ESPN Hikes Rates 20% for NFL

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Cable operators said their fears over an ESPN
rate increase were realized last week when the sports network trotted out a 20 percent
increase to help pay for its eight-year, $600 million National Football League package.

But while operators will most likely have to swallow the
rate increase, some executives hinted the huge rate increase could come at a price:
Operators could decline to launch other services from ESPN and ESPN parent The
Walt Disney Co.
, such as Toon Disney and Classic Sports
Network
.

Several large and mid-range operators have already been
contacted about the rate increase, which is expected to take effect in August. The network
is apparently exercising a clause in its current contract that allows it to raise rates up
to 30 percent, provided it gives three months notice.

The 20 percent increase comes on top of a roughly 10
percent increase, in some cases, that the network instituted last year. With the network's
yearly licensing fees already in the 85-cent to 95-cent range, a 20 percent yearly
increase -- 22.5 percent, if operators include only actual ESPN subscribers -- would push
the fee to well over $1.

ESPN invoked the clause last January, after it renewed its
Sunday-night NFL deal and obtained Turner Network Television's share of the cable package.
ESPN and TNT paid a total of $255 million for their previous four-year deal.

While ESPN would not discuss specifics of its affiliate
negotiations, it did confirm that it is "adjusting our rate as provided in our
existing contracts."

The network, through a statement from Sean Bratches, vice
president of affiliate sales and marketing, also confirmed that it is proposing "a
series of policy changes that provide savings and revenue opportunities which can reduce
the net effect of ESPN's annual rate adjustment and provide overall greater value."

Sources said ESPN extended an olive branch to operators by
reducing the penetration levels operators have to reach to avoid paying distribution
penalties. Operators will now be penalized if ESPN's penetration levels drop below 87
percent instead of the 90 percent level established now, sources said.

Other incentives include a major discount off of Classic
Sports Network, which the network purchased last September, as well as a 10 percent
increase in local advertising avail time for NFL games throughout the season.

Despite the concessions, operators were angry about the
increase, although they conceded they had little recourse against such a popular network.
Meanwhile, executives continue to insist that only 20 percent to 30 percent of its
subscriber base actually wants sports programming.

Several operators also admitted that the industry needs
high-profile sports product to remain competitive with emerging, alternative technologies
and the NFL has long been basic cable's most highly rated programming.

While most believe ESPN overpaid for the games, the
industry could ill afford to lose marquee sports programming and more sports fans to
direct-broadcast satellite services, which already offer a myriad of popular and exclusive
out-of-market sports packages.

But that rationale won't pacify the Federal Communications
Commission and congressional leaders who are keeping the pressure on cable operators to
limit what they pass along to cable subscribers.

So, instead of waging war against ESPN, operators said they
might choose to punish the network's sister services, such as ESPN2, ESPN
News and Classic Sports Network, by limiting their distribution.

"There's not a lot that can be done with ESPN; it's a
product that a sizable portion of our customers want and don't care how much they're
paying for it," said one top 10 MSO executive. "We only have so much money
allotted for a particular distributor, so if ESPN is going to cut into our overall budget,
something has to go, and it will most likely be an ESPN product rather than another basic
service."

Another top 10 operator went so far as to say that the deal
could adversely affect the launch of any services from ESPN parent Disney as well. Disney
is currently shopping its new Toon Disney service, which launches April 18.

Disney is also fighting to get basic distribution for its
signature Disney Channel service, which operators said could also be affected.

"I would be concerned if I were [Toon Disney],"
said an MSO executive. "Disney may not find operators as open to discussions after
[the ESPN deal]."

But Disney said it's not worried about operator backlash.

"We're aware of the [ESPN] situation, but Toon Disney
is moving ahead and launching with a strong number in two weeks," said Shirley
Powell, vice president of media relations for The Disney Channel. "As for The Disney
Channel, the momentum of the move to basic is strong; we've gained over 1 million
subscribers last month."

Classic Sports, which ESPN acquired last September, may be
able to sidestep any operator unrest. ESPN is proposing "deep" rate cuts, which
could take the 10-cent service down to the one-cent to two-cent mark -- or even free for a
short period of time -- depending on penetration rates for Classic and other ESPN
services, according to sources. "It is certainly the most appealing deal I've seen
come out of ESPN in a long time," said one top 20 operator.

ESPN is also hopeful that its additional 46 local-ad avails
will quell operator unrest.

Kathy Parks, general sales manager for Cable Ad Sales in
St. Louis -- representing 235,000 subscribers -- estimates that additional ad avails could
generate $50,000 for her market.

But a 15-cent monthly increase would send programming costs
covering those subscribers soaring by $32,000 a month.

"It's a little more than a drop in the bucket,"
said one MSO executive.

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