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ESPN's Face-Off Over Fees


As host of a lavish reception for advertisers in New York's Lincoln Center on Oct. 29, ESPN President George Bodenheimer was at his political best. Skillfully working a cavernous hall full of some of the deepest pockets on Madison Avenue, the 45-year-old Bodenheimer posed for pictures with execs in front of the actual Stanley Cup and trotted out ESPN's on-air star Chris "Boomer" Berman. He could not have been farther from the lonely stretches of Texas highway he traversed 20 years ago as a rookie executive trying to get local cable systems to sign up for the little-known 24-hour sports network.

Today ESPN is an empire unto itself, with a top TV, radio, magazine, and Web presence. It has become one of the most lucrative assets in the Walt Disney Co.'s (DIS) flagging portfolio, with an estimated $3.3 billion in yearly revenues. But suddenly, Bodenheimer is in the midst of a showdown with the very distributors he so aggressively wooed in the early days. It's adding up to the biggest crisis the network has faced in its nearly 25-year history, one that will require all of Bodenheimer's charisma to smooth over.

In a first for even the hard-edged cable business, a pricing brawl has broken out on the public stage over the past few weeks. Cable operators, led by Atlanta-based Cox Communications Inc., charge that they are being gouged by sports programmers like ESPN, which are jacking up prices each year for the right to carry their channels. Heading into contract talks, Cox has threatened to put ESPN, cable's priciest channel by far (table, page 68), on a separate premium tier, or even yank it altogether. A normally understated Bodenheimer is shooting back; he recently called a press conference in Washington to accuse Cox of scapegoating ESPN, rather than acknowledge its other huge costs.

"OUT OF WHACK"

How this feud plays out in the coming months could cast a shadow over the wildly successful sports network. For one thing, ESPN is due to renegotiate contracts over the next two years with carriers that together control nearly half of the network's 88 million subscriber homes. A hit to ESPN would certainly ripple through Disney, which relies heavily on the unit's robust financials. The battle could also affect the future of televised sports and how sports coverage is delivered to consumers. Already, interest in the topic of cable prices is spreading. The General Accounting Office just released a report on subscriber rates, blaming sports programming for a big part of the increases. And Senator John McCain (R-Ariz.) is set to hold a hearing on cable prices on Nov. 13. The public sparring, says Richard Greenfield, an analyst at Fulcrum Global Partners, could stir a "populist uprising" leading to government intervention.

Cox, the No. 4 operator, with 6.3 million subscribers, is leading the charge among operators. CEO James O. Robbins says Cox can't afford the 20%-a-year fee increases ESPN is asking for (industry averages are about 6%). The network now accounts for 18% of Cox's programming budget, the costliest of its slew of channels, says Robbins. Cox's current five-year contract with ESPN expires this March. "The prices have just gotten out of whack," says Robbins. Hoping to whip up support among viewers, Cox launched a Web site -- makethemplayfair.com -- targeting ESPN and Fox Sports (FOX), the second most expensive cable channel.

Bodenheimer counters that the cable companies are taking aim at sports programming as a way to disguise their own capital-spending costs that get passed on. "You can't talk about price if you don't talk about value," he retorts. "We are much more valuable than any other cable network." ESPN helps retain cable subscribers, many of whom sign up just so they can get the channel, he says. The network also helps operators sell more local advertising than any cable outlet, driving up to 20% of the industry's $4 billion in annual local sales. Cox customers' monthly fee, now at about $40 for a basic package, is bloated by overhead and capital expenditures, not programming costs, Bodenheimer contends, a consequence of operators' costly system upgrades. Worse yet, he insists, putting the sports juggernaut on a separate tier or dropping the network would only be disastrous for Cox, driving its customers to satellite services.

A HOUSE OF CARDS?

Bravado aside, the ESPN brass is taking Cox's threats seriously. They know all too well that new contracts are due in the next two years with Cablevision Systems (CVC), satellite service DirecTV (GMH), and Comcast Cable Communications, the nation's No. 1 operator, with 21 million subscribers. Whatever Cox can gain, "Comcast will be able to accomplish much more," because its size gives it greater clout, says Fulcrum's Greenfield.

Bodenheimer, also head of Disney's ABC Sports, may be the public face in the brewing cable fight, but Disney execs are following it closely. Bodenheimer reports regularly to Disney President Robert A. Iger, who told analysts recently there is no way Disney would ever allow ESPN to be tiered. Even though ESPN's own costs have grown because of escalating prices for rights contracts with the pro leagues, Iger and CEO Michael D. Eisner still value ESPN highly. That's because the network delivers an estimated $700 million in cash flow a year. It has also given them leverage to get cable operators to distribute other Disney channels, such as the struggling ABC Family Channel. "A problem with ESPN could be a real house of cards for Disney," says one media executive.

That Washington could get in on the act is now raising the stakes for all the players. Few topics are quite as incendiary for consumers as their cable bill -- and the politicians know it. Powerful ESPN, as well as Fox Sports, could become lightning rods in a debate over whether TV viewers should have à la carte channel choices on cable. Why pay for something you don't watch? It makes sense to a lot of people, except to folks running businesses like ESPN. Their biggest fear: inability to sell advertising on a big scale to the fragmented audiences created by tiering. The ad losses, suggests the GAO, would be made up for by higher monthly bills.

Bodenheimer and Cox's Robbins are both scheduled to testify before the Senate Commerce Committee on Nov. 13, which is certain to add to the spectacle of their public jousting. If Congress sinks its teeth deeper into the fee fight, Bodenheimer might just find himself wishing for those old days on the road. By Tom Lowry in New York and Ronald Grover in Los Angeles


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