SPORTS NETS Get Closer to Home

BY STACI D. KRAMER Brushing aside the notion that bigger is better when it comes to regional sports networks, several large cable operators and team owners are betting they can run successful regional sports networks (RSNs) anchored by only one major league team and, in one case, only college and high school sports. For multiple systems operators, the goals are simple: gain control over sports programming decisions and costs, increase margins and advertising opportunities and, whenever possible, create a reason for subscribers to choose cable over satellite. Along the way, they can earn community kudos and loyalty for paying attention to local sports. They can also tap into the potential for expanded services such as Spanish feeds, HDTV and interactivity. “There’s no disadvantage to being vertically integrated,” says Kagan sports analyst John Mansell. “You eliminate the middleman’s profit margin every step of the way. You also eliminate the suspicion each has of the other. Cable ops think they’re paying too much to the RSN, which feels it’s being raped by the team, and the team thinks it’s never getting enough. As a result, the three often don’t work well together.” But simple isn’t always easy. “On the other hand,” adds Mansell, “if a team is mismanaged and performs poorly long enough, ratings decline and advertising goes away. A cable operator is better off if the risk is spread around.” MSOs with sports regionals rarely succeed alone. They have to sell their network to other operators, who are already balking at the cost for sports programming and may not be eager to open up expanded basic slots for yet another channel with a narrow audience. They also have to contend with increased scrutiny by the Federal Communications Commission, which has already expressed concern about MSOs that can refuse to sell their terrestrially delivered networks to DBS, most notably Comcast and Comcast SportsNet Philadelphia. This is where smaller size can work to their advantage — in most cases, DBS generally isn’t interested in one-team networks even if games are delivered by satellite. Team owners going it alone still have to gain distribution by working with MSOs but can increase their own margins, offer more games and push their own agenda. They can make deals to their advantage instead of standing behind the RSN in line. Some owners have tested the mini-regional concept, only to then turn to the sure money from Fox Sports Net, the clear leader in local sports in most markets. Paul Allen tried and failed when his Action Sports Network featuring his Portland Trail Blazers couldn’t get on AT&T Broadband systems. The billionaire cut his losses last fall and abruptly shut down the ambitious network with its hi-def programming, and thus the Blazers are back on Fox Sports. Allen might have succeeded if his network were in a market covered by Charter Communications, the MSO in which he is a majority shareholder. On the other hand, Cox Sports Television signed a ten-year deal with the New Orleans Hornets knowing it had nearly 600,000 Cox Communications subs in the market and out-state Louisiana locked in at launch. Another startup at which there was enough heft at launch was the YES Network in New York, where George Steinbrenner has Leo Hindery, and Hindery managed to cut deals covering half of the network’s footprint. This has made it possible to stay in business without carriage into 3 million homes served by Cablevision, whose controlling shareholders, the Dolan family, have refused to pay the $2 per subscriber per month that YES is charging other operators. YES has two major league teams — the Yankees and the New Jersey Nets — with a possible third on the way in the New Jersey Devils. That’s as close as it gets to critical mass, although, without access to those Cablevision subscribers, YES may never be able to turn a profit, let alone offer its investors a payout of any sort. YES is both an exception in that it is launched and running and the rule in the sense that greed and hubris among team owners are sometimes driving forces in the creation of mini-regionals. Team owners who opt for owning their own networks think they can make more money, but, as Allen proved, things don’t always pan out. “It’s very much a market-by-market issue,” says sports consultant Neal Pilson. “There’s no model that guarantees success.” On the flip side of the issue, there are MSOs that dream of launching networks even though they don’t own any teams. They figure there are benefits that go beyond direct financial gain, most notably the opportunity to further differentiate cable from DBS. But that means ignoring their own long-standing complaints about the unreasonable cost of regional sports networks and the lack of space on expanded basic. It also means fashioning a network that other operators are willing to take — and at a price that makes sense. After all, just as regionals sharing ownership with teams have to pay market value for rights fees, MSOs owning regionals have to pay to carry the network. In an ironic twist, it can also require working a deal for syndicated content with ESPN, whose syndication operation provides a large chunk of content for Cox, or with Fox, the largest regional sports programmer and the one most new networks are likely to be up against. Having no access to the NFL’s Sunday Ticket out-of-market package through at least 2005 puts cable at a disadvantage. Coaches’ shows and training camp features may prove popular among hard-core fans, but they won’t ever take the place of actual NFL games. Still, regionals can allow the MSO to offer something they either can’t get on DBS because it’s delivered via cable (as is the case with Comcast Sports Net in Philadelphia and Cox’s carriage of the San Diego Padres) or won’t get because the DBS distributor isn’t interested. DirecTV’s Michael Thornton says that regionals hoping to use DBS as leverage with cable operators are running out of runway. He said no to Action Sports and has no plans to seek deals with Cox for the Hornets or the Royals. On the other hand, some regionals have no interest in DBS even if a deal could pump up license fees and the ad base. Just because Cox Sports Television is a satellite service — legally bound to be available to DBS operators — that doesn’t mean anyone at Cox is rushing out to sell the service to Thornton. Or that he even wants to hear the pitch. “They’d probably like to use it as a differentiator,” Thornton says. “The idea of us burning bandwidth on a channel for the Hornets doesn’t seem very economical.” So far, he adds, subscribers haven’t even asked for the channel. That may be because of the large number of NBA games available on other channels DirecTV already carries. “We didn’t carry the Trail Blazers and never heard one word.” Its failed merger with EchoStar makes bandwidth even more valuable for DirecTV. “There’s not the amount of the capacity we would have had,” Thornton explains, “therefore we’ve got to make decisions between another RSN that’s going to serve a very narrow percent or going into another market that’s going to serve the entire base.” “The likelihood of launching a successful regional sports network with only one team is very small,” says Dean Bonham, chairman and CEO of The Bonham Group, a Denver sports marketing consultancy. “There are a thousand better ways to invest your money than a one-team network.” Even a two-team network isn’t always worth the gamble. “Tom Hicks tried it in Dallas and ultimately ended up negotiating a deal with Fox. Disney tried it in Anaheim and ended up negotiating with Fox,” Bonham recalls. “Both entities came to the conclusion that Fox’s offer was better than going into business for themselves. They were better off taking the bird in the hand versus one in the bush.” Says Pilson, who advised the Minnesota Timberwolves on their decision to go with Fox instead of joining a new competing network, “The one-team regional concept is fraught with problems. You simply don’t have enough year-round programming. You may not be able to get enough money per sub. Plus, you take on the risk of advertising sales and production costs.” At Cox Sports Television, Rod Mickler is pragmatic: “If the success of our channel is just based on the Hornets, we’re never going to realize the full potential,” he says. The new network has 600,000 subscribers, almost all from Cox, and a goal of 2 million. Negotiations are underway with several MSOs. The new network’s footprint essentially matches the region assigned to the Hornets by the NBA — a 300-mile radius covering roughly 2 million cable subscribers in Louisiana and the Florida panhandle. New Orleans may be the heart, but the network’s success rides on its attraction outside the inner market. The deal with ESPN gives Cox access to 125 live college basketball and football games, ESPN’s full 900,000-hour classic archives and ESPNews for overnight programming. “In the New Orleans market we’ll do a Tulane-Auburn from ’91 and do a .4 [rating],” says Mickler. Of course, when it comes to money no one wants to provide details. “We have a competitively priced regional sports programming network,” says Mickler. Cox Cable Rep handles the advertising. A three-year deal with the New Orleans Saints makes Cox Sports Television, now playing on the expanded basic tier of all Cox subscribers in Louisiana, the team’s official RSN. Cox will produce 52 half-hours in-season, another dozen half-hour magazine shows off-season as well as live training camp scrimmages and cheerleader specials. The idea is to make the network indispensable to Saints fans even if they can’t watch the games there. Mickler hopes to sign a similar deal with Louisiana State University. In addition to the weekend shows, Mickler is experimenting with an outdoor block on Thursday nights when the NBA’s national exclusivity deal with TNT keeps the Hornets off Cox Sports. ESPN also has an agreement with the Minnesota Twins’ Victory Sports, the new network scheduled for launch in 2004. Victory is already selling a package of University of Minnesota basketball games to broadcast TV. Sean Bratches, EVP of affiliate sales and marketing for ESPN, explains: “We’ve really refocused our efforts in the past year and out of there have come agreements with teams and our affiliates. Cox is a good example of that.” He adds, “It’s easy to say I’m going to launch a sports network. It’s another thing to fill it with compelling, branded content.” Bratches wouldn’t confirm estimates that the full regional package can run 15 to 20 cents a sub, with some packages as low as 3 cents. (Some networks still pay a lump sum for the rights package no matter how many subs are involved.) Like the MSOs who see growing their own regionals as a way to add value to cable subscriptions, ESPN finds value apart from the licensing fee. “The display of ESPNews on a part-time basis on analog is an extraordinarily strong barker for digital,” says Bratches. ESPN also gets barter inventory that can be aggregated nationally as well as promotional value. “We’re in conversations, proactively approaching affiliates about them getting into the RSN business. We’ve got a sales team devoted to doing this.” Fox executives declined comment, but there’s no escaping Fox Sports Net’s influence. Fox’s desire to “own” regional sports helped teams push up rights fees in the ’90s, in turn pushing the whole scale higher. Now Fox seems to be secure enough to play hardball with owners and to wait out their efforts to start their own networks or to go with a new RSN. Fox is also willing to let networks go dark when an MSO refuses a rate hike as is the case now with Time Warner Cable, the Sunshine Network and Fox Sports Net North. The Kansas City Royals began their effort when Fox said no to expanding the number of games the team wanted carried and instead tried to slash the number of telecasts. Now the Royals are building the Royals Television Network around a linchpin deal with Time Warner Cable to carry 100 regular-season games. Unlike the Twins, the Royals aren’t trying to build a full-service RSN. Instead, the team is selling the rights to carry the package. Time Warner will carry the games to 440,000 households via its existing Kansas City Metro Sports channel, an ESPN affiliate. Time Warner’s contract calls for a fee reduction now that Fox Sports Midwest will be missing a key component. In a sign of how complex these deals can be, Comcast, which also carries the Metro Sports channel, has to negotiate separately with the Royals for the games even though the package can be delivered through the channel. To complicate matters, Metro Sports is delivered terrestrially, which means it isn’t available to DBS. However, the games are being delivered via satellite, which means they have to be available to DBS. On the other end of the scale, Comcast and Charter offer a regional without any major league teams. Instead, the Sports Southeast network, operated by Comcast as the majority owner, is built around the SEC. The powerhouse NCAA conference has more fans and draws more interest than most pro teams in the region. Sunday broadcasts of football games played on Saturday routinely pull down solid ratings. Launched in 1999, CSS now has about 4 million subscribers across its SEC footprint. Nearly one-fourth of those were added late last year when systems in Atlanta and Jacksonville became part of Comcast as a result of the merger with AT&T Broadband. The network also drills down a level by emphasizing high school sports, a tactic Mickler is employing at Cox. CSS carries a weekly Friday night high school game and each affiliate has the right to produce its own local event. In Tennessee, Comcast’s Marketlink Nashville signed General Motors as the sponsor of the high school games in Nashville, Knoxville and Chattanooga. So far, only the Comcast systems are taking part; the others see one of the games those systems produce. Cox has an agreement with Louisiana’s high school association to carry state finals of various sports on a delayed basis and is working on more high school options. Mike Sheehey, the GM of CSS and VP of Comcast Southern, isn’t saying no to pro sports. “There’s rights that are available, some sports out there we think our customers want to see. I wouldn’t say that we wouldn’t do that at some point.” Hampered first by litigation with Fox and then by Major League Baseball’s unsuccessful attempt to shutter the Twins, Victory Sports has yet to sign a deal with an MSO. But SVP and GM Mark Sharockman says the network is very close with a couple of operators. “We believe our network is very powerful,” says Sharockman. “When you take the viewership ratings we’ll have the two highest events in regional sports television in this market — the Twins and Gopher basketball.” Victory Sports is going head-to-head with Fox Sports Net North, which has the rights to the NHL Minnesota Wild, the NBA Minnesota Timberwolves and Gopher hockey. (The latter is an example of just how regional the concept can get.) “We expect to be on expanded basic,” Sharockman says. “The penetration just isn’t there to support a digital tier.” He won’t be specific but says the network will be competitive in price with Fox. That price jumped to around $2 from about $1.50 for most MSOs on Jan. 1; Time Warner did not accept the rate increase, instead offering a 10% hike or a move to a la carte. How this will affect Victory Sports remains to be seen. Effectively, operators are being asked to pay twice as much — or nearly twice as much in cases where Fox lowers its price after losing a team — to provide subscribers with the same major league product. DirecTV’s Thornton puts it bluntly: “The only thing worse for us than having one RSN in the market is having two.” Which would make one think that the growth of RSNs just may be a very good thing for cable.