ESPN Takes Off The Gloves

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Trust me, I personally checked this out. Last Thursday — when ABC Sports president George Bodenheimer took off the gloves at the National Press club and publicly bludgeoned Cox Communications Inc. — there was not a full moon.

But something more powerful than a full moon — the imminent report from the General Accounting Office on rising cable rates — can evidently make grown men revert to school-yard tactics.

The GAO report, which was requested by Sen. John McCain (R-Ariz.), an advocate of sports tiers, apparently has sent everyone over the edge.

Cox, which is in negotiations with ESPN, is fuming over another 20% rate increase to carry the sports service. Cox's CEO and president Jim Robbins had earlier gone to Washington to call for the creation of sports tiers. Robbins had threatened during the negotiations to put ESPN on a sports tier or dump it altogether.

So on the eve of the GAO report hitting McCain's desk, Bodenheimer took to the Beltway and declared that "Cox customers pay more each month for overhead costs and capital expenditures [Cox's] than they do for the programming they watch."

Cox, like every other cable operator, including Comcast Cable, will instead argue that programming is, indeed, the single largest cost, higher than payroll.

Maybe the missing word here is "ongoing" cost, which would back up cable's claims. Bodenheimer, who last week said that Cox was passing its investment in plant upgrades on to consumers, was talking about capital expenditures, a one-time cost.

ESPN's Bodenheimer publicly said that Cox was negotiating in public and wanted to protect its 35% profit margin, acknowledging that he didn't blame them for doing that.

So why has this particular negotiation become so public? Because it has hit a very raw and exposed nerve in the very underbelly of cable's economic model.

If sports tiers do, in fact, become a government mandate, that could be the beginning of the end for an economic model that has served cable pretty well. The basic deal is that digital cable offers a wide array of expanded basic channels for a set price, subject to annual cost increases, like any other business.

To muck with sports tiers is only the beginning. Will McCain say, "let consumers pick and pay for only what they want to see?"

Everyone better pray that that scenario doesn't unfold because it would wreak havoc for all. Two weeks ago in an interview I had with Comcast 's Steve Burke, at the Metropolitan Cable Club in Washington, he tackled the tiering issue in its most stark terms.

Burke said that everyone in that room, roughly 150 people, probably only watched 10 channels regularly. And if they were to pay for just those 10 channels, a fully-distributed network in 70 million homes, could shrink to become a network with 30 million subscribers.

And that would adversely affect cable's second revenue stream, advertising sales. The losses, in other words, to both programmers and cable operators would be devastating.

So what are we to make of the oh so public ESPN/Cox clash? It's bigtime stuff, with both sides trying to protect their own bottom lines.

In the end, both parties will have to make compromises. Both ESPN and Cox know that too much is at stake right now to mess up a model that, while flawed, still works well.

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