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'Consumers Won'

Baseball's spring training has just begun, but ESPN has already hit two big distribution home runs. After months of acrimony — and a very public battle with Cox Communications Inc. — ESPN Inc. reached two multi-year carriage deals with Cox and Charter Communications Inc. last week, after the sports programmer abandoned efforts to extend contract terms that enabled 20% annual license-fee increases.

ESPN had also floated long-term, all-networks deals with below-20% increases.

Charter was the first major MSO to announce a long-term pact with ESPN, last Thursday afternoon, but Cox announced its agreement hours later.

Cox said it would offer ESPN and ESPN2 on expanded basic with "moderating rate adjustments" —averaging 7% overall over nine years, when all ESPN services are factored in.

A Cox spokesman said the MSO would pay a 13% increase in 2004 — though analysts were saying they thought 20% was locked in for this year — dropping to 8% in 2005 and scrolling down to 5% over the last three years of the nine-year pact.

That's down from the 20% rate increases the expiring contract paid to ESPN — increases that led operators, including Cox, to threaten moving costly sports networks to pay tiers or to offer them to customers on an à la carte basis.

Overall, including all of the ESPN networks, the spokesman said, Cox will pay an average annual increase of 7%.

"We feel that this is a good deal for the customers," Cox director of media relations Bobby Amirshahi said. "When we engaged our customers, it shows that consumer advocacy does work, and we also feel that escalating sports rights continues to be a serious challenge in America."

ESPN executives pointed to long-term, expanded-basic carriage for ESPN and ESPN2, plus guaranteed distribution for ESPNews, ESPN Classic, ESPN HD and ESPN Deportes.

"We think both parties can declare victory on this," ESPN senior vice president of affiliate sales and marketing Sean Bratches said. "Charter and Cox captured what they were seeking, which was a moderation of the ESPN rate adjustments through the extended terms of the agreement, and the relationship going forward.

"We were able to continue to adjust our rate on the industry-leading rate base, as well as maintain the status quo of ESPN and ESPN2, as well as grow our fledging products and services."

Cox has said it's currently paying license fees of $2.61 per subscriber for ESPN. Projecting out an average 7% rate increase over nine years would have Cox paying about $4.25 per subscriber for that one channel in 2012.

Citigroup Smith Barney cable analyst Niraj Gupta's take: "From Cox's perspective, a 7% long-term growth rate for ESPN is certainly reasonable. From ESPN's perspective, they get double-digit rate increases in 2004 and 2005.

"Clearly, I think the long-term growth rate in the contract is lower than what the Street was expecting."

In December, Cox negotiated a six-year deal with Fox Sports Network with an average yearly rate increase of between 7% and 9%. Cox had said Fox Sports originally wanted a 35% annual hike in 2004.

Charter — which said it couldn't disclose many deal terms — will continue to carry ESPN and ESPN2 on expanded basic, as well as ESPN News and ESPN Classic on its sports tiers. Charter will add the ESPN Broadband Internet service and include ESPN HD and ethnic sports network ESPN Deportes on tiers.

Analysts said they believed Charter's deal was substantially similar to Cox's.

Charter senior vice president of programming Sue Hamilton said, "We didn't have a cookie-cutter agreement."

"This really is a Charter deal and it is a significant improvement over what we had," she said in an interview.

Even though Charter's ESPN contract did not expire until the end of 2004, Hamilton began negotiations with the sports giant last April. "ESPN offered us favorable enough terms to have us make it a priority."

Charter has been working hard to pare programming costs, as have other MSOs. The operator renegotiated all of its premium channel deals in the fall, CEO Carl Vogel said.

Vogel said the new deal includes changes to existing rate increases for ESPN and ESPN2, the two channels its carries on expanded basic. "This is an all-inclusive deal," he said in an interview.

"We have never had a big problem with negotiations on ESPN," Vogel said.

"I don't think we're any different than any other operator," he continued. "We found a deal that we thought made sense, and we got it done, and we picked up some products that we think are important to what we're trying to do in advanced services, specifically ESPN Broadband and the HD feed.

"I think we have lagged a little bit on our Spanish-language content, and having Deportes will help us in many of our markets where we've got that kind of demographic looking for those kinds of services. So we were glad we got it done."

Vogel said a large portion of Charter's programming contracts expire between 2003 and 2005, but the ESPN renewal "picks up a significant percentage of our costs."

Charter has been pretty aggressive in rolling out HDTV service — the service is currently available to 1.3 million Charter digital customers, or about 50% of its digital subscriber base, with plans to increase that availability to 75% of digital customers by year-end.

After publicly denouncing ESPN's annual 20% rate hikes at an industry conference last September, Cox CEO Jim Robbins made it clear that he was willing to go to the mat, implying ESPN could even go dark on Cox systems.

Both companies launched Web sites bashing the other — Cox's site (www.makethemplayfair.com) derided ESPN's rate hikes and offered consumers e-mail links to sports-network executives and members of Congress to express their opinions.

ESPN's site — keepespn.com — towed the network line, provided information to consumers on how to buy satellite dishes and offered links to satellite competitors DirecTV Inc. and Dish Network.

Both sites were considerably different last Thursday night. Keepespn.com was reduced to a three-paragraph statement announcing the Cox deal; makethemplayfair.com posted the press release on the deal and thanked customers for the more than 100,000 letters and e-mail messages sent to ESPN and Congress regarding the issue.

"I think they [ESPN] were looking to lock down some deals," said a source familiar with the negotiations. "They seem very exposed. They came in with a very different negotiating stance."

That source said that the change in ESPN's attitude came before Comcast Corp.'s unsolicited bid for ESPN parent The Walt Disney Co.

Oppenheimer & Co. analyst Tom Eagan said in a report: "Disney may have felt the need to demonstrate goodwill with other cable operators, and to get this behind them while the company is considered to be in play."

Fulcrum Global Partners analyst Richard Greenfield wondered what kind of deal Comcast would get with ESPN as a result. With 21.5 million subscribers — three times as many as either Charter or Cox — Comcast could conceivably land a deal that averages a 5% annual rate increase, Greenfield wrote.

Greenfield also saw the deal as poor for Disney. ESPN and its 20% annual rate increases have been a major driver of Disney growth. He estimated cash-flow margins (as a percentage of revenue), artificially inflated in the last fiscal quarter because of accounting changes for the current National Football League contract, could shrink after 2004 because of these deals.

Merrill Lynch & Co. analyst Jessica Reif Cohen saw pluses for Cox and Disney. Cox gets the single-digit average annual rate increases it wanted, while Disney removes a major overhang and locks in nine years of distribution for ESPN's networks through two major MSOs.

In a research report, Reif Cohen added that Cox alone contributes an estimated $400 million to ESPN in fees and ad sales.

Banc of America Securities LLC cable analyst Doug Shapiro wrote in a report that he's lowered his long-term earnings per share growth estimates for Disney to 10% from 13%.

ESPN, Shapiro estimated, accounts for about 25% of Disney's total earnings before interest and taxes.

"One caveat is that we don't know what assumptions Disney is making about the cost, or the likelihood, of renewing major sports contracts after they expire, namely the NFL contract," he wrote. "Perhaps its willingness to cut this deal indicates the intention to forego some renewals."

ESPN's Bratches said "we feel very comfortable that we are well positioned to compete in the sports rights marketplace going forward."

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