It sounds so rational when NBC Sports chairman Dick Ebersol explains why cable can afford to be the home for big-ticket sports and broadcast can't. Even though cable is advertising reliant and therefore subject to the same vagaries of the market, it has that nifty extra revenue stream from licensing fees, guaranteeing continuing revenue that comes in handy during economic downturns. But Ebersol and others, such as Morgan Stanley analyst Rich Bilotti, seem to be overlooking an important constituency in this debate: cable operators.

?There is limited ability for cable distributors to pay these sports programming rights,? says Cable One VP-strategic marketing Jerry McKenna, who wouldn't mind if marquee sports, such as football, were all on broadcast networks with the exception of out-of-market premium packages.

How limited is that ability? When the costs of programming stretch so high they can no longer be passed on to the consumer and start cutting into operator margins, the limit will have been reached. Quietly ? never on the record ? some programmers suggest operators may have to get used to lower margins. Some operators are already at that point with analog margins but thus far have been able to make up for it on the higher end.

?I think we're rapidly approaching that point now because we are trying to keep our rate increases to 5%,? says McKenna.

What these programmers don't realize is that there is no possibility of reducing margins to pay higher sports rights fees, at least at the publicly held cable operators. Investors will either vote with their feet and sink a stock, or they will act to oust a management.

That doesn't mean Ebersol and company are completely off base. Some cable networks ? those that are part of extended corporate families of AOL Time Warner and the Walt Disney Co. ? have far more flexibility to engineer creative rights deals than their broadcast counterparts. Witness the complex, far-reaching $2.4 billion deal AOL and Disney just signed with the National Basketball Association. This deal wasn't just about NBC walking away from a big price tag and near-certain losses; it was about the ways in which the companies with sports cable networks could flex their corporate muscle. Turner Sports president Mark Lazarus describes the NBA deal as ?somewhat transformational.? He explains: ?We got the broadcast benefits [like exclusivity], something that cable's never had before. The model is starting to shift. The model shifted a little bit three years ago, when Turner and NBC combined to get the NASCAR rights.?

The NBA model includes a potential new channel with ownership divvied up between the league and AOL. Potential because in order to get launched the channel needs to match 10 million subs pledged by AOL's Time Warner Cable with an equal number from other operators. Sounds like a no-brainer because the NBA has three owners in addition to AOL that own major cable systems ? Comcast, Cablevision and Charter ? representing nearly 20 million subs. It may not be so easy, however, to get the cable operations side of the business to go along with the content side. The cable operations of these companies have to justify acquiring a new network whether or not it benefits the owners.

In this case, that means justifying a new network offering product ? four games a week ? very similar to programming the operators are already paying for on other channels (ESPN, TNT, regional sports channels) for an additional cost of 50 cents per sub.

The Cablevision example of saying no to the New York Yankees' new YES Network for now highlights cable's split personality when programmers and MSOs share the same parent.

?I certainly don't look at them as being heroic,? says Time Warner Cable EVP-programming Fred Dressler. ?I look at [Cablevision founder and chairman] Chuck [Dolan] as being a businessman and doing what's best for him in each different situation. When he's the seller, he tries to get the highest price; when he's the buyer he tries to get the lowest.?

When Dressler thinks about escalating sports costs, he remembers an axiom coined by the legendary cable entrepreneur Bill Daniels during ill-fated negotiations to bring the National Football League to cable: ?One thing I've learned is when businessmen begin to deal with sports, they lose all rationality.?

?I don't see any relief on the horizon,? says Dressler. ?I don't think that the issue should be limited to the relationship between the cable operator and programmer. This goes to the owners being able to say no to the players and the programmer being able to say no to the team.?

So why didn't Dressler say no when YES knocked on his door instead of committing his subs for an average of just under $2 a head? ?If we said no to what Chuck is saying no to we'd be vilified. On the other hand, we say yes and we're being vilified. We hear it from the sports fans when they can't see the game. At the end of the day, you've got to give them what they want. We have to find a way to absorb the costs that we can't control.?

Dressler may be right ? it could just be that there is no relief to be had. Kagan analyst John Mansell sees some downward pressure on rights fees for major properties but no real change in the dynamics. ?There will still be an auction for major properties like the NFL and NASCAR, but it will be tempered by the new reality of a depressed advertising market. Instead of the near triple-digit increases of the late '90s, mid-double digit resets may be the order of the day for major programming.?

In other words, costs will keep rising, but they won't rise as much. Or maybe they will. In his experience, explains ESPN EVP Ed Durso, the most predictable element when it comes to bargaining for sports rights is unpredictability. ?I don't think I can hazard a prediction that it will go up or down and be right. Every one of these things is unique,? says Durso, the veteran of many bargaining sessions.

Even when it looks like the cycle may be slowing, all it takes is one network that sees a strategic reason ? or a major form of competition like DBS ? to pay up to throw it out of whack again. Think Fox and the way it used the NFL to add an aura of legitimacy. Then think about the $909 million write-down Fox parent News Corp. just took on the NFL, NASCAR and baseball. Buying high doesn't work, when you have to sell low. If costs do simmer down nationally, there's no guarantee the regionals won't bite at the bait thrown by local owners and throw the system out of balance from the grass roots up. Says one operator, who would not speak for attribution, ?There's going to be a point where they've committed it, and all of a sudden they can't get it and that's the trauma I'm trying to avoid.?

Insight Communications president and CEO Michael Willner, who is also chairman of the NCTA, is not quite so worried, but he is nonetheless wary. ?I don't have the path to the end. I think the first thing we have to do is stop fighting with each other and try to figure out a way to deal with the entire flow of economics in sports.?

SPORTS RIGHTS DEALS

sport	networks	fees (000)	years total	years remaining
NFL $18.28B	ABC	$4,387	8	4
	CBS	4,022	8	4
	ESPN	4,936	8	4
	FOX	4,387	8	4
	DIRECTV	548	8	4
NBA $4.3B	ABC/ESPN/ESPN2	2,400	6	6
	NBA-AOL SPORTS	335	6	6
	TURNER	1,876	6	6
MLB $3.4B	ABC FAMILY	675	6	5
	ESPN/ESPN2	912	6	4
	FOX	1,310	6	5
	FOX CABLE	518	6	5
NASCAR $2.4B	FOX	867	6	5
	FX	333	6	5
	NBC	600	6	5
	TBS	600	6	5
Golf $1.1B	ABC	375	6	6
	CBS	359	6	6
	ESPN	151	6	6
	GOLF	14	6	6
	NBC	116	6	6
	USA	113	6	6
NHL $930M	ABC	250	5	2
	ESPN/ESPN2	350	5	2
	CBC*	270	5	2
	CTV*	60	4	1
College Basketball $6.4B	ABC	17	7	7
	CBS	6,003	11	11
	ESPN	367	7	7
College Football $1.7B	ABC	724	8	4
	CBS	160	8	4
	ESPN	714	8	4
	NBC	100	8	4
SOURCE: KAGAN WORLD MEDIA, MORGAN STANLEY *CANADIAN BROADCASTERS

He adds: ?There's a tendency to believe there's a bottomless pit to extract money from the American public and funnel it to the talent. The problem here is there's a tremendous amount of money being flowed from the consumer to players, and there's going to be a point where people are going to have to say no.?

Willner doesn't see a role for NCTA in this fight. ?This is a significant business issue within our industry that has to be dealt with in the boardrooms of companies.?

Dressler and McKenna are looking at the companies that own the sports channels. For his part, Dressler says, ?Sometimes you pay more for one network and less for another one. On balance, the issue isn't how much you're paying ESPN. It's how much are you paying for Disney. When you push it all together, how much are all of those networks??

Which is exactly what is beginning to happen. At Cable One, McKenna favors sports tiers. ?We would tier the regional sports and ESPN and ESPN2 and continue to carry ESPN News and Classic on digital. I think that would go halfway.? He would charge customers as close to cost as possible for the tiered sports. That's not a solution all operators embrace, especially because it paves the way for customers to demand similar setups in other areas. For instance, households without children may want to drop kiddie channels. ?I think you get closer and closer to a video-on-demand world if that starts,? says Turner's Lazarus.

Willner is impressed with some of the efforts, like dedicated broadband channels and interactive services, Fox Sports Net and ESPN are making to help operators find more revenue. ?That helps. It may not be the solution but it does help. We're very excited about some of the products we're seeing ? being able to click on our interactive platform if you're a digital customer and getting statistics of the batter at the plate.?

What about the sports equivalent of VOD? In Demand has been carrying and selling out-of-market sports product for years. Couldn't that model be brought in-market?

Fox Cable Networks president Jeff Shell sees possibilities for VOD. ?I think probably in reality, it's more value-added opportunities. Do you want to see a replay immediately after the game? Do you want to see a press conference? We can take this content and really drive it into the homes of the rabid fans.?

At Turner, Lazarus doesn't see VOD as an answer for sports. ?It's not in our current model. Sports still has a sense of immediacy and are not as evergreen as other product is.? Putting some games on pay-per-view doesn't work for him, either. ?I don't think there are that many sports properties that would lend themselves to a PPV model in terms of its general exposure to audiences. In terms of just regular-season games in any sport I don't see it being a near-term reality.?

One pay package that would most certainly fly with cable operators would be the NFL's Season Ticket package now held by DirecTV, which expires at the end of the 2002 season. If the NFL agrees ? and that's a mighty big ?if? ? to share the package with cable, DirecTV would lose its biggest selling point and the operators would finally be on a level playing field.

Says Insight's Willner, ?If the NFL wants to be in the out-of-market business the only way they can do it is to sign with both DBS and cable. DBS has already got every customer it's going to get with the DBS package.?

Of course, that would be rational.

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