Cox, ESPN Pound Out Pact

Feb 23, 2004  •  Post A Comment

After a bruising heavyweight bout, ESPN and Cox Communications emerged from the ring last week with a new nine-year carriage deal under their belts.
The deal means neither party risks knockout punches from subscribers or Washington.
Before last week the high cost of sports programming had cable operators complaining and lawmakers investigating. In its agreement with Cox, which had been uncharacteristically public in its negotiations, and in a separate agreement with Charter Communications, ESPN agreed to rate increases far smaller than the 20 percent hikes it had been getting annually for its main channel under its current contracts.
Moderating the increase in programming costs is a key objective for operators.
“We are resolved to protect the value of cable television service for our customers, and with this agreement we believe we made material progress in accomplishing that objective,” said Jim Robbins, Cox president and CEO, in a statement.
But as Sean Bratches, executive VP at ESPN, points out, even smaller increases add up fast because ESPN is already by far the highest-priced network on basic cable, with an average fee of $2.67 per subscriber.
“It’s the perfect deal after the perfect storm,” Mr. Bratches said. “We were seeking to moderate our annual adjustments in exchange for long-term agreements and the rollout of new products and services.”
Mr. Bratches said Comcast’s bid for ESPN parent, The Walt Disney Co., did not affect ESPN’s strategy. In fact, he said, he was in Cox’s boardroom hammering out details when he first heard about the Comcast offer.
Cox’s agreement calls for a 13 percent increase in 2004 and an 8 percent increase in 2005. In the last three years, the increases are 5 percent. Overall, the increases average about 7 percent, according to a Cox spokesman, who noted that while 7 percent is much less than 20 percent, it is still “on the high end compared to many quality networks out there.”
The 7 percent hike is also higher than the 5 percent rate increases cable operators like to pass on to their customers.
If ESPN reaches similar deals with other operators, by 2012 ESPN will cost almost $5 per subscriber per month and, based on its current 88 million subscribers, generate $5.23 billion annually.
The agreements keep ESPN and ESPN2 on the expanded basic tiers for Cox and Charter subscribers. Cox had threatened to move the channels to a sports tier that customers would have to purchase additionally when its deal with ESPN expired March 31.
ESPN also gets carriage (and increasing rates) for ESPN2, ESPN Classic and ESPNews, ESPN HD and ESPN Deportes.
A Cox spokesman said ESPN Classic and ESPN News are carried on digital sports tiers and that the operator already was carrying ESPNHD under a one-year contract. ESPN Deportes will be introduced in selected markets with Hispanic populations, he added.
The spokesman said the fees for all of the other ESPN channels will also rise at a rate of about 7 percent over the life of the new pact.
Some Wall Street analysts were surprised at how well Cox fared after its public fight with ESPN and said the cable channel’s willingness to accept a lower increase illustrates the upper hand that cable operators have in a programming-fee fight.
Aryeh Bourkoff, an analyst at UBS Securities, said that the Cox and Charter deals “indicate that ESPN may be losing some of [its] negotiating power, which may prove beneficial for Comcast in its bid for Disney.”
In addition, the deal could mean bad news for Disney. Douglas Shapiro, an analyst at Banc of America Securities, said ESPN represents about 25 percent of Disney’s earnings before interest and taxes. If ESPN cuts similar deals with other cable operators, its affiliate-fee growth could be cut from previous projections of 13 percent to an estimated 10 percent between fiscal years 2004 and 2010, he said.
Sports Renewals
The impact of accepting lower affiliate fees from cable operators could be minimized if Disney is considering not renewing some major sports contracts.
“Perhaps its willingness to cut this deal indicates the intention to forego some renewals,” Mr. Shapiro said. “But all things [being] equal, we believe that the reduction in affiliate-fee growth has a material effect [on Disney].”
If ESPN were to pass on renewing some of its sports contracts, that could prove problematic for Cox, especially given the length of the ESPN-Cox pact, said Lara Warner, analyst at Credit Suisse First Boston.
“It exposes Cox to the risk that ESPN’s value proposition to consumers declines over time,” she said.
ESPN’s Mr. Bratches maintained, however, that the Cox deal leaves ESPN “very well positioned to continue the growth of our company from a profitability and margin perspective.”
Unlike Cox, Charter’s agreement with ESPN was not about to expire, and Cox conducted its negotiations with the sports network quietly. “As a result of this early completion, we expect to enjoy meaningful financial benefits in the latter portion of 2004,” Carl Vogel, Charter president and CEO, said in a statement.
Mr. Bratches said ESPN prefers to negotiate with customers privately, but declined to say whether Charter’s tack earned it a better rate than Cox. “We certainly wouldn’t disadvantage our friends at Charter,” he said.
A Charter spokesman declined comment on the details of the agreement with ESPN.