It agrees to skimpier rate hikes in nine-year contracts with cable firms Cox and Charter.

February 20, 2004 Friday

Los Angeles Times

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From LexisNexis

Walt Disney Co.'s ESPN network signed long-term distribution agreements with two cable operators Thursday, accepting much skimpier rate hikes than TV's sports titan has enjoyed in the past.

The deals with Cox Communications Inc. of Atlanta and Charter Communications Inc. of St. Louis lock in annual rate hikes that will average less than half the 20% annual boost ESPN has demanded for the last five years. At the same time, they give the sports channel added stability by guaranteeing an unusually long nine-year term.

The pacts appear to defuse the cable industry's escalating war of words over ESPN's runaway prices. Cox — which serves San Diego, Santa Barbara, Phoenix and Las Vegas, among others — had threatened to drop ESPN from its basic service packages rather than swallow another deal from the Disney unit with big rate increases.

"This is a significant step in the right direction," said Cox President and Chief Executive Jim Robbins. "It doesn't fix the problem of the high costs of sports programming, but it's a start."

ESPN is 80% owned by Burbank-based Disney, with Hearst Corp. of New York holding the balance.

Analysts were quick to see the agreements as evidence that Disney was trying to mend industry fences as it confronts an unsolicited takeover bid by Philadelphia-based cable giant Comcast Corp. Disney board members this week rejected Comcast's $50-billion bid as too low.

"Disney is probably being a little more proactive to show they are perfectly capable of running their company," said David C. Joyce, media analyst with Miami-based investment banking firm Guzman & Co. "It's one less arrow in Comcast's quiver."

Richard Greenfield, an analyst at Fulcrum Global Partners, wrote in a report: "ESPN probably gave in to the cable operators to end fears of ESPN being dropped by major cable operators in the coming months, to help the company appear stronger in light of the current hostile takeover bid by Comcast."

But ESPN President George Bodenheimer said the deals were not related to Comcast's bid.

"I'm very pleased with the results of these negotiations," he said in an interview. "There's plenty of horsepower in this company to reinvest and build on our bottom line."

Thursday's deal with Cox, worth more than $2 billion, gives ESPN an average 7% rate increase over nine years. Analysts familiar with the deal said the first five years would bring double-digit rate increases, starting at about 13% for the first year. The increases taper down to about 5% a year toward the end of the term.

ESPN had been charging Cox $2.61 per subscriber per month, or about $188 million a year, under a contract that expires March 31.

Terms of the Charter deal weren't disclosed, but some analysts believed they were similar to the Cox carriage deal.

The repercussions of smaller rate increases will likely be felt beyond the Bristol, Conn.-based sports network. Some sports leagues, such as Major League Baseball and the National Hockey League, may now have a more difficult time winning top-dollar increases from the networks when they renegotiate their TV rights packages, for instance.

"There's no question that ESPN will be paying less to some of the sports leagues than they have in the past," said Lowell Singer, media analyst with S.G. Cowen Securities. "That will make it harder for some of these leagues to sustain their salary structures."

Under the Cox deal, ESPN and ESPN2 will remain part of the company's expanded basic package. The cable operator had threatened to kick ESPN out of its basic package and move it into a higher-priced package. That would have dramatically reduced the number of homes that receive ESPN, thus compromising the network's advertising rates.

In stretching the contractual term to nine years, up from five years in the last round, the cable companies also locked in long-term agreements for other ESPN offerings, such as ESPN Classics and ESPNews.

The longer term should help ESPN navigate a fast-changing media landscape that has seen an avalanche of fragmentation in recent years.

For two decades, ESPN was the primary source of cable sports entertainment, but the last five years have witnessed the emergence of numerous niche competitors, including Comcast's Golf Channel and the independent Tennis Channel.

Charter also signed up for ESPN High Definition service and the Spanish-language ESPN Deportes, while Cox extended its deal for ESPN HD and agreed to carry ESPN Deportes.

Associated Press was used in compiling this report.