Sure, It's a Spring Rite, But Ops Say: Not Right
By R. Thomas Umstead -- Multichannel News, 4/20/2003 8:00:00 PM
It's spring. Baseball is in full swing, the trees are flowering and operators are bracing for ESPN's annual 20 percent rake hike.
The day of reckoning for operators is likely May 1, when ESPN is expected to send out letters detailing plans to exercise its right to up its already costly license fee — believed to average about $1.30 per subscriber — under its long-term affiliation deals.
Rather than wait for the mailman, small-operator groups like the American Cable Association and the National Cable Television Cooperative decided to publicly urge that the increase be well below that maximum — more like last year's 2.4 percent rate of consumer inflation.
A 20 percent jolt could push some of their members' license fee for the service above the $2-per-subscriber mark.
Pre-emptive strike
The pre-emptive backlash looks like an attempt to trump a strategy ESPN has used over the past two years to defuse operator discontent: Touting the network's value to affiliates in the press before the increase notice goes out.
Last April, at ESPN's New York ad sales offices, network president George Bodenheimer touted the programmer's efforts to help MSO broadband services with the launch of the action sports-based EXPN.
ESPN also announced the extension of its part-time ESPN Deportes Spanish language service to full-time status.
To that end, ESPN has scheduled a press dinner with senior executives in New York this week to "update" the industry on the network's progress.
"All we're doing is responding to the criticism out there," spokeswoman Katina Arnold said. "We're responding to questions in the marketplace — we're not positioning ourselves or renegotiating contracts that have been signed."
Those contracts — long-term deals that give ESPN the ability to raise its license fee a previously unprecedented 20 percent per year — were largely signed in the late 1990s.
Tiering sought, too
For the most part, ESPN has sought the maximum increase, frustrating operators, some of which say that ESPN on its own accounts for 20 percent of their overall programming costs.
With deals that run at least through 2005, though, there's not much operators can do but absorb the hike.
But as programming costs threaten to undermine cable's financial viability, some operators are jawboning against that maximum hit.
The ACA, a lobbying group for small operators, has publicly asked ESPN to limit its increase to the rate of inflation and to alter its current basic-only carriage agreement to give operators the option to offer the channel on a tier or a la carte.
"ACA members and all cable operators hope that ESPN will heed the calls of regulators, legislators, the marketplace, [U.S.] Sen. [John] McCain [R-Ariz.] and others to limit its rate increase closer to the rate of inflation, and give us the option to carry this most-expensive of analog services on a tier or a single-channel, a la carte basis," ACA president Matt Polka said in a prepared statement on April 11.
The National Cable Television Cooperative last week joined its sister organization in asking ESPN to lessen the blow to operators.
NCTC CEO Michael L. Pandzik said that rising costs are endemic to programmers these days.
"Sports-rights fees have pushed many of the national and regional sports networks to seek high increases, but other entertainment networks have also passed along some significant increases," he said in a statement.
ESPN's Arnold downplayed the ACA and NCTC comments, accusing the organizations of "negotiating existing agreements in the press."
A la carte carriage does not provide a model for success for either the network or operators, said Arnold, and would inevitably cost operators more over the long run.
As for raising license fees in lockstep with the Consumer Price Index, ESPN said its wholesale costs have risen more quickly than is reflected by the retail-based CPI. The index "is not a relevant consideration in the entertainment industry," Arnold said.
"Revenue affiliates generate offsets a significant portion of the fee," she added.
In 2000, ESPN said it would substantially increase the number of local avails on its popular nightly highlights show SportsCenter, enough to bring an additional $80 million per year into affiliates' coffers. Even without that upsurge, ESPN has long been cable's leader in generating local ad dollars — accounting for more than 20 percent of the local sales total, according to industry estimates.
In 1999, ESPN helped operators amass $400 million in local ad revenue.
But local cable operators that can't insert local ads don't enjoy that benefit.
ESPN's good year
ESPN does have a good story to tell on the ratings end. It finished 2002 with a 1.5 rating, up 15 percent from 2001, accompanied by a 24-percent gain in adults ages 18-to-49 and a 20-percent rise in attracting 18-to-54 adults.
Its high-profile National Football League and Major League Baseball packages enjoyed ratings gains, and its maiden season of National Basketball Association coverage averaged a higher-than-expected 1.2 rating.
Beta Research Corp. studies consistently rank ESPN first in such areas as subscriber acquisition and retention, local ad-sales revenue, perceived value and importance to cable systems.
ESPN has been floating a new long-term proposal to cable operators that calls for smaller annual rate increases in return for buying other services, including ESPN.
Deportes, the ESPN HD high-definition TV service, high-speed Internet content service ESPN Broadband, EXPN and ESPN Classic, which shows vintage archival events.
That arrangement — which would supersede the current agreement — would run until 2014.
By the end of that deal, ESPN's license fee would be near $9 to $10 for some operators.
Arnold said ESPN is having "productive" negotiations with operators, but has yet to reach official agreements.
No NCTC member operator has taken up ESPN on its offer, senior vice president of programming Frank Hughes said.
"It's hard to think of $10 as a good deal," Hughes said. "We're still working with them on that."
Linda Moss and Jim Forkan contributed to this story.
| ESPN's Winning Year | |||
|---|---|---|---|
| ESPN had a stellar ratings year in 2002, increasing its primetime household ratings by 15% over 2001, due in part to strong NFL performances. The year's top 10 basic-cable shows: | |||
| Date | Program | Network | Rating |
| Source: Turner Research analysis of Nielsen Media Research data |
|||
| 9/8/02 | Cowboys-Texans | ESPN | 9.6 |
| 9/5/02 | 49ers-Giants | ESPN | 9.4 |
| 9/15/02 | Raiders-Steelers | ESPN | 8.9 |
| 12/8/02 | Vikings-Packers | ESPN | 8.7 |
| 12/1/02 | Buccaneers-Saints | ESPN | 8.5 |
| 11/17/02 | Patriots-Raiders | ESPN | 8.4 |
| 8/29/02 | 2002 Video Music Awards | MTV | 8.3 |
| 11/24/02 | Colts-Broncos | ESPN | 8.0 |
| 12/22/02 | Jets-Patriots | ESPN | 8.0 |
| 11/10/02 | Dolphins-Jets | ESPN | 7.6 |
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