More Net Unraveling Ahead - Multichannel

More Net Unraveling Ahead

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Earlier this year, the 12-year-old Comedy Central partnership between co-owners Time Warner Inc. and Viacom Inc. ended, with the latter taking full control of the network for $1.2 billion.

Then this September, after Liberty Media Corp. exercised its exit rights, Comcast Corp. rather reluctantly sold its 57.5% stake in QVC to John Malone's company for $7.9 billion.

And back in 2001, Fox Family Channel was sold to The Walt Disney Co. for $5.2 billion. Jointly owned by Haim Saban's Saban Entertainment Inc. and News Corp., the network was ultimately purchased by Disney after Saban exercised his "put" option for the service.

More and more, partnerships in which several players jointly possess a cable network are being unwound, with the services ending up with one corporate owner.

Even with the Comedy Central and QVC deals closed, more consolidation could lie ahead.

After paring down its debt, Time Warner Inc. may look to take full ownership of Court TV, which it jointly owns with Liberty, a Wall Street analyst predicted last week. And Scripps Networks in October said it was eager to buy Tribune Co.'s 30% share of Food Network to gain full ownership.

"We are in an economy of consolidation," Court TV CEO Henry Schleiff said. "If you start with that, I think it is more unlikely than not that all of these partnership-owned networks will, at some point in time, end up wholly owned in some way."

The trend hangs over not only Court TV, but other programmers with multiple owners, such as E! Entertainment Television, owned by Comcast Corp., Disney and Liberty; A&E Network, owned by NBC, Hearst Corp. and Disney; Lifetime Television, owned by Disney and Hearst; and Discovery Communications Inc., whose ownership includes Liberty, Cox Communications Inc., Advance/Newhouse Communications and founder and chairman John Hendricks.

Attempting to unspool these partnerships is no easy matter. Often, the parties endlessly haggle over price, ultimately scuttling any agreement. And in some cases, one player is simply unwilling to sell its stake in a successful network to its partner, or partners.

"A lot of times one side wants to buy out the other, and the other has no interest," one cable-network chief said.

Hearst and ABC Cable/Disney have been partners in cable networks — not only Lifetime and A&E, but also ESPN — for 23 years, and that successful relationship will continue despite any speculation to the contrary, according to Ray Joslin, president of Hearst Entertainment and Syndication.

Officials at A&E, Lifetime, ABC Cable and NBC Cable couldn't be reached for comment.

But the current environment of endless media mergers has and will continue to fuel scenarios in which one partner looks to take over full ownership of a cable network, according to cable executives.

"My guess is over the coming months we will see some of that happening," said Ken Lowe, president and CEO of E.W. Scripps Co. "Everybody is just trying to clean up their balance sheet and be in control. And if you're selling across multiple networks, it just makes a lot more sense."

The cable TV-programming landscape has become so competitive that having just one owner can substantially benefit a network.

No matter how successful a partnership is, a co-owned network is in many ways a stepchild, often forced to essentially function as a standalone, according to several cable programming veterans.

Jointly owned networks often can't take full advantage of their owners' leverage and promotional clout.

"Networks that are owned by multiple partners to some degree face a more difficult task in terms of realizing their full potential, because of conflicting agendas among the owners and the inability to apply all the resources, whether it's retransmission consent or to purchase programming," an industry veteran said. "Those issues have all come up to one degree or the other with A&E and Lifetime."

Under its News Corp.-Saban joint ownership, Fox Family's request to repurpose Fox network shows like Malcolm in the Middle
were rejected, while News Corp.'s wholly owned FX was able to re-air fare like 24.

Distribution-wise, networks with multiple owners usually aren't packaged for affiliate sales with the services their co-owners control. In instances when they are jointly sold to MSOs, the question is always whether the partially owned network will get short shrift.

"If you've got one slot, do you give it to the network you own 50% of or 100%," one cable executive said.

Joslin, though, sees A&E's and Lifetime's jointly owned status as virtual independents as an advantage, not a curse.

"There's a [team] spirit that really allows management and the board of directors of those companies to really make decisions in the best interests of the business, rather than the best interest of the parents," he said.

Ex-NBC Cable president Tom Rogers, who was involved with a variety of services that NBC had stakes in — including Court TV, CNBC and A&E — knows instances in which a partner in a cable network has sold its piece of that programming service — and what triggers that kind of action.

"Sometimes a partnership has a predetermined life to it, a buy-sell of some kind," said Rogers, who just started a consulting company, Trget Media. "Sometimes it's because one partner wants to do something to expand and the other partner doesn't want to — or have the financial wherewithal.

And there are other reasons why network partnerships ultimately unravel.

"Sometimes, it's because the governance is unwieldy, and it leads to deadlocks on critical strategic and management issues, in which case the only resolution is to figure out how somebody can control it without having committee-type governance," Rogers said.

According to Schleiff, a network partnership gets dissolved for one of two reasons: "Either because it's acrimonious, or because it's successful."

Acrimony had been the story at Court TV for some time before he joined the network in 1998, after Time Warner and Liberty had become its sole owners.

"Prior to my coming it was a little dysfunctional, as I understand it," said Schleiff, referring to the period when NBC and Cablevision Systems Corp. still held stakes in Court TV. "For a lot of reasons, it made it a little crowded around the table. And by definition, when you get that number of players, there's more of an opportunity for more agendas."

Once Court TV's ownership was "clarified" — leaving only Liberty and Time Warner — "you then had basically two deep-pocketed, sophisticated players in both cases," according to Schleiff. "From the get-go, people understood the language. You did not have a publishing entity or a broadcast company. These guys understood cable networks, both of them."

At Comedy Central, it was a much different scenario than at Court TV: There had never been any feuding between Viacom and Time Warner.

"It was a good partnership," Comedy Central president Larry Divney said. "It was maintenance-free and made a lot of money."

So why did Time Warner peddle its stake to Viacom?

"For us specifically, it was pretty clear: Time Warner needed the money," Divney said.

In the case of both Fox Family Channel and QVC, there were financial triggers in their ownership agreements that forced change. With Fox Family, "Haim just wanted to flip it," according to one source.

In December 2000, Saban exercised his "put" option for Fox Family, forcing News Corp. to decide whether to buy his 49.5% stake in the cable network. Ultimately News Corp. — busy trying to acquire DirecTV Inc. parent Hughes Corp. — didn't want to buy Saban's stake, and Fox Family went to Disney, which rebranded the network as ABC Family.

With QVC, Liberty back in March told Comcast that it planned to exercise its exit rights for the home-shopping network. Under that trigger, Comcast had the first right to acquire Liberty's 42.5% stake in QVC. If Comcast passed, Liberty could then buy the MSO's piece, which is what happened.

In an interview this fall, Comcast CEO Brian Roberts said that Comcast "couldn't add enough value" to justify not cashing out to collect $8 billion for its initial $200 million investment in the shopping channel.

Relative to Court TV, both Liberty and Time Warner have "gotten along great, and both share the vision of growing subscribers and growing ratings and investing in the network," according to Schleiff.

"Having said that, there's no question in my mind in the real world that both are used to investing in something like this, and harvesting their investments," he said. "It is not unlikely in some period of time that one of these two partners — it's no secret there's a buy-sell provision in 2006; maybe it will get triggered earlier — will say, 'This thing has worked, but I'd like to own it all.' Hopefully, it will be an amicable negotiation."

Now that Time Warner has reduced its debt, by selling its Comedy Central stake and the Warner Music Group, it may look to "roll up its cable network investments" and buy Liberty's half of Court TV, Lehman Brothers analyst Vijay Jayant said in a report last week.

Time Warner declined to comment, while Liberty couldn't be reached.

There is no buy-sell or "put" option to prompt Tribune to sell its stake in Food Network to Scripps, according to Lowe. And while the partnership has been very amicable, Scripps wants the network.

"What we have said repeatedly is our No. 1 priority is expanding Scripps Networks, investing capital, free cash flow," Lowe said. "To reclaim that 30% of Food Network really supports that strategy. If you have X number of dollars to spend, where would it be — an acquisition?

"This is more along the lines of investing in ourselves. We passionately believe in the enormous potential of the Food Network."

Comcast is aggressively seeking to expand its content portfolio, which already includes stakes in or whole ownership of G4, CN8: The Comcast Network, regional sports services and holdings in national services E!, Style, Golf Channel, Outdoor Life Channel and TV One.

One source familiar with the situation said that Comcast may wind up with Disney's stake in E! as part of a broad negotiation.

"E!'s tied up with all the other issues that Disney is discussing with Comcast, everything from ESPN to license fees to Outdoor Life," the source said. "There are just a large number of items that are on the table between those two companies."

If Comcast were to gain 100% ownership of E!, it could take advantage of economies of scale and use the infrastructure that network has in place — in terms of affiliate and ad sales and production — to service G4 and its other services.

"One of the things that gets in the way of that is the partnerships," the source said.

Officials at E! and Comcast declined to comment. But one person familiar with the situation denied that E!'s future was tied to issues like ESPN's rates. The source said Comcast looks at network ownership — be it taking a stake in TV One, so it doesn't bear all the risk of a startup, or gaining majority ownership in a network like The Golf Channel — on a case-by-case basis.

Proponents of network partnerships, like Joslin, argue that co-owned networks can reap benefits through alliances with their various owners. Lifetime
magazine is a joint venture between Hearst and Disney, for example.

In the case of ESPN and Lifetime, they've been able to use their owners' broadcast stations' retransmission rights as a tool to launch networks.

"In our own experience, we've been able, with ABC and Hearst retransmission consent, [to] essentially launch ESPN2, and exercised it again in the case of the Lifetime Movie Network," Joslin said.

For his part, Divney said Comedy Central is already enjoying being in MTVN's tent.

"It's better for the business to be in one place," he said. "The upside, which we're experiencing already just from cost savings and consolidation, is already in place. … Our bottom line's going up considerably next year."

Mike Farrell contributed to this story.

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