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Volume 23 No. 17
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ESPN fires back at critics of ‘MNF’ deal’s price tag

ESPN is hitting back against critics who publicly accused the media company of wild, indiscriminate spending with its eight-year, $15.2 billion deal to extend its rights to “Monday Night Football.”

Sean Bratches, ESPN’s executive vice president of sales and marketing, said he fielded calls earlier this month, shortly after the deal was announced, from several video distributors who expressed concern over the nearly $2 billion annual price tag. He said he allayed their fears that ESPN would seek to fund the deal through increases in their affiliate fees.

But some critics took their concerns public last week, pointing to ESPN’s NFL deal as an example of a sports rights landscape that is becoming too expensive for the average fan. Matt Polka, who heads an association of small cable operators, publicly called for Congress to take a look at the cost of sports rights. Polka complained that consumers ultimately would have to pay for the contract through higher cable fees.

“We’re accustomed to his refrain,” Bratches said. “It’s unfortunate that these types of allegations are made without any conversation with us to explain the thought process behind our investment.”

Financial analyst Craig Moffett of Bernstein Research also questioned the size of the deal, concluding that “sports fans are overwhelmingly being subsidized by non-sports fans,” and suggesting that an opportunity exists “for an entertainment-only offering, at half the price of a sports-included offering.”

But Bratches said the distributors who contacted ESPN don’t share those same fears. Bratches promised that ESPN would not try to force them to pay an “NFL Tax.” He also explained how much more TV, broadband and mobile content ESPN was getting through this deal. On TV alone, ESPN is planning to roll out 500 new hours of NFL-related studio programming, which is the highest-rated programming on TV. In 2010, for example, 17 ESPN-produced NFL games made the list of cable’s 20 most watched shows.

Executives from several large distributors confirmed Bratches’ account and said that they were not alarmed by the size of ESPN’s “Monday Night Football” deal.

At $4.69 per subscriber per month, ESPN already is the most expensive channel on cable systems. TNT is a distant second, at $1.16, according to SNL Financial. At that rate, even a small percentage increase would represent big bucks to distributors.

“There is no NFL surcharge, and we’re not seeking to negotiate one,” Bratches said. “The consumption of sports continues to grow on TV and all platforms. This is the last bastion of live programming, making it valuable to many networks. We’re confident that the price-value dynamic is in line.”

Interviews with executives from three of the biggest distributors suggest that ESPN’s NFL price tag was expected and is not a huge concern. These executives said they are satisfied that ESPN does not make its content available for free on mobile or broadband platforms, as only authenticated subscribers can watch ESPN content on digital platforms. Distributors also control up to 40 percent of ad inventory during “Monday Night Football” games, which translates to significant ad sales revenue.

Even if distributors weren’t satisfied, they would have little recourse. It would be a huge risk for any distributor to drop ESPN because they don’t buy ESPN as an individual channel. It’s part of a bundle of channels that includes all the ESPN and Disney-branded cable channels and the ABC broadcast network. If a distributor tries to say no to ESPN, it would have to do without all of Disney’s channels, which gives ESPN protection against any distributor trying to shed its sports channels.

“The size of the NFL contract is notable because this is the most expensive content on television at a time when consumers are seeing increased pressure,” said David Bank, managing director of global media and Internet research for RBC Capital Markets. “But I don’t stay up late worrying in the near term that the push back will amount to much. For distributors, it’s not about losing just ESPN. It’s about losing the entire Disney package.”

Reaction from financial markets also has been muted. At deadline, Disney’s stock was up slightly in the week following the NFL announcement. And, perhaps most importantly, there’s been no outcry inside the Beltway from Congress or regulators.

While this increase from the average cost of the current contract ($1.1 billion per year) to the new one ($1.9 billion per year) is more than 70 percent, Credit Suisse analyst Spencer Wang said the actual annual increases are just 6 percent.

“This implies a neutral impact on our margin assumptions and to the extent that ESPN can grow revenues at a faster clip, we still see the opportunity for longer term margin expansion,” Wang wrote in a research report.