ESPN Takes Offensive On Rates - Multichannel

ESPN Takes Offensive On Rates

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For many cable executives, the baseball playoffs don't begin to compare with the drama of ESPN and Cox Communications Inc. and their escalating war of words over programming costs and cable rates.

ESPN president George Bodenheimer last week counterpunched Cox's vociferous complaints about ESPN's high costs by pinning the blame for rising consumer cable bill costs on margin-happy MSOs.

Cox, meanwhile, tried to gain a public-relations upper hand, launching an anti-ESPN Web site.

Backed with a report on the effects of rising programming costs from Washington-based consulting firm CapAnalysis, Bodenhiemer — speaking last Thursday at the National Press Club — said that overall programming costs only represent $11 of Cox's average $40 monthly basic cable rate.

Instead, the majority of those costs instead go toward capital investments, as well as maintaining Cox's "healthy, growing 35% margin business."

In regards to ESPN, Bodenheimer said the network only costs Cox $1.50 per subscriber — after recognizing local ad sales dollars the network provides costs. But Cox officials have said the network costs over $2.50, and disputes ESPN's local ad sales estimates relative to the network.

Bodenheimer lauded cable's basic tier as a "great deal" and pulling ESPN from that package and placing it on an optional sports tier or offering it on an á-la-carte basis "would not benefit Cox customers."

The remarks directly target Cox CEO Jim Robbins's threats made last month to drop or move expensive sports services like ESPN to a dedicated sports tier.

Robbins, speaking at a recent Goldman Sachs Communacopia conference, said ESPN and the regional sports networks account for only 8% of viewers but make up 32% of the MSO's total programming costs. Robbins also decried ESPN's annual 20% rate increases.

Cox's deal with ESPN ends in spring 2004, but Bodenheimer said he's "optimistic" an agreement will be reached.

In a statement, Cox last week said: "ESPN's 20% increases are disproportionate to the economic reality of the world today. If we raised our rates 20% a year, what do you think our customers would say?"

While agreeing with ESPN that cable is a "terrific value," Cox also said that "the rapid and unrestrained rise of sports programming costs is threatening the value of cable television for American consumers."

Cox launched a new Web site last Thursday during Bodenheimer's morning speech "to educate consumers, media and policymakers about the rapid, unrestrained rise in the cost of cable sports channels and the threat that poses to the value of cable-television service for American cable consumers."

The site contains background information, frequently asked questions, and related news articles. It also allows consumers to e-mail sports-network representatives and national lawmakers to express their opinions.

If Cox does decide to drop or tier ESPN, Bodeheimer promised to aggressively support Cox competitors, including satellite-TV providers DirecTV and Dish Network.

Bodenhiemer said overall programming costs in the cable industry "are not nearly as significant as non-program expenses, capital investments and industry payments," and Cox's programming costs as a percentage of total expenditures have remained relatively flat since 1999.

The CapAnalysis report — analyzing recent Federal Communications Commission and National Cable Television Association data — states that in recent years non-programming costs represented 57% of cable operator costs compared to the 22% represented by programming expenditures.

In 2002 alone, non-programming operating costs represent 56% of total operating expenditures in 2002.

National Cable Television Association CEO Robert Sachs came to MSOs' defense, saying in a statement that the CapAnalysis' report "oversimplifies" the economics of cable TV and doesn't place enough weight on the true cost of programming to operators.

"Delivery of popular channels such as ESPN depends upon infrastructure, personnel and programming investment. But when sports programming fees have increased significantly year to year due to soaring player salaries and TV rights, it's impossible to ignore these costs as a contributing factor in cable price increases," Sachs said.

ESPN's public hyperbole over programming costs isn't sitting well with many lower-priced basic networks, who fear a potential backlash from operators for even modest rate increases due to the high cost of sports networks.

"The demands by the sports programmers for large increases in affiliate fees can only have a negative effect on independent programmers," Oxygen chief operating officer Lisa Hall said.

Kagan Associates sports analyst John Mansell said disputes between networks and operators are not unusual — although few rise to the public level of this one — and tend to be short-lived.

Still, one sports-network executive said public exhibitions of private negotiations don't benefit either party or the industry. "None of the rhetoric helps in regards to cable's image in the minds of the public or Congress," said the executive.

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