News

The ESPN Two-Step

2/22/2004 7:00 PM Eastern

A hostile takeover can be a powerful motivator. Such was the pop explanation for the stunning back-to-back affiliate contracts ESPN disclosed last Thursday — especially the one announced second, with Cox Communications Inc.

The one that came out first was with Charter Communications Inc., an MSO whose deal with ESPN had months to run. Cox's was coming to an end.

Cox and ESPN had been jousting — you know, the medieval sport in which combatants lance each other in the midsection — for months about ESPN's unfair demands or Cox's insistence on propping up profit margins.

Two deals analysts judged "favorable" to the operators get done mere days after ESPN parent The Walt Disney Co. gets a buyout offer from Comcast Corp. — couldn't be a coincidence.

Right?

Cox and Charter might have benefited from Comcast's initial spin that, under the Roberts rules of order, ESPN wouldn't continue banging contracts with 20% annual license fee increases on cable execs' desks.

Disney needed to show it could deal rationally, too.

Analyst Rich Greenfield last Thursday found it hard to believe Disney would have settled to terms like average annual fee increases of 7% — or a "reset clause" that automatically slashes fees if ESPN loses Sunday-night National Football League games in two years — if Comcast hadn't been trying to take over Disney.

But Disney had more than enough motivation to bring some good news to Philadelphia next week. Philadelphia as in the site of Disney's annual shareholder meeting on March 3, not as in a place to talk turkey with Comcast.

One might also say Disney wouldn't have agreed to the Cox and Charter deals had chairman and CEO Michael Eisner not been facing a threat of shareholders voting him off the board of directors. (Disclosure: From the period when this magazine was owned by Disney, some of our editors, including this one, own Disney stock. I expect to be at the meeting, but won't vote.)

Moreover, ESPN and Disney knew their ability to jack up license fees 20% every year — even to their best and biggest customers, already carrying many ESPN and ABC Cable services — was a Brigadoon destined to disappear. (After 2004, that is.)

Those increases gave ESPN the capital it needed over the last several years to become a powerhouse.

But once that base (of $2.50 per month, per sub) has been established, adding to license fees "only" by an average of 7% per year is easier to take. Especially when the deal includes keeping the two main services, ESPN and ESPN2, in expanded basic at a time when operators have gone on Capitol Hill to talk about offering costly sports networks à la carte.

And when the deal promises more carriage for the many and growing ancillary ESPN services.

And when the deal carries the stability of a nine-year term, and books the highest percentage increases at the front end.

Again, these are some of ESPN's biggest customers. For affiliates with less leverage, the deals likely won't be as good.

Even before Comcast reached out and clawed Disney, word was that talks with Cox and other affiliates were going well.

What put them over the top?

Could have been Comcast.

Could have been the shareholder fight.

Whatever. It made sense.

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