SBJ/March 8 - 14, 1999/No Topic Name

Cablevision Systems faces decisions after shock of merger

Cablevision Systems Corp.'s critical sports strategy may be on shaky ground.

The New York Yankees and New Jersey Nets merger gives the Yankees, the gem of Cablevision's MSG Network, an option to sever ties with Cablevision next year when the club's 12-year, $486 million broadcast contract expires.

After months of pressuring Yankees owner George Steinbrenner to sell the club to Cablevision, with the argument that there were no other takers in town for the broadcast rights, the entertainment and cable giant has essentially received an audacious and well-crafted missive from the colorful owner: Pay up or lose us.

For Cablevision (NYSE:CVC), the choices are stark: Lose rights to the Yankees and, along with those rights, a possible lucrative spin-off of the cable company's sports holdings, or pay a steep premium to buy the new YankeeNets company or its rights and watch angry shareholders drive down Cablevision's share price.

"They have to make a decision whether they will up the ante and pay the price Steinbrenner is asking or whether they will play hardball and go without the Yankees," said John Mansell, an analyst with Paul Kagan Associates, which tracks the cable and media industries.

Cablevision won't comment, except for a statement issued by President James Dolan the day the merger was announced: "Cablevision has enjoyed a long-standing, productive relationship with both organizations, and we look forward to continuing those relationships in the future."

Without the Yankees, Cablevision would still have an enviable New York sports empire: Madison Square Garden, MSG Network, half of Fox Sports, and the New York Knicks and Rangers. There are even reports Cablevision may be eyeing the New York Mets, though that team's co-owner, Nelson Doubleday, denied it.

But by losing its grasp on rights to the Yankees and the Nets, the door is open for a competitor to enter New York. The Yankees could sell their broadcast rights to Time Warner Inc. (NYSE:TWX) or Walt Disney Co. (NYSE:DIS) unit ESPN, or form their own network. While Cablevision controls a good part of the cable system in the New York area, it would be hard-pressed to keep Yankees games off the air.

"This is somewhat analogous to the situation on the West Coast, when Fox Sports blocked ESPN from starting a regional cable channel by offering Disney a huge amount of money for Disney's teams' rights," said Neal Pilson, president of Pilson Communications Inc. and the former head of CBS Sports. "ESPN had to cancel its plans, because [then] there was no way it could justify paying such a huge amount of money" to start up a new network.

But the Dolans — James and his father, Charles, the chairman of the company — have passed on the Yankees before. In 1986 their SportsChannel NY lost the team's rights to MSG when the network signed the current Yankees contract. Several years later, Cablevision acquired MSG.

This time the stakes are even higher. Pilson thinks a 10- to 12-year broadcast deal would cost $1 billion, the major reason Cablevision wanted to buy the Yankees.

One possibility is a licensing arrangement, Pilson added. The Yankees could license broadcast rights to a host of cable carriers, not just Cablevision.

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