ESPN 20% Fee Hike: Maximum Headache

As expected, ESPN last week sent out letters to cable operators detailing another 20 percent rate hike, effective Aug. 1.

In the letter, the sports network writes, "Our fees reflect the tremendous value that ESPN brings to you and your customers each and every day."

The network made note of everything from surveys indicating its ranking as the most valuable cable network to its use of the "ESPN The Truck" promotional tour to justify its fourth consecutive 20 percent rate hike.

Naturally, cable operators had a different interpretation of the increase. For many, it pushed the network's monthly license fee past the $1.40 mark. Some small operators said they will soon be paying upwards of $1.60 per sub, per month.

Time Warner Cable spokesman Mike Luftman said the MSO was notified by ESPN that it was raising its monthly license fee to the maximum rate allowed under its contract.

"We recognize it's a difficult environment, but in a competitive environment, you can't simply expect to go for the maximum every year, and expect that we and our customers will pay it," he said.

Time Warner will not be able to pass the entire rate hike onto its subscribers, since it needs to remain competitive with DBS companies and other competitors, Luftman added.

Though he would not reveal specific contract language, Millenium Cable senior vice president of marketing and programming Peter Smith called ESPN's latest increase a disappointment, but no surprise. While the midsize MSO will take advantage of every discount the network offers, he said, the end result will only be incremental savings on its significant outlay.

"We're continually disappointed to see sports rights continue to outpace everything else in the economy," Smith added.

DirecTV Inc. is also concerned about higher sports costs. Vice president of programming acquisitions Michael Thorton said the hike, while substantial, will not force an increase in rates for the DBS service, which has only increased prices once in its seven-year history.

"Ten or 20-percent increases are numbers that we deal with every year, but as long as society as a whole says its OK to pay athletes tens of millions of dollars, we'll continue to see high-rising sports costs," Thorton said. "As sports fees become a disproportionate expense, at some point you have to determine whether it's fair to have your whole subscriber base pay for high sports fees."

ESPN has come under fire each spring over the past several years for its practice of raising fees by 20 percent. As a result, several operators have considered offering the service à la carte, or on a sports tier.

However, the network's contracts with cable operators protect it from getting kicked out of widely distributed basic-cable tiers.

Charter Communications Inc. CEO Jerry Kent last week, however, raised a new option cable operators may be able to pursue in order to move ESPN from basic cable tiers.

Kent said the antitrust exemption Congress has granted to Major League Baseball could require the television programming distributed by the league to be offered à la carte.

"What Congress gives, they can take away and say that if a channel is carrying programming in which the league has an antitrust exemption, then the quid pro quo is they have to offer that on an à la carte basis," Kent told reporters during a briefing at the National Cable & Telecommunications Association.

Paul Kagan Associates analyst John Mansell called Kent's idea "a creative option that's probably worth being explored.

"It's really more of an effort to gain leverage in the negotiations with ESPN than anything else," he said.

ESPN spokesman M.C. Antil wouldn't comment on Kent's idea. But he noted that "history has shown that à la carte is not a viable business model," using the example of regional sports networks that launched as à la carte services, but later migrated to expanded basic.

ESPN is hiking its rates as its ratings continue to fall. In April, its primetime performance dropped 24 percent from last year to a 0.83, Nielsen Media Research rating.

On a total-day basis, ESPN's rating fell from a 0.6 rating to a 0.5 rating. But spokesman Mike Soltys noted that its rating in the males 18-to-34 demographic increased by one-hundredth of a point, from a 0.61 to a 0.62.