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Programming Costs Rankle, Prompting Olive Branches

5/12/2002 8:00 PM Eastern

As it often does, cable programming took center stage at last week's National Show here.

Some elements remained the same, such as distribution deals and debates over how to hold down costs — especially sports costs. And some have evolved over time, like the current back-and-forth over whether to charge for video-on-demand or just tack it onto existing digital tiers as a way to retain subscribers.

Although overall attendance at the show was down about 30 percent (7,000 attendees) from 2001's mark of about 24,000, a strong turnout of top cable-operator executives did lure such media moguls as Walt Disney Co. chairman Michael Eisner and Viacom Inc. president Mel Karmazin to The Big Easy to openly court their customers.

In a very public bid to ease tensions with MSOs — just days after ESPN gave notice of its annual 20 percent rate hike — Eisner and Disney president Robert Iger accompanied ABC Cable Networks Group president Anne Sweeney on a tour of the convention floor. Eisner also met with MSO officials at the show.

Karmazin, in turn, was spotted chatting it up with conventioneers at the MTV Networks booth.

Alongside crawfish and jambalaya, spiraling programming costs — particularly Cablevision Systems Corp.'s ongoing battle with the Yankees Entertainment & Sports Network in New York — was a major topic of show and dinner conversations.

Cablevision has refused to carry YES, a fledgling regional sports network with exclusive rights to 130 New York Yankees baseball games, citing high per-subscriber costs. YES responded with an antitrust suit against the 3 million subscriber MSO.

Also on the menu in New Orleans was talk of VOD as a means to draw subscribers to digital. Cablevision and News Corp. used the show to unveil an unusual partnership in which two popular series — FX's
The Shield
and Fox's 24
— will be offered on VOD, for free, to the MSO's digital subscribers.

Disney also unintentionally revealed that it has a contract renewal in the works with DirecTV Inc. for ABC Family. Eisner let that cat out of the bag while talking to reporters on the convention floor.

OLIVE BRANCHES

The appearances of the mega-media titans, Eisner and Karmazin, was testimony to programmers' efforts to extend olive branches and bolster what have been some very rocky relationships with distributors during this past year.

The effort seemed to work to some extent. During the closing panel on Wednesday, AT&T Broadband CEO Bill Schleyer lauded Disney for becoming a good partner.

"Good partners don't say, 'Here's the price, take it or leave it — put this on or we'll sue you.'

"I support the Dolans. I hope they win this," Schleyer added, referring to the stance of Cablevision chairman Charles Dolan and CEO James Dolan on carrying YES.

Eisner, who hasn't attended a National Show in recent memory, joked about a dinner he had set up with MSOs, including members of the NCTA board. He brushed off press questions about the extent of the strain in Disney's dealings with MSOs.

"Cable is amongst our best businesses and our best relationships," Eisner told reporters.

But during the show officials from several MSOs — such as Millenium Digital Media, Massillon Cable and Mediacom Communications Corp. — bristled when programmers argued that rising license fees are justified.

"Value," scoffed Mediacom chairman Rocco Commisso.

Schleyer was among the operators who dined with Eisner, but he declined to talk about what was discussed during that meeting.

SPORTS STINGS

Iger — who sat on a Tuesday panel that included some of cable's top programming executives — became somewhat defensive when the issue of ESPN's license fees came up, citing the investment the network has made in programming.

"ESPN's margins have actually gone down," Iger said. "We think we create value for the operator. We have nothing to be apologetic about. I don't feel a need to be defensive about the rates we are charging."

During that programming panel, the top officials maintained that sports-rights costs are getting close to their limit.

"Sports rights won't peak unless competition disappears," Iger said.

It has become difficult for companies that can't amortize sports-rights costs over several networks to be in the bidding for packages, noted Iger. He said that's why NBC dropped out of the bidding for the National Basketball Association. ESPN/ABC Sports and Turner Broadcasting System Inc. eventually paid a combined $4.8 billion for six-year deals with the league that begin in the fall.

"We figured out a way to amortize the cost," Iger said. "We're not only buying the product, we're producing the product across both our services, ESPN and ABC, to sell it effectively and market it more effectively to the consumer."

CHERNIN SEES LIMITS

News Corp. president Peter Chernin said sports-rights fees could be hitting their zenith, mainly because few, if any, broadcasters wind up in the black with the genre.

"There probably isn't a sport that is on free broadcast right now that doesn't lose money," Chernin said. "There are clearly limits as to how much we can and should pass on sports-rights fees to cable people. If you look at sports rights around the world, they are coming down."

Turner Broadcasting System Inc. chairman Jamie Kellner said it remains to be seen if sports fees will drop.

"We are right at that magic moment where we are going to find out," he said. "We're going to see how the industry behaves."

At Wednesday's closing panel on finance, Cablevision got a vote of confidence for its refusal to carry YES, the sports-battle du jour.

"I called Chuck [Dolan] a week ago and said, 'Hang in there, you're doing the right thing,' " Cox Communications Inc. CEO James Robbins said.

Schleyer also chimed in on Cablevision's behest. "If they win, then the subscriber wins," he said.

VOD PARTNERSHIPS

Operators and programmers have successfully partnered on some fronts. In what is apparently the first agreement of this kind for the programmer, the Fox Entertainment Group and Cablevision inked a deal to offer The Shield
and 24
on a VOD basis.

Cablevision's iO: Interactive Optimum digital customers will have access to all first-season episodes of the two groundbreaking shows, at no additional charge.

This is first time that an original broadcast series and original basic-cable series have been simultaneously offered to consumers on a free VOD basis. Previously, only off-premium network series, such as Home Box Office's The Sopranos, or theatricals were offered on pay VOD.

"I approached them," James Dolan said of News Corp. "It's [VOD] particularly good for this kind of product.

"We've been talking to everybody about this kind of thing. They've all expressed interest, but Fox was the first to have the foresight and courage to step up and make this happen."

Cablevision will immediately make each episode of both first-year series to date available on digital, adding and promoting subsequent episodes less than 24 hours after their cable or broadcast debuts.

The MSO will dedicate significant local cross-channel promos to both the May 21 24
finale on Fox and the June 4 finale of The Shield
for FX.

"Jimmy [Dolan] is a fan of the two shows," FX president Peter Liguori said. "And as we build to the season finale [of The Shield], this makes all the sense in the world. From our standpoint, we certainly want the sampling."

Said Chernin, "It's a win-win scenario."

Mike Farrell contributed to this story.

September