ESPN Pays The Price

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ESPN turned the sports-TV world upside down last week when it acquired the long-standing broadcast franchise Monday Night Football.

It took the handoff from ABC, its sister The Walt Disney Co. network, which punted on the pricey money-loser. That enabled NBC to return to the National Football League on Sunday nights in 2006.

But the biggest surprise of the NFL’s sports-rights bonanza may be on the horizon: Sources close to the situation said that Comcast Corp. and EchoStar Communications Corp. are among the potential bidders for a late-season Thursday-and-Saturday primetime package that could net the league an additional $400 million to $500 million per year.

The resolution to the Sunday and Monday night packages did not come cheaply. ESPN will pay $8.8 billion over eight years for 17 games, without any playoff tilts.

NBC, back in the NFL game for the first time since 1997, will allocate $3.6 billion over six seasons for 18 regular-season games, including a Thursday-night season opener and flexible scheduling, a pair of Wild Card playoff games annually and Super Bowls in 2009 and 2012.

ESPN’s annual $1.1 billion outlay is double ABC’s current $550 million price tag for the 35-year-old MNF franchise, which remains a major ratings draw, despite erosion in recent years.

But unlike ABC, which has lost an estimated $150 million a year on the package, ESPN and president George Bodenheimer said the cable network will turn a profit.

“Our expectation is that we’ll deliver double-digit growth to Disney with this package,” Bodenheimer said. “Monday Night Football is the pre-eminent property in television, so it reorders the landscape and radically increases the value that we offer to our three main constituents — sports fans, cable and satellite operators and advertisers.”

In a research report, Merrill Lynch & Co. media analyst Jessica Reif Cohen said that ESPN, with its dual revenue stream of advertising and license fees, could earn a profit of $100 million to $200 million a year.

MILLIONS IN PROFIT

ESPN’s new rate agreement, reached with most operators last year, calls for annual hikes in the 7% range — substantially less than the yearly 20% increases ESPN had been levying — in exchange for the launches of additional ESPN services.

Despite the lower annual increases, industry executives said ESPN’s monthly fee nonetheless will approach the $3.50-per-subscriber range by the time its NFL deal expires in 2013. Industry observers also say ESPN’s pact is structured on a sliding scale, with higher rights slated for the latter years. That could give ESPN an opportunity to renegotiate new, higher-fee carriage contracts.

Bodenheimer also said the network will realize additional revenues through other ancillary distribution rights for its wireless, Spanish-language and HDTV platforms.

“We have an NFL Films extension and Monday Night Football will continue to add value to ESPN HD and ESPN Deportes,” Bodenheimer said. “We have an additional two years compared to the other players, so we’re able to map out the next eight to 10 years in growth.

“Being able to lock down prominent product like this has strategic value, in addition to what you can quantify.”

Still, industry observers say the $1.1 billion fee is exorbitant, even given the breadth of rights and whatever cache MNF retains.

ESPN 'REBATE’ ISSUE

Some executives speculate that ESPN had no choice but to pay the NFL’s price. Sources indicate that if ESPN hadn’t secured MNF, it would have had to provide an approximate 50-cent per-subscriber monthly rebate to operators — nearly 25% of its current $2.50 licensing fee or approximately $500 million annually over the course of its current agreement.

ESPN officials would not comment on whether it faced a rebate.

Industry sources also said the NFL insisted that a broadcast network carry the Sunday-night package. But with the success of its Desperate Housewives-led lineup, Bodenheimer said Disney never tendered an ABC bid for the package.

“We always said that our goal was to renew ABC on Monday night and ESPN on Sunday night,” he said. “We never made an offer to flip-flop the nights because we were not interested in moving ABC to Sunday night for a variety of reasons — the biggest of which is the industry-leading success we’re enjoying on Sunday nights.”

Industry watchers dispute those claims, saying that ABC was in the running for the Sunday package as late as April 22 before finally pulling its offer. In fact, NBC Universal Sports and Olympics chairman Dick Ebersol said during a conference call last week that formal negotiations with the NFL didn’t begin until that Friday afternoon, after Disney punted on the Sunday-night game package.

'THIS WE CAN AFFORD’

Once Disney passed, NBC which has sustained significant primetime slippage, snatched up the rights, even though it has been adamant about only pursuing sports properties that can produce returns.

“This one, we can afford,” NBC Universal chairman and CEO Bob Wright said on a conference call, noting that ad revenue alone would make the pact profitable. “This is not the full-scale extravaganza of Monday nights on ESPN; this is affordable and, in that respect, it’s very attractive.”

Wright and NBC Stations Group head Randy Falco wouldn’t comment on whether or not NBC affiliates would be asked to cough up money to help pay for the games.

As for ABC, Bodenheimer said the broadcast network will build on its sports presence with college football, the National Basketball Association and golf — as well as its affiliation with ESPN. Bodenheimer said he’s “confident” that Disney will be able to support its current rights holdings, while adding other properties despite the new MNF contract deal and the lower license-fee increases.

“We’ll continue to look at any and all opportunities to acquire high-profile properties, including NASCAR, baseball,” Bodenheimer said. “We feel confident about not only our current mix of programming, but about what we can envision down the road.”

With its Sunday afternoon and Sunday- and Monday-night lineups now in place, the NFL will generate a minimum of $23.9 billion in TV revenue over the next eight years. Aggregating some $3.7 billion annually — 42% more than the $2.6 billion it garners each year under its current contract — the NFL points out that it collects more in annual rights fees than all major sports properties combined.

CABLE NETS INTERESTED

There’s also potentially more on the way. Several cable networks have expressed interest in the late-season package of eight Thursday and Saturday night games, which industry observers say could fetch $400 million to $500 million in annual rights. Bodenheimer said ESPN would be interested in having a “conversation” with the league about the package if offered.

Turner Sports president David Levy said the group has had discussions with the league over the last three to four months, adding that the NFL has not set a firm deadline for the package.

“We still have interest in that package if we can find a financial model that works,” Levy said.

FX, the Fox Sports Net regional networks, USA Network and Spike TV have all been rumored to have interest in the package.

The league could also see fit to place the games on its own NFL Network. The 17-month old channel currently has 26 million subscribers and carries 54 preseason NFL games.

COMCAST, DISH ENTRIES

Among potential wild card bidders for the package are Comcast and EchoStar’s Dish Network. Sources close to the proceedings said the two distributors have expressed individual interest, but also could team to provide a cable or DBS outlet for the games.

For Comcast, the games could also serve as the kickoff to the creation of national sports network it could use to compete against ESPN.

Mark Ganis, president of Sports Corp. in Chicago said he wouldn’t be surprised by a Comcast bid.

“It won’t go to a traditional network … it will either go to NFL Network, which will use the game to leverage its position into more homes and onto expanded basic, or to a new Comcast channel,” he said, most likely a rebranded Outdoor Life Network.

Relative to Dish, such a deal would give it a relationship with the NFL and could come in concert with an NFL Network carriage commitment, sources said. It could also position the DBS service to bid for the “NFL Sunday Ticket” out-of-market package when it comes up for renewal in 2010, something Dish didn’t do last fall when DirecTV paid $3.5 billion for a deal through 2010.

Comcast and EchoStar officials declined to comment.

The NFL might pass on the Thursday/Saturday package.

“Since the league probably overachieved its [rights fees] expectations with the deals it now has in place, I’m not certain what it will do,” said Neal Pilson, principal in sports consultancy Pilson Communications. “More games could hurt ratings of the other packages. It could wind up on NFL Network, or more likely be held for the next round of negotiations.”

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