For most sports programmers, carriage on a digital sports tier is equivalent to no carriage at all. Sports programmers are nearly unanimous in describing digital sports tiers as a failed strategy. Tennis Channel CEO David Meister is one of the few who will go on record to say that tiers aren’t working, they’ve never worked and he can’t wait until operators accept that fact and disband them. And Meister has agreed to launch his network on these tiers. Other sports network heads, who asked for anonymity, are similarly dismissive of the thinly penetrated tiers. One tells the story of a top 10 MSO programming executive who actually admitted that its sports tiers weren’t making money. Another complains that his network’s launch has been stalled for more than a year because of his refusal to be placed on a tier. So why are operators continuing to pursue what these programmers are calling a failed strategy? Comcast’s EVP, programming, Matt Bond says it’s not a failed plan at all and that his company’s tiered strategy is sound. The MSO’s digital sports tiers are designed to attract a small percentage of good-paying customers who otherwise would subscribe to satellite. As the company focuses more on exclusive video-on-demand content, digital sports tiers represent the dwindling opportunities for new linear networks hoping for a launch with the top MSO. "It appears to be a niche that, while not universally desirable in that only a percentage of your customers sign up for it, there is a percentage of customers who want this content and want this product and are willing to pay for it on a tier basis," Bond says. "So as in most of the video product, we’re going to try to meet that need." Comcast rolled out its first digital sports tier, in the Baltimore-Washington, D.C., market in April. The $5 per month package includes three Fox Sports diginets, Fox Sports World, NBA TV and soccer-centric GolTV. It’s now launching the tier with the same lineup (plus TVG in wagering states) in markets including Chicago, Philadelphia, Los Angeles, Boston, San Francisco, Miami and Dallas. The Strategy Cable operators are navigating a delicate balance in rolling out their digital tiers. While Bond supports the idea of niche digital tiers, he warns against rolling out too many. "Clearly, the taste of the consumer for new packages is not infinite, and it’s a big challenge in trying to manage a product complement in such a way that meets the needs of the customer," he says. The key to creating successful tiers is keeping popular ad-supported networks in basic and expanded basic packages. That leaves more targeted niche services available for digital tiers. "Give digital customers access to the ad-supported big-name branded sports content and tier the more esoteric fare to a very carefully defined target audience whose primary business model is not impulse," says Howard Horowitz, president of Horowitz Associates. "[This will guard against] angering or gouging or charging too much money to the mainstream audience that would not be interested in content like a tiddlywinks contest." Horowitz cites research that shows consumers support tiers when asked if they should pay extra for sports in which they have no interest; and they change their answer when they are asked if they want sports in which they do have interest to be part of their cable service. For that reason, popular sports networks such as ESPN never will be part of a digital sports tier, says Bruce Leichtman, president of Leichtman Research Group. That leaves smaller, less popular nets available for the digital tiers. Instead of paying each of those networks a license fee for expanded basic carriage, operators are managing costs by placing them on tiers, says Leichtman. "It’s funny, you turn back the clock three or four years and sports were always thought of as one of the drivers of digital," he says. "But they don’t drive digital in a tiered fashion. There’s very little original sports content on tiers today, and there’s not a wide variety of what’s available on them." Time Warner Cable’s View Like Comcast, Time Warner Cable is not giving up on its tiering strategy. In fact, VP of programming Lynne Costantini says the MSO is growing its digital tiers because they help offer consumers more choice. "We continue to add linear networks to our digital sports tier, our digital movie tier, our digital Spanish-language tier and to some extent the digital ethnic-premium services," she says. "So no, we’re not finished. We’re not done yet with respect to building those tiers and tweaking them, and replacing and packaging and adding services and taking services off." Time Warner Cable executives are basing the decision to expand digital tiers on feedback they get from local markets. For digital-only networks, that means it takes more than a great concept to get carriage. "It’s very important to us that whatever product we add doesn’t just provide more linear programming but it also has other value-added aspects to it, such as interactive capability, a broadband application as well as a VOD application," Costantini says. "So we’re looking at a bundle of rights when we’re looking at a new network." And what of those sports programmers holding out for the widest possible distribution? "We go through the process, and I understand and appreciate the fact that the programming community thinks it’s a very long process," Costantini says. "I guess in some respects the deal cycles are longer in our business than in some other businesses. But we do meet with programmers on several occasions and we do assess and gather information and, yes, we do weed some out." Costantini says sports networks are assessed on their merits—whether independent or affiliated with a larger programming entity—and that Time Warner, like Comcast, will consider making a strategic and financial investment in new linear sports services, as it did with Si TV. "There are some deals that are done by virtue of the fact that there are other relationships and there are leverage points that can be exploited at any given time," she says. "But we’ve got a good track record of doing deals, including, recently, with independent networks—CSTV, Si TV, Tennis Channel, just to name a few. We’re engaged in lots of very active discussions with other independent networks, so I don’t see being independent as a drawback to getting carriage on Time Warner Cable." While Time Warner Cable has been in the forefront of launching digital tiers, and obviously still sees value in them, Costantini says expanded basic carriage still is possible for some linear channels, sports or not. "Generally speaking, we wouldn’t say that there’s no room at the inn for analog or digital," she says. "If there is a compelling enough product that meets the demand of a particular market or a demographic in a particular market or system, or a service that has broad appeal, we might put it on the CPST [cable programming service tier, versus basic service tier] lineup. "I think the days of rolling out an entire new service on CPST are probably over," she continues. "But on a system-by-system, network-by-network basis, it might make very good sense for our customers to receive a new service or other services on digital, on a broader level of service." Charter’s View Regional sports networks are one of the most popular services on digital sports tiers. That is, unless the RSN flat out refuses to be carried on one. Such a situation led to the folding of the Minnesota Twins’ six-month-old Victory Sports One network in May after it failed to get traction with cable operators. The Twins’ management instead signed an eight-year carriage deal with Fox Sports North. Charter was one of the MSOs that failed to come to terms with the Twins. "It’s difficult to say that there’s a clear win, even in a situation such as Minneapolis where the regional sports network ultimately decided that it was not economic for it to go forward as a stand-alone network," says Charter SVP of programming Sue Ann Hamilton. Now, Charter is waiting for the other shoe to drop, most likely in the form of a higher license fee from the Twins’ new rights holder. "We have yet to learn from Fox Sports what our incremental charge is going to be because of that," Hamilton says. Fox Sports is not giving the operator digital tiering rights but is on expanded basic across its lineups. "There are very few new networks these days that would rather not be carried than be carried on a sports tier," she adds. "Victory Sports was one example of a network that didn’t want to be tiered. It’s difficult for those economics to work in a lot of cases, which is why it’s sometimes inadvisable, I think, to try to form a new network." As a general rule of thumb, MSOs want to put as many sports networks on digital tiers as they can. "Where we have the ability to do that, we have," Hamilton says, citing the example of Cox Sports Louisiana, which is tiered on the Charter systems where the MSO has the digital rights to do so. "In most of Charter we have three side-by-side digital tiers. We don’t have digital basic, we just have a movie tier, a family and information tier and a sports tier in addition to a Spanish language tier," she says. "Each tier is $4 by itself. We have less product than we would like [on our sports tier] in that there are fewer networks just by sheer numbers than the other tiers. So from a rights perspective, I want to get the rights to—since we don’t have a digital basic—truly tier any sports network, but that’s not always possible. It really depends upon the relative leverage of the parties. Certainly that’s Charter’s goal." The lineup is evolving as Charter cuts deals with sports diginets to fill that need. "We’ve had ESPN News, ESPN Classic in some cases, the Fox Sports diginets that are now becoming the college sports product, Fox Sports World," Hamilton says. "We’re adding Fuel from Fox and we’re putting the NFL Network in there in many locations—we were the first ones to do a deal with NFL. We’re talking to CSTV: College Sports Television, we’re talking to The Tennis Channel, talking to NBA TV." Like Costantini, Hamilton is interested in more than digital tiering rights from sports programmers. "We don’t have a lot of VOD sports rights right now, so we’d like to acquire more of those rights," Hamilton says of a task that falls to her colleague, VP of programming R.B. Lerch. "HD is an attractive element of all of our sports deals as well, and we’ve certainly been in negotiations for more of that." Cox’s View Rather than adding more networks to Cox’s digital tiers, SVP of programming Bob Wilson wants to focus on getting better buy rates for his current digital tiers. "We launched those channels with little fees," he says. "Now that they’ve matured, and in a lot of cases we’re paying fees for those services, the perspective is that we don’t want to erode our margins any more on those tiers. And the marginal value of networks being added to those tiers is not such that it’s worth spending any money for and/or dedicating any more bandwidth. So we’d like to see the current networks that we have be more effective." How so? "I’d like to see some networks come to us and say, `Listen, this was a placeholder for us, but we’ve got a new idea and here’s a new niche and we’d like to convert the channel,’" he continues. "It’s already happened with TechTV. Comcast bought it and merged it with G4. Before we had two channels and now it’s one, and it’s going to be a more effective channel. I think there’s some room for that to continue to happen with the existing digital networks that we’ve got." With digital distribution growing for cable operators each quarter, digital networks should be able to afford tweaking themselves, Wilson says. "If they’ve got a better content idea for a network they need to explore that. It’s much more different in analog because that’s a huge value for any channel to have." Like Bond, Wilson is cautious about offering too many digital tiers. Wilson’s main concern is that digital tiers will start fragmenting audiences too much. That means diginets won’t be able to attract the audiences that bring in ad revenue, which, in turn, increases the likelihood that they will fail. "Whereas you might have had a digital penetration of 40% and their digital tiers were penetrating at 60-70%, that’s effectively a 25-30% effective tier-to-total-subs penetration," he says. "When you set up a new tier you’ve missed out on the digital growth to date, so you’re starting from ground zero, so any networks that go on that new tier—even though it helps the system not erode their margin—it gets that network very little distribution." To that end, Wilson wants to see prospective diginets show an integration of linear, VOD and HD platforms. "A 24/7 linear network is just an inefficient use of space, and therefore let’s see if we have some way to do this on VOD. We haven’t really done it yet, but if we saw value in the content for VOD we wouldn’t mind paying a fee for it." Wilson has found digital sports tiers to be less popular than Cox’s ethnic tiers. "We do have one really incredible success story in San Diego with the Filipino Channel. We sell it at $19.95 and we have some 20,000 subscribers," he adds. "That’s a system that knew their needs and is filling that need. San Diego had their three digital tiers and about a year ago they set up a fourth one called a lifestyles tier, and that was fine. We didn’t quite support that here but they didn’t want to erode their margins, they wanted to put new content on this fourth tier. "[But] when you start setting up any new tiers beyond where we are now, they have to be highly specialized, they have to have a much greater reason for it to earn ad revenue beyond just volume." Sports diginets would likely agree—so is the answer for sports programmers and MSOs to agree to disagree when it comes to tiering? "I think the main thing is we’re all trying to understand the evolution of the business," says Wilson. "Everybody’s trying to figure all this out. I don’t think there’s a right or wrong method right now to try to evolve this business in a positive way for consumers. Ultimately, it’s all about developing markets on this stuff."

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