SQUEEZE PLAY

As pro teams launch their own sports networks, some hit it big, but many strike out. One loser: fans.
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The Big Hitters

Around the country, owners of pro basketball, baseball and hockey teams are shutting out their onetime partners—regional sports channels—and starting up networks of their own. With sports rights more valuable than ever, owners are taking on new financial risks and striking alliances with cable operators to keep the TV profits for themselves. Blame George Steinbrenner's hard-won success with his New York Yankees and the YES network. Now, with other owners chasing similar riches, big regional players Fox Sports and Cablevision Systems are taking a hit. If a new channel is added, viewers can end up paying more. And if cable and satellite systems don't agree to carry the channel, fans are often left in the dark.

In Denver, pro basketball has hit a new low this season: Cheap shots, trash-talking and nasty public fights over money have become a common spectacle for fans—and the Nuggets have yet to play their first game.

The boorish behavior has little to do with players. It started when Denver Nuggets owner Stan Kroenke unveiled his new regional sports network, Altitude, effectively cutting out middleman Fox Sports Net Rocky Mountain. Now Altitude, which launched Sept. 4 to carry Nuggets and other sports programming previously carried by the Fox channel, has waged war with the two biggest carriers—cable giant Comcast and satellite firm DirecTV—leaving nearly 1 million Denver-area fans in the dark for about two months.

Kroenke has fought battles in print and on radio. In one local newspaper ad slamming the nation's largest cable operator, an image of Nuggets star Carmelo Anthony is blocked by a large, bald head. The copy reads, "It promises to be a great Nuggets season and Comcast is blocking it." The tagline: "What's up with Comcast?"

Says David Ehrlich, COO of Altitude owner Kroenke Sports Enterprises: "We have a plan, and we're sticking to it."

Around the country, owners of pro sports teams are shutting out regional sports networks, their onetime partners in supplying local games to viewers. Now those partners are considered middlemen, and in New York, Chicago, Memphis and elsewhere, owners are taking their balls and pucks and going home to strike out on their own.

At a time when sports rights have never been more valuable, team owners are tired of watching the two biggest regional sports players—Fox Sports and Cablevision Systems—film their
games to build a $1.2 billion empire. "It's safe to say that almost every team owner is looking at it," says Steve Greenberg, a sports investment banker with Allen & Co. who is helping team owners set up cable networks. "For a long time, many owners thought they were only good at one thing, running teams. They're changing their minds."

But such regional networks are a risky gamble. While the new networks have made millions for such teams as the New York Yankees, several—notably the Minnesota Twins—have struck out with steep losses after the networks folded. Aside from huge startup costs, owners can waste money if their teams fall flat or if cable operators refuse to carry the games.

And team owners often end up annoying fans. In Denver, fans who didn't subscribe to satellite service EchoStar missed the Nuggets' entire pre-season because it was blacked out. "This has been a real ugly deal all the way around," says Devon Padgett, a 28-year-old Nuggets fan from Denver. "All the fans are stuck in the middle of it, and it couldn't be more frustrating." At press time, Altitude was close to ending its two-month blackout by finally signing with DirecTV and Comcast.

Indeed, subscribers may be the biggest losers as owners go solo. Often, fans aren't able to see games because contract negotiations have stalled, and sometimes bills go up as operators add another regional network, which can cost them about $2 per customer monthly.

Blame George Steinbrenner for the spate of new networks. Other team owners want more than anything to replicate the New York Yankees managing partner's success with YES Network. Cablevision, whose own networks carried the Yankees and New Jersey Nets games, initially boycotted the YES network in 2002, angering fans who couldn't see their teams on television. After about a year of a bruising battle that required the intercession of the New York and New Jersey governors, Steinbrenner won in arbitration.

"The whole regional sports network landscape has changed," Cablevision Systems CEO James Dolan said Friday in an interview with New York sports talk station WFAN(AM). "It changed with the Yankees."

Today, YES, now teamed with basketball's New Jersey Nets and private investors, has an estimated value of $1 billion, and the Yankees own around 35%. Consider that just months before starting YES, Steinbrenner was negotiating to sell 70% of the team for just $360 million. The buyer: Cablevision, which was paying $50 million annually for TV rights to feed its MSG Networks.

Owners reason that by starting up networks, teams can grow their fan base and promote games on-air. The networks with the best odds of success secure both baseball and basketball rights. Baseball teams get two to five times the rights fees of basketball teams. Hockey's appeal is minimal, and the NHL lockout of hockey players means no games this season so far. (NFL teams don't have local football rights available.)

But starting a new sports channel is no slam dunk. Billionaire Charter Chairman Paul Allen, who owns basketball's Portland Trailblazers, shut down the team's new network after just 16 months. Banking billionaire and Minnesota Twins owner Carl Pohlad surrendered and shut down his Victory Sports One
in May after just six weeks of carrying Twins games; Minneapolis-St. Paul's four major cable operators and DirecTV and EchoStar all balked at the monthly subscriber fee Victory wanted, even after Victory lowered the price. The Twins dropped the network and signed up with Fox Sports Net North for eight years. ESPN West, which was to be anchored by parent company Disney's Anaheim Angels and Mighty Ducks, never got off the ground.

Startup costs for a new network can be huge. Between building a studio, covering games and securing TV rights, operating costs can run as high as $50 million annually, and it's hard for a standalone network to sell commercials to national advertisers. Advertising on regional sports networks, which Kagan Research estimates grew from $414 million in 2002 to $510 million in 2003, typically generates just 20% of a regional network's revenues. License fees from cable and DBS systems account for the rest. But since regional nets' profit margins also run about 20%, any snag on the advertising side crushes profits.

In most cases, if the new channel is even a moderate success, one of the 19 Fox Sports networks suffers a blow. Fox's broadcast network scored strong ratings with the World Series, but its networks airing regional games are vulnerable. The worst damage from the team owners is occurring in markets where Cablevision runs the show. The company is a 60% owner in six of the Fox Sports-branded networks, including those in New York and Chicago.

In New York, a planned Mets baseball channel could force the shutdown of Fox Sports New York, which one Wall Street analyst valued at $400 million—and that's if it doesn't lose the Mets. Last week, MSG Networks, the second Fox-owned network in the market airing Mets games, filed suit in New York State Supreme Court against the Mets, alleging the team prematurely signed a deal to launch a new network with Comcast and Time Warner in 2006.

"It is really about eliminating the middleman," says Jerry Reinsdorf, chairman of baseball's Chicago White Sox and basketball's Chicago Bulls. "Instead of dealing with Fox Sports Net, who then dealt with Comcast, we are now dealing directly with Comcast. It's really that simple."

Years ago, Reinsdorf and the owners of the Chicago Cubs and the Blackhawks maneuvered to have their rights deals with Fox Sports Chicago expire simultaneously. To head off a fight, the team owners approached Comcast, which controls 60% of the cable and satellite homes in Chicago, and offered it a part of the venture. With Comcast as a partner, "there's the certainty of knowing that you have the deal done," says investment banker Greenberg, who represented the teams in negotiations with Comcast. Comcast SportsNet Chicago debuted Oct. 1 in 1.5 million homes with rights to the Bulls, White Sox, Blackhawks and Cubs.

Fox Sports Chicago, which at its peak had generated $20 million in profits, is now subsisting on sports from Midwestern colleges.

In many markets, Comcast, the nation's largest cable operator, is actively partnering with teams. In return, the cable operator hopes to control sports costs and snare a source for its new video-on-demand platform. Comcast has regional networks in Philadelphia, Chicago and Washington, D.C., and is starting channels without game coverage around teams like the Atlanta Braves and Dallas Cowboys. "We have a keen interest in replicating our experience in as many of our other major markets as we can," says Amy Banse, executive vice president of programming investments at Comcast.

Fox Sports President Bob Thompson isn't alarmed at the defections. He says he wants to keep good relations with pro-team owners, but Fox Sports has a definite cost ceiling. "We're not going to simply pay any
rights fees for teams," he says. He notes that, in Denver, Fox Sports increased its payment to the Colorado Rockies and bought 12% of the team earlier this year.

Even so, Thompson expects Fox Sports Rocky Mountain to turn a profit for the first time since 1997, in part because of a stronger ad market and partly because the network won't bear the cost of basketball and hockey. "The Nuggets' being the worst basketball team during that seven-year period didn't help," Thompson says.

Still, the mere threat
of starting a network can give owners leverage in negotiations with regional sports channels. Tom Hicks, managing partner of baseball's Texas Rangers and hockey's Dallas Stars, spent a year posturing that he was going to start his own network. Instead, he cut a new 15-year deal with Fox Sports Net Southwest. It pays Hicks—a founder of giant buyout firm Hicks, Muse, Tate & Furst—more than $40 million a year now. That's more than the Cubs and White Sox got in their last Fox Sports Chicago deal—combined.

Says Jeff Cogen, current COO of the Texas Rangers, "We probably could've gotten robust distribution, but it was there already, we didn't have to reinvent it."

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