Programmers Big and Small Face Network-Launch Trials

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On the eve of the Comcast Corp.-AT&T Broadband merger's close, four programmers representing a broad spectrum of start-up networks — MSO-owned, part of a big media conglomerate and independent — gathered to discuss the trials and tribulations involved in launching a new channel. Multichannel News's annual new-network roundtable participants were: Sean Bratches, executive vice president of affiliate sales and marketing with ESPN, which is debuting ESPN HD and Spanish-language ESPN Deportes next year; Debra Green, chief operating officer of G4, the new video-gaming network owned by Comcast; Classic Sports Network (now ESPN Classic) founder Brian Bedol, who is now president and CEO of CSTV: College Sports Television, which bows Feb. 23; and cable and direct-broadcast satellite veteran Daniel O'Brien, co-founder and CEO of Brief Original Broadcasts (BOB), a diginet airing short-form programming that rolls out March 3. The four veteran executives talked about the virtues and woes of being an indie as it compares to having a powerful backer; programmer-distributor relations; the sunny side of digital carriage; and competing for bandwidth against offerings like video-on-demand. An edited transcript of the interview — conducted by editor-at-large Linda Moss, editor Kent Gibbons and news editor Mike Reynolds — follows.

MCN: Can any of your services succeed without eventually getting a Comcast deal?

Brian Bedol:
Consolidation is challenging for new networks, but if you have a good product, it can be a great advantage because you can roll out much quicker. If you can prove the value of your service, having a strong, smart operator like Comcast isn't a disadvantage. I would rather see one well-operated, 20-million subscriber MSO than three who don't know what they're doing.

MCN: So you see the glass as half full. Of course, if they decide not to carry you, then it's not so great.

Bedol:
It's the reality of the marketplace, and as a company coming into the marketplace, you have to deal with the reality of this situation. They certainly aren't consolidating this company or creating this big company to stop growing. They're creating it to grow. Historically, strong programming has been the principal driver of subscriber growth and revenue growth.

Debra Green:
What's interesting with what you say — and this is true for not only Comcast, I think, but for anyone who's continuing to exist in the industry — is the fact that the digital revenue stream is real. The only way that the industry is going to be able to grow that revenue stream is through content. You've never heard of a technology growing without content.

MCN: This is for Brian and Dan. You both represent independent services at this point. Are you looking for MSOs as investors?

Daniel O'Brien:
If you can have a strategic investor, obviously that's tremendous value. Whether that comes in a strategic form where there's equity associated with it or just very strong support, is a critical value driver in the success of a new network.

MCN: And Brian, what about you? Any money you can get, anywhere?

Bedol:
We look at the capital markets as being one of the ongoing important, strategic parts of the business. With Classic, we were held out sort of as the poster children of independent networks.

We didn't really set out to be an independent. We went and we visited with every major media company and MSO when we started and had something, you know, and weren't able to just say it. We had to show it. So ultimately, when we sold to ESPN, I think there was a certain evidence that we were able to build something that had value.

But we would have loved strategic partners early on, had there been that right relationship. I think with CSTV, we will have a variety of financial and strategic partners as we roll this out.

And I think that there always is a balance between how much a company has to give up for what it's getting. So to the degree that there are those kinds of relationships that are mutually beneficial to the partner and to us, we'll always pursue them.

MCN: But with the difficulty of raising money these days, and the fact that there are just so few big distributors, do start-ups come on to the market now assuming that they'll have to yield a significant amount of equity to distributors?

Bedol: I'm not sure that it's more difficult raising money today than when we were raising money for Classic. It's sort of interesting that people always talk about the MSO being the gatekeeper. I would argue that the capital markets are the gatekeepers, that generally, a well-defined business strategy with good prospects and a good potential return for the capital markets will get funded.

If you look at it historically, cable networks that have gotten launched compared to the failure rate or the success rate — and I don't know this scientifically — but in a snapshot, I would bet that the ratio of new networks to success or new companies to success in the cable business is higher than almost any other business. There are very few networks that get funded and launched that actually tank.

O'Brien:
But hasn't the model changed, though? I mean, I think you're right — there are not many networks that have gotten funded and tanked. But the prior paradigm was it was a license fee; the network always got a license fee. Now there's a greater period of maturity in the business where I'm certainly hearing from operators on both sides that, 'We really have to look at every new channel we launch now.' It's no longer the formula of: 'Let me add these three, I think people are going to be interested and they'll find a niche appeal. And yeah, it's OK to pay three cents, five cents, seven cents, 12 cents.'

Now I'm certainly hearing, 'I'm not sure that customers really are coming on or staying on because of any individual new network, and so all I'm really seeing is margin erosion.'

Bedol:
See, but the funny thing is, I'm not sure that that is any different. When we first visited with operators with Classic back in, I guess, '94, it was around the time that the Food Network was doing 10-year free deals. That's supposedly was going to change the paradigm that everything was going to be free and we thought, 'You know, how can you ever have a business that survives with that economic model? It can't get any worse.'

About six months later, Rupert Murdoch came in and started paying people $10 a sub [to carry Fox News Channel], and we said, 'I guess it can get worse.' Ultimately, with Classic, we were able to deliver a high-quality product in sports that had a high perceived value and still get paid, but get paid significantly less than they were paying for live sports.

MCN: Deb — now, obviously Comcast [Corp.] is your big backer. Are you giving equity to other operators, like Insight [Communications Co.]?

Green:
I just have to go back to something that Brian had said about the failure rate of networks [being] really nonexistent. The amount of work that goes into launching a network — by the time it gets launched, the value is already there.

It was as difficult for G4 to get Comcast into our tent as it will be for any network. You have to go in, you have to sell the value of what you have. Comcast didn't just invest in G4 because they thought it was a good idea. There was a process that has to happen, which is identifying the demographic, identifying the value of the service, why would it be good for either digital or analog, and going through the same steps that I think all of us here are going through. It was no different for me than it will be for everybody else.

So it took us two long years to really go step-by-step with Comcast and AT&T [Broadband] and Insight and everyone else in the marketplace to prove the value. Then once that value was proven, we then were able to accept some equity. We were giving away some of that equity. Because Insight came on so early, we did give them a very small piece to bring them on early. But Comcast was really the driving force in the network.

MCN: We were talking about that the failure rate of networks that have launched is pretty low. But it was two years ago that New Urban Entertainment TV chief Bob Townsend was sitting across the table where you guys are and telling us, 'There's only one major African-American service, there's room for more.' NUE is out of business. Not to make anyone feel paranoid over there, but …

Bedol:
There was a different measure or filter during the late '90s and sort of into 2000. A lot of businesses and a lot of industries got funded that — and I'm not saying that NUE shouldn't have gotten funded — but there were a lot of businesses that got funded without going through the process. It's sort of like you hear about how much better free-range chicken is than farm-grown chicken because they've got to survive on their own.

There's something about having to through what Deb has had to go through and what we're going through and what Dan is going through and what Sean has never gone through. [Laughter.] You learn to build up some resistance, you build up some muscle and ultimately you have to get through those filters.

O'Brien:
We can't let the free-range chicken thing go yet. [Laughter.] I thought it was steroids.

Bedol:
I love a good free-range chicken. Don't get me wrong.

Green:
Let's get back to the equity question, though. If the content — and again, I get back to the content — if the content is something that is going to drive value on the lineup, you have a very good chance whether there's equity or not in getting launched. You may call me an optimist, but I truly believe that.

Bedol:
And you have to have the resources to make it to that point.

Sean Bratches:
Going forward, my suspicion is you're probably going to see an increased number of, percentage of, companies that come into the market and fail than you have historically. Because as the market has burgeoned and the genres have been surfed, tapped and sliced into multiple pieces, it's much more challenging to find that consumer application that is going to drive demand, drive service fees, drive advertising revenue, drive bandwidth allocation.

O'Brien:
And there's a difference between digital and analog.

Bratches:
Unequivocally.

O'Brien:
If you have 90 million homes that you can reach versus today 37, 38 on the digital side, you've got a big difference. So you really have to be distinctive.

Bratches:
You sure do.

MCN: I want to use your own words here Brian: You have said a number of times that your College Sports service won't be a distribution snob, that you're more than happy with getting digital carriage. Are there no analog opportunities?

Bedol:
Can I explain what I mean by that?

MCN: No, let them go. [Laughter.] So is analog gone?

O'Brien:
From our perspective, we're not focused on analog at all. If you talk to the distributors, the affiliates, that they don't see a tremendous amount of room left in analog. So most of the growth has to come from digital.

MCN: Deb, what about you?

Green:
I'm always asked this question: What would I like and what am I going to get? What would I like? I would like every home watching G4. What I'm going to get is digital carriage. Even though our business plan is based on that — a digital rollout — I believe that digital will be ubiquitous, because I know that the goal on the cable side of things is to get a box in everyone's home. So having patience is I think really key here.

MCN: Now Sean, with Deportes, the plan is digital, right?

Bratches:
We're in the market today with really two new services on the linear side of the equation. One is ESPN Deportes, which is a 24-hour Spanish-language sports network, and the other is ESPN HD, which is a simulcast of ESPN in high definition. I'm slightly more optimistic in terms of ESPN Deportes relative to the analog-digital equation.

There are certain markets in the United States — certain markets, not all, but certain — that ESPN Deportes on an analog basic will make sense.

It's an underserved community, there's huge acquisition upside, and there's huge opportunity from a local ad sales perspective to tap into the

local newspaper budgets that are directed toward that community.

On ESPN high def, you're going to need a digital set-top box with a converter in the home, and we think that we can really be a catalyst for the driving of digital set-top boxes in the home with ESPN high def. We think sports is a natural high-definition product, along with movies, and we're very bullish on that.

O'Brien:
How much of your optimism is based on the content itself and the need it fulfills in the marketplace, versus the broad array of services that you have and the actual leverage that you have being able to package them — the difference between a large group programmer and an independent?

Bratches:
It's a very fair question. With regard to ESPN Deportes and ESPN high def, these are two services that our affiliates have proactively asked us to deliver. ESPN high def and Deportes will accomplish our distribution objectives independent of any associated packaging with other networks.

MCN: Now Brian, were you misquoted on not being a distribution snob?

Bedol:
No, not at all. What I mean by that is, I remember 10 years or so ago, first time I was at the Super Bowl, I made the mistake of asking where my seats were. The guy who gave me the tickets said, 'They're in the stadium, now shut up.' What he meant was be happy with what you can get.

It's similar to what Deb said earlier. My belief is that we've got a great value in what will be a very popular service. At the same time, you can't fight City Hall.

So I'm happy to get in where I can get in and then prove our value. I believe that we can prove that in certain markets, this should be a broadly distributed service. In other markets, you know, it may do very well on a sports tier.

Bratches:
We think that there are markets for ESPN Deportes that make sense for analog, for our affiliates and our fans, the consumer. We think that there are markets that, in large part, our distribution will be housed on a Spanish-language tier. We understand that.

Green:
We're programmers and we're running businesses. What we say to ourselves when we're developing these great business plans, we have to say, 'OK, this is a great concept. The reality, though, is how it's going to work for the guy that's operating the cable system?' If the cable operator's goal is to drive digital, then your opportunity on getting onto analog is very limited, because if that's where they see their future revenue streams, that's the business plan you must have.

O'Brien:
I think you have to find out what is going to attract consumer attention.

MCN: Does anyone here ever expect to see ESPN on a sports tier?

Bratches:
I certainly don't. [Laughter.]

MCN: I kind of knew what your answer would be. But what about anyone else here?

O'Brien:
I don't think you'll ever see ESPN on a sports tier. You may see some of the services that they launch as new services that wind up on the sports tiers, particularly if they want a license fee.

Bedol:
I defer to Sean.

O'Brien:
He's already answered.

MCN: You talked about bandwidth allocation before. Aren't operators increasingly going to be moving analog channels onto digital so they can reclaim that spectrum for a lot of other things?

Bratches:
I don't think we should get too bogged down in terms of the differentiation between analog and digital per se. It's really distribution, and if we were in a model where the entire business was digital 100 percent and the services that are on analog today are — in our former parlance, continue to be distributed on basic or expanded basic — we are amenable to that.

Bedol:
The technology itself isn't really relevant. You know, five, six years ago MSOs were experimenting with new-product tiers and in most cases, they didn't work and they were collapsed.

There will be a model that works that has full penetration for some services, less than full penetration for others and partial penetration for others, but I don't think you will see a complicated selection of à la carte services. So if digital allows all of these things to be delivered to everyone, I don't think being on digital is bad.

We really represent the first generation of new networks that have a business model that is compatible with the digital tier. In the consumers' eyes, there's a big difference between HBO 3 through 11 as a reason to buy digital, and services that are actually unique, exclusive original services that are new networks that they look at and say, 'Hey, I'd like to have that channel.'

Bratches:
And really present them in new ways. I mean, if you look at what Brian's doing with College Sports Network, it is very much in the sweet spot of pursuing colleges and university alumni groups and start much more niche marketing opportunities.

O'Brien:
You come to a point where you have to decide how many more genres are there that people will really want to watch, which is part of what we're doing with BOB. Short-form content has existed for a long period of time, but there's no full-time venue for it, so being able to take advantage of this incredible array of compelling, distinctive content that's never been seen on television anywhere before — where the producers of that content are dying for that exposure — is, we think, one of the last opportunities.

And the content is incredibly compelling and — particularly for the younger demographic who has a shorter attention span.

Bratches:
There's an evolution of, you know, to the shorter form. You look at the evolution of magazines like Maxim
which, I mean, their articles aren't more than 200 words.

Bedol:
Oh, does it have articles? [Laughter.] But also what Sean is alluding to, that I think is important to understand in the growth of these new networks, is really that it's programming as marketing.

So to the degree that we're able to tap into alumni databases and so forth, it's really going to the operators and saying, 'We're going to help you sell digital and we're going to help tap into a market that otherwise you don't have access to through our programming service.'

MCN: Sean and Brian face the same issue. You don't have the premier programming in your genres. What are you offering then?

Bedol:
I would just answer somewhat by analogy. One of the new networks or newer networks that has done a wonderful job establishing a strong position in the category is the Golf Channel. The Golf Channel has no [Professional Golfers' Association] Tour or big championship rights, yet it is probably the most relevant network to golf fans.

Our view is that we can't program a successful, moderately distributed network — digital network — if we're going out and chasing expensive rights.

ESPN, the regionals, the networks, do a terrific job programming top-conference football and basketball. There's a tremendous amount of college-sports product that doesn't get seen, as well as we can provide wonderful coverage. We can help make college sports fans better college sports fans. One of the nice things about the network business is it's not zero-sum. ESPN doesn't have to fail for us to succeed.

Bratches:
Your initial question was regarding rights and what we have. You have to understand the Hispanic consumer or the collegiate fan to determine what those rights are and what is the most compelling content. With regard to the Hispanic marketplace, we're really serving two markets — one assimilated, one non-assimilated. That's going to continue to exist in some degree of equivalency.

We're going to put on Major League Baseball and the [National Basketball Association] in Spanish. That is very compelling to the Spanish-language homes to watch sports that they've grown up [with] — particularly second and third generation Hispanics whose primary language is Spanish in the home.

MCN: Do you have Spanish-language rights to all the major pro sports?

Bratches:
We have them to a significant number. We're in discussions with others that we think make sense. We have Major League Baseball and the NBA right now. Also, if you look at the demographic of the Hispanic in the United States, two-thirds of United States Hispanics are of Mexican descent. ESPN is the No. 1 sports brand in Mexico.

We've been in the [U.S.] market for the past five years with ESPN Deportes, which is a syndicated four-hour block on Sunday nights. It's done very well and our research tells us that people want us to do more.

MCN: So obviously you don't think you're too late to the party in terms of a 24-hour Hispanic network, because there is so much out there.

Bratches:
But in the sports genre, we think there's a paucity of content that's targeted at this consumer. Our affiliates realize that. They've been asking us to launch this for some time.

MCN: What do you think the state of programmer-distributor relations is right now? That's going to be a segue into what do you think about Turner Network Television's attempt to go in and redo its deals…

[Laughter.]

Bedol:
Once again, I'm sure I'll defer to Sean on that.

O'Brien:
I think that the state is fine if you're delivering the right value. If you can create a winning combination of distinctive content and very low-cost content, then I think that enhances distribution and really serves the needs of the operators.

Bedol:
Operators are more excited about programming content than they've been in many years because for the first time, they can use programming to grow their revenues. When we launched Classic, we were just a drain on margin. When you had a programming service you were asking an operator to pay for, that they didn't believe was going to incrementally grow the penetration or the rates that they could charge, all you are is a margin drain.

Here, the operators — having made the $60-billion-plus investment in infrastructure — they're looking to grow these services and they realize that they need the content to do it. While it doesn't mean that the pricing negotiations will be any easier than they've ever been, they really are more welcoming to strong content providers.

O'Brien:
As opposed to what you said earlier, I think, where originally basic, digital basic, was a lot of repurposed content.

Green:
For digital to be successful, the industry is not looking for more of the same, because the consumer already has that. Young demographics are going to help drive digital because the young consumer is technologically savvy.

O'Brien:
And wants the technology.

Green:
And wants the technology in their home. So anything that's geared to the young adult is going to have a much stronger success rate on the distribution side than anything else.

Bratches:
My point of view is that we [programmers and distributors] need one another. I haven't talked to anyone in any business in the last year, year and a half, two years even, that is not going through some challenges in terms of managing their business. But I think that there's an acknowledgement from the affiliates' perspective that content is a critical element in terms of what they bring to their overall proposition.

You've got most of the major companies either owning outright or having equity positions in many, many networks. Cox just launched a regional sports network and put it on basic in New Orleans. So I think we're poised to move forward and grow together.

MCN: Again, to get back to that question: What do you think about what Turner Broadcasting System Inc. is doing with TNT? What success do you think will they have in opening those contracts and what kind of precedent does that set for programmers like yourselves in general?

[Laughter.]

Bedol:
Please note all eyes turned to Sean.

Green:
I don't think it's going to be easy. I think opening up any contract is a difficult discussion to have and luckily, I have not ever had to do that.

Bratches:
We have no plans to revise any agreements that we've negotiated …

O'Brien:
Because they're awfully good right now. [Laughter.]

Bratches:
We didn't put a gun to anybody's head to sign them.

Bedol:
We have no plans to reopen ours. [Laughter.]

MCN: Even for a programmer with the greatest content, what are these operators looking for in terms of deal points?

O'Brien:
Three years ago, a lot of the focus was, 'I'm getting paid for the spectrum, the channel works great. If it doesn't work, I'll resell that spectrum.' I don't hear that anymore, because I think they're focused on consumer satisfaction.

Bedol:
We have a test — a current launch with us with one of the major MSOs and a large university — where we are basically doing a direct-mail campaign with this university to help sell digital for this MSO. In exchange, the MSO has agreed to make a donation to the athletic fund of that university.

MCN: Do you have a carriage deal with that MSO? Or is it just a test?

Bedol:
I anticipate we will have one. We have not signed a piece of paper yet, but we have

MCN: Care to say who?

[Laughter.]

Bedol:
Nope. But I think that what you will see is you will see these creative relationships where, when MSOs see a network that they can use as a catalyst to drive their own growth, they will look at that network differently than one that they believe is just another slot, another channel that may not have the same impact.

Green:
We have now commitments in 12 million homes. We'll end the year next year in many, many more than that. What we have found — which is no different than what we found at E! [Entertainment Television] or what we found at CNBC or all the other locations I've been in, negotiating these deals — is that every deal is different.

If the business plan for one is that not eating into margin is critical, then you structure your deal that way. If margin is not so much of a concern at this point, launch fees may be more apropos. At the end of the day, it's the bottom number anyway, whether it's launch support or free carriage or direct mail to a university.

Bedol:
It's such a great point, because there really isn't a cookie-cutter deal. A deal with an MSO that's looking to drive broadband is very different than a deal with an MSO that's looking to drive a sports tier.

MCN: Sean, it's no secret that sports costs are such a hot button. Do you fear that even though Hispanic is a hot market, that there'll be a backlash because of ESPN's annual rate increases, and operators will seek retribution for that by not launching your Hispanic service?

Bratches:
I am not concerned about ESPN's pricing in the market relative to our new businesses. It comes back to providing quality and providing value. ESPN bought from Brian and his partner in crime, Steve Greenberg, Classic Sports Network, which we now call ESPN Classic. A few years ago, we bought it with about 7½, 8 million homes. Today we're closing in on 50 million homes in the context of our adjustments in the marketplace.

So from our perspective it's that we seek to have our customers look at us as ESPN Inc., not ESPN the network. We look at the value we provide across multiple platforms — whether it's the value that ESPN provides to the basic or expanded-basic package from a retention and acquisition perspective; local ad sales; what we're developing in terms of new revenue streams in supporting new businesses in broadband; interactive television; video-on-demand; subscription video-on-demand; pay-per-view and syndication.

So I am very optimistic. I've been on somewhat of a road show the last month talking about ESPN high-def and ESPN Deportes. The reception's been overwhelming because it fills a consumer need.

MCN: To what extent has video streaming come up in conversations? Obviously, there was a dispute last year with Charter Communications Inc. involving video streaming of content from ESPNews …

Green:
It comes up in negotiations. It does come up.

MCN: How do you handle it?

Green:
It's less applicable to what I'm trying to do. I'm not concerned about video streaming.

MCN: So Sean, is it coming up with you, with new contracts?

Bratches:
No, that [Charter dispute] was really a limited or an isolated instance. We're developing products like ESPN Broadband that's content for the PC that's really being driven to support the cable modem, very high-margin businesses. On espn.com, when the access speeds to where you pull up a piece of broadband content, you have three choices — 56K, ISDN and cable modem. If anybody hits anything but cable modem during their broadband experience, there's a 'This is best experienced with a cable modem' banner underneath it.

MCN: I know that Deb and Dan, your services have big ad plays, correct?

Green and O'Brien:
Yes.

MCN: So how is that possible, when digital cable's penetration is so limited at this point?

Green:
You have to look at the demographic and the viewer that you're able to deliver to the advertiser. The video game business, the industry, is outselling right now theatrical box office and that if you have children in your home — anyone from 12 to 34 — they're playing video games, whether it's on a console, whether it's on their PC.

So all those statistics are out there. All the advertisers have the statistics. They want to reach that 12-to-34-year old. So we're very lucky, and specifically with the niche that we're trying to deliver, is that the advertiser is actively pursuing that demographic in a very big way.

We made a very large deal with Pringles, the chip of choice, but it's really a crisp.

Bedol:
I love Pringles.

Green:
What we learned about Pringles after doing our deal is that Pringles, it's the gamer's chip of choice. Does anybody know why?

O'Brien:
It's not greasy, so your hands don't get greasy.

Green:
There's less grease with the Pringles potato crisps, so that the gamer is eating more of those chips than they are other chips, because it's less greasy and it's easy to play the console. So there are advertisers out there that are very much wanting — the movie industry in particular — to reach that 12-to-34-year old.

There are not a lot of places on the cable lineup today that heavily bring in that 12-to-34-year old. You have it on sports, you've got it on MTV [Music Television] and Comedy Central. But that's really about it.

MCN: That's your demographic too?

O'Brien:
That's exactly what we're targeting. We don't have any 30- or 60- second commercial breaks. We never give the consumer a reason to leave the network. So we seamlessly weave in entertaining advertising — what we call brand clips — into the flow pattern of the network. And it's interesting, in research, that only about 17 percent of the people can actually identify what the advertising was, because it's so entertaining.

Bedol:
I also think the other part of that is that advertisers have become much more sophisticated in the fragmenting marketplace. Five years ago, 10 years ago, advertisers were looking for eyeballs and they were concerned about smaller networks because they needed to be at a certain threshold before they were interested.

Without the eyeballs, we really haven't actively gone out to sell sponsorship, but have fielded a large number of incoming calls from some pretty significant advertisers who say, 'We love the college-sports market; we've redeployed a lot of dollars against college sports; we would like an early relationship because we'd like that association with college sports.'

Sponsors see the association with the network as a way of extending their reach and their message into the college sports market — even for those who can't see the network.

MCN: Now Sean, is there a national ad play on ESPN Deportes?

Bratches:
Yeah, it's a significant part of our business plan early on and long-term. In fact — I'm not sure this is public — but we've already signed two sponsors to ESPN Deportes. And also from our league partners, it is a real priority for leagues to reach this constituency.

We've got a deal with the [National Football League] for the last four or five years with ESPN Deportes, our syndicated block. It's been successful on both fronts.

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