Who Picks Up the Tab?

MSOs insist that nets accept greater share of rising programming costs
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Seven of the cable industry's most powerful executives last week reacted like deer caught in the headlights when confronted with one simple query: "Who here had dinner with Bob Iger last night?"

The question about the president of Walt Disney Co. abruptly silenced the chatty executives, who knew that it would lead to a public discussion about the hottest topic in the cable industry: the angry fight between operators and Disney's ESPN.

One by one, six of the seven executives on a panel during the National Cable Show's closing general session raised their hands, acknowledging dining with Iger and his boss, Disney CEO Michael Eisner. Only Cox Communications President Jim Robbins kept his hand low, saying "I had another obligation."

Robbins had, in fact, dropped by the ritzy French-Asian restaurant where Disney was holding court with the likes of Comcast CEO Brian Roberts, Time Warner Cable CEO Glenn Britt and Insight Communications CEO Michael Willner. But Robbins left to join a group of 60 Cox employees for dinner and had breakfast with Iger the following morning.

The Cox chief, of course, is seen as the lead combatant against the rising cost of ESPN and other cable networks, having testified before the Senate Commerce Committee in May. A week before the National Show, Eisner publicly slammed Robbins as a "big whiner" about programming costs. Robbins, in turn, accused Eisner of employing "Goofy accounting" in defending ESPN's cost surge to, in Cox's case, $2.65 per subscriber monthly.

National Cable & Telecommunications Association officials were striving to keep the National Show from being dominated by operators' anger over ESPN's coming 20% annual rate hike and, by extension, rising license fees of all sorts of programming. They instead sought to keep politicians, Wall Street analysts and other attendees focused on more-upbeat messages, such as the promise of HDTV or the profits in video on demand services.

Operators' annoyance over programming remained, though. MSOs believe that competition from DBS and pressure from politicians keeps them from raising basic rates enough to keep pace with the rise in license fees. A handful of sports networks account for about 25% of their basic programming costs.

Mediacom CEO Rocco Commisso blamed ESPN for overbidding on TV rights to pro sports. "None of us have more than a one-month contract with our customers; just because [ESPN has] a long-term contact with us doesn't mean that they should be undisciplined and relying on 20% when they go out and buy these programming rights."

Comcast Cable President Steve Burke broadened his complaints to all sorts of cable networks: "There are very few businesses that say 'my major cost item is going to grow 10, 12, 13, 14%.'" He acknowledged that cable operators and programmers have for years thrived in "a wonderful symbiotic relationship. But it's broken."

Disney and ABC executives are equally frustrated. They see themselves as providing some of cable's most valuable product, in terms of both viewership and the ability to secure subscribers for operators. The 20% annual escalator originated in operators' desire for ESPN to bid pro sports packages away from broadcast networks.

"There's been way too much focus on pricing and not enough focus on value proposition to the consumer," Iger said in an interview, adding that "there's always been tension, based mostly on price."

The schoolyard name-calling by Disney boss Eisner proved a sensitive topic to both Iger and George Bodenheimer, president of ESPN and ABC Sports. "I don't really want to comment on whether it was productive or not," Iger said.

One often-suggested solution is tiering expensive sports networks or selling them à la carte, just like pay movie networks. So, instead of all basic subscribers' paying higher rates, the avid sports fans would bear the high cost of national and regional sports networks.

That would shatter the economic model of sports networks, which would have to hugely increase license fees to cover the loss of subscribers. And, of course, the more expensive the license fees and retail price, the fewer subscribers they would get.

Serving up cable on an à la carte basis, said Joe Uva, president of ad agency giant OMD, speaking on another panel, "would be absolutely devastating for advertisers."

And the suggestion by some small operators that Congress or the FCC should force networks to give operators tiering flexibility is seen as a Pandora's box that could lead to all sorts of cable-price regulation.

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