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Report Assesses Potential Cox, ESPN Damage

11/04/2003 9:27 AM Eastern

Cox Communications Inc. would likely lose anywhere from 500,000-1.2 million subscribers if it drops ESPN, according to a Wall Street investment bank.

The prediction was part of a report on The Walt Disney Co., ESPN’s parent, which was issued by Deutsche Bank Securities Inc.

The Deutsche report -- based on a independent survey the bank commissioned -- estimated that Cox would take a hit of anywhere from $170 million-$380 million annually in cash flow, or EBITDA (earnings before interest, taxes, debt and amortization), based on the loss of those customers. Disney would take a hit in EBITDA of $233 million or so, Deutsche predicted.

Deutsche asked a company named Evalueserve Inc. to survey cable and satellite subscribers in order to "better understand the true leverage underlying the key battle of 2004, Cox vs. ESPN," according to Deutsche analyst Douglas Mitchelson, who wrote the report.

The survey of 400 respondents was conducted in late September and early October, and it found that 24% of customers would definitely switch providers or consider switching if ESPN were no longer available from their current service provider.

Based on the survey, Deutsche estimated that while Cox could lose between 8%-19% of its basic subscribers, or 500,000-1.2 million homes, "it also appears to us that a more likely tighter range would be between 12%-17% of customers lost, or 750,000-1.1 million."

A 12% loss of homes would translate to a $245 million-$260 million decline in EBITDA for Cox and a $223 million EBITDA loss for Disney, according to Deutsche.

In response to the Deutsche report, a Cox spokesman said the MSO has no plans to drop ESPN, but it might make the channel an anchor for a digital-sports tier.

"Of course, if ESPN would not agree to continue working with us to find a solution for an increased price that can work for our customers and both our companies, they might possibly pull their signal from Cox Cable systems after March 31, 2004," the Cox spokesman said.

"But we’re hopeful that an agreement will be reached in which we would not have to be concerned about customer defections over the loss of ESPN," he added.

"It makes no sense to take ESPN off expanded basic," ESPN executive vice president of affiliate sales and marketing Sean Bratches said."ESPN drives so much customer satisfaction and local revenue that to do so would be detrimental to
Cox's subscribers and its business," he added. "But make no mistake, it will be Cox that makes the decision whether or not to drop ESPN.  If they do, ESPN will aggressively market ESPN services on competitive platforms against Cox."

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