Cox Communications Inc. officials last week stepped up the rhetoric against ESPN over its latest license-fee increase, which for many MSOs pushes the sports network's per-subscriber rate beyond $2 as of Aug. 1.
Operators cannot prevent ESPN's contractual rate increases for at least another year, nor can they move the total sports network from basic cable to optional tiers.
But they can try to gain some public-relations advantage as they look ahead to contract negotiations — and they appear to be doing just that.
In return, ESPN got more aggressive in defending itself. It claimed that operators are choosing to protect 30% to 40% cash-flow margins through rate increases, while also paying for debt they accumulated for investing in new plant to offer new programming and services that ESPN helps support.
Stakes are high
For ESPN, the stakes are high. Sources say the network's current industry contracts — which provides the built in 20% increases — end mostly in 2005.
That means that along with new affiliate deals, the network over the next two years will be renegotiating new rights deals with the National Football League, Major League Baseball and the National Hockey League — three of its top sports properties.
"It'll be interesting to see how much ESPN will be willing to pay for those rights if they don't have an annual 20% incremental raise from the industry to fall back on," one sports-league executive said last week.
An NFL spokesman said the league would only say that it is "closely monitoring the developments."
It's imperative for ESPN to convince operators the rates are justified. ESPN also continued to tout its value to the operators through new products like ESPN Broadband, ESPN Deportes, EXPN, ESPN HD and its video-on-demand services — new offerings operators are relying on to offset slow growth in basic video services.
The network's annual increase was a topic of much discussion during last week's Senate Commerce Committee hearing on cable programming costs.
Cox CEO James Robbins testified that sports programming — and in particular ESPN's now nearly $2-per-subscriber licensing fee — was the driving factor in rising cable rates.
ESPN continued to press its point that all but $1 of its wholesale fee is offset by revenue generated from ad sales — an assertion Robbins called "a flat-out myth."
Cox executive vice president Patrick Esser said that from August 2003 to August 2004, the MSO would only generate about 30 cents per subscriber per month from ESPN's ad platform.
"That means our net cost for ESPN is nowhere near the $1 that's been in the press," Esser said. "It's well over $2 per sub, per month. To me, that's unacceptable."
ESPN disputed Cox's numbers, saying the 2002 figure was generated in a much softer market — before the network obtained the NBA and prior to its recent climb in the primetime ratings.
"It's hard to believe that Cox's ESPN local ad sales numbers are about $1.85 less than the industry average, based on third-party studies that we've done that include Cox's feedback," ESPN vice president of affiliate advertising sales and marketing Jeff Siegel said.
He also said Cox underestimated ESPN's "halo" effect, or the ability of ESPN's inventory to generate money in revenue on other networks.
Ops want tiering
ESPN's ad-sales impact could be further eroded if MSO executives get their wish to shift the sports service to an optional tier.
Robbins suggested cable operators should be able to pull from expanded basic any network costing more than $1 per month, per subscriber.
Esser even intimated that if push came to shove, the MSO — which he said would be paying $2.61for ESPN as of August —- would consider dropping ESPN.
Mediacom Communications Corp. chairman and CEO Rocco Commisso issued a similar warning in a speech in Washington last week, throwing in other cable networks owned by The Walt Disney Co. for good measure.
"Disney has been put on notice that if they try ever again to exert a 20% price increase, I have to react. Do we want to do it? Absolutely not," Commisso said in remarks at an American Cable Association event.
ESPN/ABC Sports president George Bodenheimer said in a statement that ripping ESPN and other popular networks out of basic cable and charging more for them is not "pro-consumer."
ESPN is currently circulating a new affiliate proposal, which would reduce the cap on the annual rate hike it can levy, dropping it to from its current 20% clip to 16% in the first year to as low as 12% by 2012.
But operators complain that by the end of its term, ESPN's license fee would fall within the range of $9 per month, per subscriber.