increase.

As of Tuesday night, Disney has offered to raise rates more slowly (still in the wrong direction, dummy Disney) in exchange for other concessions, but with Disney asking operators to agree to longer contracts and carriage of new channels, talks are far from over.

Cablevision Systems Corp., Mediacom Communications Corp., and others said that discussions have improved, compared to Cox's hard tone on the costs of the channels.

The issue has drawn the attention and ire of politicians, including Senate Commerce Committee chairman John McCain, who chastised operators for raising rates after the Federal Communications Commission released a cable bill report in July.

Companies on both sides of the debate may also be hoping to fend off regulatory attention ahead of a report on cable pricing expected to be released by the U.S. General Accounting Office later this month, said cable industry sources.

It was reported that Disney may slash its annual rate increases from 20 percent to 13 percent, still in the wrong direction it should be heading. They should be reducing it to zero. In exchange, ESPN wanted contracts for nearly 10-year terms (which is way too long) and the promise by operators to carry a suite of new services and channels such as Spanish-language ESPN Deportes, a new high definition ESPN channel, and video-on-demand services (which many basic-tier subscribers don't care to buy, but the few that do should get it on a ala carte digital tier package where it really belongs.)

"We've listened to cable operators," said ESPN spokeswoman Rosa Gati. Operators "are focusing only on the cost, not on the value to revenues."

Robbins said his company wanted the flexibility to offer high-priced programming services like ESPN on a separate tier as a way to control the cost of basic cable services, but Disney and News Corp. have scoffed at that idea.

From USA Today: "The people who bring you your TV sports are squabbling over how they'll split up your money. No wonder: There's billions to split up."

Problem is...why are your billions supporting the high cost of programming on basic cable? It should go on premium cable instead like HBO and Showtime.

In the past five years, estimates the Bureau of Labor Statistics, viewers' bills for basic cable TV rose about 7% annually — three times the inflation rate.

Ed Durso, an ESPN executive vice-president, says Cox's complaint is "negotiating rhetoric." And he suggests ESPN isn't ready to blink. "I don't know why Cox would drop us. But if they did, it would be a huge disservice to Cox's customers and an advantage to its competitors" — meaning ESPN could bypass Cox via satellite TV.

Beyond these facts, each side argues the other side is too greedy and the major cause of consumers' rising cable TV costs.

Gene Kimmelman, who is a senior director of Consumer's Union, says that while satellite TV has proven to be a real competitor to cable TV on high-end programming, it hasn't helped bring down the cost of basic cable.

The only thing that allows that, he says, is giving consumers the choice of two local cable operators. But that choice is available in less than 5% of the USA. Kimmelman's conclusion on cable costs: "The lunch-bucket crowd doesn't have an alternative."

Back in the early days of cable, everything was hunky dory as cable programmers coexisted peacefully with the cable companies as cable helped these cable networks grow into the size that they are today. Both sides were pleased in 1987 when ESPN landed NFL games, which dominate lists of cable TV's most-watched shows.

News Corp., FSN's parent, bought satellite TV's DirecTV. That might help FSN play hardball with cable operators who threaten to drop it. It could afford to just help its DirecTV tout that their sports programming is available only on satellite.

As the cost of purchasing broadcast rights for major league sports shot up, paying billions and billions (apologies to the late Carl Sagan) to the overpaid pro leagues and athletes, ESPN freely began charging cable operators with higher premiums to carry their channels on basic cable, which is making as much sense as sports teams demanding ticket guarantees from their local cities. If there was a cap, say, 10 cents a month for ESPN and FSN, there would be no such thing as major league sports on cable, and the only outlets would be basic cable, which can put them on pay per view like Cox Cable once did with the San Diego Padres baseball team in 1983, or better, the local TV broadcasters who are hungry to pre-empt their low-rated rerun fares and dog netlet offerings from UPN and WB with fresh local sports programming.

Cable operators, meanwhile, looking for new revenue streams, spent billions to upgrade their cable networks for digital cable, broadband Internet, and digital phone service.

Sports channels, grouped in a tier, might cost $5 to $10 extra a month. But ESPN is adamant. Since TV sports is a perishable commodity that needs to reach the broadest possible audience immediately, it must remain on basic cable.

ESPN covers a lot of bases

ESPN, which now reaches 86.5 million households, televises more than 5,100 live and/or original hours of sports programming annually — more than 65 sports.

The network shows all four major sports — NFL, NBA, NHL and MLB.

NBA — Doubleheader to kick off the season in late October.

NHL — Kicked off the regular season in October.

NFL — Nationally televised games on Sunday at 8:30 p.m. ET.

Major League baseball — Broadcast some of the Division Series, plus doubleheaders Wednesdays and Sunday night games.

College Football — Nationally televised games on Thursdays at 7:30 p.m. ET during the fall.

Golf — Coverage of three events in October: PGA Tour American Express Championship; LPGA Samsung World Championship; and PGA Tour Funai Classic at the Walt Disney World Resort among others.

ESPN Original Entertainment — first-run movies on sports topics.

Source: USA Today.