FS1-Dish Flap Brings Conversion Fees to Fore

Distributors Find Hidden Costs in Network's Format Change
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A rift between Dish Network and Fox Sports 1 over a handful of college-football games that were scheduled to air over the Labor Day weekend put a spotlight on an often-overlooked aspect of carriage negotiations: the hidden costs associated with the conversion of a cable network to a new format.

Satellite-TV provider Dish, which has some 14.1 million subscribers, had threatened to black out four college-football games scheduled to air on Fox Sports 1 between Aug. 28 and Aug. 31 — Rutgers vs. Washington State on Aug. 28, Colorado St. vs. Colorado on Aug. 29, North Dakota St. vs. Iowa St. on Aug. 30 and SMU vs. Baylor on Aug. 31 — because of what it said was “a significant additional charge” to carry the events.

The two sides eventually worked out a deal. Dish said it would carry the games but offered little in the form of an explanation.

“We are proud to deliver the most college football anywhere, at the best possible value,” said Dish vice president of programming Josh Clark in a statement.

CONVERSION CHARGE

But sources in the distribution community said the rift was due to the unique launch of Fox Sports 1, essentially involving the conversion of the former Speed Channel, which focused solely on motorsports, to a broader sports channel.

As part of that conversion, distributors had the option of striking a new, longer-term FS1 distribution deal at a higher price, or opting to ride out the remainder of their Speed Channel agreement. While the latter option was cheaper — Speed was charging about 24 cents per subscriber per month — it came with a catch: FS1 would be able to charge an additional fee for event programming that normally wouldn’t have been aired on Speed.

And while Dish ultimately worked out a deal, other distributors that opted to stick with their Speed deals may face even higher fees as the college-football season moves forward and the games on FS1 draw more interest — and those fees could bleed into other sports. FS1 is scheduled to air several Major League Baseball playoff games next month.

Sources in the distribution community believe the Dish dispute was the first in what could be other battles as FS1 tries to convert distributors from their old Speed deals to more costly carriage agreements with the sports network. FS1 has reportedly asked for fees of about 80 cents per subscriber per month, escalating to $1.50 over time.

PLAYOFF LEVERAGE

Sports consultant Lee Berke, president of LHB Sports, Entertainment & Media, said he believes the baseball playoffs could provide FS1 with the leverage it needs to move distributors to long-term deals.

“It is inevitable that over time they [FS1] are going to raise their [subscriber] fees as they add on more and better events,” Berke said.

Berke said distributors could opt to not carry events, but that will be harder as the games and the stakes get bigger.

“Potentially, [distributors] might express their displeasure in a number of ways,” Berke said. “As I see it, this is the back and forth of negotiations that will ultimately lead to a revamped deal with FS1.”

Berke added that surcharges for additional events are commonplace in the sports world — particularly with regional sports networks that will charge distributors for additional games outside of their original rights package.

“I’ve seen it on the RSN front and I’ve seen distributors push back against it,” Berke added. “But ultimately these are short-term situations that get negotiated out.”

While Dish would not reveal just how “significant” FS1’s surcharge was, other sources in the distribution community said they are usually based on the size of the distributor’s footprint. So, if a network pays $100 million for rights and a distributor represents about 20% of its footprint, it could be on the hook for $20 million.

FS1 launched on Aug. 17, 2013, to 90 million homes, the single-largest debut for a sports network in cable history. That mark held last month, as ESPN’s SEC Network is available in 98 million homes, but counts some 62 million subscribers.

ROCKY LAUNCH

But FS1’s launch was not without its hitches. Fox initially tried to force distributors to renegotiate their Speed deals to the higher FS1 rate, but relented as the network’s launch date approached with few takers. Recently, the network has come under some criticism for poor ratings — it averaged about 267,000 total primetime viewers in its first year, behind NBC Sports (305,000 viewers) and ESPN (2.3 million viewers), but still well ahead of Speed (151,000 viewers). And those numbers are expected to climb as it adds more substantive programming.

FS1 is expected to air about 40 regular season baseball games this year and, as part of its parent’s $4 billion, eight-year rights deal with MLB, will air Division and League Championship Series games beginning this October. The sports network also is scheduled to begin airing NASCAR Sprint Cup and Nationwide races in 2015 and has inked deals for the FIFA Women’s World Cup and U.S. Golf Association championship events, including the men’s U.S. Open, in the spring.

“All those things combined add to the leverage that Fox Sports has and ultimately will lead to increased fees,” Berke said.

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