MTV Networks Continues Strong Run

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MTV Networks is basking in the success that has been
radiating from the many parts of its empire.

VH1 has completed a turnaround that has cable operators
virtually gushing. Distribution for Nick at Nite's TV Land, which may be one of the
last mass-audience analog channels, continues to climb. And Comedy Central, half-owned by
MTVN, has created a monster hit with South Park.

Buoyed by those factors, and by the uphill march of its
ad-sales revenue, MTVN continues to be a cash-flow cow for its parent, Viacom Inc. In
first-quarter results released last week,MTVN's revenue increased 19 percent,
to $361 million, with cash flow of $134 million, up 17 percent.

"We've had a great run at MTV Networks, in terms
of delivering solid, steady growth for ourselves and for Viacom," said Tom Freston,
MTVN's chairman and CEO. "I feel very proud of our performance, because
basically, we're a creative-driven company, and our output largely depends on the
things that we come up with and on how we market and merchandise those."

But MTVN also faces some heady challenges this year. Its
major focus is on a much-publicized retooling of the programming on MTV: Music Television,
which is embarking on its biggest slate of pilot development ever. MTV's ratings are
already seeing a lift, and Freston expects this year to be the network's best ever.

But some cable operators complained that MTVN has failed so
far to clearly explain to them what its new programming strategy is. And more than one MSO
official groused that the programming revamping is aimed at national sponsors, and at
bringing even more ad dollars into MTVN's coffers, rather than at meeting operator
needs.

MTVN will also be put to the test this summer, on both the
digital and kids' fronts. Right now, MTVN is putting into high gear its effort to
market its first foray into digital: a package of 10 networks that will include Noggin, an
educational, commercial-free kids' network that Nickelodeon is creating in a joint
venture with Children's Television Workshop, the Sesame Street producer.
Noggin, which launches in January, will be available for analog or digital carriage. But
it is envisioned as the anchor for a group of Nick networks that will be part of
MTVN's digital tier.

That digital package, which will be carried on a single
MTVN satellite transponder, will also include "The Suite from MTV and VH1" -- a
group of six digital-music-video networks representing different genres, which launches
July 31.

"We will step up marketing The Suite and determine
what the final composition of various networks will be," Freston said.

Also on the kids' front, this August, News
Corp.'s Fox Family Channel will debut its daytime kids' programming, mounting a
full-front attack on Nickelodeon. But Nick isn't sitting still: In late summer or
early fall, it will extend its kids' programming an extra half-hour into primetime,
from 8:30 p.m. to 9 p.m.

LATE TO DIGITAL PARTY?

MTVN has already started talking to a number of MSOs,
including Cox Communications Inc., about The Suite, and that marketing push will increase.
But MTVN is coming a little bit late to the party for digital.

Programmers such as Discovery Communications Inc. have
already staked claims there, enjoying carriage right now on Tele-Communications Inc. and
Cox. DCI has six digital networks -- seven, if you count BBC America -- either up and
running or in the works.

As for the issue of being late to the party with digital,
Nicole Browning, MTVN's executive vice president of affiliate sales and marketing,
said operators are retooling their digital-video product based on initial results out in
the field. Therefore, the MTVN digital group can still get a berth on those digital
platforms, Browning said.

TCI, for example, recently sent its affiliates a survey on
its Headend in the Sky lineup, asking them which services they'd like to see added.
TCI expects to do a major revamp of its HITS lineup by July.

"Operators will revisit it [their digital
platforms]," Browning said. "It's not going to be stagnant. They'll be
looking for vibrant product."

And one big advantage that MTVN has, according to Browning,
is that The Suite, unlike Discovery's digital offering, will have original
programming. "This is not just repackaged MTV," she said. "These are
brand-new services."

Operators are giving The Suite and MTVN's digital tier
a serious look.

"We are considering their digital networks and waiting
to learn more about them," said Bob Wilson, Cox's vice president or programming.

Lou Borrelli, executive vice president and chief operating
officer at Marcus Cable Co. L.P., added, "I'd anticipate being a partner with
them."

But Freston -- unlike digital boosters, such as DCI
chairman John Hendricks -- doesn't see a big upside for programmers with digital.

"The economics for a programmer being in that business
are rather marginal, inasmuch as you're not going to get a large license fee, and
it's doubtful that you're going to get any significant advertising
revenue," Freston said.

Despite having those reservations, it's necessary for
MTVN to have a digital offering, according to Freston.

"We see ourselves in the branded business, and we want
to be in there with our brands, whether it's on analog cable, digital cable, or the
Internet," he said. "We want our viewers to be able to get us in whatever ways
they use the media in their homes."

'M' BACK IN MTV

Under the leadership of its new programming guru, Brian
Graden, MTV is undergoing a revamping that aims to put the "M" back in MTV, as
Freston put it.

"We're putting a renewed focus back into
music," he said. "What I would call the next incarnation of MTV -- we've
just begun to see the results of it on the screen."

Freston is upbeat about the results, to date. In the first
quarter, MTV was up to a 0.5 in total day, a 25 percent increase, while primetime was up
17 percent, to a 0.7, according to Nielsen Media Research.

"MTV had a good year last year, but not a spectacular
one," he said. "Its performance was up, in spite of the fact that the music
business had a particularly flat year. That happens every so often. This year is going to
be the best year that MTV has ever had. All of the vital signs are positive."

Despite the press that MTV's programming retooling has
received, a number of cable operators expressed confusion about what the network was
trying to accomplish.

"They have not communicated what they are doing,"
said Pam Burton, director of marketing for Prime Cable.

Some operators said that although MTV is aiming to do more
music-oriented programming, they were worried that this would actually mean fewer music
videos -- a claim that MTV denied. Several MSO officials even said that they wished that
MTV had sought their input on any programming changes.

Several operators noted that they were giving music-video
channel MuchMusic USA -- the rates for which are far less expensive than MTV's -- a
good, hard look.

Both Freston and Browning said MTV is about to ramp up a
communications campaign to fully explain the programming changes to affiliates. Both
pointed out that most cable operators are now out of the MTV demographic and more in the
VH1 demographic, so they aren't watching the network, and they don't see its
changes firsthand.

"We are going to undertake a much more ambitious
communications strategy [for MTV this year]," Freston said. "Last year, we had a
large focus on VH1, and also on moving Nickelodeon up to the next level. And this year,
with the emphasis on MTV, we're telling everyone -- the press; first of all, our
viewers; secondly, cable operators -- what we are doing. We have a trade campaign for MTV
that is really about the recommitment to music at MTV."

Out in the field, Browning said, her sales force is
"in the process of communicating the MTV repositioning ... that the music is back in
MTV. We have work to do on that front. On the process side, it takes a while for any
message to be communicated."

For example, Browning pointed out that one year after
sitcom reruns were taken off VH1, "people still perceived that comedy was on
there."

In terms of MTV's refocus, Freston said, changes
can't be made to please cable operators or advertisers -- they are meant to please
MTV's audience.

"We program the network for the viewer," Freston
said. "Worldwide, we probably do more research on kids, teens and young adults than
virtually anybody. That's not to say that we don't also listen to our customers,
which would be advertisers, cable operators and people in the music industry. We have a
regular dialogue with people in all three of those communities."

He added that it's "wishful thinking" to
believe that MTV can just air music videos and be a success.

"Going back 15 years ago, the music video was a total
novelty on the pop landscape," Freston said. "You could play just music videos.
You play them back-to-back today, and basically have a video jukebox, and you're not
going to have any audience. How do I know this? Because we get ratings on all of our
services, every 15 minutes, and the viewer today responds much better to music videos if
you somehow context them better and put them in a different type of format than radio on
TV."

Ultimately, MTV's programming retooling will help its
audience, cable operators and advertisers, according to Browning.

"It's all married together," she said.
"At the end of the day, we become a stronger network. Whatever we do to be stronger
is beneficial to cable operators."

KIDS HEAT UP

Operators continue to view Nickelodeon as a model of what
children's programming should be. But the network will have to face off with its new
competition this summer: Fox Family.

"Fox Family is coming right at Nickelodeon, and who
can blame them?" Freston said. "Nickelodeon has been a very successful business.
It has tremendous loyalty and viewership from young people. If I was out there, I'd
want to come right at Nickelodeon, too."

Freston described Fox Family's announced kids'
schedule as "somewhat ambitious." He jokingly added, "We wish them luck,
but not an awful lot. It takes a long time to build up a brand, as they well know. I
suspect that whatever comes out of Fox Family will take a few years to really manifest
itself."

In any event, Nickelodeon isn't standing still. It
will extend its kids' programming even deeper into primetime, to 9 p.m., later this
year.

"We're not going to be looking over our shoulder
at competition, but eye to eye with our customers -- kids," Freston said.

This year, MTVN's other big distribution drive is for
TV Land. "It's one of the fastest-growing networks, pushing 30 million homes and
expected to hit 33 million to 35 million by the end of the year," Browning said.

Freston is pleased with the network's progress. He
noted that its first-quarter, total-day ratings of 0.5 ranked it with cable networks that
have been around for years.

"It's very cleverly programmed and
promoted," Freston said. "Our advertising sales are right on target. We think
that it's one of the last big analog ideas to reach broad distribution in this
country. If you have the space, why wouldn't you want to have a service with this
type of ratings and broad household appeal?"

MTVN is now sitting back and reaping the rewards of the
three-year-old retooling of VH1 as an entertainment-music channel for those 25 and older.

"I give fantastic credit to [VH1 president] John
Sykes," Freston said. "Cable operators that were lining up to drop us three
years ago are now lining up to add us. We added some 4 million subscribers last year. I
couldn't be happier about taking this brand and making it deeper."

Browning recalled that three years ago, her job was to
listen to operator complaints about VH1.

"It was really grim," she said. "Now, the
momentum behind VH1 has been astounding. Operators are exuberant about it. They come up to
me at events."

MTVN'S LEVERAGE

While some operators raved about VH1 -- one wished that
Sykes could "be cloned" -- some officials at smaller MSOs resented the way that
MTVN uses its leverage to package its networks, imposing rate penalties if an operator
doesn't carry a network like VH1.

"The problem with packaging these together is that you
assume that the group works in every market," said Ron Martin, chief operating
officer for Buford Cable TV. "You end up putting product on systems that has
absolutely no value to the customer."

Jerry McKenna, vice president of strategic marketing at
Cable One, was among several midsized operators who complained that MTVN was getting
aggressive with its rates. Several MSO officials also said they still resented being
"incented" to carry MTV -- a service that offends the sensibilities of some
parts of the country, in smaller and more conservative markets -- in order to get
Nickelodeon, a must-have network.

However, Freston maintained that MTVN hasn't tried to
take advantage of operators.

"We want to sell to them at a fair price, and
we'd like to provide fair value for what they bought. And we think, by and large,
that over the years, we've delivered on that promise," he said.

"You could say that some years, this service or that
service might have underperformed, but net-net, the MTV networks have been a good deal for
the cable industry. It's the type of programming that you don't get on
broadcast. It has very strong reaches into demographics that are difficult to reach,"
Freston added.

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