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Making a Play for ESPN

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Times Staff Writer

These days, cable companies have practically made a sport of bashing ESPN.

They accuse the channel’s owner, Walt Disney Co., of gouging them for the right to carry one of the most profitable channels on pay TV, raising rates by an average of 20% for the last five years.

Cox Communications, for one, is in the midst of a showdown with Disney, threatening to remove ESPN from its basic programming package in such markets as San Diego, Las Vegas and Phoenix unless the rate increases slow down.

Comcast Corp. last week came up with its own solution: Buy the channel’s parent company. By gobbling up Disney in a deal valued at $49 billion, the nation’s largest cable operator could eliminate the fees it pays for ESPN while charging competitors for the channel.

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But ESPN may not be the slam dunk it once was.

With the flagship sports channel already reaching more than 80% of the nation’s TV homes, ESPN has to find new ways to grow its revenue to keep ahead of its pricey deals with the nation’s leading sports leagues.

Last year, ESPN paid $600 million to carry National Football League games, $400 million to the National Basketball Assn. and nearly $142 million for Major League Baseball.

Programming expenses for ESPN, which celebrates its 25th anniversary in September, will top $2.2 billion this year alone, according to a recent study by Kagan World Media. Within four years, those annual costs could surpass $4 billion.

Looming large is the contract renegotiation for the granddaddy of them all -- the NFL. Professional football’s current deal with the television networks, including ESPN and its sister network, ABC, which carries the long-running “Monday Night Football,” expires in 2006.

Whatever amount is settled on, one thing is certain: The price tag will be passed on in part to the cable and satellite companies -- and their subscribers.

ESPN is becoming a bit of “an Achilles’ heel for Disney,” said Ryan Flury, a media analyst with Virginia-based Heritage Financial Management. That has led some to suggest that ESPN’s growth potential might have reached a plateau.

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ESPN President George Bodenheimer dismissed the notion that the network has peaked -- “ESPN has very solid growth ahead” -- and downplayed the suggestion that it was charging too much. He said the ESPN portion of a cable subscriber’s bill translates to about $2 a month.

“We’re talking about something that costs less than a cup of coffee,” Bodenheimer said. “We have negotiated fair agreements that reflect the value of the service that we provide.”

Not everyone is convinced.

“Something’s got to give because the cable operators are on the verge of saying ‘forget it’ to ESPN,” said Derek Baine, a senior analyst with Kagan. “The business model has to be fixed.”

What’s more, there’s increasing competition for sports fans, thanks to niche sports networks that are nibbling into ESPN’s audience. The Golf Channel, Tennis Channel, and CSTV: College Sports Television have joined the mix, as well as channels launched by the NBA and the NFL.

For now, though, leagues make tens of millions of dollars more from their TV rights deals than the networks do by selling advertising time during games they broadcast.

Still some industry experts predict that within 20 years, the sports leagues probably will bypass the middlemen -- such as News Corp.’s Fox Sports, Disney’s ABC and ESPN and Viacom Inc.’s CBS -- and make their deals directly with the cable companies and satellite providers.

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Since ESPN was launched in 1979 with coverage of a slow-pitch softball game, the Bristol, Conn.-based operation has grown into more than just another remote control stop. It now boasts seven outlets, including the flagship ESPN, ESPN2, ESPNews, ESPN Classic Sports and the recently launched Spanish-language ESPN Deportes.

In addition, there’s ESPN Radio, the leading sports website, a sports magazine, a chain of restaurants and even its own glitzy awards show, the “ESPY Awards.”

Disney owns 80% of ESPN, with the remainder held by Hearst Corp. Worth as much as $20 billion, it generates profit of about $1 billion a year, analysts say. In all, the channel raked in an estimated $2 billion last year from cable and satellite providers, according to the Kagan study.

ESPN is already in the game of working to maximize its revenue, Bodenheimer said. The network has improved its ratings during the last two years, diversified its programming with “ESPN Original Entertainment” and launched other new initiatives.

Some of those efforts have produced mixed results. The network’s edgy drama about the off-the-field lives of professional football players, called “Playmakers,” produced strong ratings and good reviews. But it infuriated one of ESPN’s most important partners, the NFL. This month, ESPN announced that it would not bring back “Playmakers.”

Cable fees remain ESPN’s bread and butter. Leading the high-profile battle against double-digit increases has been Atlanta-based Cox, which pays more than $170 million a year to carry the channel. Its agreement with ESPN expires March 31, and negotiations to renew the pact are continuing.

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In materials provided to its customers and posted on its website, Cox blames ESPN distribution fees for escalating cable costs. The company contends that if current pricing trends continue for the basic cable channel, Cox customers will have to fork over $10 a month for ESPN alone.

Cox also maintains that ESPN’s prices are disproportionate to its ratings. ESPN accounts for about 18% of Cox’s standard-cable programming costs, the company says, but only about 4% of the viewing during prime time. Bodenheimer counters that ESPN brings other benefits, including driving local ad revenue to cable companies and delivering male viewers, whom advertisers pay more to reach.

ESPN, meanwhile, has paid for its own advertisements in newspapers serving Cox markets. Those ads stress the network’s value to sports fans.

“We felt that we had to make our case directly to the public ... that losing ESPN would be a real disservice to sports fans,” Bodenheimer said.

The ESPN chief suggested that the network was willing to “moderate” its rate increases in exchange for long-term agreements that guarantee that other Disney channels, such as ESPN2 or perhaps even the ABC Family channel, will be carried.

But that, too, is bitter medicine for some cable operators.

“We’re hearing a lot of screaming out of the cable companies about having to take more channels than they want,” said Baine, the Kagan analyst.

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Some in the industry have suggested making ESPN part of a pricier, or second-tier, cable package so that basic cable consumers who don’t watch sports programming would not subsidize it. Bodenheimer said he didn’t support that scenario.

The current structure works, insists Bodenheimer: “Paying about $40 a month for cable television, including ESPN, is the best entertainment value in America.”

Times staff writers Richard Verrier and Sallie Hofmeister contributed to this report.

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