ESPN is already starting to face a major backlash from pay TV providers and some Wall Street analysts to yesterday’s $15B deal extending its rights to Monday Night Football for eight years to 2021. The agreement – which is at least 60% higher than the previous deal — “will push the cost of pay-TV service into the stratosphere, making the product less and less affordable during a time of severe economic stress and high unemployment,” says Matthew Polka, CEO of the American Cable Association, a trade group for small and mid-sized operators. His main complaint is that ESPN requires distributors to offer the channel in the most popular expanded basic package which means “consumers with no interest in sports are required to subsidize the sports fan.” ESPN and ESPN2 represent about 20% of a typical pay TV provider’s wholesale programming costs even though the channels just appeal to 2.5% of the viewers, Bernstein Research analyst Craig Moffett says in a new report. If you throw in other services, including regional channels, then about $12.15 — more than half of the average monthly wholesale programming payments — go for sports. Moffett figures that pay TV subscribers would have to pay an additional 67 cents a month just to cover ESPN’s additional new football costs. The price would rise to 78 cents if Dish Network drops the Disney-owned sports channel, something that the satellite company’s chairman Charlie Ergen has threatened to do. No wonder some analysts say Disney bit off more than it can chew. Dave Novosel at newsletter Gimme Credit today reiterated his “sell” recomendation for Disney’s bonds. Although the NFL “is valuable programming even by sports standards,” he says, “let’s not forget that Disney, and other media companies, often lose money on sports programming.” In addition to the NFL, ESPN’s costs are rising for Major League Baseball, the PAC-12 Conference, and Wimbledon tennis — and from start up costs for the Longhorn Network (which specializes in University of Texas games). That’s troublesome, Novosel says, because ESPN’s ad revenues fell 1% after excluding unusual items in the quarter that ended in June.
Moody’s Investors Service analyst Neil Begley is less troubled. He says that the NFL “is must have programming” and will give ESPN “more leverage in its upcoming and ongoing negotiations with pay TV distributors” as well as its deals with advertisers. Yesterday ESPN chief George Bodenheimer predicted that the new NFL deal “will be received very well by our distributors” calling the sports channel “the most valuable service in cable for more than 30 years.”
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