Malone’s a la Carte Menu

May 19, 2003  •  Post A Comment

Liberty Media Corp. Chairman John Malone used his appearance during an annual conference for investors last week to wade into the escalating debate over a la carte pricing of cable programming. Mr. Malone saved his most pointed remarks for sports channels, which have stirred controversy with large rate increases, especially ESPN, a division of ABC and Disney. “It really needs to end. Somebody needs to say `No’ to the underlying sports machine,” Mr. Malone said. “Something has to be done to break that chain, by Congress or by the courageous Brian Roberts [Comcast president and CEO].”
His reference was to the struggle between Comcast Corp. and ESPN, which have been in contention over a proposed rate increase. He said it would be best if the companies could work out a solution, because any government action to force adoption of a la carte pricing could have a devastating effect on the bottom line of companies like ESPN, and in turn, Disney.
Industry experts estimate that ESPN generates about $1 billion in annual cash flow for Disney. ESPN and all of its branded services are expected to generate $1 billion in operating profits this year on about $4 billion in revenues. About $2.4 billion will be from affiliate license fees, with most of the remainder coming from advertising sales, analysts said.
George Bodenheimer, chairman and CEO of ESPN and ABC Sports, told TelevisionWeek that all cable players risk potential adverse financial impact. “I think it is a serious financial issue for the entire industry,” he said.
“A broad move to a la carte risks upsetting the economic models of every cable network and, therefore, cable operator,” Mr. Bodenheimer said. “With cable charging $40 a month on the average and ESPN at $1 (not including local ad revenues), there is no basis to take that step.”
ESPN’s contract with MSOs prohibits an arbitrary move to a la carte pricing. Instead, according to sources, Comcast, the largest MSO, has reduced the license fees it pays ESPN by an estimated 10 percent, based on a contractually allowed adjustment in connection with its newfound scale. ESPN has offered instead to extend its contract term with Comcast to include more time and services-an offer Comcast and other cable operators are rejecting. Comcast and ESPN decline comment on their tense talks about the matter.
In his remarks, Mr. Malone said a la carte pricing would jeopardize ESPN’s business model. “End of story. End of Disney,” he told investors, adding that in retrospect he wishes he had imposed a la carte pricing on ESPN, and set an industry standard, when he had a contractual window to do so as the head of TCI Cable in the mid-1990s, before he sold to AT&T.
Mr. Malone advocated that any cable service that charges more than 50 cents more per subscriber per month be subject to a la carte pricing.