With new partner Liberty Digital on board, Game Show Network has set its sights on doubling its cable distribution with an increased focus on interactive programming.
Liberty Digital, a unit of AT & T Corp.'s Liberty Media Group subsidiary, cut a deal last week to acquire 50 percent of Game Show Network from Sony Pictures Entertainment Inc. for $225 million in cash and $50 million in Liberty Digital stock.
It's been a long haul for Game Show Network. When it launched in December 1996, the network tried to entice cable operators to carry it by offering Sony VideoStore digital-insertion technology to every system that launched GSN to 75,000 subscribers.
GSN president Michael Fleming acknowledged that the free-hardware tactic didn't succeed. Nonetheless, the network has signed up about 29 million subscribers in four years, including 9 million this year.
"This network is very close to breakeven. We're not looking at years and years of huge losses," Liberty Digital CEO Lee Masters told analysts last week, emphasizing that there's much upside for basic-cable networks once startup costs are recovered.
The deal marks Liberty Digital's first investment in a cable network. So far, most of the company's investments have been in interactive-television companies such as OpenTV Corp., ICTV Inc. and ACTV Inc.
About 10 percent of Game Show Network's lineup contain programs that include an interactive element, such as Inquizition, which allows viewers to play online while they watch the show on television. But executives said every new program that GSN adds from here forward will be interactive, and predicted that 35 percent of the network's schedule would be interactive within two years.
Some of the new shows may contain a gambling or betting element, Masters said.
"We think there are going to be numerous streams of revenue beyond the basic traditional basic-cable model of advertising and affiliate revenue," said Masters, who noted that the games may ask users to cough up "micro payments" to enter the contests. "We think that you can play games of skill for cash and prizes that are not illegal."
Shares in Liberty Digital took a hit after the announcement. Stock in the company dropped from $24 on Aug. 18, the last trading day before the deal was announced, to $22.18 by mid-Wednesday. Shares in Liberty are down significantly from January, when the stock traded in the 60s.
But S. Muoio & Co. analyst Salvatore Muoio attributed last week's Liberty Digital dip to overall market conditions, and not investors who may be concerned about the deal.
"I think the market is just weak. I don't think necessarily it's that bad of a deal for them," Muoio said. "It fits right into what they're doing. They want to be right in the middle of interactive television. Strategically, it makes sense."
Fleming will continue as GSN president, but Masters will take an active role in the management of the network.
"It's a business that I know," said Masters, who built E! Entertainment Television into a 50-million-subscriber basic-cable network.
Sony and Liberty executives said they plan to expand GSN internationally. Their 50-50 deal also covers the network's possible expansion into other media, such as new wireless phones that enable users to play games, executives said.
Sony is very familiar with the gaming business. Its PlayStation game consoles are one of the most popular video-game systems worldwide. Executives said there's no guarantee that GSN could somehow be marketed through its Sony tie to the PlayStation brand, but they wouldn't rule out such a possibility.
"To the extent we have to reach back into Sony, we will reach. But I can't reach beyond that," said Len Grossi, president of Sony Pictures Entertainment's Columbia TriStar Television division.
Grossi said the goal is to eventually grow GSN's subscriber base to 50 million to 60 million households.
Most of GSN's current base comes from analog distribution. Fleming said the majority of the network's digital carriage comes from AT & T Broadband, noting that half of its 4 million AT & T subscribers are on analog. Time Warner Cable is also rolling Game Show Network out on digital, including a launch this week on the MSO's New York City system.
Other major Game Show affiliates include Cox Communications Inc. (5 million Game Show subscribers), Time Warner (2.5 million), Charter Communications (1.8 million) and Adelphia Communications Corp. (1.5 million). Both DirecTV Inc. and EchoStar Communications Corp. carry the channel.
Publicly owned Liberty Digital (its NASDAQ symbol is LDIG) has holdings focused mainly in Internet and interactive-television companies. Its portfolio includes stakes in MTVi Group, ACTV Inc., ICTV Inc., iBEAM Broadcasting Corp., Respond TV Inc., TiVo Inc., Drugstore.com, Priceline.com, SportsLine Inc. and iVillage Inc.
DMX Music Inc. is also a wholly owned subsidiary of Liberty Digital.