ESPN: MLB Urged Surcharge on Ops

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New York - Pending the outcome of ESPN's upcoming federal
trial against Major League Baseball, the sports network's contract with the league is
officially as dead as the 1999 season.

Hundreds of pages of documents that ESPN and MLB filed with
the court last week illustrated how contentious the relationship between The Walt Disney
Co.'s basic-cable network and the league has become.

The documents also offered a rare glimpse into what occurs
behind the scenes of major sports-rights negotiations -including how MLB allegedly asked
potential rightsholders to levy surcharges on cable operators and share revenue from the
rate hikes with the league.

Last year, MLB rejected ESPN's request to run Sunday-night
MLB games in September on less widely distributed sister network ESPN2 to make way for
National Football League games covered in its expanded NFL contract.

MLB terminated ESPN's rights deal after the company refused
to run the games on its flagship network. MLB countersued, and the parties are set to slug
it out Nov. 15, when the trial opens.

ESPN's filings showed how the network hopes to prove that
MLB sought to extort millions of dollars from the network in exchange for approving the
pre-emption of the Sunday-night games.

A memo that Philadelphia Phillies chairman and MLB
television committee member Bill Giles sent to MLB commissioner Bud Selig and other
baseball executives in May 1998 discussed how baseball generated more gross rating points
in 1997 (149.2) for ESPN than the NFL did (148.8).

Giles noted that MLB's rights fee per rating point worked
out to $516,000, while the NFL's fee per rating point was $4 million.

"ESPN is paying MLB $523 million less per year than
they are paying the NFL for approximately the same number of total ratings points last
year [1997]. Admittedly, the demographics, ad rates and cable exclusivity make the NFL
more valuable. However, it doesn't seem like the gap should be anything close to what it
is," Giles wrote.

Giles added, "It seems to me that one of the most
valuable 'give backs' we could get from ESPN in our 'September Sunday' debate would be a
termination date ASAP or a declaration that MLB may terminate our contract with ESPN
following the 1998 postseason."

The major issue of contention is whether the clause in
ESPN's contract that allowed it to pre-empt games with MLB approval for "events of
significant viewer interest" would allow ESPN to move September MLB games to ESPN2 to
make room for games from its expanded NFL schedule.

Because NFL games are traditionally the highest-rated shows
on basic cable, ESPN argued it was unreasonable for MLB to oppose the pre-emption.

MLB countered in court filings that it never approved a
pre-emption for a game from a competing league's regular-season schedule.

Supporting its argument, MLB cited a clause in its 1994
contract with ESPN that would allow the network to pre-empt baseball if it acquired the
rights for the 1996 Summer Olympic Games.

"If baseball had intended for ESPN not to have a
continuing right of approval with respect to any NFL-related Sunday-night pre-emption
requests, we could have put the same language in the paragraph about Sunday nights as we
did in the paragraph about the Olympics," MLB general counsel Thomas Ostertag wrote
on April 28, 1998, to ESPN executive vice president Ed Durso and senior vice president and
general counsel David Pahl.

"It would have been very simple to do, but we did not
do it. We did not do it because we did not intend to do it," Ostertag added.

Documents obtained last week revealed that ESPN and MLB
discussed the possibility of ESPN acquiring the full-season NFL contract as early as
January 1989. ESPN's filings included a March 1, 1989, agreement signed by Steve
Bornstein, then ESPN's executive vice president, and Leslie Lawrence, MLB's director of
broadcast administration, addressing the issue.

"If the current ESPN/NFL agreement changes with
respect to Sunday-night preseason games, so as to eliminate the potential for conflict,
then ESPN may only switch to day the Sunday-night exposures during weeks 23 and 24,"
the 10-year-old agreement stated.

Pahl cited the 1989 agreement in an April 20, 1998, letter
to the league. Ostertag countered one week later in his letter that the agreement expired,
rendering it "utterly useless in all respects."

The agenda from a Jan. 3, 1989, MLB television-committee
meeting that ESPN obtained during discovery is included in its filing. The document -
which addresses MLB contract bids from ESPN, Turner Network Television, USA Network and
SportsChannel America - offered a rare glimpse behind the scenes at negotiations between a
sports league and a cable network.

The first point the MLB television committee addressed was
whether ESPN, TNT, USA or SportsChannel would be willing to levy a surcharge on cable
operators if each respective network won the baseball contract.

The committee noted that USA "does not believe a
surcharge is viable without LCS [League Championship Series] in [the] package and [the]
superstation situation unchanged" - an apparent reference to TBS Superstation, which
telecasts Atlanta Braves MLB games.

ESPN "does not want to assess [a] surcharge - feeling
operator pressure," MLB wrote in the agenda notes.

On SportsChannel, "there would not be a baseball
surcharge - only rate increases," according to the MLB document.

TNT's stance on the surcharge, according to MLB: "Not
pleased with our desire to be involved with rate increases and pricing. Would, however,
agree to pay extra for growth in excess of attainable projections. Since TNT's rate
schedule is already published for 1989, 1990 and 1991, they do not feel that baseball
should share in rate increases for those years."

MLB spokesman Rich Levin declined comment on the surcharge
issue.

In August, U.S. District Court Judge Shira Scheindlin
encouraged ESPN and MLB to settle the case out of court, according to the transcript of a
court appearance.

The trial is expected to last five to six days, according
to a document submitted by Eric Lobenfeld, ESPN's lead attorney.

MLB executives have said they won't offer the national
games covered in ESPN's contract to another network until the dispute is settled. But
former CBS Sports president Neal Pilson said in an interview last week that he suspects
that MLB may already have a deal in place.

"I would have to assume that baseball wouldn't carry
the case this far if it didn't have a replacement carrier. But baseball has done strange
things in the past," Pilson said.

He added that Turner Sports "is the only credible
player at this point" to replace ESPN.  Asked if Turner had a deal with MLB,
spokesman Greg Hughes said "Absolutely not."

ESPN's contract, which has been terminated, was set to
expire at the end of the 2002 season.

Even if ESPN wins the case and is allowed to finish out its
contract, Pilson said, the "real issue" is the position ESPN would be in when it
attempts to renew its contract with baseball.

ESPN spokesman Chris LaPlaca responded that the ESPN - MLB
relationship remains "professional" despite the litigation, but said the network
won't speculate on how the legal battle could affect future rights talks.

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