Negotiations are expected to get under way as soon as this week between Cablevision Systems and the YES Network, which has rights to New York Yankees baseball games. The talks, at the highest levels of each organization, are an attempt to secure a negotiated settlement before they are forced into binding, court-mandated arbitration in October.
The negotiations are being closely watched throughout the cable and sports industries because the talks hinge on the red-hot issue of carrying major sports on basic cable, as opposed to offering them on a premium tier or a la carte.
Last year, Cablevision, the largest system operator in the New York market, refused to carry Yankees games over the conflict. While Cablevision lost nearly 50,000 subscribers in the process, it held its program cost increases to 10 percent, analysts said. Under a compromise made on the eve of the current season, Cablevision is offering YES as a premium service alongside its own MSG and Fox Sports NY channels-a move that is estimated to cost the cable operator about $25 million. YES cannot begin turning a profit without that added East Coast distribution.
New York mayor Michael Bloomberg recently appointed Tom Rogers, former Primedia chairman and CEO, and former Madison Square Garden chief Bob Gutkowski to negotiate a deal between the parties. Cablevision is expected to be led by Chairman Chuck Dolan, while veteran cable executive Leo Hindery is chairman of the YES Network.
The outcome is expected to set a precedent, and could strongly influence the relationship between large multiple system operators and Disney’s ESPN Network, which has been seeking subscriber fee increases to offset rising rights costs but has run into strong industry opposition.
“The biggest challenge companies face is how to position themselves during times of change,” Mr. Rogers said about broader industry trends, refusing to discuss any of the issues about the YES-Cablevision dispute. “The hard part is not so much the role they are playing now or in the future when it’s all decided, but getting through these transitions.”
Programmers prefer that sports be carried on basic cable so they reach a wide audience, making them more attractive to advertisers. MSOs want to offer sports on a tier, which would allow them to pass along the added costs.
So far the battle between Cablevision and YES has proved to be a “no-win” for all concerned, according to Bernstein Research analyst Craig Moffett. “The transition to an a la carte tier for the YES Network illustrates an unpleasant dilemma in the industrywide look to a la carte sports tiers as a potential solution to programming cost hikes: Nobody really wins,” Mr. Moffett said.
The 68 percent drop in second-quarter operating income Cablevision reported this week largely reflected the costs and losses associated with offering YES as a premium sports service. The costs incurred by Cablevision to make the transition (an estimated $16.5 million plus legal fees) are just the beginning. Cablevision’s Telecom Group also incurs incremental programming expenses for all 1.2 million subscribers receiving YES, only 130,000 of whom are paying for it. The remaining 1.1 million subscribers get it for free as part of Cablevision’s existing premium tier.
Cablevision’s Madison Square Garden Network loses an estimated $26 million in cash flow from having nearly 3 million subscribers shift to a tiered arrangement where only about 1.2 million subscribers pay fees to MSG and the regional Fox Sport NY. An estimated $2 million in annual advertising revenue also is lost in the process, Mr. Moffett said.
Mr. Moffett’s initial modeling hints at the kind of dire economic impact a la carte and tiered sports can have for all industry players. Some analysts estimate that the $1 billion in cash flow ESPN generates annually for Disney will be at risk at a time when the media giant needs income to offset heavy losses at its ABC TV Network and theme parks.
ESPN has been in delicate contract negotiations about fees and tiers with Comcast Corp., the nation’s largest cable operator. ESPN’s existing contracts with cable operators prohibit the arbitrary offering of ESPN programming on a tiered or a la carte basis as a way to address losses and price pressure.
Comcast has been using its increased size since acquiring the AT&T systems to reduce programming costs. So far it has achieved an estimated $270 million in savings by rolling back program license payments by roughly 10 percent.
Cox Communications President Jim Robbins has indicated he might be willing to remove the all-sports network from his systems before they submit to another round of 20 percent fee increases to carry ESPN as a basic service. “We cannot keep going down the sports escalation path. Everyone knows it,” Mr. Robbins said. “At some point someone has to say this is enough.”
Mr. Moffett estimates that Cox pays about $156 million annually to ESPN and will pay $29 million more annually after the next round of fee hikes. That is about 13 percent of Cox’s total programming costs, or about 3.5 percent of its total operating budget, Mr. Moffett said.
Given its willingness last year to black out the YES Yankees baseball broadcasts over similar issues, Cablevision also is expected to play hardball when it soon begins negotiating a new ESPN contract. DirecTV, soon to be majority-owned and -controlled by Rupert Murdoch’s News Corp. and its Fox Entertainment Group, also will soon be renegotiating its ESPN license fee.
Cablevision, which is under investigation by the Securities and Exchange Commission, declined comment. However, it was very vocal last year about the need to preserve the right of cable subscribers to pay hefty fees only for programming services of their choosing.
Mr. Hindery argues the single standard is “the fair market value of programming” as it applies to 27 other regional sports networks and 150 other cable channels in basic cable that receive zero to $3 per subscriber from cable operators. “Where the industry is hypocritical on this whole issue is that they don’t mind basic for stuff; they just don’t want it for your stuff,” Mr. Hindery said. “We believe in parity regardless of ownership and that all vertical and nonvertical programmers should receive the fair value of their programming. And the industry should be content-neutral in their actions.”
“We would be thrilled to have facilitation or our own negotiations lead to a settlement in advance of arbitration, barring which, we’ll wait for the arbitration,” Mr. Hindery said.