Cox, ESPN Brawl Gets Nasty

Eisner calls Robbins a 'whiner'; Robbins accuses Disney of 'Goofy math'

The brawl over ESPN's ballooning license fees broke out into a round of schoolyard taunts between CEOs, with Disney's Michael Eisner deriding Cox's James Robbins as "a whiner" and Robbins accusing Eisner of using Disney-style "Goofy math" in attacking cable operators.

ESPN's Magic Dollar
ESPN says cable ops offset their $2-per-sub monthly license fee with $1 per sub worth of local ad sales. It counts in more than just ad sales to arrive at that value:
2002 2003
Source: ESPN
Net cash sale48¢52¢
12% sales commission
20% used in marketing inventory11¢12¢
Halo effect (NFL only)26¢26¢

Eisner is fuming over Robbins's jihad against Disney and its 80%-owned sports network, a campaign that has included public attacks, filings attacking Disney in the FCC ownership-rule proceedings, and newspaper op-ed screeds. And the worst in the eyes of Eisner, Robbins, testifying at a Senate Commerce Committee hearing, called for regulation of sports-network license fees.

Asked about Cox's complaints at an investor conference sponsored by Sanford Bernstein & Co., Eisner was blunt: "Now Cox is the big whiner. He's here?" Told that Robbins was appearing later in the week, Eisner responded, "Good, he'll whine, he'll whine about me, he'll whine about us."

That's true.

Robbins and other operators are furious at ESPN's license fees, the highest of any basic cable network. Already exceeding $2 per subscriber monthly (vs. 35 cents for top-rated network Nickelodeon), ESPN is set to take its annual 20% rate hike Aug. 1. Programming costs are increasing at a rate exceeding operators' ability to raise their basic rates, Robbins and others complain.

"Why he's whining now is beyond me," Eisner said. "These are monopolies. They have incredible margins. They charge $40 for basic; the programmer suppliers altogether get $11. ESPN's going to get $2." After accounting for local ads that systems sell on ESPN, operators "get $1 back [per sub per month] in local advertising."

Robbins was unsurprisingly testy when he made a presentation two days later, contending that Eisner is distorting the numbers. "I for one would like to see the Goofy math gotten rid of. It's just not true."

Robbins said his ESPN rate is not the $2 per subscriber monthly that ESPN executives tout as the industry average. His cost is $2.15. "That will go up to $2.65."

Also, ESPN executives contend the local advertising avails that operators get to resell and Eisner says are worth $1 per sub per month generate just 30 cents after deducting costs like sales commissions.

Robbins wants to put ESPN on a tier and give consumers the option not to buy, rather than charge everyone. Cox research shows, he said, that 24% of our customers will "pay up and pay big."

He further contends that ESPN is 18% of his basic programming costs, but attracts just 3% of Cox's average viewership.

"Somewhere in this world is an imbalance," Robbins said, "I want to be sure that this erroneous information coming from Mickey Mouse doesn't stink up the street."

So how does ESPN count $1 in local ad sales offsetting its license fee when Robbins counts 30 cents? According to Jeff Siegel, ESPN vice president of affiliate ad sales and marketing, it includes much more than the cash that MSOs book from ad sales: for example, such elements as how much operators use the spots to promote things like cable-modem and pay-per-view sales. Based on data from consultants and industry surveys, Siegel estimates that, in 2002, commercials generated from selling ESPN local avails were worth 48 cents per subscriber. He then adds an estimated average 12% commission to inside salesmen, or 6 cents. (ESPN does not account for additional costs of commission paid to ad agencies.)

That comes to 54 cents. Then Siegel estimates that operators use 20% of their spots as "marketing inventory" for their own products. "That has a value," he said, estimating it at 11 cents.

But Siegel also believes that MSOs should count ESPN's "halo effect" in local ad sales. He says he has a Cox presentation to one local advertiser "where they bundle 500 spots on other networks with NFL spots on ESPN." He estimates that ad time—limited only to spots packaged with ESPN's NFL games—as bringing in 26 cents.

So that's 91 cents for 2002. ESPN then assumes 8% growth in ad sales (though not the halo effect) and arrives at 96 cents in value of local ad avails on ESPN.