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SBJ/20090126/This Week's News
Why NFL Network is stuck on the sidelines
Published January 26, 2009
After years of distribution missteps and a controversial negotiating strategy, there are signs that NFL executives are willing to take a new approach with NFL Network, which has become a rare and high-profile black eye for the biggest and most powerful sports property in the United States.
The network still is talking with potential partners about giving up equity in the network, demonstrating that after more than five years, the league is growing increasingly concerned about how to get the asset in more homes. For the last two years, its distribution has been going backward despite high-quality year-round programming and top-shelf production.
The confidential equity discussions also suggest that owners and top league executives are willing to change course on a distribution strategy that has been marked with miscalculations.
Last month, league executives met in New York City with the top brass from Fox. The two sides discussed ways Fox could help increase distribution of NFL Network, which is in 35 million homes and is set to lose 2 million homes in April when its deal with Comcast ends.
The mid-December meeting included top Fox executives Peter Chernin, David Hill and Tony Vinciquerra, as well as NFL Commissioner Roger Goodell. NFL Network President and CEO Steve Bornstein participated via speakerphone from his Los Angeles office.
The meeting touched on many of the same points as the league’s discussions with ESPN earlier in the year. The NFL told Fox it was considering giving up equity in its channel to a broadcaster that could wield more leverage with the country’s biggest cable operators. The NFL’s goal is simple: It needs its network in more homes.
As an incentive, the NFL told Fox it was considering placing more live regular-season games on NFL Network if a deal was completed — something the league believes will help in carriage battles against big cable.
Fox executives, who had initiated the talks in late summer, listened intently. They see NFL Network bolstering their cable sports portfolio and envision a scenario similar to their partnership on the Big Ten Network, where Fox owns slightly less than half of the network and was able to cut cable deals with the country’s two biggest cable operators, Comcast and Time Warner. Those two operators have kept NFL Network largely on the sidelines. Time Warner Cable does not carry the channel at all, and Comcast has relegated it to the digital ghetto, its sports-and-information tier.
Sources say executives on both sides left the December meeting upbeat and positive, but the two have not held follow-up talks and conversations are considered still in the early stages.
Meanwhile, multiple sources say the NFL’s talks with ESPN about a partnership on NFL Network have broken off completely. The sides were not able to agree on the amount of equity and control ESPN would have with the network. At one point, the NFL offered to increase the number of games on NFL Network, with the added games coming from ESPN’s “Monday Night Football” schedule, sources said. ESPN dismissed the offer and talks have not resumed.
The idea of giving up equity is a relatively new one for NFL Network, which, unlike other league-owned networks, has remained staunchly independent. For the past five years, NFL executives have believed that their league is powerful enough — and their programming appealing enough — that they don’t need help to get carriage.
But that mind-set may be changing, especially as other networks, like most notably MLB Network, have given up equity to get carriage.
Hatching the idea
Being stuck in less than 40 million homes is not what league executives envisioned when they hatched the idea of their own network.
That was in 2002, when the league was trying to figure out whether to exercise an option in its TV contracts that would terminate the eight-year TV deals that it had with ABC, CBS, Fox and ESPN.
The two executives most instrumental with cutting those original deals — NFL President Neil Austrian and executive vice president Tom Spock — had left the league by then.
In their place was Goodell, who had been named chief operating officer in December 2001, and Bornstein, whom Goodell brought into the league in September 2002 to assist on the TV strategy. The commissioner at the time, Paul Tagliabue, team owners Robert Kraft and Pat Bowlen, NFL executives Frank Hawkins, Chris Russo, Neil Glat and outside consultant Kevin Mayer made up the group that met regularly that fall on the 17th floor of the league’s New York offices.
By the start of 2003, the group decided not to exercise the option terminating the league’s broadcast TV deals. Instead, it focused on launching a league-owned channel. League executives believed, and rightly so, that NFL programming was the reason ESPN and TNT became fully distributed networks; that NFL Sunday Ticket had fueled DirecTV’s popularity; and that the NFL had catapulted Fox into being a dominant network and brand when the league moved its NFC package to the network in 1994. After years of watching other companies build equity off NFL programming, the league felt it could expand its own media asset by launching NFL Network.
Plus, worried that broadcast TV rights fees could stagnate, the group members decided that a new network — one they envisioned could grow to 70 million subscribers and eventually carry live games — would help keep those TV rights fees high and serve as a safeguard should one of the networks drop out of the bidding.
Bornstein’s past accomplishments with ESPN figured into the league’s thinking.
“Because of the success he had with ESPN jacking up those subscriber fees over the years, Steve brought a perspective that other people shared — that it would be nice to not be solely dependent on ad-supported broadcast networks,” said an executive with direct knowledge of the NFL’s plans. “You didn’t want all your eggs in that basket.”
In March 2003, owners officially approved the network’s creation, and NFL Network formally launched eight months later, in November, to about 10 million DirecTV homes.
After its first two years, the channel was a distribution success, having grown to 30 million homes and signing distribution deals with three of the top five cable operators (Charter, Cox and Comcast) and both satellite providers (DirecTV and EchoStar).
But then the league made a spate of controversial and questionable decisions. First, the league passed on a $450 million-a-year deal from Comcast and opted to place a new package of eight regular-season games on NFL Network. Second, the network nearly tripled its license fee to the cable operators. Third, it was steadfast in its negotiating posture and seen as unwilling to compromise.
These moves angered operators and stunted the growth of the network, resulting in a distrust between the sides that continues to this day.
Comcast Chairman and CEO Brian Roberts and Tagliabue were having dinner at Restaurant August in New Orleans in the spring of 2004, just six months after the NFL Network launched.
It was a warm evening in early May, and the two engaged in small talk with high-ranking cable executives at the restaurant’s bar before heading upstairs for a small dinner in a private dining room. Bornstein and Comcast COO Steve Burke also attended the dinner.
The group was in town for the cable industry’s annual trade show, and Tagliabue knew that NFL Network needed to get a carriage agreement from the nation’s biggest cable operator if it had any chance of success.
By the end of the dinner, the group had decided on the framework of a plan. Comcast would launch NFL Network on its D2 tier, which is its second-most-popular digital service.
In return, Comcast believed that it would be awarded the Thursday and Saturday night package of eight regular-season games for OLN, its network that was subsequently renamed Versus.
Comcast executives also believed that they finally would get a chance to distribute the NFL’s popular package of out-of-market games, Sunday Ticket. The NFL had exclusively sold the package to cable’s main rival, DirecTV, since 1994, but the package was coming up for bid.
Three months after that May dinner, Comcast launched NFL Network on its D2 tier, which had roughly 10 million homes at the time.
But just three months later, the NFL renewed Sunday Ticket’s exclusive deal with DirecTV for $3.5 billion over five years, which meant that cable operators would not have access to the package until after the 2010 season.
Comcast officials privately seethed. But they still believed that they had the inside track to what they really wanted, the live-game package. By getting those games, Comcast felt it would be able to increase OLN’s distribution and license fee.
Shortly after losing out on Sunday Ticket, Comcast officials say that they sweetened their bid by offering the NFL an equity position in OLN, in addition to the $450 million a year package for the games.
But in the fall of 2005, sources said Tagliabue was receiving pressure from some NFL owners who did not want to sell the rights to Comcast. Roberts’ reputation as a difficult negotiator and some of his “my-way-or-the-highway” tactics irritated owners, the sources said.
One of the defining moments that fall came as OLN launched its coverage of the NHL, coverage that was widely panned for on-air gaffes and a studio set that one newspaper described as “something assembled in a garage by a bunch of kids on a rainy day.”
Based on those early results, one influential owner called Tagliabue and pleaded with him not to entrust NFL programming to Comcast.
In January 2006, Tagliabue called Roberts and told him that the NFL planned to put the eight-game package on NFL Network rather than take the deal with Comcast.
Roberts was furious. And hurt. He never thought that he’d lose the package and was particularly peeved that the NFL spurned him in favor of its own network. Not only that, but he was angry that Bornstein was one of the NFL’s executives making the decision, since Bornstein was also in charge of the winning bidder, the NFL Network.
During the conversation, Roberts warned Tagliabue that the league would have trouble expanding NFL Network, even with the live games. According to Comcast officials, Tagliabue responded, “Sometimes the owners have to learn the hard way.”
Operators were caught off guard by the decision to put live games on NFL Network so soon, which triggered a clause in their affiliate deals that nearly tripled the license fee, from about 25 cents per subscriber per month to about 70 cents.
The rate increase emboldened operators, who used it to make a public stand against the league’s demands.
Relations quickly deteriorated from there.
The NFL pulled its signal from Charter when the operator moved the channel to a sports tier. It sued Comcast after that company moved the channel to a sports tier. It also sued EchoStar when the satellite distributor moved NFL Network to a digital tier.
NFL Network has yet to recover from those moves, and after a promising beginning, it now has deals with only two of the nine biggest
While league executives refuse to this day to talk about the negotiations, Comcast executives are still smarting from what they feel was unfair treatment. But it wouldn’t be the only time that operators felt that the league was delivering mixed messages.
Turning down Time Warner
In the fall of 2006, Time Warner Cable’s Fred Dressler agreed to carry NFL Network.
At an annual cable function at the New York Hilton that November, Dressler, who headed the programming group for the country’s second largest operator, huddled with Adam Shaw, NFL Network’s senior vice president of distribution and marketing. Over drinks, the two finalized the framework of a deal that would see Time Warner launch NFL Network on analog in its markets that had NFL teams, like Dallas and Cleveland, and on a digital tier everywhere else.
As the two shook hands to cement the deal, Dressler was not convinced. He told Shaw, “I’ll do this deal, Adam. But your bosses won’t.”
Shaw, who had been trying to cut a Time Warner deal for three years, was more optimistic. He felt this was the best deal he could get from Dressler, who was soon retiring and wanted to wrap up NFL negotiations before he left.
But Dressler proved to be right.
The following week, Shaw called to say that his bosses would not agree to any digital distribution. It was analog or nothing.
In one of his last interviews before his death a year ago, Dressler recounted that exchange, saying that even though he shook hands with Shaw, he never expected the deal to close and was not surprised by Shaw’s subsequent phone call.
Shaw has since left the network and did not comment for this story.
Operators consistently point to examples like this as evidence of the NFL’s lack of negotiating flexibility. Operators are infuriated by the fact that there has been no give in the league’s position. Its offer from three years ago — 70 cents per subscriber — is almost exactly the same rate it is offering today.
The problem, according to one executive with knowledge of NFL Network’s strategy, is that the channel is boxed in and can’t afford to negotiate too far off of that 70 cents per subscriber figure.
That’s because it has to make up the $450 million that owners passed up when they decided not to sell the eight-game package to Comcast.
“The NFL had this amount of money on the table that they had forgone,” the executive said. “The NFL had to do their pricing based on what that forgone revenue was. In a pure economic sense, that’s what went wrong.”
Bornstein says that the notion that the league has been inflexible is flat-out wrong.
Without going into detail, he says NFL Network has moved off of its original demands. Sources say that the league will accept digital basic penetration instead of expanded basic analog. And NFL executives have hinted that they would be willing to give up an equity stake to a partner, something that was seen as a deal breaker three years ago.
“We continue to explore creative solutions,” Bornstein said. “What you’re asking me is can I cut four distribution deals with four gatekeepers in the cable industry. I’m always optimistic that if we continue to put out good content, we will be able to work out deals with those four guys that we worked out with 240 other guys.”
A visual success
Bornstein’s Los Angeles office gives one a feel for his flair for confrontation, as he keeps several framed quotes that bolster his hard-nosed and pugilistic persona.
One, from Shakespeare’s “Henry VI,” reads, “The first thing we do, let’s kill all the lawyers.” Another is a signed quote from Mike Tyson about everyone having a “plan” until they get “hit.”
During an October interview, Bornstein complained that the NFL Network’s distribution challenges were overshadowing other measures of its success.
“With one notable exception, which has been our issue in cracking big cable, it’s been a fabulous success story,” he said of the network’s first five years.
To underscore his point, Bornstein spoke in front of a wall of Emmy statues. Most were collected from his time at ESPN. But NFL Network was responsible for five of them, an impressive haul for a channel that’s been around for such a short period.
When the NFL decided to launch the network, owners were committed to investing heavily in its on-air look. Using many of the production values from NFL Films, not to mention much of its library, NFL Network’s programming is top shelf, with a sleek look that rivals much bigger and better-funded broadcasters.
Its Los Angeles studios are state-of-the-art, with impressive sets, quality talent and the latest technology. Across the industry, the network receives high marks for its on-air look and feel.
“They’re not going to put anything with the letters ‘NFL’ on this unless it can be the best it can be,” Bornstein said. “We won our first Emmy within six weeks of being on the air. I won my first one at ESPN eight years after being on air.”
Bornstein said ratings and viewer feedback prove to him that the programming is resonating.
“Whenever you build something, there’s … an energy that comes from the people that are skeptical of you at first, the people that ridicule you when they realize that there’s something real there,” he said. “But people really do love the content we’re putting out there. … The distributors that have us, love us.”
And the ratings seem to support him. NFL Network was the highest-rated cable network in prime time for the week of Dec. 15 with a 2.3 coverage-area rating, thanks largely to its two live games that week. One of those games, the Ravens-Cowboys matchup, pulled a 9.2 coverage-area rating, making it the fourth-highest-rated cable sporting event of the year.
Despite the NFL Network’s impressive production, many in sports business insist the league miscalculated the value of its own programming, which has prevented the network from getting full distribution.
Mark Lazarus was with TNT when it got an eight-game package in the early 1990s. He admits the NFL — and the NBA — helped TNT become a fully distributed network because operators believed that exclusive sports programming helped bring more subscribers to cable.
But Lazarus, who is now president of media and marketing for Career Sports and Entertainment, notes that NFL executives are dealing with a different environment today.
“When you think back to those years — the late 1980s, early 1990s — growth in cable homes every year was 5 to 7 percent,” he said. “We weren’t near the full distribution that we’re at today. Live, high-impact sports helped drive cable penetration.”
That kind of growth doesn’t exist today and operators are looking for other things — like equity or partnerships — to counter a mature subscriber base. And that’s where he believes the NFL has missed out.
“While sports is still one of the most precious programming commodities out there, cable operators want scale,” Lazarus said. “Distributors want and need scale in sports, not a small number of episodes.”
David Cohen, Comcast executive vice president, agrees that part of the NFL Network’s failure has been that the eight-game package is not compelling enough for operators because so much other NFL content is already available. He describes the network’s offering as “a small additional increment of out-of-market games.”
“That’s the fatal flaw underlying the NFL Network,” Cohen states. “If they put a whole season on the network, and they priced it at a rational level and they retooled the out-of-market package, then they may have a value creator there.”
The suggestion that NFL Network is nothing more than eight live games is one that makes Bornstein visibly bristle.
“Anyone who says that misses the point,” he said. “They’re not programmers or they’re not football fans. We do 365 days of quality programming and we have the viewership to support it. I don’t know what other metrics you can look at.”
Where to from here?
This week as NFL owners meet in Tampa for Super Bowl XLIII, they will again be asked about the future of NFL Network.
And as they have for the last five years, they will publicly support the concept and strategy. No fissures of discontent have developed among the ranks, at least not publicly.
In his office in the Culver City section of Los Angeles a few months ago, Bornstein mirrored such confidence. Sitting back in a leather chair, he was calm and determined as he spoke.
In looking back at the distribution battles over the past five years, Bornstein expresses no regrets and contends that NFL Network did not miss the mark on pricing. Rather, he says cable operators changed priorities over the years, and have become more focused on their telephone and Internet businesses, as opposed to video programming.
“The cable business changed on us. It wasn’t anything that we did,” he said. “They decided that they want to be telephone companies. They are concentrating on delivering high-speed data. They are concentrating on delivering telephones. They are not just video providers anymore … If you are in the business of delivering [only] video programming, we would have these deals done.”
But deals get done by communication and negotiation, and the network’s only talks these days seem to be with potential equity partners.
In fact, Time Warner Cable, Charter and Cablevision did not have any substantive talks with the NFL in 2008, sources say. The network is involved in lawsuits with Comcast and EchoStar and is not talking with those companies either.
NFL Network’s affiliate relations department, which is responsible for maintaining relationships with cable operators, also appears in disarray, losing three high-ranking executives in the past 19 months without replacing any of them.
Shaw, who headed the department, left in April 2007, and vice presidents Art Marquez and Brian Decker left in July and December 2008, respectively.
The fact that none have been replaced bolsters cable operators’ opinion that the NFL is not willing to work with them.
Bornstein, whose future at NFL Network has been the subject of speculation, dismisses the notion that the network is without a distribution plan. He also disagrees with the idea that the network needs a new approach.
During his interview, he remained upbeat about the long-term plan and preached patience.
“I’m not trying to fix something,” he said. “I’m trying to build something.”
As the talks with broadcasters like Fox continue, however, the question is whether NFL owners want a five-year-old channel to still be in a building mode.