Time Warner Does the Math on Sky-High Sports Rights

Cable operator says long-term pacts minimize risk

Time Warner Cable chairman and CEO Glenn Britt on Thursday told investors that the operator’s RSN strategy is designed to minimize costs in the long haul.

Speaking on TWC’s fourth quarter earnings call, Britt said the company’s 25-year pact to distribute SportsNet LA, the Los Angeles Dodgers’ new RSN, was a forward-looking deal.

“We do not pretend that these deals are inexpensive or cheap, and our sense is that if we’re going to carry these games, they’re going to be expensive when we get them,” Britt said. “So what we think we’ve done with these deals is to minimize and stabilize the cost over a long time period.”

While terms of the quarter-century deal with the Dodgers were not disclosed, analysts believe TWC paid as much as $8 billion for the right to distribute the team’s RSN. This week’s Dodgers deal comes on the heels of a $3.6 billion, 20-year agreement to buy the Los Angeles Lakers’ local TV rights.

The Dodgers will remain on Fox Sports West through the end of the 2013 Major League Baseball season. While the plan is to get the team-owned RSN up and running in time for Opening Day 2014, the deal with TWC must first pass muster with MLB.

Day-to-day operations and programming for SportsNet LA will be handled by the NL West franchise, while TWC will cover advertising and affiliate sales.

TWC chief financial officer Irene Esteves told investors that the key objective behind the Dodgers deal is “to ensure that access to programming at a certain cost,” adding that “over the long-term, this will be a lower-cost alternative than if we had not guaranteed those rights for the 25-year period.”

Esteves noted that TWC is “confident that we made the right decision with the Lakers,” before adding that the operator is “hopeful we’ll find the same with the Dodgers.”

(Disclosure: A group of investors led by Guggenheim Partners last March purchased the Dodgers from owner Frank McCourt for $2.15 billion. Guggenheim Partners owns the subsidiary Guggenheim Digital Media, which is the parent company of Adweek.)

Or, as Britt said, no one at TWC is “trying to pretend the first year [of the Dodgers pact] is really, really cheap or anything.” But given the ever-escalating cost of sports rights, programmers have to expect to take an early hit in order to reap the benefits of such a partnership down the road. “In both cases, these rights were up for auction in a sense and they were going to be expensive no matter what happened,” Britt said. “We think we’ve done the best of the alternatives.”

TWC charges other distributors nearly $4 per subscriber per month to carry the Lakers channel, and the new Dodgers RSN is expected to command an affiliate fee near the $5 mark. Per SNL Kagan, the most expensive RSN is Comcast’s SportsNet Washington, which last year fetched an average sub fee of $4.02 a pop.

That TWC effectively plans to charge competitors as much as $9 per sub per month for the rights to carry the two RSNs is almost certain to hit Angelenos square in their wallets. This is rather ironic, given that Britt only a month ago warned programmers that he was drawing a line in the sand regarding channels that “cost too much relative to the value of their service.”

Speaking at a UBS investor conference in early December, Britt said TWC’s programming costs have increased 30 percent since 2008, while the rates it charges consumers for its cable service have increased by just 15 percent.

Shortly after making those remarks, Britt dropped the arts channel Ovation, a service that reached just north of 50 million subs. Ovation’s carriage fee is 7 cents per sub per month.

“Obviously, sports and other really popular programming keep getting more and more expensive, and that’s where most of the money is,” Britt said today when asked about keeping escalating costs in check. “But these networks that hang on, they think they have a birth-right to carriage, even though hardly anybody watches them. Those are the ones we’re going to be taking a look at.”