Fox, NFL Talking Sports Net

Feb 23, 2004  •  Post A Comment

The Fox Entertainment Group is in preliminary talks with the National Football League and some cable operators about creating and launching a national sports television service, said Rupert Murdoch, chairman and CEO of News Corp., which holds a controlling interest in Fox.
Fox already has a major presence in sports through a series of regional networks, but it does not have a single national sports outlet that competes directly with ESPN, which is an affiliate of The Walt Disney Co. The addition of a well-heeled competitor could have a major impact on sports economics. “We’d have to proceed very carefully if we do it. We’d certainly do it with partners,” Mr. Murdoch, the chairman and CEO of News Corp., confirmed in a recent interview.
“We have to consider the capacity of pay television subscribers to pay for two ESPNs,” Mr. Murdoch said. “It will depend entirely on the terms.”
A key element in launching such a basic cable sports venture would be the participation of major cable operators such as Comcast Corp., which has had its own preliminary discussions with the NFL about acquiring the rights to Sunday Ticket. Well-placed sources said Comcast is interested in participating in the formation of a new national sports entity that would give ESPN a run for its money. There is no comment from the NFL or Comcast.
Comcast is already negotiating to acquire Cablevision Systems’ stake in many of the Fox Regional Sports Networks, which would also provide a foundation for a new service.
“We’d love that. They [Comcast] are very aggressive competitors. You get a lot quicker answers from them,” Mr. Murdoch quipped. “There are many things we could do together. We’ll see.”
An ironic twist to these discussions is Comcast’s recent hostile bid for The Walt Disney Co., which relies on ESPN for nearly a third of its overall earnings and 75 percent of its cable networks unit earnings. Theoretically, Comcast could find itself with a stake in competing national sports services with its dominant 22 million cable subscribers.
Based on its monopolistic hold on virtually all of its hometown sport in Philadelphia and the bold move it recently made in Chicago, taking over Fox’s regional sports networks andTV rights to the city’s major teams, Comcast is savvy enough to know what to do with that kind of power. And so is Fox.
Fox’s Regional Sports Networks and Speed Channel already are valued by Wall Street at $3 billion, with the regional Fox Sports networks alone generating more than $200 million in annual earnings.
There is considerable upside growth for Fox Sports, whose ad revenues and affiliate fees are about half those of ESPN. Advertising revenue per subscriber is about 46 cents at Fox’s regional sports networks compared with about $1 at ESPN, and Fox Sports’ affiliate fees average $1.07 per subscriber, compared with $1.75 per subscriber for ESPN, according to Credit Suisse First Boston analyst William Drewry.
ESPN last week scurried to secure new license agreements with cable operators Charter Communications and Cox Communications rather than find itself in a blackout or forced onto pay tiers.
The pacts represent a major compromise and reduction in profits for ESPN, which, in the case of Cox, settled for an average 7 percent fee increase over nine years-far below the 15 percent to 20 percent increase ESPN initially sought. Although the first-year fee increase is 13 percent, it ramps down to only 5 percent in the final years of the new pact, and radically cuts Cox’s payments to ESPN if it loses the rights to Sunday night NFL football telecasts.
ESPN will go from making $2.61 per Cox subscriber today to making $4.38 per subscriber in nine years, over which Cox saves $550 million as a result of resisting ESPN’s initial asking price.
“ESPN still has a fat enough checkbook to keep almost everyone else out of the serious sports rights bidding world,” said a source close to the negotiations.
The fee increase is about what Viacom settled for with Comcast for carriage of its MTV networks. With nearly four times the number of subscribers as Cox, Comcast could seek an even more stingy fee deal with ESPN in its negotiations later this year-just as it has secured with all other major cable programmers based on its newfound scale.
In truth, Comcast’s hostile bid for Disney could arguably be the ultimate attempt to clip ESPN’s overt fee-fixing capabilities. The new agreement with Cox also appears to table for nearly a decade the prospect of moving pricey sports en masse to pay tiers or a la carte services, as Cox had threatened to do.
Cox’s new pact assures a majority of ESPN’s fare will remain on basic cable.
In the end, and under a extraordinary pressure, Disney and ESPN executives probably figured it best to battle in the future under less volatile circumstances.
The concept for a new sports entity has been unsuccessfully floated before. It could take hold this time because of the potent distribution afforded by a partnership involving the largest TV station group (Fox), the dominant domestic satellite provider (News Corp.-controlled DirecTV) and possibly the largest U.S. cable operator (Comcast).
Other cable operators such as Cox also have been casually approached or have expressed preliminary interest in such a venture as a means of countering ESPN’s pricing power.
The loss of all or part of its current NFL rights in the next contract negotiations for their potential new television sports entity could be ESPN’s undoing, since ESPN’s new licensing agreement with cable operators such as Cox is predicated on delivering the same level of popular professional sports.
Such an upset could begin to unfold later this year, after the start of the next NFL season, when the NFL and its television licensees begin renegotiating their existing pacts, set to expire after the 2005 football season.
High-level sources said Fox will aggressively bid for all of the NFL rights it can wrestle away from the competition. Current contracts with ABC, CBS, Fox and ESPN put the collective cost of NFL games rights at about $3 billion, well-placed sources said. ESPN and ABC reportedly pay about $2 billion for their combined NFL rights and have a “first right to respond” provision in their existing pact.
“It’s open bidding. You just don’t know,” Mr. Murdoch said. “We’re waiting to find out what the NFL wants before we do anything.”
“It’s very important for us to do two things: to keep our relationship with the NFL, which is a very good one, and secondly, not to do it at a loss,” said Mr. Murdoch, whose companies took nearly $1 billion in write-downs on their sports contracts in 2002.
“The NFL is entering in a few months into its perennial round of labor negotiations,” Mr. Murdoch said.
“When that’s all through, before the end of the year, they will be testing ideas on all the franchise holders-including broadcasters-and then we’ll turn our attention to it,” Mr. Murdoch said.