Guesstimating ESPN Bite

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How painful would it be if Cox Communications Inc. and ESPN don't agree on contract terms and the MSO stopped carrying ESPN?

Anywhere from 500,000 to 1.2 million of Cox's 6.5 million subscribers might defect, a Wall Street investment bank has estimated.

The prediction, part of a report on The Walt Disney Co., comes from Deutsche Bank Securities Inc., based on an independent survey the bank undertook.

Deutsche Bank also estimated Cox would take an annual cash-flow hit of $170 million to $380 million, based on the predicted loss of customers, if it were to delete ESPN.

That scenario would also affect ESPN parent Disney, which would see a drop of $233 million or so of earnings before interest, taxes, depreciation and amortization (EBITDA), the bank projected.

Deutsche Bank hired Evalueserve to survey cable and satellite subscribers in order to "better understand the true leverage underlying the key battle of 2004, Cox vs. ESPN," analyst Douglas Mitchelson wrote. Attempts to interview Mitchelson last week were unsuccessful.

The survey, with 400 respondents, was conducted in late September and early October, and found that 24% of customers would definitely switch providers or consider switching if ESPN were no longer available from their current service provider.

Based on the survey, Deutsche Bank estimated Cox could lose 8% to 19% of its basic subscribers, or 500,000 to 1.2 million homes.

While that was the low-to-high estimate, Deutsche found a "mid-case" scenario more probable, in which a "tighter range would be between 12% and 17% of customers lost, or 750,000 to 1.1 million."

A 12% loss of homes would translate to a $245 million to $260 million decline in EBITDA for Cox, and a $223 million EBITDA loss for Disney, according to Deutsche.

In response to the report, a Cox spokesman said the MSO has no plans to drop ESPN, but might make the channel an anchor for a digital sports tier.

"Of course, if ESPN would not agree to continue working with us to find a solution for an increased price that can work for our customers and both our companies, they might possibly pull their signal from Cox Cable systems after March 31, 2003," the Cox spokesman said. "But we're hopeful that an agreement will be reached, in which we would not have to be concerned about customer defections over the loss of ESPN."

ESPN officials restated their position that the sports network deserves the broadest carriage possible.

"It makes no sense to take ESPN off expanded basic," said Sean Bratches, ESPN's executive vice president of affiliate sales and marketing. "ESPN drives so much customer satisfaction and local revenue that to do [so] would be detrimental to Cox's subscribers and its business.

"But make no mistake, it will be Cox who makes the decision whether or not to drop ESPN. If they do, ESPN will aggressively market ESPN services on competitive platforms against Cox."

Privately, cable industry insiders doubt Cox will be the first to pull the plug on ESPN — not after the public firestorm of several years ago when Time Warner Cable dropped ABC owned-an-operated TV stations in a carriage dispute.

The Deutsche Bank report, touching on ESPN and Comcast, also predicted the biggest U.S. MSO "will receive an appropriate volume discount given Comcast represents about 25% of ESPN's subscriber base."

"On balance, we would expect Comcast to be in a position to garner only high single-digit to low double-digit pricing increases from ESPN depending on the agreed length of a new contract," Mitchelson wrote.

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