Channel Space? Who Needs Channel Space?

BY LINDA MOSS

MTV's Tom Freston isn't impressed with the economic model for digital networks, which have thin distribution and low ad rates. ?How do you make money?? he wonders.

?You have to find out if a new network is what people want,? says Disney's Sweeney. ?Is this something your company can do better than anyone else??

Toddlers aren't often called on for focus-group duty, but in testing concepts for a new cable network, that's exactly whom Walt Disney Co. turned to.

The company says it's talked to parents, educators and kids about a potential preschool channel that would be based on Disney Channel's Playhouse Disney block for the under-six set.

In tackling the project, Disney is bucking some tough odds. Channel space on most systems is scarce, and new networks ? even with the backing of a huge conglomerate like Disney ? have no guarantee of securing crucial distribution. With the rise of digital services, startup networks face new competition for cable-system bandwidth that didn't even exist a few years ago, from not just rival 24-hour cable networks but from video-on-demand, dozens of premium multiplexes and interactive services. Some leading industry figures ? including MTV Networks' Tom Freston ? insist that the possibility of getting decent carriage is so low that it doesn't make economic sense to launch new networks these days.

?It's getting more and more difficult to launch widely distributed networks,? agrees Jeff Shell, the president and CEO of Fox Cable Networks Group, which earlier this year launched the National Geographic Channel, perhaps the year's biggest debut. ?National Geographic will probably be the last one launched. But we are considering launching new networks for the digital environment.?

Indeed, an official at one of the largest MSOs says he'd rather offer e-mail over his cable pipeline than add another 24-hour cable network.

Despite all this, though, Anne Sweeney, president of Disney's ABC Cable Networks Group, says, ?There is enough of an appetite for Disney? to go ahead with research on its preschool project.

Other programmers are following suit. ESPN is incubating a Spanish-language sports network. USA Cable is plotting a crime channel. Lifetime Television is doing a reality spin-off for women. And Scripps Networks will offer luxury-lifestyle programming 24 hours a day.

Of course, there's a reason that media companies are still eager to take such risks. With last year's $3 billion sale of Black Entertainment Television to Viacom as a benchmark, companies understand that down the road ? maybe way down the road ? successful 24-hour cable networks can become major assets.

?People recognize [that] if you have the opportunity to launch new programming services, they will be extraordinarily valuable in years to come,? one cable network official says.

The programmers with new networks in the chute have offered very few details in terms of their strategies to secure distribution for these channels, although cash launch fees, free carriage and a price break on their existing sister services will probably be part of the sales pitch for them.

So far this year the biggest cable network launch has been the National Geographic Channel in January. Last year the two big debuts were that of Oxygen, Geraldine Laybourne's women's network, and Disney's SoapNet, a soap-opera rerun channel. But Disney isn't resting on its laurels this year. It is studying a variety of potential channels, including services aimed at so-called tweens and families and one based on its library programming, but it's still leaning toward the one for preschoolers.

Among the media conglomerates, Walt Disney has been perhaps the most aggressive in creating new networks, with channels it owns or hold stakes in ? The Disney Channel, Lifetime and ESPN ? all poised to forge ahead with spin-offs in the near future.

Disney looks for two factors when determining whether a new channel is a go-ahead.

?First, you have to find out if this is what people, consumers, want,? Sweeney says. ?Second, is this something your company can do better than anyone else??

Lifetime, which is half owned by Disney (Hearst owns the remaining half), later this year will launch a digital network called Lifetime Real Women. Lifetime is looking to duplicate the success of its first spin-off, the Lifetime Movie Network, with the new service that will feature reality-based programming for women, including some original fare.

Disney's sports programming crown jewel, ESPN, is likely to launch a 24-hour channel in the next two years, according to Sean Bratches, SVP-affiliate sales and marketing for ESPN. The options being considered include an outdoor ?hooks and bullets? channel, an ?extreme sports? channel, a women's-sports channel, a Spanish-language channel and a collegiate-sports channel.

?In many respects, the dynamic of launching new channels has really changed over the past few years,? Bratches says. ?We are trying to make sense of a very challenging business model.?

ESPN has already started to lay the groundwork for the Spanish and outdoor services. It recently debuted a four-hour, Sunday night block of Spanish-language programming, called ESPN Deportes, in an effort to incubate a Hispanic network.

?There is a wide opportunity to serve the Latino community,? says Bratches, who says a Spanish-language sports network could be a tool to help MSOs acquire new Hispanic subscribers.

As the basis for possibly creating an outdoor channel, ESPN in April acquired B.A.S.S. Inc., the world's largest fishing organization. Those assets include fishing magazines, like Bassmaster Magazine and bass-fishing tournaments.

ESPN is looking not only at traditional 24-hour channels as an outlet for its branded content, but also at video-on-demand as a platform, according to Bratches.

?There could be a rich, robust offering of a genre,? he says.

While ESPN has no illusions about how difficult the distribution landscape is, there is space for compelling product, according to Bratches.

?There is opportunity for analog carriage, if you want to pay,? he says. ?It's a function of your pain threshold. And digital is not tight per se. But quality digital tiers are tight.?

USA Networks Inc., one of the few programmers that had not launched new channels in recent years, is finally taking the plunge. This fall USA Cable plans to roll out Crime, a digital network devoted entirely to crime programming. Cops creator John Langley is USA's partner in the project.

Unlike Lifetime or Disney, USA is not doing brand extensions, like a Lifetime or Disney, says Patrick Vien, USA Cable's president of emerging networks.

?We're starting from scratch,? he says. ?We don't want to do derivatives. We want to do a new franchise. And we have the means of doing it organically, from the inside.?

USA has at its command the combined programming savvy of chairman Barry Diller, USA Cable president Stephen Chao and Bill Taber, the new president of Trio, which USA acquired along with Newsworld International a year ago.

?We have terrific acumen in this company,? Vien says. ?The expertise is here, and we need not just apply it to USA and SciFi (Channel).?

Despite the tight channel space, Vien says digital ?is real, and it's here now,? which is creating opportunities for startup services. So he says there is room to develop new networks this year.

?It's tougher,? Vien says. ?The ideas have to be better. But as long as you're in fact developing new franchises and have the operational and financial patience to build those brands, we feel we can do all of those things.?

Meanwhile, Fox Cable has already launched National Geographic Channel, which it co-owns with National Geographic Television. And the unit this month will debut Fox Sports Digital Nets, an out-of-market regional-sports package meant to help cable operators compete with DirecTV.

The digital environment today for programmers is similar to what the analog landscape was five or six years ago, according to Shell.

?There is not endless bandwidth, but if you offer compelling product, you'll find a way to get on,? he says.

One obstacle programmers face now is that they are not just competing against other programmers for a channel slot, Shell says. When operators think about bandwidth today, they are often thinking in terms of pay-per-view networks, premium multiplexes and interactive services, he says. ?You have to compete against other bandwidth users,? Shell says. ?But I do think there's room.?

Rolling out new channels is such a thorny proposition that even Liberty Digital, which in 1999 said it planned to create 12 to 15 interactive channels ? with AT&T Broadband committing 6-megahertz to carry those services ? hasn't launched any of them yet, notes Derek Baine, an analyst for Kagan World Media, the media-industry newsletter and data-book publisher that, like CableWorld, is a subsidiary of Media Central.

?If a well-heeled player like that has not gotten anything out of the gate, it's very difficult,? Baine says.

Still, Scripps thinks it can succeed. Later this year the company is slated to launch Fine Living, which will join a portfolio that includes Food Network, Home & Garden Television and Do It Yourself. In the immediate future, Scripps will concentrate on rolling out Fine Living and building distribution for DIY, according to Susan Packard, president of Scripps Networks New Ventures.

?We're committed to growth, but we want to properly manage our existing networks and grow our new ones,? she says. ?We've got to try to be prudent.?

The mandate of Fine Living, which is targeting households with $75,000-plus income, is to offer information on fine dining and entertainment, personal transportation and technology, homes and real estate, exotic travel and personal finance.

Scripps takes a long-term view on cable launches and isn't afraid that the recession will hurt Fine Living's prospects by crimping consumer spending for luxury items.

?Our business plan does not depend on ad revenue in the next six months,? Fine Living president Ken Solomon says. ?We have a five-year business plan. These guys (Scripps) know how to find a niche and grow it.?

Fine Living is in discussions with advertisers about charter sponsorships that go beyond the buying of traditional spots, according to Solomon. And the startup is talking about such partnerships with luxury-item companies that have never advertised on TV before, he says.

Solomon cited the continuing boom in luxury hotels as just one indication that businesses expect upscale consumers to continue living and spending as they have been accustomed to doing during the economic boom of the late '90s.

Fine Living's approach to getting distribution will be different than other networks in that initially it is most crucial for the network to gain carriage in upscale communities such as Aspen, Colo., and Palm Springs, Calif.

?You're going right to where these people are,? says Solomon, referring to Fine Living's target demographic.

Rainbow Media Holdings Inc. has a lab for new niche services, Sterling Digital, which is incubating some possible channels, a Rainbow spokeswoman says. One concept being explored is American Catholic TV, which would target viewers of that faith. But the Rainbow spokeswoman says that concept will probably be developed as a new-media application, not a 24-hour channel.

Rainbow is also expected to turn to the film library of its new part owner, Metro-Goldwyn-Mayer, for content to create new cable networks. MGM acquired a stake in the four existing Rainbow channels earlier this year, for $825 million.

Patty McCaskill, VP-programming and pay-per-view for Charter Communications, says she is interested in adding compelling new 24-hour channels to her digital platform, as well as interactive services.

?Some people look to digital for new video entertainment,? she says. ?Our job is to sort through all the new concepts and see which are executable to be a channel 24 hours a day. We don't want a channel that's just re-purposed programming from someone's library.?

But there are still those who see folly in all this optimism over new launches. Take, for instance, MTV's Freston, who insists that starting a new network no longer makes economic sense.

?You can start up a new network,? Freston says. ?People seem to be doing it every other day. But the economics are more difficult than any another point in time. Our priorities [at MTV] are TNN, CMT, MTV2 and TV Land. We have our hands full.?

He noted that the financial model for digital networks isn't particularly appealing. Programmers can't charge distributors large license fees for these netlets, and they can't attract advertising until they're in 30 million homes.

?How do you make money under those circumstances?? he wonders.