Pay Nets Are Their Own Soap Opera

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Driven by a potent combination of fierce competition and
new opportunities brought about by expanded channel capacity, the lucrative
premium-television business has become a cauldron of programming and marketing innovation
and good, old-fashioned corporate intrigue.

All three players in the pay TV drama are owned by some of
the nation's largest media conglomerates: Industry-leader Home Box Office is a unit
of Time Warner Inc.; perennial bridesmaid Showtime is part of Viacom Inc.; and upstarts
Encore and Starz! are run by Encore Media Group, which is controlled by
Tele-Communications Inc. and Liberty Media Group.

The premium networks are all spending millions of dollars
on programming, as well as on marketing and branding campaigns. They are all offering
cable and satellite operators an array of multiplex channels. And reports keep circulating
that a major realignment of the pay universe -- involving Rainbow Programming Services
(owner of American Movie Classics, Bravo and The Independent Film Channel) and the Encore
services -- is in the works.

HBO recently reaffirmed its position as the leading premium
network with the spectacular success of its 12-hour original miniseries, From the Earth
to the Moon
, which garnered critical raves and pulled in solid ratings.

In addition to spending $68 million to produce the series,
HBO also spent an estimated $10 million to market it, capitalizing on the involvement of
Tom Hanks as executive producer of the series to reap a blizzard of media coverage.

"They're head and shoulders above everybody
else," said Geof Rochester, senior vice president of sales and marketing for Comcast
Corp. "When it comes to content and promotion, no one spends at that level."

SHOWTIME'S

MAKEOVER

Showtime has decided that it needed a branding makeover.
Late last year, it unveiled the largest image campaign in its history -- the $40 million
"No Limits" campaign -- which has given the network unprecedented exposure.

Len Fogge, executive vice president of creative and
marketing services for Showtime Networks Inc., said the network spent 16 months
researching the campaign, and it "identified the key emotional benefits" that
Showtime's target audience expects from its programming.

In fact, Showtime's emphasis on original programming
-- now up to 50 new movies per year -- has won praise from television critics and cable
executives.

"They've done a great job," said Skip
Harris, vice president of marketing at Falcon Cable TV Corp.

Jerry McKenna, vice president of strategic marketing for
Cable One, praised Showtime's original-programming strategy as an "excellent
retention tool."

STARZ!/ENCORE

ANTES UP

Starz!, meanwhile, has trumpeted its lineup of big
Hollywood movies and its deals with such major studios as Touchstone, Universal and
Miramax for first crack at their hit movies.

Movies, said John Sie, chairman, CEO and president of EMG,
were the "soul and essence" of the premium business. "People want to watch
movies," he said, "and we want to give them the best movies."

Some industry analysts credited Starz!/Encore -- which,
through its affiliation with TCI, has been able to secure distribution on that MSO's
systems for a flat fee -- with invigorating the pay category.

"They're coming of age," said Des Moines,
Iowa-based marketing consultant and producer Terry Rich, "and they're making a
run at the big guys."

"Nothing but hit movies and big hits," McKenna
said, was an "easily identifiable" selling point.

To drive the point home, Starz! and Encore rolled out a $40
million branding campaign earlier in the year, complete with actor Martin Sheen as the new
"voice" of Encore and Beethoven's Ninth "Ode to Joy" symphony as
the Starz! musical theme.

Encore is also credited with leading the way in
categorizing movies and channels by theme with its multiplex package of Westerns, Mystery,
Action, True Stories and Love Stories.

Sie argued that multiplexed thematic-movie channels can be
a "killer application" for operators because they "replicate browsing
aisles" in video stores and they can, in fact, win back business that cable systems
have lost to video stores.

Not everyone is convinced, however. Some operators are
skeptical of Sie's "mood" arguments, which he makes every chance that he
gets.

"It's a good idea, but I think that it sounds
better in theory than it actually works in practice," one operator said. "How
many people do you know who make their viewing choice of a movie by genre? I think that
most people just want to watch a good movie, and they either have something specific in
mind, or they look for the best one that's available."

Marketing consultant Steve Liebmann was more blunt,
describing Encore as "old movies packaged in a different way."

PAY'S NEW THEME

Nonetheless, thematic categorization of premium channels
has clearly struck a nerve. Showtime has won praise from operators for its
action-adventure category, "Showtime Extreme."

"We've been very pleased with the reaction,"
said Jeff Wade, Showtime's executive vice president of sales and marketing. "Our
strategy has been to put out real brands on their own, and this one has established an
identity very quickly. We believe that you have to lead with brands and add with
plexes."

HBO provided a dramatic demonstration of that philosophy
several weeks ago, when it introduced new branded channels to enhanced
"mega-brand" multiplex packages from HBO and Cinemax.

With an eye toward expanded channel capacity available on
direct-broadcast satellite systems and on emerging digital tiers on cable, HBO and Cinemax
will begin branding additional channels in June, bringing the total number of channels
offered by the two services to 10 by the end of the year.

The HBO "mega-brand," called "HBO The
Works," will be made available at no additional cost to cable systems, and it
includes the original HBO service; HBO Plus (counterprogrammed to HBO); HBO Signature
(showcasing original movies, series and documentaries, as well as theatrical films); HBO
Zone (movies, music, boxing and programming for a "Gen-X sensibility"); HBO
Family; and HBO Comedy. HBO will introduce the new services in the fourth quarter.

In June, Cinemax will expand to four channels, collectively
known as MultiMAX, including the original Cinemax; MoreMAX, with harder-to-find movies,
including premieres of foreign and independent films; ActionMAX; and ThrillerMAX.

The move has been widely praised by cable operators, DBS
executives and marketing consultants for increasing the perceived added value of premium
offerings and making them easier to sell with distinctive, descriptive brand names.

"There's no question that it helps sales,
retention and perception of value," Rich said, estimating that being able to sell
multiplexed premium channels without raising the price can boost sales by anywhere from 15
percent to 50 percent.

In addition to "shoring up the perceived value"
of HBO, the "real value" of the mega-brand move will be evidenced in the
trenches, when customer-service representatives sell pay channels, said Lee Clayton, vice
president of marketing for Rifkin & Associates Inc.

"Now, my CSRs will see the value for the price,"
she said. "It will be easier to communicate. They'll be more comfortable
selling, and that's half the battle."

HBO The Works was driven by "exhaustive" consumer
research showing a demand for more easily identifiable channels, according to HBO
executives, as well as by the success of multiplexing on DBS services and the onset of a
digitally driven "high-volume" channel environment in cable.

Indeed, said Bob Grassi, senior vice president of affiliate
relations for HBO, the additional branded channels were designed to "help cable
operators to drive digital boxes into homes."

Some operators wondered out loud how much the new brands
"will compete with each other," but Eric Kessler, senior vice president of
marketing for HBO, responded that while each multiplex channel would have a
"different feel and personality," the majority of advertising and promotion
would focus on marketing the image of the HBO brand name.

Operators also questioned whether the thematic-multiplex
trend on premium networks really offers viewers different product, or whether it merely
reconfigures existing programming.

"How did they arrive at these categories?"
McKenna asked. "Was it based on customer desires, or inventory?"

Tom French, senior vice president of corporate marketing
for TCI, added, "How many channels add value? I'd rather take fewer that are
more salient than more channels that are less salient."

MORE CHANNELS

Few people in the business expect the onslaught of new
premium channels to slow down, however, and quite a few believe that there may be some
sort of realignment among premium channels before long.

The most recent scenario making the rounds had TCI's
Liberty Media Group merging with Rainbow Programming Services and taking a majority share
while Rainbow managed the venture. TCI has a 34 percent equity stake in Rainbow parent
Cablevision Systems Corp.

While cable operators were not pleased at the prospect of
less competition among pay networks, thereby reducing their own negotiating leverage, they
appeared intrigued by the powerful marketing possibilities of a new, strong premium brand
with instant name recognition.

"Can you imagine the possibilities of a
'Blockbuster' brand in pay?" one operator asked. "Imagine how you
could take advantage of that relationship at retail -- the kinds of cross-promotions you
could run -- not to speak of the power of the brand itself. There would certainly be a lot
of opportunities."

No matter what happens in the future, high-stakes jockeying
among the pay networks remains as fiercely competitive now as ever.

Encore, which was built by Showtime alumnus Sie, just lured
longtime HBO executive Robert Leighton away to head its programming division. Vice
president of HBO International for the past seven years, Leighton becomes senior vice
president at EMG, overseeing all programming, including the development of original
productions for Starz!

The beat goes on.

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