ESPN executive vice president of affiliate sales and marketing Sean Bratches had the unenviable task of calling cable operators recently to notify them of ESPN's 20% annual license-fee increase. National editor Steve Donohue spoke to him last week.
MCN: What were those calls like?
Sean Bratches: They're difficult phone calls to have, but I feel it's important to speak with our customers first and directly to communicate that we are exercising the rights under the agreements that they signed.
MCN: How do you explain the new license fee to an MSO like Cable One, which is freezing rates this year?
Bratches: Those decisions are made by our customers in the context of the agreements that they have with ESPN and other programmers. We feel strongly about the value that we provide under the context of our agreements, and what we do to grow that value through [programming] such as the NBA and Wimbledon, and strengthen the brand with a multitude of new products and services used to drive our affiliates' new businesses.
MCN: ADA Cablevision in Idaho, said it plans to kick ESPN onto a sports tier when the new rate goes into effect in August. Will you let them?
Bratches: We would prevent it, however I don't think that's going to be necessary, because we have taken action to terminate that agreement for other reasons. Their response was precipitated by termination notices that have been delivered over the past month.
MCN: Time Warner Cable and Comcast are hoping to create sports tiers for their regional New York channels this summer. Are you concerned that the next shoe to drop would be for them to add ESPN to that tier?
Bratches: Our affiliates don't have the right to distribute us in that fashion. ESPN is not a regional sports network. The value that we provide extends well beyond the local professional team — we're over 65 different sports strong and one of the strongest brands in America.
MCN: If subs really wanted ESPN, they could pay more for it on a tier.
Bratches: Consumers today have a choice. ESPN is on a tier called expanded basic that 10% of subscribers elect not to take. This debate that we're having is over [operators] protecting a 40% margin business.
MCN: Do you ever consult affiliates before deciding to spend billions of dollars on a contract like the NBA?
Bratches: Many of our affiliates are vertically integrated and are competitors for the same product, therefore it would be imprudent for us to do that.
MCN: I interviewed [former ESPN CEO] Steve Bornstein in 1998, and he said that ESPN would show restraint in buying programming rights. He said, "That's one of the reasons ESPN will never have it all, because we don't want it all. It's incomprehensible to be able to afford it all." Is it fair to say that ESPN management now believes, after buying NBA rights, that it can afford it all?
Bratches: There's obviously been a change in management's position since Steve stated that.
MCN: So you do think ESPN can afford it all?
Bratches: I didn't say that, and we don't have it all. We don't have NASCAR, for instance.
MCN: Are you concerned that when your cable contracts expire over the next few years that there will be a push to move ESPN to a tier, and that if you're not more flexible that you may lose distribution?
Bratches: It's not a model that we feel is prudent for the industry. We've never held a gun to anyone's head to make them sign an agreement, and we'll continue to move forward in the market as we feel our value merits.
MCN: You've been pitching operators packages that reduce the annual rate hike in exchange for launching new services such as ESPN HD. Do you have any takers?
Bratches: There is no economic incentive for our affiliates to enter into those agreements until Aug. 1, the first date by which our rate would be impacted by the new agreements.
MCN: Some operators complain that those packages don't allow them to reduce their overall ESPN costs since you're lowering the increase for ESPN, but making up for it with other services.
Bratches: That's inaccurate. The new services that we are discussing with our affiliates are discretionary in nature, and if a consumer does not buy a tier that has ESPN HD, they don't owe us any money.
These negotiations contemplate multiple products, and for me to speculate on how any individual deal will end up is premature at this time. But we are actively negotiating a number of agreements, and I'm optimistic that many will be completed, and those affiliates will pay substantively less than those affiliates that don't embrace this.