SBJ/Jan. 24-30, 2011/Media

Time Warner Cable in talks for Longhorns network stake

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ESPN and Time Warner Cable have engaged in preliminary discussions that would give the cable operator an ownership stake — as much as 20 percent — in the new University of Texas channel in exchange for wide distribution throughout the state, according to several sources with knowledge of the talks.

ESPN, which formally announced a 20-year, $300 million deal to own and operate the first-of-its-kind channel last week, says it will push for the broadest possible distribution, meaning expanded basic carriage in Texas and sports tier carriage elsewhere. IMG College, the school’s multimedia rights holder, negotiated the deal for Texas and will lead the channel’s advertising sales.

There are 7.75 million cable and satellite households in the state, according to MediaCensus 2011 from Media Business Corp. Executives are tight-lipped on how much the channel’s license fee will be for the channel when it launches in September.

A deal with Time Warner Cable is essential for the unnamed channel’s distribution because TWC is the state’s dominant cable operator, with close to 2 million subscribers, according to Media Business Corp. In addition to being a UT corporate sponsor, TWC has wired the university for cable and broadband services, and it has a system that covers the state capital, Austin.

“The channel offers a compelling proposition to operators that have a significant presence in Texas,” said Burke Magnus, ESPN’s senior vice president of college sports.
The carriage negotiations will culminate a complicated three-plus-year process that saw a shift in ownership of Texas’ multimedia rights, conference realignment, and as the talks heightened, a series of high-level discussions between ESPN President George Bodenheimer and IMG Sports & Entertainment President George Pyne.

The Longhorns began discussing their own channel in April 2007, when athletic officials were approached by two private equity firms whose idea was to create the channel, get it up and running, and then sell it in five years. Texas officials were intrigued by the concept but didn’t like its short-term ownership model.

At the time Host Communications owned the school’s multimedia rights, including the TV rights for Texas events that weren’t televised as part of the Big 12’s package. Host’s CEO, Tom Stultz, agreed to represent Texas in the discussions to form a channel. He then moved over to IMG when it acquired Host a year later.

“That acquisition by IMG represented a big change in the process,” said Stultz, now senior vice president and managing director of IMG College. “When Host was doing the talking, there was a belief that we’d find a way, but when it was IMG College, there no longer was a question about whether we could do it or if the financing would work. It took discussions into a whole new stage.”

Talks for the channel picked up last summer as major college conferences realigned and Texas explored a move to the Pac-10. As those talks evolved, it became apparent that UT’s athletic director, DeLoss Dodds, was driving much of the discussion and that Texas was central to the Big 12’s salvation, all of which added to the Longhorns’ leverage in pursuing their own channel.

“Texas’ whole profile in the sports industry changed from that,” Stultz said. “The tone of the discussions changed. Anyone who was lukewarm before certainly wanted to be a part of the channel now because they understood the power and reach of Texas athletics.”

It was September when Texas and IMG College decided to partner with ESPN, choosing the Disney-owned company over Fox, cable operators and other private-equity candidates. ESPN’s commitment showed in a $300 million, 20-year offer that beat out other bids, and it committed to put all of its creative resources to work to enhance the programming.

“Let’s just say the money is there on the production side to do it the way it needs to be done,” Dodds said. “ESPN has made a full commitment on the production side.”
In fact, a clause in the contract requires ESPN to produce programming for the Texas channel that is comparable in quality to ESPN’s national networks. One option ESPN is considering is building a studio onto the end of the football stadium.

“We’re going to bring all of our experience, personnel and resources to bear to make it successful,” Magnus said. “There’s more than enough content, and we’ll have the budget to keep content fresh and diverse.”

Based on its multimedia rights contract with IMG College, Texas receives 82.5 percent of the $300 million rights fee from ESPN, or $247.5 million over the 20 years of the deal. IMG College will keep $52.5 million.

That breakdown is based on IMG College’s revenue-share contract with the school that gives Texas a larger share of the revenue as it increases. Once annual revenue hits the highest threshold spelled out in the contract — $15 million or more — the split is 82.5 percent for Texas to 17.5 percent for IMG.

IMG College’s revenue-share agreement with Texas is unlike any of its other school contracts, which pay a guarantee and then a 50-50 split of revenue once it hits certain thresholds. In other words, Texas’ cut of revenue from the channel would have been $150 million instead of $247.5 million if Dodds had negotiated a conventional contract.
IMG College also is in talks with Texas to extend its rights agreement, which has 11 years left, out to 20 years so that it’s co-terminus with the ESPN contract.

“We’ve always believed that we’re in business with Host and now IMG,” Dodds said. “We have a lot of faith in them to do the business and we have a lot of faith in our ability to generate revenue. We’d rather share in the risk and share in the good times.

“The good times are still here,” he added with a laugh.

Added Stultz: “This deal with the channel shows the beauty of a revenue-share model for the school. They’re getting much more money than if they had a traditional multimedia rights deal.”

As the talks with ESPN progressed, questions emerged over what to do with the digital rights. IMG College owns the digital rights to the official UT athletic department website, but ESPN wanted a website that would represent the network and carry part of its programming.

The rub was that many of UT’s live events already were being streamed on the official site and now they were moving to the channel. ESPN needed a website where it could promote the channel and broadcast events live if they weren’t airing on the TV channel.

IMG College will retain the rights to the official website, but it will show highlights instead of live streamed events. According to the agreement between IMG College and ESPN, the school’s official site cannot show more than two minutes of an event that’s live on the channel or the channel’s website.

IMG College also will sell all of the advertising inventory on the channel. In addition to ad units, IMG will sell title sponsorships to shows, segments and features on the channel, and it will target Texas’ corporate sponsors first. Under the banner of Longhorn Sports Network, which is managed by Scott Willingham, IMG College sells the corporate sponsorship program as well.

Advertisers will be billed by the network, and the network will pay IMG College a commission. Corporate sponsors will continue to be billed by IMG College.
“We’ll give partners every opportunity to bundle everything together so that they can make a bigger impact,” Stultz said.

IMG College is in the process of building a national sales team of 15 to 20 people who also will be involved in the selling for the network. The national group is being assembled by IMG College’s senior vice president, Lawton Logan.

It will be ESPN’s job, as the channel’s owner and operator, to hire a general manager and staff of 50 to 75 employees. ESPN wants to fill the channel’s top spot quickly, and a source said ESPN is likely to hire from within. Most will be based in Austin, while others will be in New York and some will be at ESPN’s Bristol, Conn., headquarters.

Magnus said it’s impossible “to know how long it will be before the channel is profitable, but we wouldn’t be doing this unless we thought it was a good business proposition.”
While he didn’t rule out cutting a similar deal with another school, Magnus said ESPN has nothing in the offing. “Our focus is here for the foreseeable future,” he said.

Because of Texas’ reach and following, it is uniquely positioned to launch such a channel, Stultz and Magnus said. There are only a handful of schools that could launch similar channels.

Oklahoma is in the process of forming its own channel, and Notre Dame and BYU have the kind of national followings that could position those schools to do something similar.

But teams in the Big Ten could not cut this kind of deal because of the rights held by the Big Ten Network. The Pac-10 also has made its intentions of launching a conference network clear. The SEC and ACC are encumbered by long-term rights agreements.

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