Time Warner's Lakers Channel: Is $4 Too Much to Ask?

Friday, October 26, 2012 10:03 AM ET 
By Sarah Barry James

Sports programming does not come cheap these days.

After having reportedly paid $3 billion for its 20-year deal with the Los Angeles Lakers, Time Warner Cable Inc. is now asking DIRECTV, Cox Communications Inc., Charter Communications Inc., DISH Network Corp., AT&T Inc. and other distributors for affiliate fees of $3.95per subscriber per month for its new regional sports networks, Time Warner Cable SportsNet and Time Warner Cable Deportes.

But with multichannel operators already facing shrinking video margins and not necessarily able to pass on new costs to consumers, is nearly $4 per subscriber too much to ask?

Cox certainly seems to think so. "The price for the Lakers is one of the highest wholesale prices that we have seen, especially when you consider it on a 'per game' basis: only 53 of the of the Lakers' 82 regular season games will be exclusively available on TWC SportsNet," Cox spokesman Todd Smith said in a statement emailed to SNL Kagan. "The additional 29 games will be available on broadcast and other cable networks including ABC, ESPN and TNT, which are already available on Cox's lineup."

Chris Bevilacqua, CEO of the consulting group Bevilacqua Media Co., however, told SNL Kagan that there are millions of Lakers fans in the Los Angeles region and that they will not be satisfied with having access to only a fraction of the team's games.

"I don't think there is a real substitute," he said. "If you are truly a fan — and the Lakers obviously have a pretty big viewer base as illustrated by the ratings — you are not going to settle for [the 25 or so] games a year on other outlets. You are talking about 55 other games where the only place you can get them is by having the sports net. So it's a powerful programming offering."

For its part, Time Warner Cable said Oct. 25 that with games from the L.A. Lakers, L.A. Galaxy and the L.A. Sparks, its two RSNs deliver "tremendous value for Southern California sports fans."

The company added: "Any assertion that we are the highest-priced regional sports outlet in the country is simply untrue; as a significant buyer of regional sports across the country, we know that there are higher-priced regional sports networks, including Root Sports that we buy from DIRECTV."

According to SNL Kagan data, Time Warner Cable is correct that its RSNs are not the most expensive in the industry, especially since the company is asking for $3.95 per sub for the combination of two networks. Broken down between networks, that works out to less than $2 per subscriber for each.

By comparison, SNL Kagan estimates that Comcast Corp.'s Comcast SportsNet Washington will earn $4.02 per average subscriber per month in 2012, and News Corp.'s FOX Sports North will earn $3.68 per average subscriber per month. As for a national sports network, ESPN is expected to earn $5.13 per average subscriber per month in 2012.

The question of which network is most expensive, however, may not be the right one to ask. According to some industry observers, the more important question is whether Cox, DIRECTV or any other distributor can succeed in the Los Angeles region without offering Time Warner Cable's RSNs.

"It's tough to compete in L.A. without offering up Los Angeles Lakers basketball," LHB Sports Entertainment & Media Inc. CEO Lee Berke told SNL Kagan. "That is going to be a substantial piece of leverage of getting these networks distributed."

Berke noted that the two RSNs have the added advantage of already being carried on Time Warner Cable, the largest distributor in the L.A. market. Indeed, SNL Kagan estimates that Time Warner Cable has 1.7 million subscribers in the Los Angeles designated market area, whereas DIRECTV has 1.2 million, DISH has 608,860, Verizon Communications Inc.'s FiOS has 461,132, AT&T's U-verse has 294,819, Charter has 292,525 and Cox has 246,984.

With their biggest competitor already offering the two RSNs, Berke said the other distributors will have to follow suit. "It's inevitable that there are going to be some distribution battles, but it's inevitable that they are going to get distributed."

Bevilacqua agreed, saying that rival operators stand to lose subscribers to Time Warner Cable if they do not come to an agreement for the networks. "If enough customers went long enough without having access to the games, they would have motivation to switch," he said. "At some point, it will start eroding the customer base."

SNL Kagan Derek Baine, however, is not convinced that DIRECTV or DISH need TWC SportsNet or TWC Deportes to remain competitive.

"I don't think it's a must have for satellite," he said in an interview. He noted that other cable operators have had "a distinct strategy" of not selling their RSNs to satellite companies because it gives the cable companies a competitive edge in their markets. He pointed to the Comcast SportsNet Philadelphia network as an example.

Further, both DISH and DIRECTV have proven several times over that they can take a hard line when it comes to paying more for programming. DISH, for example, went without AMC Networks Inc.'s channels for months until a carriage agreement was reached a few days ago. And DIRECTV currently does not carry the Pac-12 networks, saying on its website, directivepromise.com: "Pac 12 either needs to agree to a price to make it affordable for all of our customers ... or allow Pac 12 fans to buy the network separately or purchase individual games on demand. Unfortunately, Pac 12 has refused all of these options. Regardless, we stand ready to agree to add the network if they propose a deal that's fair."

Earlier this summer, DIRECTV also went up against Viacom Inc. in a carriage dispute. For roughly nine days, DIRECTV customers did not have access to all of Viacom's networks, including MTV, Nickelodeon and Comedy Central.

Cox, though, is somewhat of a different story and Baine said he ultimately expected Cox would carry Time Warner Cable's two RSNs.

Cox's Smith said the company is continuing to negotiate with Time Warner Cable and hopes to reach "an agreement that does not burden our customers with excessive price increases."

He added: "We have offered to carry TWC SportsNet channels on our optional digital tiers, which would enable those who want to pay for the programming to have it. This offer has been refused."

Time Warner Cable defended is refusal in its Oct. 25 statement, noting, "Cox and DIRECTV know that there is no regional sports network anywhere in the country that is offered on an optional tier — that would be unprecedented."

Interestingly, Bevilacqua, Berke and Baine all agreed with Time Warner Cable on that front, noting that it would be unlikely that an RSN could be carried on an optional tier within a home market.

"I think that as you get out of market, sports tiers are a possibility but not in-market," Baine said.

Berke echoed: "Virtually every home team RSN is on expanded basic or basic. And I think that's going to continue. They are huge drivers of overall subscription retention and overall subscription revenue. So I think they will continue to be on basic for the foreseeable future."

Bevilacqua, meanwhile, noted that the economics of RSNs are not set up to support their placement on optional tiers. "The RSN industry has a business model that has been in place for some number of years where, without exception, they are broadly distributed networks in home markets," he said. "The idea that you would start some migration off what is expanded basic in the home markets to a sports tier seems to me not very likely."

On the other hand, Bevilacqua said he is sympathetic to distributors who are facing shrinking video margins. And he does believe there needs to be a "rationalization" of the pay TV marketplace.

But he expects that rationalization to occur through pay TV operators dropping less popular cable channels while paying more for sports and other highly watched programming.

"There's a lot of waste in the current system, meaning there are a whole bunch of networks that are getting bought by distributors and then sold through to customers that nobody watches," he said. "But in virtually every market, local sports are among the highest-rated programs of any genre of programming in those local markets. So it would seem to me that you will continue to pay a premium for the stuff people actually watch; and as a distributor, you should be trying to shed or reallocate costs from programming that nobody watches to programming that people do watch."

"Rightly so," he added, "sports is commanding a premium."