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MSOs, Nets Cited for Hikes

Oct 27, 2003  •  Post A Comment

The battle between cable operators and programmers over who’s to blame for skyrocketing cable rates took an unexpected turn last week, with the General Accounting Office pointing the federal government’s finger at both parties.
In a rapidly escalating public relations war, operators have been claiming that soaring programming costs, particularly those associated with sports networks, are chiefly to blame for rate hikes.
As part of a no-holds-barred campaign to shift the blame to cable operators, ESPN and ABC Sports President George Bodenheimer came to Washington last week to release a controversial study claiming that rate increases are being fueled more by cable’s infrastructure improvements and other operating costs than by programming expenses.
But after Mr. Bodenheimer presented his case in a briefing at the National Press Club, the GAO released its long-anticipated report on the causes of cable rate increases, identifying the key culprits as “programming expenses and infrastructure investment.”
In a troublesome development for ESPN, the GAO report also gave a cautious endorsement to the concept of relieving pressure on basic rates by shifting sports programming to a extra-fee sports tier-a proposal that Cox Communications has advanced in its increasingly bitter fight with the sports network over carriage terms.
“Creating a separate tier for sports channels may be viable because this genre of programming has a loyal base of customers,” the GAO report said.
But that’s a proposal that ESPN has vehemently opposed on grounds that it could erode the network’s advertising base.
Cox is in the fight, it says, because it is already paying $2.61 per sub per month for ESPN in a contract that expires in March 2004. Cox officials say ESPN wants the right to raise the price for the network by up to 20 percent a year in a new contract-a proposal that Cox says could result in ESPN costing more than $10 per customer per month in less than 10 years.
“The rapid and unrestrained rise of sports programming costs is threatening the value of cable television for American consumers,” said Jim Robbins, Cox president and CEO. “ESPN’s 20 percent increases are disproportionate to the economic reality of the world today.”
According to the ESPN economic study, basic cable programming costs have accounted for only about 20 percent of the cost increases for cable operators in recent years. “[Cox’s] annual expenditures in the last four years for capital and overhead far exceed the amount spent on programming,” Mr. Bodenheimer said.
Mr. Bodenheimer also said Cox’s cost for all programming in its expanded basic tier, for which subscribers pay an average of $40 a month, comes to $11 per subscriber per month.
He said Cox derives about $4 per subscriber per month from local ad revenues.
“That would make Cox’s net expanded basic cost about $7 per sub per month,” Mr. Bodenheimer said. “Most businesses would beg for this type of opportunity.”
In its own report, GAO said cable operators’ overall programming costs have gone up by up to 34 percent annually over the past three years, with the costs of sports programming up 59 percent over the same period.
Katina Arnold, an ESPN spokeswoman, said the sports network did not interpret the GAO’s report as an endorsement of a sport tier.
Sen. John McCain, R-Ariz., who requested the study, said he plans hearings to consider the GAO report’s findings.
But Blair Levin, telecom analyst for Legg Mason, said, “The primary impact of the report, in our view, is to give cable operators and programmers new ammunition in their public campaigns to `pin the tail on the bad guy,’ casting the other as the major culprit in causing cable rates to rise.”
Said Mr. Bodenheimer: “We are heartened to see the GAO confirm that FCC data blaming program costs may be flawed, that a la carte is not a panacea and that competition is better than regulation.”
Said a Cox spokeswoman, “The GAO report affirms what we’ve been saying about the rapid and unrestrained rise in sports programming costs.”
Getting in a fresh lick in the dispute last week, Cox announced it has launched a new Web site-makethemplayfair.com-to blast ESPN and Fox Sports over their programming cost increases.
“You are paying dearly for sports TV-like it or not,” says the Web site’s home page, which features a matronly woman wearing a catcher’s mask. “Cable sports networks are driving up cable prices for everyone.”