ESPN is floating a proposal to cable operators that would supersede its existing carriage deals — a long-term pact that calls for smaller annual rate increases than in the programmer's current contracts — in exchange for rollouts of its other services.
ESPN's proposal would essentially amend existing affiliation deals with operators, which are staggered and expire anywhere between 2004 to 2010, depending on the MSO, according to Sean Bratches, ESPN's executive vice president of affiliates sale and marketing.
The current contract permits rate increases of up to 20 percent per year, which would be lowered under the new proposal, sources said. Nevertheless, the compound annual increases over the life of the proposed pact would push ESPN's rate near the $9-per-month mark for some operators.
According to a proposal sent to the National Cable Television Cooperative, whose members received letters from ESPN over the past few weeks, the amended deal for them would extend until 2014, according to four sources who are familiar with the situation.
The proposal is comprehensive, and discusses the launches of not only existing services such as ESPN2 and ESPN Classic, but also new offerings, including ESPN Deportes, ESPN HD, ESPN Broadband and a video-on-demand service, among others.
"It's branded content that's going to drive their new businesses," Bratches said.
The contract amendments that ESPN has discussed — to which MSOs would have to voluntarily agree — will be customized and vary from one cable operator to the next, according to Bratches. Affiliates have expressed an interest in longer-term contracts, he added.
In the six-page proposal outlining the new deal for the NCTC, ESPN said it would reduce the cap on the annual rate hike it can levy against operators, dropping it from its current 20 percent. The maximum license-fee increase ESPN could charge would be 16 percent this year.
From there, several sources said, the proposal calls for the following hikes: 15 percent in 2004; 14 percent in 2005; 13 percent in 2006; 12 percent in 2007; and 11 percent each year from 2008 to 2014.
Bratches declined to comment on whether the new ESPN proposal included a reduction in annual rate increases. "It's a proposal that supports ESPN's and our affiliates' businesses over the short, mid- and long-term," he said.
For roughly the past four years, MSO officials have been irked because ESPN, owned by The Walt Disney Co., has always taken the maximum increase its contract allows — namely 20 percent — each Aug. 1.
The NCTC, which represents small operators with 14.5
million homes, is studying the new ESPN proposal.
"We looking at it," said Frank Hughes, the NCTC's senior vice president of programming.
Under the new proposal, in exchange for the rate-increase reduction, MSOs would have to significantly bolster analog distribution for both ESPN2 and ESPN Classic. That has some operators complaining that any money they save through a decrease in ESPN's annual price increase would be eaten up by license fees for the two sister services.
"The concept of a long-term deal is always quid pro quo, but ESPN is looking for too much here," one operator said. "It wants to get something for all its product lines."
ESPN2, in 84.7 million homes, is distributed fairly widely. But ESPN Classic is only in 47.4 million homes, and the programmer is trying to augment its penetration.
Doug Fuller, vice president of planning and technology for NPG Cable in St. Petersburg, Fla., noted that channel capacity is already tight, with space allocations needed for high-definition TV and other offerings.
The new, long-term ESPN deal "requires a lot of distribution" for additional services, according to Hughes. But if an operator is already carrying a number of ESPN channels, he said, the new contract could make financial sense.
"Every company would be impacted differently [by the new contract]," Hughes said.
As part of the new proposal sent to the NCTC, ESPN is asking that ESPN2 be distributed to 97 percent of the subscribers who get ESPN. ESPN Classic would need to be distributed to 75 percent of ESPN's homes, according to sources.
Under the proposed pact, ESPN is also seeking launches for new services such as ESPN Deportes, a Spanish-language sports network launching this year; ESPN HD, which also debuts this year; and ESPN Broadband, among others.
Fuller, an NCTC member and a member of the co-op's board, also said that under the new ESPN contract — with its compounded annual increases — the network's license fee would hit $8.78 by the end of the deal, in 2014. That makes ESPN look like a good candidate to be offered as a standalone premium service, some operators said.
When ESPN's license fees are added up with spinoffs such as ESPN2, ESPN Classic and ESPNews, the programmer is "getting absurd prices," Fuller said.
Depending on the MSO, ESPN's monthly per-subscriber license fees currently range from $1.75 to $2.25, according to operator sources. That makes it one of the most expensive national cable networks, although regional sports services rival it and some cost even more.
But ESPN has been on a ratings roll, up 15 percent in primetime last year to a 1.5, according to Nielsen Media Research. Also, ESPN always notes that it is a top service in terms of local ad sales and consumer desire.
Distributors angry about ESPN's annual 20 percent rate increases have sought retribution by dropping other services that are part of its empire. A year ago, EchoStar Communications Corp. briefly dropped ESPN Classic. And this year, Mediacom Communications Corp. dropped both ESPN Classic and ESPNews.