delanceyplace.com 9/28/11 - espn hemorrhages money

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In today's excerpt - the negotiations that changed the cable industry. In 1982, ESPN was hemorrhaging losses of over $8 million each month, and was sustained only by continued investments from Getty Oil. Getty became concerned and sought additional investors, eventually attracting a minority investment from ABC, but the bleeding continued. Advertising revenues were simply too small. ESPN didn't have enough money to cover operating expenses, much less win television rights to even minor national properties such as NCAA Division II football. What was needed was a new business model—a fact made all the more obvious when CBS Cable failed. ESPN had been paying cable operators for the privilege of being included, but needed to turn that around or fail. The cable operators had to start paying ESPN a monthly fee per subscriber, so ESPN had to bluff that it was going to pull its programming off the air:

BILL GRIMES (ESPN CEO):
Whenever I would look ahead, I would say, we're not going to be able to get enough ad revenue to make this thing profitable. We were buying more programming, and the ad revenues weren't coming. Then we're paying more nickels as every new cable subscriber came on in America. It won't work. Getty is not going to be patient forever.

ROGER WERNER (McKinsey Consultant and later ESPN COO and CEO):
The failure of CBS Cable was one of those watershed dates that opened a big window of opportunity for us. Cable stocks fell dramatically within one or two weeks. It was an obvious reaction, and the press was almost universally negative and predicting bad things for the cable industry. If CBS can't make it as a cable network programmer, how could anybody else like ESPN hope to succeed? So a number of our affiliates, I think, were worried that another failure by another leading cable programming network in 1983 or '84 would be a terrible thing. ...

We went to the market with this sort of survival pitch essentially as follows: If you [cable operators] come in voluntarily and do a new deal with us, we'll start your rate at four cents in 1983 or '84 and then we'll go to six cents the next year, then eight cents. Either rip up the old contract and have protection for whatever the term of your new affiliation agreement is going to be, or pay the prevailing rate when your old deal expires. There was the specter that if we were still around—and we intended to be around—we'd be a much more expensive service.

BILL GRIMES:
We were thrown out of offices. I flew to Denver once to see a company called United Cable that TCI later bought. It was run by a guy by the name of Gene Schneider. He was a guy about my age who had been in the telephone business and then became one of the early cable founders and made big money. I had made an appointment with his secretary, and I sat in a room for two hours waiting to see him, but he refused to see me.

ROGER WERNER:
J.C. [Sparkman, COO of TCI] kind of told us to get f**ked and that TCI would never pay us a penny.

BILL GRIMES:
Cablevision was the first cable operator whose contract had expired that we were trying to get to be the first cable-system company to pay a fee. It was, in many ways, the worst operator to start with because they had some sports programming! Dolan was a tough guy. We had to threaten to turn ESPN off.

ANDY BRILLIANT (ESPN General Counsel):
It was an all-day negotiation that Bill, Roger, and I conducted with the Cablevision people on Long Island. They all got really pissed. There was a lot of walking out of the room and throwing stuff around. It got to the point where we really thought that there wasn't going to be a service.

BILL GRIMES:
There was yelling and screaming. We took quite a beating early on. ...

ROGER WERNER:
Essentially we were saying, guys, if you're not interested in paying a fee and you're really not interested in stepping up to the plate in the near term, tell us now and we'll pull the plug. Nobody really wanted to deal with the idea that they were going to be paying for a product that had been free, but actually my recollection of this is that it was very stress-filled, it was very contentious.

ANDY BRILLIANT:
But at the end of the day, they blinked and agreed to pay us a dime per household. We breathed a massive sigh of relief. It was the first time we actually received validation that our service was worth something to the cable operators. I think that really put us on the map for good.

BILL GRIMES:
I'll never forget. We got in the car and stopped at the first bar we saw. It was a Mexican place. I know I had at least two margaritas. Then we called [Getty Oil Vice President] Stuart Evey on a pay phone. We didn't have cell phones. I said. 'Stu, we got it. We got the toughest one. We got the deal.' And from there it was not easy, but that was the start of it all.