Why cable operators don't have choice to carry ESPN on a sports tier

It wasn't shocking that Time Warner Cable (NYSE: TWC) didn't include a pitch for its new $40 monthly TV Essentials programming package in that Super Bowl ad that it ran last weekend. Instead, the company focused on subscribers' ability to watch ESPN and premium network Showtime, rather than promote a less expensive programming tier that doesn't include ESPN and regional sports networks.

Of course, no one would expect Time Warner Cable or another provider to hype a programming tier that don't include sports networks in an ad running during the biggest sporting event of the year. But the MSO, along with Comcast (Nasdaq: CMCSA) and Cox Communications, hasn't put any marketing resources into touting low-cost programming packages.

While Comcast's MyTV Choice, Time Warner Cable's TV Essentials, and Cox's TV Economy packages have generated a lot of headlines, few cable subscribers have heard about the packages. One reason why there may be little marketing resources dedicated to promoting the option is that cable affiliates don't want them to become too popular.

As Jay Rosulo, CFO at ESPN parent Disney (NYSE: DIS) explained on an earnings call Wednesday, ESPN's contracts with cable and satellite affiliates mandate that it be carried on their most popular programming tiers. "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," he said.

Time Warner Cable CEO Glenn Britt has been a proponent of developing sports programming tiers. But rather than kick ESPN onto a tier, the company has placed less expensive networks such as AMC, CNN, HGTV and CNN onto its TV Essentials programming package, and offered that tier as an option to subscribers who don't want to pay for a more expensive programming package that includes ESPN and regional sports channels. Most distributors do offer some form of sports tiers, but those channels include less expensive networks such as Fox Soccer Channel and Tennis Channel.

American Cable Association (ACA) president Matt Polka wrote an op/ed piece a few days before the Super Bowl in which he bemoaned the cost of the NFL's $42 billion in rights deals with broadcast and cable networks, and the impact it will have on consumers. Pointing to the "absence of real consumer choice," Polka called for operators to be able to distribute sports tiers.

But even if cable and satellite affiliates weren't contractually obligated to carry ESPN on expanded basic, most distributors would likely continue to carry ESPN on their most popular tiers because of competitive reasons. The landmark carriage deal that Disney signed last month with Comcast, the biggest U.S. distributor, will force other cable and satellite affiliates to reach similar deals.

Now that Disney has Comcast on board, DirecTV (Nasdaq: DTV), Dish (Nasdaq: DISH), AT&T (NYSE: T) and Verizon (NYSE: VZ) will have to reach similar deals in order to offer subscribers access to live TV, VoD and mobile video programming that Comcast can offer its customers. And once Disney has the satellite TV firms and telcos on board, all cable operators, big and small, will have no choice but to sign similar agreements that will keep ESPN off of sports tiers for years to come.--Steve