Cable Operators

Ticket too high

11/14/2004 7:00 PM Eastern

Cable operators have complained for years about losing customers who jumped to satellite for DirecTV Inc.'s exclusive “NFL Sunday Ticket” package. But when cable recently had an opportunity to buy the National Football League's out-of-market pay-per-view offering, Comcast Corp. and other operators took a pass.

“It's no secret cable was interested in Sunday Ticket, but the price was too high,” said Cable & Telecommunications Association for Marketing CEO Char Beales, referring to the five-year, $3.5 billion contract extension DirecTV cut with the NFL last week, giving it rights to 14 live games each Sunday through the 2010 season.

At $700 million per annum, DirecTV's new contract represents a 75% hike over the $400 million it is paying per season under the pact signed two years ago that was slated to extend through the 2007 campaign.

NFL's Annual Rights Fees
Carrier Package Current Deal New Deal
CBS AFC $500M $622M
Fox NFC $550M $712M
DirecTV Sunday Ticket $400M $700M
ABC MNF $550M $?
ESPN SNF $600M $?
New Package Th./Sat $?

It should be pointed out, though, that DirecTV only had satellite exclusivity for the 2006 and 2007 seasons under the previous pact. DirecTV's new contract supercedes the remaining years on the old deal.

NFL representatives declined to discuss the size of cable's offer for Sunday Ticket. One source, though, said MSOs walked away from the table after they were “blown away by what DirecTV was willing to pay.”

This was the first time that the NFL had even entertained a bid from cable operators for Sunday Ticket. Cable executives were miffed when DirecTV last renewed its Sunday Ticket contract in December 2002.

At that point, the league wouldn't consider selling the games to cable because of concerns that if every Sunday afternoon football game nationwide was available on digital cable, broadcast-TV carriers Fox and CBS would suffer significant ratings erosion.

BRIAN ROBERTS' ROLE

Sources said Comcast CEO Brian Roberts — who cut a deal with the NFL Network in September to offer game highlights as part of Comcast's expansive free on-demand platform — led the major MSOs in negotiations for Sunday Ticket.

But Comcast spokesman Tim Fitzpatrick said Roberts wasn't representing other operators in his talks with the NFL. “Brian was not negotiating on behalf of the cable industry for Sunday Ticket,” he said.

Some other operators said they believed the NFL used cable merely as leverage to obtain a better price from News Corp.-controlled DirecTV.

“We had ongoing conversations,” Time Warner executive vice president of programming Fred Dressler said last week. “I think they came to us to get a floor for [DirecTV bid].

“I'm not sure the economics work. I never believed they [the NFL] were really serious about” giving cable a shot at Sunday Ticket.

The NFL last week also cut Sunday-afternoon deals worth a combined $8 billion to extend CBS's rights to the American Football Conference and Fox's National Football Conference rights, both through the 2011 season.

Still up for grabs: the Sunday- and Monday-night game packages, now controlled by The Walt Disney Co.'s ESPN and ABC. A deal for those games may not be struck until next year, and a bidding war could see NBC Universal attempt to secure games for NBC and USA Network.

Other observers contend Comcast is considering bidding for cable NFL rights that could be used as the cornerstone of a new all-sports network.

2M SUBS — AND BUZZ

Sunday Ticket has been a thorn in the side of cable operators since 1995, when DirecTV first launched the package, charging customers $99 in its debut year.

Analysts said the package, which now retails for $249 annually, has grown to 1.6 million to 2 million customers, many of whom are former cable subscribers.

DirecTV has made Sunday Ticket the centerpiece of its subscriber-acquisition campaigns, and it ran a media blitz this fall, offering new customers that ordered Sunday Ticket four free months of its Total Choice programming package.

“Sunday Ticket is probably the most important feature of DirecTV to really establish it as a leader in subscription television,” DirecTV Group Inc. CEO Chase Carey told analysts on a conference call last week.

While some cable executives said operators wouldn't be hurt by Sunday Ticket, as DirecTV has already picked off most hard-core football fans, some analysts said they see more room for growth. That's because DirecTV plans to offer a slew of new ITV features, including multiple camera angles and the ability for fantasy football players to get personalized highlight shows.

“They [DirecTV] could start targeting your super fanatic NFL fan, and turn it into something like a gambling addiction, where they can't stop spending money on each new offering,” The Carmel Group analyst Jimmy Schaeffler said.

DirecTV will generate about $385 million in revenue this year from Sunday Ticket, and revenue has grown 20% during the past two years, Carey said. If DirecTV grows its Sunday Ticket revenue each year by 11% to 12%, the company will be able to break even on the rights deal, Carey said.

“I think there is certainly an opportunity to make money, although … the real value for this is what it does for our overall business in terms of taking it to the next level,” he added.

ITV ANGLES

DirecTV hopes to inflate Sunday Ticket revenue by offering new ITV features — an area where cable operators once thought they had a lock, thanks to the industry's two-way infrastructure.

In addition to offering subscribers that pay a premium the ability to control their own camera angles, DirecTV will download NFL content to digital video recorder owners, and run a new “Red Zone” channel that will take viewers from game to game when teams are poised to score.

While Sunday Ticket has helped DirecTV compete against cable and eclipse EchoStar Communications Corp. in growth, the package also makes DirecTV beholden to the NFL.

“What they [DirecTV] mostly get for $3.5 billion is insurance against losing the 1.6 million NFL Sunday Ticket subscribers they have,” Sanford Bernstein analyst Craig Moffet said in a research note.

Other analysts said that the deal portends more bad news for cable. The move suggests that DirecTV parent News Corp. “will continue to spend aggressively to grow subs, to the detriment of the cable industry,” Fulcrum Global Partners analyst Rich Greenfield said in a research note.

DirecTV is expected to launch an aggressive Sunday Ticket marketing campaign next summer, but Beales doesn't think cable will be hurt.

“Unless they [DirecTV] do something dramatic with the price, it's the status quo,” she said.

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