It's not often that a cable operator asks for more regulation, but cable operators annoyed at the cost of ESPN are starting to lend support to Charter Communications Chairman Jerry Kent's call for help from Congress.
Industry executives have generally viewed Kent's recent requests for the federal regulation of sports networks as, at best, quixotic and, at worst, insincere.
But ESPN's push for a 20% license-fee hike—the third in three years—to around $1.20 per sub monthly is provoking operators who are typically adverse to scrutiny by Washington. At last week's NCTA convention in Chicago, however, Kent's discontent was starting to catch on.
AT&T Broadband Chairman Dan Somers and even a resistant Insight Communications Chairman Mike Willner publicly expressed support for the idea. Other operators concur privately.
"I would support regulatory action," Somers said. "I think sports has to step back and look at how it manages itself."
The only other topic competing with ESPN-bashing for dominance at the show was how poorly the show itself was performing. Attendance was off about 20% and there was lots of unused space in the middle of the exhibition floor, monuments to dotcom or tech companies that had canceled.
Kent said that the cost of sports rights and, hence, TV networks licensing those rights is so onerous to cable subscribers that Congress should intervene. He called for a law that would let operators treat sports networks the same as Home Box Office or Starz, selling them à la carte to sports fans rather than in basic tiers for which every subscriber pays.
Such laws would apply to any network that licenses rights for any sports exempt from antitrust rules, not just baseball's famed 1922 antitrust exemption but also the 1961 Sports Broadcasting Act covering most major pro sports.
That exemption allows teams to pool individual broadcast rights and divide the proceeds among the teams. Media executives say that dramatically increases the money that leagues raise for TV rights.
Only ardent sports fans, which Kent puts at 10% of all cable subscribers, would pay for the increasingly expensive product.
"When I stay up at night, I worry about two things," he said. "One is my kids; the other is sports-programming costs."
Kent has been embroiled in several disagreements with sports networks. Fox Sports threatened to yank one of its Midwestern regional nets off Charter in a rate dispute. ESPN is threatening to take ESPN News off Charter systems in a disagreement over what the network can stream over the Internet.
Networks generally don't want to be sold on tiers or, worse, à la carte, because they want the best chance to capture surfers who wouldn't ordinarily pay for a channel individually. Also, pay networks like HBO have enormous marketing costs to keep their subscriber levels up.
ESPN has increased its license fees 15% to 20% in each of the past few years, to as much as $1.20 per subscriber. A network like CNN charges about 30 cents per subscriber, and smaller networks charge as little as 5 cents per sub per month.
Under the new rate, ESPN would account for about 14% a cable operator's basic programming budget.
ESPN President George Bodenheimer blamed the increases on the high cost of sports rights, which in turn are inflated by the rising salaries for ball players. He noted the irony of operators' complaints, since "most of the MSOs are team owners themselves." That includes Charter's controlling shareholder, Paul Allen, who owns the Portland Trailblazers.
Bodenheimer said that operators have to look at the amount of local ad-sales revenues they generate from ESPN and the collection of networks the company sells, including ESPN2 and ESPNews. "The trick going forward is to maintain the price-value relationship for not just ESPN but ESPN Inc."
ESPN Senior Vice President of Affiliate Sales Sean Bratches cited the creation of ESPN Broadband, a sports service that would allow cable modem subscribers, for example, to have a collection of highlight clips from their favorite teams packaged for them after every game. "Our proclivity," he said, "is to work something out with our affiliates, as opposed to pursuing solutions that are outside the business arena and are capricious, at best, at the end."
It's not clear how serious Kent's proposal will become. He acknowledged that he doesn't have lobbyists seriously working on a proposal, and the NCTA is taking no stance. "I think the problem is easier to diagnose than the solution," said association President Robert Sachs.
One non-sports network CEO called Kent's proposal "the stupidest thing I've ever heard." The big danger is that Congress wouldn't stop at regulating just a sliver of the industry, particularly given the kinds of political counterattacks ESPN parent Walt Disney Co. tends to launch.
—Additional reporting by Paige Albiniak
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