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ESPN, MSOs Face Off
Broadcasting & Cable, 4/28/2003


Cable operators reflexively moan about ESPN's annual increase in its already huge license fees, now around $2 per sub monthly. ESPN executives, in turn, talk up the cost of sports rights and how their channels drive subscribers and local advertisers to cable operators.


If this were a typical year, on May 1, the Disney-run programmer would notify cable and DBS affiliates that it plans to take the full 20% rate hike beginning in August, and operators with several years left on their deals could do little more than complain.


This year, however, ESPN executives have a new and complicated proposal, offering to start dropping the rate of increase first to 16% annually and eventually to 11%. In exchange, ESPN wants wide distribution and relatively high license fees for its all its products, including ESPN Classic, startup Spanish-language service ESPN Deportes, and a new pay-per-view service. Further, ESPN wants long-term commitments and pricing schedules for more-uncertain products, such as a high-definition ESPN feed, a nascent interactive-TV product, video-on-demand packages and a high-speed Internet product.


Operators adding up the pieces say that whatever savings they got on ESPN would be offset by the costs of the other products. For example, one senior MSO executive said his rate for ESPN2—now about 45 cents monthly—had always increased 6%-8% a year but the new deal calls for "double double-digit hikes."


ESPN executives fear political repercussions from being the most expensive basic-cable channel and demanding a 20% hike each year. Already, ESPN and its siblings account for 20%-25% of basic-cable programming costs.


As for the ancillary products, operators are averse to 10-year pricing deals on something like broadband services or video-on-demand because they can't tell what the economics will be. "Imagine if, two years ago, you had set the pricing for interactive-TV product until 2010," said a senior executive at one cable operator. "There's no business, but you're still paying big for the product."

That's assuming operators are willing to pay anything at all. One programming executive who wants to launch ESPN HD is balking at a price that starts at 85 cents and keeps climbing. "First, this is basically a simulcast of something I'm already paying a lot of money for," the executive said. "Then they said they need to cover the cost of the hi-def technology. But those costs are going to go down, not up, and their rate card only goes up."


ESPN is critical to Disney, which is misfiring in many other parts of its business. The sports network is such a money-maker that the network group should deliver 30% of the company's consolidated operating income this year—around $1 billion out of $2.7 billion—even though it accounts for just 10% of the company's revenues, $3.8 billion out of Disney's total $27 billion.


But, between the escalating cost of sports rights and ESPN's grab for more sports and games, the network isn't quite as lucrative as it used to be. Morgan Stanley media analyst Richard Bilotti says ESPN's sports-rights payments have surged from $525 million in 1997 to $2.2 billion this year. That has sliced operating profit margins from a huge 52% to a more modest 20%. He expects operating profit on ESPN's main channel to fall 14% this year, to $575 million, despite a 16% increase in revenues, to $2.8 billion.


Full story at:
http://www.broadcastingcable.com/in...eid=CA294807&doc_id=118032&pubdate=04/28/2003
 

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Quote:
"First, this is basically a simulcast of something I'm already paying a lot of money for," the executive said. "Then they said they need to cover the cost of the hi-def technology. But those costs are going to go down, not up, and their rate card only goes up."
I feel great joy in seeing this in print, this is something I have been saying for quite awhile now!


Tha bove quote speaks volumes about the problem with ESPN-HD and Disney
 

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Richard Bilotti says ESPN's sports-rights payments have surged from $525 million in 1997 to $2.2 billion this year. That has sliced operating profit margins from a huge 52% to a more modest 20%. He expects operating profit on ESPN's main channel to fall 14% this year, to $575 million, despite a 16% increase in revenues, to $2.8 billion.
Disney is paying $4.0 billion for sports rights this year (according to the annual report), so I assume they've allocated $1.8 billion of that to ABC.


I do think the executive referenced in the article does have a point. Short term (next few years), I can understand the costs going up as they produce significantly more events in HDTV, but in my opinion, the ESPN-HD rates should go down, or at least remain stable, over the longer term as the costs for HDTV fall. Years and years from now, when ESPN-HD becomes the primary ESPN channel, then the rate card should go up significantly, but that should be offset by rate declines in the standard channel, if it is to be phased out.
 

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Originally posted by bfdtv
Disney is paying $4.0 billion for sports rights this year (according to the annual report), so I assume they've allocated $1.8 billion of that to ABC. But I found it interesting that even with its price hikes--which generated 16% additional revenue--they will only be making a 14% profit. That implies ESPN would be losing money this year without the recent 20% price hikes (for contract renewals). So much for corporate greed.
Ok, how about corporate stupidity then? Nobody forced them to pay so much for the rights that they wouldn't be able to turn a reasonable profit on their product. They have no one to blame but themselves.

Quote:
I do think the executive referenced in the article does have a point. Short term (next few years), I can understand the costs going up as they produce significantly more events in HDTV, but in my opinion, the ESPN-HD rates should go down, or at least remain stable over the longer term, as the costs for HDTV fall. Years and years from now, when ESPN-HD becomes the primary ESPN channel, then the rate card should go up significantly, but that should be offset by rate declines in the standard channel, if it is to be phased out.
In addition to that, I don't believe costs will go up as much as they say in the short term either. It's not like they'll have two separate productions like it used to be. It will be one unified production with the NTSC feed downconverted from the HD feed. It's not twice the cost but 20-30% more, if that.
 

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"Then they said they need to cover the cost of the hi-def technology. But those costs are going to go down, not up, and their rate card only goes up."
As far as I see it, the costs will keep going up for quite some time if ESPN is to provide the amount of HD coverage that we all want. Costs could go down if ESPN stops buying and/or renting these HD production trucks, however if we want more coverage of more events, then they are going to have to increase the amount the equipment/truck production units they from what they currently have. I can even see a time when they will probably have HD equipment permanently at many sites.
 

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I disagree. Like I said before, it's not like they now have to rent twice the amount of trucks and equipment. They're still doing the same amount of games. The only increase will be the incremental cost of renting HD trucks instead of (not in addition to) SD trucks.
 

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Victor,
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Ok, how about corporate stupidity then? Nobody forced them to pay so much for the rights that they wouldn't be able to turn a reasonable profit on their product. They have no one to blame but themselves.
You quoted the error'd statement I made quickly after skimming the article; ESPN's profit this year is closer to 20% than 14%. I corrected it right after posting.


But as for what they are paying, it's not like they pulled these numbers out of a hat. They've been in competitive bidding with other networks. Certainly, ESPN would like to pay less rather than more, but if FOX, CBS, and TNT are bidding up the price on just about every sports league, ESPN doesn't have a whole lot of choice if they want to remain the premier sports channel. Really, what is ESPN without the NFL, MLB, NHL, and NBA rights?


As far as production costs, I agree with Barnman. Right now, ESPN is doing between two and three HD events per week. If that doubles in the next two years, then their production costs will increase, even when accounting for some decline in the incremental cost of HD production. The incremental cost may not be that significant (in terms of overall sports costs) on an individual basis, but when you are doing several hundred events per year, it adds up.


Of course, you also have the millions ESPN is spending to upgrade their Bristol facility and studios to HD; if they had chosen not to do HD, or to do HD many years from now, they'd probably save millions in infrastructure upgrades. In an interview, ESPN also mentioned that they would be installing HD cameras and equipment in various stadiums over time, so the planned rollout of this infrastructure would add to the total $$$ layout in the short term -- at perhaps several million per stadium?
 

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No question it's costing ESPN money to upgrade to HD. I wonder if they had been more reasonable in previous negotiations, would it make a difference now?


Bottom line is that the market will determine how this all plays out, just as it should. As soon as one DBS company, or a few big cableco's get on board, it will all turn on a dime. No pun intended.
 

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Ken hit the nail on the head. They will all pay up a soon as one big one bites the bullet.


But there will be one or two co. that will hold out longer, ie D*.


When are we getting that new info you promised Ken?
 
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