When Rates Rise, Disney Shares Blame

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To the Editor:

I thought my head was about to explode when I read Linda Moss' July 30, 2001, article titled "Eisner: We Aren't the Problem." Is Michael Eisner so totally disconnected from his affiliates that he really believes the enormous rate increases regularly inflicted upon cable operators have no impact on rising rates?

If so, he really does live in a fairyland castle. Or, as I believe, might this be another blatant, desperate attempt to deflect congressional, regulatory and consumer criticism by invoking the old "cable monopoly" mantra?

This is not the first time The Walt Disney Co. has tried this approach. The last time was in 1998. It sent Robert Iger to Capitol Hill to tell the Senate that Disney-owned ESPN's $4.8 billion acquisition of National Football League rights would add "just a few pennies" to subscribers' bills. I guess that is true if you call 480 billion pennies "just a few."

There was never any possibility of ESPN paying for the NFL without significant increases in subscriber fees every single year of the contract. Those of us in the cable industry knew that from the start. We know from the start that the same is true for the acquisition of Fox Family Worldwide. The only way Disney can pay $5.3 billion for Fox Family is to charge higher subscriber fees.

For those readers outside the industry (Congress, the Federal Communications Commission, consumers), a mathematical history lesson may put this current acquisition into perspective. ESPN paid $4.8 billion dollars for six years of NFL television rights. That's $800 million per year. It produces 18 games per year. That's $44.4 million per game.

ESPN has only two ways to generate the money to pay these rights fees: advertising and subscriber fees. Assuming Mr. Iger was telling the truth (and history has proven that he was not), ESPN would generate a paltry $28,800,000 a year from the increased subscriber fees he mentioned at his Senate hearing ($.03 per month times 12 months times 80 million cable subscribers equals $28.8 million). That's $1.6 million per game. That leaves $42.8 million per game to generate from advertising sales.

Advertisers pay for TV spots on a cost-per-thousand (CPM) basis. A first-rate NFL game can command a CPM of $20.00 to $25.00. In the past, NFL football games on ESPN generally achieved a rating of 8 percent to 10 percent (and that's being generous). Let's be generous and assume that all of the games will generate the maximum rating of 10 percent and all of the commercials will sell for an average CPM of $22.50. If we apply the math, we find ESPN's revenue per commercial is about $180,000 (80,000,000 cable households times 10 percent rating times $22.50 per 1000).

At this point, the impossibility of ESPN's challenge becomes clear. To generate $42.8 million in ad revenue per game, they would have to sell 238 commercials per game
($42.8 million divided by 180,000 equals 237.8 commercials). Everyone knows that ESPN runs a lot of commercials, but it certainly doesn't show two hours of commercials per game! Of course, these calculations only cover the cost of the rights. ESPN must spend millions more for production, talent and promotion.

As we all know, the rate for ESPN has almost doubled since the NFL rights deal in 1998. More importantly, it has increased by almost a dollar per subscriber per month. If ESPN continues its practice of extracting the maximum rate increase every year (and there is no reason to expect otherwise), the rate will increase by another $1.50 per subscriber per month before this NFL contract expires. So much for the "few pennies" Mr. Iger discussed with the Senate in 1998. I shudder when I think of how much the next NFL contract will cost consumers.

Mr. Eisner now is attempting to hoodwink the press, public and Washington about the Fox Family acquisition with the same flip and glib comments. He told the assembled press that a nickel increase really doesn't matter. In the first place, Disney doesn't mess around with a nickel rate increase. The combined weight of the Disney rate increases (including the Hearst-ABC properties) in 2001 is closer to $.45, not a nickel (a cool half billion
a year from cable consumers). These increases bring the cost for Disney services we carry to almost $4.30 per customer per month!

Second, believe it or not, there are a few other programmers who demand to be paid each month and
institute rate increases every year. But, finally, if a nickel here and there really doesn't matter, let Mr. Eisner reduce his rate increase by that much.

We all know that programming costs are the fastest-rising portion of operating expenses, in both dollars and percentage. No other item even comes close to its annual double-digit increases. It is the pinnacle of hypocrisy (and irony) for Mr. Eisner to claim that cable rates rise as a result of cable operators' pursuit of margins, profits and acquisitions (presumably ill-advised and evil) at a press conference he convened to discuss the margins and profits of his own $5.3-billion acquisition of Fox Family (presumably wise and Snow White pure). Disney paid 34 times cash flow. Cable operators pay about 15 times for quality properties. Fox and Saban paid a measly $1.9 billion for The Family Channel in 1997 and couldn't make it work. (It required an extra $125 million dollars in 1999 just to meet its bank obligations!)

Fox Family's current cash flow of $150 million a year positively pales in comparison to a $5.3 billion debt load. The paltry $50 million in mythical "synergy savings" and $100 million in hopefully increased ad sales doesn't really help.

Do the math again. Assuming Disney successfully doubles cash flow from $150 million to $300 million, it will take 18 years to recover the $5.3 billion price tag! And, that doesn't include any increased interest expense, increased spending for new programming or profit. I certainly admire the patience of Disney shareholders if they are willing to wait that long.

As with other acquisitions, television viewers will pay for Disney's acquisition of Fox Family. Fortunately for Disney (and unfortunately for us), cable operators will have the difficult job of explaining and collecting the increased fees. It's obvious that Disney won't accept that responsibility (at least not willingly). It is especially unfortunate because, from all accounts to date, consumers will receive little, if any, new programming.

It is shameful that Disney will not be honest about who will pay the cost of this acquisition, and for its other programming. It is shameful that Disney continues its unrelenting attack on its own affiliates by trying to unfairly shift the responsibility for its profligate spending in pursuit of a larger corporate empire.

Robert Gessner President Massillon Cable TV Inc.

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