A plethora of new, independently owned cable networks plans to launch within the next 12 months with high hopes of finding spots on operators' digital-cable platforms.
Armed with an array of financial backers, reasonable rate-card fees and content they claim differs from the repurposed fare offered by many current diginets, these entrepreneurs believe operators are starving for compelling programming to help sell digital cable to consumers.
But for most independent newcomers, industry observers said, such a scenario is more a pipe dream than reality.
Mega-programmers Viacom Inc., Discovery Networks U.S., The Walt Disney Co. and AOL Time Warner Inc. continue to exploit such cable brands as MTV: Music Television, TLC, ESPN and Turner Network Television — and in some cases, the right to carry broadcast-network shows — to launch their own digital networks.
Operators are seeking steep ownership stakes in new programming services in return for carriage.
Basically, the obstacles now faced independently owned networks could be greater than at any time in cable's history.
Gold's panned out
"I think anyone who says this is a good time to launch a cable network is smoking something," said Cathy Rasenberger, president of Rasenberger Media, which works with privately held networks to gain distribution. "It is the hardest time in the history of cable to get a network launched with economics that allow it to become successful."
After the gold rush of the late 1980s and early to mid 1990s — when most of today's cable networks were launched — few independently owned networks with significant subscriber bases have emerged.
Some, like Classic Sports Network (now Disney-owned ESPN Classic), were snapped up by multimedia conglomerates looking to buttress their cable portfolio or eliminate competition for existing channels.
As a result, only a handful of video services exist beyond vertically integrated media companies today.
"We joked when we started that we would be the last independent network with widespread carriage," said Oxygen Media CEO Geraldine Laybourne of the privately owned, female-targeted network, launched in 2000. "But it may not be a joke anymore."
Industry observers said the capping of analog channel capacity have combined with a depressed economy and the relatively slow digital rollout to make it very difficult for digital networks to break through.
In addition, skyrocketing programming costs have forced operators to become very selective about additions to their cable lineups.
"Industry consolidation, coupled with enormous shareholder pressure to extract performance out of the cable operators, have made [operators] reluctant to add any out-of-the-ordinary costs," said Rod Perth, president of MovieWatch, a start-up network trading on original programming about films.
"It's created a perfect storm of sorts, making the decision process of launching new cable networks all that more difficult."
Hopeful network executives said operators are also under pressure to quickly grow digital penetration. Digital additions totaled 4 million in 2002, down from the pace of 5 million to 6 million subscribers set over the two previous years, according to Yankee Group estimates.
Operators say in order to get subscribers to pay an extra $5 to $15 for digital cable, the tier has to feature unique programming that viewers can't get anywhere else.
"There's only so much repurposed programming that subscribers are willing to tolerate and pay for," said one operator executive. "We're looking for content that subscribers haven't already seen on basic."
Hence, there's been a flurry of activity from new niche-targeted networks aimed at older viewers (The Anti-Aging Network); presenting short films (Atom TV, Briefly Original Broadcasts); martial arts (BlackBelt TV) or reality shows (Reality Central); and airing sports events (Tennis Channel and The Football Channel).
"I think cable subscribers are less enthusiastic about repurposed programming than they've ever been," said veteran cable programming executive Stephen Cunningham, currently serving as management executive at newly announced start-up JokeVision. "I think that original programming will get a reception from the subscriber community and thus from the MSOs."
Creating unique, original programming is a costly undertaking that has forced many a start-up network to the sidelines.
In the past, new networks could count on operator license fees and a certain amount of advertising revenue based on analog carriage. Today's digital platform holds no such guarantees.
Given the current digital-cable economic model, most networks that aren't affiliated with multimedia content companies are forced to offer programming virtually free to operators to gain access.
"The operators don't want to add programming that's going to increase the cost of the digital platform," Rasenberger said. "So if you're a new network — whether an independent, or part of a consolidated group which has major programming costs that will force you to charge a big fee for your service — you will not get widespread distribution."
In addition, new networks have to compete for eyeballs with other established analog and digital services, limiting the ad-sales stream.
"If you're an independent channel, I don't know what content you could possibly put on a digital tier that anybody would want to watch," said Laybourne, whose Oxygen now nearly has 50 million subscribers. "It's simple mathematics. There isn't a promising enough area to operate in."
At the same time, operators want to be sure prospective networks have the financial wherewithal to weather digital's growing pains.
"We certainly don't want to launch a network that will be financially bankrupt in two to three years," said a midsized MSO executive.
Dennis Wilkinson, a former Home Box Office and PrimeStar Partners executive now at venture-capital company Katalyst, said only those networks that can develop a business plan that reflects "the new digital marketplace" will survive.
"They have to stay [afloat] for three, five, seven years in a lot of cases before they can hit break-even cash flow," said Wilkinson, who has been working with hip-hop-oriented start-up Fabulous TV.
"Credibility is a critical ingredient, and operators want to know that you have the staying power to go the road," added JokeVision's Cunningham, who was instrumental in launching cable networks ValueVision (now Shop NBC) and Food Network.
He said JokeVision will keep programming costs down by developing original, reality-based content featuring everyday people and up-and-coming comics telling their best jokes in short vignettes.
"We're fully funded. We're in position to focus on creating programming that's responsive to what the cable operators are interested in," he said. "We don't have the distraction to spend the bulk of our energy looking for capital."
For its part, the Anime Network hopes to capitalize on the popular Japanese cartoon craze. Wielding 1,500 hours from owners A.D. Vision Inc., Anime Network president Kevin Corcoran said the service is in a good financial position to wade out the digital storm.
"The economics make it much more achievable to launch without millions of subscribers," added Rasenberger, who consults for Anime.
Even with unique content and sound financial backing, independents still face an uphill carriage climb.
Industry operators are reluctant to launch independent channels without taking a piece of the action.
Indeed, many of the high-profile new network announcements such as the African-American targeted TV One network and the video-game-based G4 are owned by Comcast Corp. or other multimedia companies.
Network entrepreneurs admit that it may take a "strategic" partnership with an MSO or multimedia company to gain digital access.
"We're very open to strategic alliances — we're not coming in with any baggage and we're not allied with anyone that prevents us from talking to operators," JokeVision management executive Jeff Rowland said. "The possibility of partnerships are the open question as well."
African-American targeted Major Broadcasting Corp. has also said it would entertain strategic partnerships with operators — including yielding equity — if the deal was right.
But the 27-million-subscriber service, which plans to launch a minority-targeted, 24-hour news service next January, will remain financially viable and valuable to operators without industry partnerships, according to network executive vice president of operations Travis Mitchell.
Other networks are also resisting such overtures. Fabulous TV, founded by media mogul Russell Simmons, has thus far turned down potential investment cash from Comcast, sources close to the situation said. In the past, Simmons himself has said he wants to keep the network wholly minority owned.
To date, though, the network has yet to announce a launch date or any affiliation deals.
Cable veteran Dan O'Brien, the CEO of Brief Original Broadcasts — BOB for short, which will offer the short documentaries, scripted and animated fare wrapped around longer-form ads — said the decision to exchange autonomy for financing or distribution is a choice he and other indie networks must weigh carefully.
"The question is, whether or not you're willing to accept the fight and say, 'It's my dream and my vision and I don't want someone commercial dealing with that?' " said O'Brien. "I think we're more pragmatic about it. Sure, we have a vision for the network. But that vision could still be fulfilled with a strategic partner."
One advantage independents are banking on is the ability to provide operators with alternatives in their often contentious carriage negotiations with mega content providers.
To date, operators have been forced to yield to programmers who force distribution of digital network suites as part of carriage renegotiations for fully distributed, core channels.
"I think Viacom and AOL Time Warner, Discovery and Disney do what anyone would do in their situation: Leverage new services with existing mainstream, highly recognizable foundation services," said Larry Meli, president of baby boomer-targeted GoodLife TV, now in 10 million homes. "That's the reality that we're in."
But network executives said low-cost, unencumbered indie services allow operators to be a bit more aggressive in rejecting digital services that they may not want to carry.
"The operators will eventually say: We'll take your core channel, but we're not going to pay exorbitant fees for your digital channel," Meli said.
MBC's Mitchell said is even more confident. "The operator leverage game is about to be up."
That could be true in the sports arena, where operators have constantly complained about the high price of ESPN and the regional networks.
Operators have already begun to offer sports tiers in an effort to shift such high-priced networks, to allow consumers the choice of purchasing the product.
Although operators don't have contractual rights to offer ESPN or regional sports networks outside of basic, sports services like The Tennis Channel — which signed a key 15-year distribution deal with Time Warner — and College Sports Television, are getting a closer look from operators seeking to create premium sports tiers.
CSTV president and former Classic Sports head Brian Bedol believes operators will use CSTV and other sports services as leverage against networks like ESPN, which is seeking distribution of its own digital services in return for a reduction in the core network's licensing fees.
"We give the operators an option and we're willing to work with them so that we can fit into their budgetary plans without being linked with any other services," he said.
Given the financial and carriage hurdles, most network executives believe that only a few select digital networks — independent or otherwise — will survive.
"You can only package so many channels together at a price point that the consumer considers acceptable and also generates a margin that the operator considers meaningful," Rasenberger said.
Added MBC's Mitchell: "I believe there will be a shakeout on digital. I don't believe you can have 400 or 500 channels operate effectively. Even some of the major networks will eventually scale back their channel services to be more effective.
"Only networks with a sound business plan that can prove its value to operators will be left standing."
Perth said digital networks can't expect too much too soon. Hubbard Media Group-owned MovieWatch has carriage deals with several distributors, including part-owner DirecTV Inc., the National Cable Television Cooperative and Insight Communications Co., totaling about 13 million households.
But MovieWatch won't announce an official launch date until it reaches the 20-million mark.
"Unlike other networks that can [launch] because they have the leverage to demand a dual revenue stream, it's absolutely mandatory that we sign as many agreements as possible because we're going to live or die on advertising," Perth said.
Likewise, O'Brien has tabled BOB's bow until he can secure at least 3 million subscribers, the threshold required under the network's agreements with several advertisers.
BOB has reached verbal agreements with four distributors, but would not reveal details, he said.
In the end and despite the hurdles, network executives remain sanguine that independents will play a major role in the evolution of digital cable.
"This business is going through a fundamental transition, and it's easy to make forecasts based on how difficult it is today," Perth said. "But as in all businesses, there will be those that will prevail and emerge and prove that a lot of the predictions that we're all making now are wrong."