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Cablevision Shows Rivals How to Play Sports

The YES deal opens the door to a new pricing structure that operators favor but programmers don't.

The fight between Cablevision (CVC) and the Yankees isn't just about the money.

Believe it or not, it's also about the principle of the thing.

The deal that Cablevision and the Yankees announced March 12 -- and which collapsed last week, only to be revived Monday evening -- represents a watershed event in the history of the cable and satellite businesses, say industry observers and participants.

If Cablevision ends up broadcasting Yankee games under terms similar to the ones that the two parties announced earlier this month, it would likely open up the floodgates, say onlookers, to a tactic that cable operators and direct broadcast satellite services have long wanted to use to hold down rising basic cable costs. That practice is known as "a la carte" sales: offering the most expensive programming, primarily sports channels, as an option rather than as part of the basic package.

Such a la carte pricing, however, could result in less money for sports programmers, saddling them with broadcast rights fees -- already expensive -- that would be even harder to pay off. Further down the road, this scenario would mean less money for professional athletes, since team owners would have less money jingling in their pockets.

"There's a general realization right now that the entire structure of the sports television business is about to change," says Bob Scherman, editor and publisher of

Satellite Business News

.

Breadth vs. Depth

Programmers, other than those of premium movie channels such as HBO, have steadfastly fought a la carte pricing. Though they would likely receive a higher fee per household among the customers who paid for their service a la carte, they prefer the per-subscriber fees they receive for carriage in 100% of a cable system's homes -- plus the advertising revenue that's bolstered by their widespread availability.

Though cable operators may have preferred a la carte deals, they've been loath to drop sports programming from their systems, fearing the consumer outrage that would result. Over the years, cable operators have complained about soaring sports costs, but paid up anyway. A recent report by J.P. Morgan, for example, calculates that in an average cable household with more than 50 channels, two sports channels --

Disney's

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ESPN and the

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News Corp.

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-controlled

Fox Sports Net

-- amount to 25% of a cable operator's programming costs.

That traditional complain-and-pay ritual, however, fell apart last year when Cablevision, which has 3 million subscribers in the New York City area, walked away from an agreement with the YES Network, the sports channel that broadcasts the Yankees games. YES is controlled by YankeeNets, the organization that owns both the Yankees and basketball's New Jersey Nets. The inability of Cablevision and YES to come to terms effectively blacked out Yankees games for Cablevision customers -- hurting Cablevision by sending some of its customers to rival DBS service DirecTV, and chopping YES's advertising revenue and subscription fees by eliminating more than a third of the 8.3 million households it had hoped to reach in the metropolitan area.

The agreement finally reached on Monday, in time for the Yankees' season opener, represents a toehold for the a la carte proponents. The one-third of Cablevision customers already subscribing to high-end cable packages -- which start at about $65 a month -- will receive the YES Network at no extra charge. But the other 2 million Cablevision subscribers will be able to order the YES Network a la carte, either by itself for $1.95 a month, or in a package of three sports channels for $4.95 a month. This package of similarly themed channels, known as an "affinity tier," would comprise YES, Fox Sports New York and the Cablevision-owned MSG, which had the Yankees broadcast rights before the YankeeNets reclaimed them.

"The precedent of the March 12 deal is very important for the cable industry," says Steve Effros, a cable industry attorney and consultant who formerly headed a cable operator trade association. "Very high-priced programming is going to end up on affinity tiers or a la carte," he says. "You just can't put champagne on the menu and make everybody drink it," he says.

Trail of Tiers

Now that Cablevision's bargaining has given it the power to roll out tiers -- at least for the next year -- other cable and DBS operators may be encouraged to try similar tactics.

On this front, they even have support in Washington. Soon after Cablevision and YES reached their March 12 agreement, Sen. John McCain (R., Ariz.), chairman of the Senate Commerce Committee, sent a letter to other major cable operators in which he encouraged them to try similar plans as a way to limit customer complaints. "I applaud the courage of Cablevision to reach an agreement with the YES Network that provides its customers with an option not to pay for programming they do not want," wrote McCain. "I challenge you to provide your customers with similar choices, especially with respect to the most expensive programming, like sports, that continue to drive up cable rates."

Such a changeover would create a puzzle for sports programmers. If a la carte packaging took off, the channels could raise their subscription fees for remaining subscribers to make up for lost per-household fees and advertising revenue. Households are happy to pay, say, $10 a month for HBO. "The question is, what is sports really worth?" says Effros. "And I don't think anybody really has an answer to that."

In the worst-case scenario for programmers and sports teams, the channels won't be able to pass on price increases to distributors, limiting their ability to pay teams for broadcast rights. That, in turn, will limit teams' ability to pay for talent. "If

a la carte leads to a restructuring of the sports television business," says Scherman, "that could have ramifications down to the very salary that professional athletes get."