ESPN STICKER SHOCK Disney Co. Sports Net Hikes Rates by 20%

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Here we go again: One year after ESPN staggered operatorswith a 20 percent licensing-fee increase, the network notified them last week of a secondincrease of about 20 percent, which MSOs said would push the sports network well over the$1-per-subscriber mark.

Touting the network's value from both the consumer andlocal advertising sides, ESPN executives claimed last week that the increase wasjustified.

But their rationale did little to appease operators,several of which said they can no longer absorb high programming increases whilecontinuing to keep consumer cable-rate increases in check.

ESPN executive vice president of administration Ed Dursoconfirmed that the network was talking to operators about another licensing increase,which would take effect Aug. 1.

The increase is part of the network's long-termlicensing agreement that runs through 2006. As part of the deal, ESPN can institute yearlyincreases of as much as 30 percent after providing three months' notice, sourcesclose to the situation said.

While Durso would not disclose full rate-card details, hedid say that the average net increase for operators -- factoring in ad-sales revenue --would be about 10 cents per subscriber. That works out to about $7.6 million per yearacross ESPN's base.

"The net average rate for the industry [incalendar-year 1999] will be just under $1," Durso added.

But some operators told different stories about theincreases.

At least two operators said their rates would rise to wellabove $1 per year, per subscriber for ESPN, up to around $1.25. Both characterized theincrease as 20 percent.

"I knew that they were going to sock it to us,"one MSO programming official said.

At AT&T Broadband & Internet Services (formerlyTele-Communications Inc.), spokeswoman LaRae Marsik said the MSO was examining how theESPN rate increase would affect it. But AT&T Broadband is perturbed by theever-skyrocketing costs for sports and other programming.

"It's alarming that this trend continues,"she said. "As competition across all of our businesses is fierce and the relationshipthat we hold with our customers is critical, we are in many ways trapped betweenescalating programming costs and the value that we bring to our customers. In that vein,any increases are of great concern to us as we seek to balance out this equation.

"We as a company continue to welcome the possibilityof tiering options, offering this programming only to the customers who want to pay forit," she added.

Other operators have also talked about possibly shiftingcostly basic networks to pay tiers, but ESPN insisted that its contracts impose severefinancial penalties if the network is removed from basic tiers.

Time Warner vice president of corporate communications MikeLuftman confirmed that it has been notified of an ESPN increase, adding that the hike is"permitted under the contract." He would not say, however, how much the increasewas, nor whether the MSO was conformable with it.

Officials at the National Cable Television Cooperative wereamong those who had been bracing for the ESPN increase. "It's not like it was asurprise," senior vice president of programming Frank Hughes said.

Durso defended ESPN's rate-card increase by toutingthe increasing value of the network, particularly with regard to local advertising rates.He said ESPN represents $400 million in local ad revenue, or about 20 percent of theindustry's total take.

"On average, ESPN is generating more than 50 cents persubscriber of advertising revenue on ESPN," he said. "We are certainly theleading network in terms of local advertising revenue for the operators."

He also pointed out that the network has provided more adavails for operators during its National Football League and SportsCenter shows. Inaddition, the network will provide "significant" discounts regarding packagingand distribution of ESPN and related services such as ESPN2 and ESPN Classic.

"We've made the discounts easier to reach, andwith the recent industry consolidation, the value discounting has become moresignificant," Durso said.

Also, with 20 of the top 25 highest-rated shows on basiccable in 1998, Durso said, the value of ESPN to the consumer is well documented. Combinedwith the local ad-sales success, the network's value to the industry certainlyjustifies its licensing-fee asking price.

"ESPN is the single most valuable service on cable,and our fees represent that," he said

The new rate increase will cover in part the network'swhopping eight-year, $600 million NFL deal, signed last year, which gave ESPN full rightsto the Sunday-night package.

Many industry executives decried that deal, saying thatESPN overpaid. Prior to the deal, ESPN shared the package with Turner Network Television.

But ESPN said the package has been a ratings and ad-salessuccess for operators thus far. Ratings for the 18-game package were up 9 percent overlast year's numbers.

Further, Durso said, ESPN added 10 percent more localavails in the regular-season package and 26 percent more during NFL-related programming.

"The business that we're in is an expensivebusiness because it's a very competitive business. As a result, our cost structure issix to seven times that of other networks,"

Durso said. "We paid a market price [for the NFL].We're not asking [operators] to bear the entire cost, but rather, to share some ofthat cost."
That's little consolation to operators, which are being barraged withprogramming-cost increases this year -- including another major increase in the sportsarena for the Olympic Games.

NBC Cable is asking operators to pay a surcharge of $1 persubscriber, per year, over an eight-year contract, to air Olympics coverage on CNBC andMSNBC. In essence, NBC is looking to collect $50 million or more per year from MSOs for apackage of five Olympic Games, with the last airing in 2008.

On top of the Olympics surcharge, NBC is also looking forrate increases for both CNBC and MSNBC.

And NBC isn't the only programmer raising licensefees. A&E Network, for example, is angling for a 20 percent rate increase.

But it's expensive sports product that concernsoperators. "I know that sports rights are skyrocketing, and we all have to share thecosts, but where does it all end?" Hughes asked.

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