Don't blame programmers for rising cable bills. Fault cable operators for raising rates to pay for their adventures into other, non-video services.
That's the new message ESPN Chairman George Bodenheimer is hammering as he escalates his fight with Cox Communications over what Cox President James Robbins says are surging license fees. Bodenheimer blasted Robbins's attacks on sports programmers, ESPN and regional network giant Fox Sports in a presentation on cable rates last Thursday in Washington.
The location was no coincidence. He was aiming squarely at Congress, where Sen. John McCain is agitating to force networks and operators to sell channels à la carte rather than in bundles like enhanced basic. Last Friday, the Government Accounting Office delivered a report that McCain commissioned on cable rates.
But Bodenheimer said Cox "continues to grossly overstate" effects of ESPN's license fee, which has been rising 20% annually.
"Cox's effort to blame ESPN for its retail pricing decisions is just plain wrong," he said. "For Cox, this is contract-negotiation rhetoric directed solely at improving its already healthy, and growing, 35% [profit] margin business."
Robbins has been butting heads with ESPN and its parent Disney for months. Disney CEO Michael Eisner publicly dismissed Robbins as "a whiner" last June.
ESPN's new tactic was to hire economics firm CapAnalysis to investigate where a cable subscriber's $40 or so basic monthly cable payment goes. The conclusion: Far more goes to interest expense and capital improvements than to license fees for basic programming.
CapAnalysis Vice Chairman Jeffrey Eisenach noted that cable operators have spent $55 billion upgrading their cable system since 1998, borrowing money against the stream of cash they get from basic subscribers. The bulk of that spending was to enable systems to launch products that create new revenue streams. System upgrades and interest costs to finance those upgrades are driving bills up.
"It is difficult to claim that the primary factor driving changes and cost pressures on cable operators has to do with programming cost," Eisenach said. "It is, in fact, these other costs."
Bodenheimer contends this absolves him of blame in the cost-hike equation. "The primary driver of cable operators' costs," he said, "is the investment they've made in new infrastructure and services."
Robbins responds that ESPN's stiff annual license-fee increases are just, on their face, unreasonable. Cable rates, he insists, are indeed related to the cost of programming delivered, and system upgrades are demanded by subscribers and regulators.
"ESPN's 20% increases are disproportionate to the economic reality of the world today," Robbins said in an interview. "The rapid and unrestrained rise of sports-programming costs is threatening the value of cable television for American consumers."
Cox is starting to focus on educating customers about the fight, perhaps enlisting them. The company launched a Web site, dubbed makethemplayfair.com, with the headline "Cable sports networks are driving up cable prices for everyone."
The site offers Cox's perspective, links to news stories on the fight between cable operators and programmers, and a page from which they can send a form letter to their congressman, with a copy to ESPN and Fox Sports.
Robbins wants the right to put to put ESPN and other high-priced sports programming on optional tiers. That would put the burden of sports programming on fans, much like buying HBO.
ESPN's annual 20% rate hike has ballooned Cox's cost to $2.65 per subscriber monthly. That's five to 10 times the rate commanded by the likes of MTV, CNN and TBS and accounts for 18% of Cox's basic programming costs.
Robbins's contract expires next spring. Cox's contract for a handful of Fox Sports' regional nets expires Dec. 31; Fox wants a 35% hike.