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Basic Nets: Quality Costs Money

6/07/1998 8:00 PM Eastern

Cable's success in eating away at the "Big
Four" broadcast networks' audience has come at a stiff price -- escalation of
spending on programming -- according to top-level cable-network executives.

Cable operators, advertisers and Washington are wailing
about rising programming costs. Under the gun, cable programmers maintained that while
they are trying to keep their spending in check, they have entered a new realm in terms of
competition with broadcast.

On that playing field, the major cable networks said, they
can't afford to be chintzy in their outlay for programming. And it is a sellers'
market for sports, off-network shows, theatrical films, original series and made-for-TV
movies.

Basic cable spent $4 billion on programming in 1997,
compared with $482 million roughly a decade ago, in 1986, according to a study done by
Kagan Media Appraisals for the National Cable Television Association.

ESPN's $600 million National Football League deal and
Turner Network Television's $890 million National Basketball Association package have
garnered most of the attention, but it's more than just sports:

• TNT, TBS Superstation and USA Networks Inc. have
invested what will soon approach $1 billion in the past few years to acquire the
broadcast-network window to premiere theatricals.

• TBS has acquired a raft of popular sitcoms, such as The
Drew Carey Show
and Friends, while TNT anted up roughly $1 million per episode
for ER. Reruns of Seinfeld are expected to fetch a similar price from cable
later this month.

• Turner Broadcasting System Inc. has spent an
estimated $500 million during the past few years to nab marquee theatricals and to
premiere them before the broadcast networks. USA has also been very aggressive in going
after these theatricals, such as Casino.

Cable-network officials claimed that both they and cable
operators reap the benefits, ultimately, from the top-notch, highly demanded programming,
which tends to be very pricey. Higher ratings mean that cable systems can charge more for
local advertising and lure sponsor dollars away from broadcast-TV stations. ESPN and
ESPN2, for example, account for 21 percent of cable's local ad revenue -- more than
any other network, according to the sports programmer.

But some operators claimed that the extra local ad-sales
revenue doesn't offset programmer license-fee increases. And in some cases, small
MSOs that are really facing cost crunches don't even sell local avails.

Network executives also maintained that signature shows and
big events on cable -- like USA Network's Moby Dick and the NFL on ESPN --
help to build subscriber retention. Cheap, dusty, old off-network shows just don't
cut it anymore on cable, these executives argued.

"Consumers and advertisers no longer have an appetite
for series that are 30 years old. It's OK for Nick at Nite and [Nick at Nite's]
TV Land, but not in our primetime," said TNT president Brad Siegel, adding that TNT
has chosen the "top off-network shows" in order to bring in national and local
ad dollars.

An expensive series like ER, he said, "will
deliver high value for subscribers, and to cable operators, in very high ratings.
That's a far cry from what we paid for In the Heat of the Night, and even a
far cry from what we paid for Lois and Clark, which was almost $300,000, and that
was like breaking the bank."

At programming giant Viacom Inc., MTV: Music Television,
VH1 and Nickelodeon don't depend much on off-network shows.

"We try to be makers of product, and not buyers or
renters," said Mark Rosenthal, MTV Networks' president. "We don't
spend a whole lot of money on syndication rights for off-network sitcoms."

But rising program costs are still an issue. While
Rosenthal said Viacom tries its best to keep costs in line, "you have to be better
than the year before [in terms of programming] just to stay even, and we want to do more
than stay even."

NETS FEEL PRESSURE

USA -- which, in March, saw its Moby Dick attract
the largest audience ever for an original entertainment program on basic cable -- also
feels the competition and pressure to continue making gains. It turns into a cycle of
winning bigger audiences and spending more to keep them, according to Stephen Brenner,
president of operations at USA Networks.

"We spend more for bigger audiences, and we get higher
CPMs [costs per thousand homes from advertisers]," Brenner said.

Some networks are trying to offset their program expenses
and to keep license fees to MSOs down by charging Madison Avenue more to advertise. Right
now, about two-thirds of MTVN's revenue is from ad sales, with the remainder from
license fees. At USA, ad sales make up roughly 60 percent of revenue. And TNT, over the
past few years, has increased its ratio of revenue to 50 percent ad sales, up from 40
percent.

"We are shifting our burden to our advertisers,"
Siegel said.

During the next four years, he predicted, TNT's
program costs will increase by 20 percent to 25 percent per year, compared with roughly 13
percent annually in the past few years.

"Sports programming is a major culprit in this
area," he explained.

TNT walked away from the NFL this year because of its
price, while ESPN stepped up to the plate. But MSO officials who expected to get rebates
of the 12-cent-per-subscriber monthly NFL surcharge that TNT collected got a surprise --
some were dismayed to learn that the charge wouldn't be rescinded. In fact, TNT said,
it will raise its license fee by 7 percent next year, on an annualized basis for a
four-year contract, from its current 55 cents to 60 cents per subscriber, per month.

TNT argued that even though it passed on the NFL, its
sports costs are still skyrocketing.

"Our NBA package is up over 100 percent," Siegel
said. "The new NBA deal cost us more than the old NFL and NBA deals combined."

However, he argued, TNT is getting more value from the NBA
than it would have with the NFL because it has exclusivity for highly rated NBA playoff
games.

Siegel maintained that TNT has only imposed relatively
modest license-fee increases during the past eight years, "compared with the
programming that we're offering."

IN DEFENSE OF ESPN

ESPN, which is seeking 20 percent rate increases this year
to help pay for its NFL package, said controlling costs is a priority at the network. But
sports-rights increases simply reflect the marketplace at play, according to ESPN
officials.

In fact, the laws of supply and demand are impacting
heavily on operators.

"There is significant competition among major cable
and broadcast networks for quality sports programming," an ESPN spokeswoman said.
"ESPN has built and maintains the most-valued network in cable, in the face of
significant competition. You have to pay a premium price to maintain a premium
network."

The payoff is that the NFL on ESPN has been cable's
highest-rated series for 11 straight seasons, and 45 of the top-50-rated programs in cable
history were NFL games, according to Nielsen Media Research data cited by ESPN.

"Consumer demand for ESPN-branded product drives cable
subscriptions and retention and generates significant local-advertising revenue," the
ESPN spokeswoman said.

ESPN's license fee this year will hit more than $1 per
subscriber, per month, after the increase. ESPN will be giving operators more local avails
during the NFL games, which, the network claimed, will help to offset the rate increase.
But MSO officials have said that the incremental local-ad dollars won't come anywhere
near covering ESPN's license-fee hike.

ESPN, which has seen slippage of its primetime ratings this
year, maintained that no other network does the volume of live programming that it does,
noting that much of this programming can only be shown once -- unlike movies and sitcoms.
The network cannot amortize costs of a programming library, like USA and TNT can.
ESPN's schedule contains some 4,900 hours of live and original programming per year.

USA has its share of sports -- especially
professional-tennis tournaments, such as the U.S. Open and the French Open -- but these
tend to be less expensive.

BEYOND SPORTS

Besides sports, cable networks are continuing to make hefty
investments to acquire the first-broadcast window on theatricals, as well as spending
heavily on off-network shows.

As far as theatrical movies, cable networks have a better
chance of recouping their investments than the broadcasters do, Brenner said.

"We can run these movies more times and get additional
ad revenue," he said. "And I don't buy anything if I don't think that
I'm going to get my money back in ad sales."

By acquiring movies such as the Oscar-winning As Good as
It Gets
and The English Patient, Turner "is giving operators ammunition to
bring dollars off broadcast to local cable," Siegel said.

"Those [high-profile theatricals] bring an entirely
new audience to TNT and to basic cable, and new advertisers," he said.

In terms of off-network shows, many cable networks are
being aggressive in their bidding -- not just USA and Turner, but also FX and Lifetime
Television. The NCTA study found that the cost of syndication rights for off-network shows
to cable has almost doubled in the past four years, to between $600,000 and $800,000 per
episode, from between $400,000 and $600,000.

USA saw a big jump in its ratings when it replaced Murder,
She Wrote
with Walker, Texas Ranger. TNT's demographics have continued to
improve and get younger now that fare such as Lois and Clark and Babylon 5
are on its schedule. And Siegel expects major ratings increases at 7 p.m. starting in
September, when TNT will begin stripping ER reruns on weeknights.

Original programming is one of the priciest investments for
any programmer, since there are so many buyers and there is so much demand for
high-quality product from a limited pool of talent. That's because of the
proliferation of buyers, or networks, which is further fragmenting audiences.

"It's a sellers' market," Siegel said.

USA, which has seen its ratings bloom for its "Sunday
Night Heat" block of original series, "is giving operators something that they
can take to subscribers and say that they can't get this without cable," Brenner
said,

USA's $20 million Moby Dick miniseries in March
garnered a 8.1 rating. "A lot of people who had never turned to USA did,"
Brenner said. "We were able to use it as a platform to promote our 'Sunday Night
Heat.'"

SOME NETS SUFFER

Ironically, the skyrocketing costs may affect lower-priced
networks the most. Operators have a hard time removing popular services like ESPN or TNT,
so they're targeting lower-profile networks, where they can save a few pennies per
month in license fees.

CBS Cable's Country Music Television has been switched
out in a number of markets for Jones International Inc.'s Great American Country,
which is doling out small upfront-launch fees and offering the service free-of-charge for
several years.

Lloyd Werner, executive vice president of sales and
marketing for CBS Cable, complained that the network has invested over the years to build
a brand and to promote it. He argued that just because CMT and GAC both air country-music
videos, they aren't "fungible," or interchangeable.

"It's as if you said that HBO [Home Box Office]
and Showtime are the same because they both show movies," Werner said. "In that
case, why did we make the investment [in CMT]? It's a sad dissertation when the
quality of the deal is more important than the programming. The customer gets
shortchanged."

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