Will ESPN Lawsuit Against Verizon Declare Winner in Streaming Digital Sector?

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In a case that could well establish a framework for the relationship between network carriers and media content producers, Walt Disney Co. (NYSE: DIS) filed suit Monday morning against Verizon Communications Inc. (NYSE: VZ) for allegedly violating the contract Verizon has with ESPN for distributing the network’s sports programming.

If ESPN prevails, then it retains control over the content it has created, and the streaming digital world will very likely look a lot like the existing pay-TV world. If Verizon prevails, then any of the carrier networks can freely offer a la carte programming in any way the carriers choose. Companies like Comcast Corp. (NASDAQ: CMCSA) that are both carrier networks and content providers (Comcast, for example, through its ownership of NBC) may even reap outsize rewards.

This cannot have been a surprise to anyone who’s been paying attention. A couple of weeks ago, Verizon introduced a low-cost plan for its high-speed fiber (FiOS) subscribers that included a basic package of 36 channels and additional thematic packages, including one for sports, that included ESPN, Fox Sports and NBC Sports Network. The thematic packages cost an additional $10 a month and can be added or deleted at will, as long as subscribers maintain a minimum of two every month.

At least that is what Verizon planned. ESPN, which is the most expensive piece in any pay-TV package, was not amused, and made it plain very quickly following Verizon’s announcement that ESPN’s contract with Verizon did not permit the carrier to slice-and-dice its packages in this way. The very weekend that Verizon announced its plan an ESPN spokesperson said, “Among other issues, our contracts clearly provide that neither ESPN nor ESPN2 may be distributed in a separate sports package.”

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For its part, Verizon said that its offer does not violate the carrier’s contract with ESPN and did not back down, so ESPN went to court this morning.

The difference of opinion probably lies in how the two parties interpret what can be done with digital rights. Content producers like Disney and ESPN clearly rule the roost in the pay-TV universe and have fought tooth-and-nail to maintain their dominance in the digital world.