Fox-ESPN Fight Over Sports Rights Raising Cable Rates

Every student of Economics 101 knows that competition drives down prices. But that’s not so in the perverse world of cable sports, where new bidders are driving up the cost of rights because of the limited pool of desirable games.

Rupert Murdoch’s plan to compete head to head against the powerful ESPN sports empire by linking together an assembly of regional channels is perhaps the clearest case in point.

Cable operators say his News Corp.’s aggressive bidding to establish Fox Sports has already translated into higher costs for customers. And a counterattack in select regions--including Southern California--by ESPN and its owner, Walt Disney Co., could escalate cable prices.

ESPN would not comment on its strategy, but sources at the company say that Disney Chairman Michael Eisner is asking tough questions about why the network missed the opportunity to expand into regional sports before Fox began driving up prices with its big push in 1995. Disney bought ESPN last year as part of ABC Inc.

While it is too late for Disney to effectively block Fox Sports, especially after losing a bid in June for New York’s marquee regional sports channel, ESPN is setting off bidding wars in the few remaining regions up for grabs, with Florida as the latest battlefront.

“Eisner is pulling his hair out,” said an ESPN executive. “A network of regional channels would have been the perfect complement to ESPN. It would have given us local footage and saved enormously on production costs. At this point, the regional war is lost, but we can at least steal one or two networks or be a burr in [Murdoch’s] saddle by making Rupert pay more.”

That’s what happened in Detroit on Wednesday, when Fox Sports agreed to buy cable rights to the Tigers baseball and Pistons basketball games from Washington Post Co., effectively putting the newspaper giant’s Pass Sports channel out of business. An ESPN source said Fox Sports, which will air the games on a new network called Fox Sports Detroit, outbid Disney by 30%. Fox viewed the market as important because it is home to the nation’s biggest advertising spender, the auto industry.

Still, Disney’s strategy of making Fox Sports pay higher rates could pressure News Corp. While ESPN is the world’s most profitable cable network and stands to make more money this year than NBC (analysts estimate profit at $600 million), many regional networks are barely breaking even because of the soaring cost of sports rights.

The financial risks of regional sports led the management at Capital Cities/ABC to nix a proposal in 1988 by ESPN to buy the group of regional Prime Ticket sports networks that became the foundation for Fox Sports.

Fox Sports, a 50-50 joint venture of News Corp. and cable programmer Liberty Media Corp., lost $72 million last year, mainly because of the high cost of sports rights. Those fortunes could turn around now that Fox Sports can offer advertisers a variety of packages, including a national reach that compares with that of ESPN, with the higher ratings that local games command.

(Yet sources say Liberty may be losing the stomach for the increasingly high stakes of the sports game and is interested in selling out to its partner. They say Liberty had become Fox’s partner hoping to check powerful ESPN. Cable operators, including Liberty parent Tele-Communications Inc., have little leverage to refuse rate hikes and carriage of lackluster spinoffs such as ESPN2.)

Fox Sports filled in the major missing piece in its quest to offer advertisers a national reach by agreeing to pay $850 million in June for 40% of Cablevision Systems Corp.’s eight regional networks, including channels in the New York and Chicago markets. Sources say Cablevision favored Fox over a $1-billion offer from Disney in part because ESPN owns no other regional channels.

That leaves Southern California as the last major battleground, where both Disney and News Corp. have footholds. Last week, Disney prevailed in a court fight against Fox, clearing the way for its launch of a regional sports channel to challenge the two that Fox Sports operates in Los Angeles.

As a result of the settlement, Disney is expected within the next few years to offer a channel featuring the games of its two professional Orange County sports teams, the Mighty Ducks hockey club and the Angels baseball team. Fox’s two channels have rights to the Clippers, Lakers, Dodgers and Kings games, and its negotiations to buy the Dodgers should solidify its leverage in the market.

Disney had sued Fox for shifting Ducks games from an existing channel, Fox Sports West, to a new one with little reach. Fox counter-sued, charging Disney with conspiring to stunt the new channel, Fox Sports West 2, by promising special deals on ESPN and the Disney Channel.

The two rivals reached a settlement last Friday that allows Fox to keep the Ducks on the new channel only through the 1997-98 season, rather than 2001. The deal lets Fox continue televising Angels games through 1999.

Sources say Disney is so intent on blocking Fox that it passed up $100 million that Fox offered for rights to Angels and Ducks games for the next 10 years.

“Cable customers will pay more because we will be forced to squander three channels in Los Angeles on local sports,” said an executive at one of the nation’s top cable carriers. “They won’t get a channel that they should be getting, like Home & Garden or Turner Classic Movies.”

Cable operators complain that even without Disney in the mix, their rates have escalated as Fox has cornered local sports rights. For instance, to gain a foothold in Dallas last year, Fox Sports paid Lin Broadcasting a tidy profit to sublicense rights to Rangers baseball games.

“The next day, our fees went up 25%,” said Jeffrey Marcus, chairman of Dallas-based Marcus Cable. “Customers want the games, but blame the nasty old cable operators when rates go up.”

A similar scenario unfolded in Washington, where Fox Sports bid against its partner, Home Team Sports, owned by Westinghouse Electric Corp., for the rights to Bullets and Capital games, causing Home Team to pay double.

And a battle between Fox and Disney is beginning to brew in Florida, where H. Wayne Huizenga, who owns the Panthers and Marlins, is interested in selling his 70% stake in SportsChannel Florida, which is 30% owned by Cablevision. Cablevision sources say it has the right of first refusal to buy the network, which it wants to merge with the Sunshine Network--owned by Fox and a group of cable operators.

SportsChannel Florida says Disney has expressed interest in buying the channel and would be a perfect fit because of the possible tie-ins with Disney World and the new sports arena it has opened at the theme park. With eight professional sports teams in Florida, there may be room for two channels, although Cablevision doubts it.

While Disney has so far been losing the regional sports battle, ESPN is expected today to chalk up a point against Fox by buying Classic Sports Network. An ESPN source said the network, launched in 1985 by two entrepreneurs, would probably be merged with ESPN’s struggling news channel, which has little coverage.