Stakes in the regional sports business got higher. Chicago's four major sports teams have cut a deal with Comcast to create a new channel, a move likely to put Fox Sports Chicago out of business.
Comcast SportsNet Chicago is a venture of Comcast, the market's dominant cable operator; Chicago Cubs owner, the Tribune Co.; White Sox and Bulls owner Jerry Reinsdorf; and Blackhawks owner William Wirtz. Fox Sports has local cable rights to all pro baseball, basketball and hockey games—but only until next October.
For the team owners, the deal cuts out the middleman. Now they will get to divide $20 million in annual profit collected by the partners in Fox Sports Chicago: Cablevision's Rainbow Media (which owns 60% and manages the channel) and News Corp.'s Fox (40%).
By cutting Comcast in on the deal, the team owners avoid the mighty struggle that the New York Yankees' YES Network has faced getting Cablevision to carry it. As a bonus, they get experienced management: Comcast already operates regional sports networks in Philadelphia and Washington.
For Comcast, it's a matter of cost control and participating in the upside value of the network.
The teams will charge Comcast and other operators a license fee, but "Comcast Cable pays no more than it paid Fox," said Amy Banse, Comcast's executive vice president of programming investments. "And the escalators over the 15-year term are more moderate than they would have been."
The deal is similar to one in Philadelphia, in which Comcast made local NBA and NHL teams equity partners in a new channel, putting Rainbow's SportsChannel Philadelphia out of business in 1997. In Chicago, Comcast owns systems serving 1.5 million customers, or 80% of the cable subscribers in the DMA. Comcast expects to distribute the channel to a total of 3.5 million Midwest subscribers.
Many other pro-team owners have studied starting their own channels and cut out Fox Sports, but it's difficult. In Chicago, the rights for all four teams expired in the same year—a rare occurrence.
The move strips Fox Sports Chicago of its core programming. Rainbow Media and Fox are putting on a game face about staying on the air after their rights deal expires in October, perhaps by loading up on college sports. Industry executives, however, dismiss that as bluster.
Bear Stearns media analyst Ray Katz had valued Fox Sports Chicago at $266 million until it became clear in September that the team owners wanted to start their own channel. Then he wrote the channel down to zero.
In a shift, Comcast said the channel will be distributed not just to cable operators but to DBS providers as well. Comcast denies its Philadelphia SportsNet to DirecTV, exploiting a loophole in the federal program-access law. (The 1992 law mandates that MSO-owned networks distributed by satellite be offered to DBS rivals. But the Philly network is distributed to cable systems via fiber.)
Comcast executives say they won't repeat that move in setting up the new network. Chicago team owners want the widest possible distribution. And other industry executives say Comcast doesn't want to take the political heat that would be generated but denying carriage to DirecTV and EchoStar.
Comcast can't afford to treat Fox Sports Chicago too harshly. The company has approached Rainbow to buy out its interests in regional sports operations in Boston and San Francisco. Comcast is also using Fox Sports' national feeds for its regional cable networks in Philadelphia and Washington. Further, Comcast could shave the $30 million or so it would cost to start from scratch if it can buy Fox Sports Chicago's local production and sales operation.