ESPN's retreat from its aggressive rate hikes will keep parent company Disney looking good, but only for year or two. After that, the new deals hammered out last week could crimp its growth.
The sports network resolved a caustic license-renewal fight with MSO Cox Communications as Disney CEO Michael Eisner is struggling to dispel harsh criticism of how he runs the company. The new terms signed by Cox, and by Charter Communications as well, give ESPN 7% average annual rate increases over the next nine years.
There's a nice kick in the first year: 13% according to one industry executive. But that growth rate drops off quickly to 8% in the second year and as low as 5% in later years (virtually nothing compared with the 20% it gets now).
The lower increases present a big problem. Since ESPN is far more dependent on license fees than other ad-supported cable networks, sustaining financial growth will require outsized boosts in ad sales. Further, larger operators like Comcast, Time Warner, and DirecTV will get the same or better terms.
ESPN is such a huge source of profits for Disney that the slowdown should be noticeable in companywide results—though not until 2006.
"This is totally being done for short-term results," said Fulcrum Capital media analyst Richard Greenfield. "It looks good in the first year, and Disney worries about the other years later."
One Comcast adviser, obviously biased because Comcast is trying to acquire Disney, said that, for this deal, Disney is "burning the furniture"—in other words, disregarding problems the deals create down the road.
Other analysts disagreed, saying the terms could have been worse. "I was prepared for operators to start dropping some of ESPN's networks," said Sanford, Bernstein & Co.'s Tom Wolzien.
ESPN executives said they began easing their rate demands in December, before Comcast launched its hostile bid and before dissident shareholder Roy Disney's campaign against Eisner went into full swing.
ESPN Executive Vice President of Distribution Sean Bratches said Disney's corporate trouble "had nothing to do with it. This is an ESPN business, negotiated by ESPN people." He added that "everybody got what they wanted in this deal. We wanted ESPN, EPSN2 on expanded basic; at Cox, they were looking to moderate their rate adjustment."
Cox President Jim Robbins sees the deal justifying his 10-month public campaign against ESPN, which included testifying before Congress and exchanges of newspaper ads in Cox markets to sway consumers.
For months, nervous analysts peppered Disney with questions about whether Cox would drop ESPN and its sibling services.
Charter got a bonus. Since its old deal didn't expire until 2005, the company avoids a 20% increase slated to hit in August.
The deal ESPN had sought would have driven its license fees up to $5.12 per subscriber monthly in 2008 and to more than $8 by 2012. Instead, its fee will be around $3.90 in 2008 and $4.60 in the final year of the deal.
The deal keeps ESPN and ESPN2 on expanded basic and carriage of ESPNEWS and ESPN Classic on higher tiers. Cox and Charter agreed to carry of ESPN's new 24-hour Spanish-language network, ESPN Deportes, in heavily Hispanic markets.
For Robbins, the fight is aimed at sheltering cable subscribers from rate hikes driven by ever-increasing programming costs. "This is a significant step in the right direction."
For ESPN, it might have been the longest game it has ever played.