Disney: Cable affiliates can't carry ESPN in 'small packages'

Disney (NYSE: DIS) executives suggested that low-cost programming packages offered by a few major cable MSOs would be problematic if ESPN ends up in anything but the most popular tiers from affiliates.

In the last year, Comcast (Nasdaq: CMCSA), Time Warner Cable (NYSE: TWC) and Cox Communication have begun offering low-cost programming packages that don't include ESPN and regional sports networks, but the MSOs have put little marketing muscle behind packages such as Cox's TV Economy, Comcast's MyTV Choice and Time Warner's TV Essentials packages. One reason why the MSOs haven't made the low-cost packages a priority is that they could violate carriage deals with ESPN and parent Disney if the packages were to become more popular than the expanded basic programming packages that are home to ESPN.

"I just want to make sure you understood this. The MVPDs (multichannel video programming distributors) have always had the opportunity to offer small packages. What they don't have is the opportunity to offer ESPN on small packages. The deal basically requires ESPN to be offered on the first or second most popular tier offered by the carrier," Disney CFO Jay Rosulo said on a Disney earnings call Tuesday.

ESPN supplies Comcast, Time Warner Cable and other cable and satellite affiliates with two minutes per hour of local advertising inventory. That has made the network one of the biggest sources of local ad revenue for cable affiliates, which can sell ads to car dealerships and other local media buyers during ESPN's coverage of NFL, MLB and NBA games. If ESPN were to be moved to a sports tier, or not made available to the vast majority of pay TV subscribers, local ad revenue at cable MSOs could take a hit.

Disney CEO Bob Iger told analysts that he has had trouble finding information about the low-cost programming packages from affiliates. "I went online yesterday to a local cable operator's site just because I was curious. And I tried to order a small package, and I couldn't find it. And my guess is that they are not marketing it very aggressively because it's not, one, not all that attractive to their customers and, two, not all that attractive to them," Iger said.

Cox Communications recently began marketing $35 monthly TV Economy packages that feature about 20 channels, including Discovery Channel, Nickelodeon and E!. Asked about the Disney comments, Cox spokesman Todd Smith noted that ESPN is offered in its most popular tiers, and that it expects that ESPN will remain in its most popular tiers.

"We fully expect that our most popular tier will remain our most popular tier. This is just one more option for our customers," Smith said regarding the TV Economy package.

Offering low-cost programming packages help MSOs appear more consumer friendly, and allow them to tell regulators that they are offering consumers more options. But until Comcast, Time Warner Cable and Cox reach carriage agreements with ESPN that would allow the distributors to place the network on a sports tier or any tier other than expanded basic, it's unlikely that the MSOs would invest in marketing low-cost programming packages.

For more:
- see the Disney fiscal Q1 earnings release
- and the transcript from Disney's earnings call

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