TOP of the LEAGUE

MIKE REYNOLDS

Juggling cable and satellite channels becomes a Shell game for Fox executive

Jeff Shell has a lot of cable networks in his dugout.

Serving as president/CEO of Fox Cable Networks Group since January, Shell, who helped pioneer what would become Fox Sports Net, is now responsible for the 20 major domestic cable and satellite channels in which parent Fox Entertainment Group and News Corp. hold interests.

That roster, in addition to 21 regional sports networks (in partnership with Rainbow Media), includes general entertainment network FX, Fox Family Channel (in partnership with Saban Entertainment), Fox Movie Channel, WebMD Television, Fox Sports World, Fox Sports World Espanol and the soon-to-be-launched National Geographic Channel.

As a member of the executive committee, Shell is also charged with integrating their operations into all other News Corp. and Fox Entertainment Group assets and activities. To that end, he has led executive teams that have secured deals with AT&T and Time Warner Cable, encompassing expanded distribution for many Fox-owned cable properties.

Shell also serves as a board member for such Fox sports-related investments as The Golf Channel, Speedvision, Outdoor Life and the Cablevision/MSG partnership. Additionally, he manages Fox Sports Enterprises, the division containing various Fox non-television sports investments, including its ownership stake in the Staples Center and a majority interest in the Los Angeles Dodgers.

In a far-ranging interview, Shell discussed Fox Cable Networks' strategies in leveraging its various properties, his views on the company's positioning within the analog and digital spectrums, and its interactive TV strategies. He also provided a scorecard on some of the developments and issues surrounding a number of the networks. An edited transcript follows.

CW: What have been your biggest priorities?

There are two main priorities I've focused on during my first year. The first one is really just maintaining and building the momentum we have. Fox Sports Net has a lot of momentum, the regional news and things we're doing there. FX is just on fire. The challenges there are from distribution and programming standpoints. We're really picking up speed in a lot of our new and additional products.

The second priority I've really focused on is - and a major purpose for me being named to the position - is to make sure we're thinking about our capability as a whole, as opposed to individual assets. Where can we get leverage on one side to get value somewhere else? How can we think about consolidating our operations? How can we figure out working together? Beforehand, there really wasn't any focal point for everybody to talk to each other.

We're also supplying the Fox Family people and Roger Ailes (chairman) at Fox News and a variety of other partnerships. I'll try to get that working more closely together and functioning more, as a complete body as opposed to individual assets.

CW: Is that the main goal, to integrate things and make sure they are leveraged and moving in the right directions?

There's really a short-term goal within the long-term goal ... But the short-term goal, which we're well into right now, is really just getting the benefits of having this big group. The benefits come from all places, but the main ones are that we get a lot of cost savings. We've consolidated a lot at our group end, as far as finance, legal, ad sales, affiliate sales. This is a cost benefit that also allows us to really launch new products in a very cost-effective way.

National Geographic is a perfect example. We've immediately got 80% or 90% of what you need in-house. If we want to launch it to cable operators, we can go out and do the accounting, do the deals and then focus on what's important, which is what's on the screen and the products and how you market it. It gives us an incredible leg up.

The question is how we look at all our assets and set priorities for leveraging them into digital and extending them into the broadband interactive world.

CW: What's the climate out there for the MSOs with digital and broadband? It's grown more slowly than I think some people expected it to. Are they really focused in that space?

It varies, but I think they are focused, and I think there's nothing like competition to focus you in. DBS has been so successful that I think it's impossible for cable not to focus. I think if you look at companies like Comcast, they have a very clear and defined digital strategy. It's starting to pay off, and it's starting to roll out very successfully. Some of the other guys are a little less focused than Comcast, but they're all coming around. Everybody is realizing that digital is their future, and that is how they're going to compete with DBS and also how they're going to expand the revenue streams from what they are now.

CW: Everybody has different forecasts. What's your sense, Jeff, in terms of the cable homes that will be digitized, two or three years down the road?

I'm not going to pick a number out of the year. But I do think that five years from now we'll wake up, and 75% of the homes will have some kind of cable digital capability.

CW: On the flip side, if people are focused on digital, what about analog? How tight a road is that at this point?

Our viewpoint at Fox is that the distinction between analog and digital will really blur in the next couple of years. It really is no longer the applicable distinction in the cable business. I mean, if you're a Direct TV subscriber, you don't think about digital or analog. You think about, `Do I get Select Choice, or do I get Total Choice? Do I get Gold, or do I get Platinum?' I think that's where cable is going.

People aren't going to think, `Is this channel analog or is this channel digital?' They're going to think about, `Do I get the basic package or the extended basic package or the sports tier or the family tier?' I think it's going to be more about how things are packaged, and I think we've switched our strategy at Fox in the last year or two to really focus on that, betting on that progression happening.

CW: Does it matter then: Do you still prefer analog?

It wouldn't matter to me. If a customer has a digital box and he's getting FX, do I care whether it's coming over the digital box or analog? I don't care, as long as they have access to the channel, and they can watch it. It's more about what tier we're on, what package we're in, how many homes we're going to get. When we go out and talk to operators, we're not even really talking about analog versus digital. We're talking packages, percentages, number of homes.

CW: Are you running into a lot of constraints among operators who are devoting digital bandwidth to multiplexes and additional pay-per-view channels?

Not really. I think most of the MSOs are really still feeling their way, trying to figure out what's the best way to maximize revenue. Should it be huge, expanded basic packages? Should it be in the different tiers? AT&T and Cox are going toward genre-specific tiers, whereas some of the others, Comcast for example, are going to a wider expanded basic. We're working with each operator to roll out what they think is the best thing to roll out.

CW: How much of a priority is interactive right now? Or is it a case of getting the distribution first and then working through the interactive applications?

I would say our focus still is distribution. However, interactive is a growing shadow on the horizon. We are committing significant resources internally to interactive television. We're doing it because we believe it is going to be a consumer-accepted technology. I think a lot of the things people are leaving the room to go log onto the Internet and do right now what can be done much more simply through the clicking of a remote.

Just as a tangent, one of our biggest competitive advantages is that outside of the country we are a platform, not just a programmer. If you look at Sky in the U.K., it is probably the world leader in interactive television, and we learned a lot of things about what people want and don't want.

Things you think that are going to be small things, like ordering a pizza during a game, are huge, and everybody wants to do it. My personal feeling is that banking on interactive television is something I'd rather go to my computer and do. Yet an increasing number of people on Sky are doing their banking needs through the TV while they're watching the soccer game.

CW: The international experience gives you a leg up then?

Yes. The other thing that gives us a leg up is that we frankly have the genres that work in interactive television. There is no question that sports is going to be a primary driver of interactivity. If you look at Sky, their biggest take is on some of the sports surfaces.

Then, we have our other services behind that, that are very applicable. Whether it's news, which is also a very popular interactive platform with Sky, or National Geographic Channel, which has incredible kind of interactive applications.

CW: Do you think there will be a lot of transactional business?

One thing Sky has taught us is that there are transactional elements there. Now, transactional may not be exactly what we all think of, because we're at the very forefront of this happening. It may not be the T-shirts. You live in Cincinnati, and you're watching the Reds game. Are you going to click on to buy a Reds T-shirt? Probably not. You probably already have 16 Reds T-shirts.

What you might do is click on and see how your personalized Cincinnati Reds fantasy team is doing and see how your other buddies who are watching the game are doing.

I think there are going to be a lot of transactions for people to get stuff they want and for the cable operator to have a different revenue stream, for us to have a different revenue stream ... Will they order a T-shirt? No. Will they order pizza? Well, Sky tells us yes.

CW: OK. I was speaking to (VP-enhanced programming Fox Television Group) Eric Shanks a while back. He said there would be some interactive elements on Fox Sports Net, in the way of instant messaging, personal stats and the like, by year's end or in the fourth quarter. Are you on track?

It's completely on track. There are really two segments of it in the development process, which we're working with Sky on. And we're talking to operators right now. I anticipate that by early in the first quarter, we'll have a couple deals to announce on some of these platforms.

CW: Sports and news are the most likely?

Sports is the first one. News will be right on its heel. I think we see those as the two most applicable. We'll also be doing interactivity on some of our big broadcast events, too. So, you know, you're a cable operator, and you want to carry the interactive element of the big event platforms. There's the World Series next year, and you also have it packaged over an interactive application on the cable side.

CW: Do you see some applications in terms of video-streaming? Like the Reds guy might be able to go back to some highlights kind of things on Fox Sports Net?

I personally think there's a huge appetite for that, and I think cable, frankly, has a competitive advantage. I think the Internet is years - and some people would say decades - away from broadcast-quality streaming video. Whereas cable, that's their business. If you are watching your Yankees on a Sunday afternoon and there are NFL games going on, and you want to see a quick highlight reel of what's happened during the early games, cable is uniquely positioned because of its thick pipes to provide that video.

If you log onto FoxSports.com or ESPN.com or whatever, you may get grainy stop-and-go video. With cable, you could click on the football highlights and get your minute-and-a-half, two minutes of video. You could see what's happening with your team, your fantasy players, or take a peak at the scoring plays. I think there are all sorts of applications for streaming video, and I think it will be something cable is going to figure out as a competitive advantage in the interactive arena.

CW: Do you have the rights, relative to the leagues? Isn't that protected?

It's murky. I think if it's for news purposes only ... If you're providing what you would be providing on Fox Sports News, or whatever, and we're paying highlights costs to them, I think we can work with the links to do that.

CW: You said off the top, FX is on fire. Why is it hitting some chords with different folks?

In the last couple of years, it started to really pick up momentum from a distribution standpoint. We're in 54 million homes. If we do nothing else, we have contractual commitments up into the mid-60s. With a couple of last holes to fill, I'm confident we're going to get that level up to 70 million. If you look at the audience for FX, when you get to 70 million homes, the reality is that 40 million of the homes didn't get the network three years ago. In many ways, it's a new network, a chance to really establish the brand.

(President) Peter Liguori has a real vision for what he wants FX to be, a place where you can go as an alternative to broadcast or other networks. Some of the other general entertainment networks out there are having a tough time establishing their identity and brand.

I think at FX, we're starting to hit our stride with a combination of the best series on television. We have tremendous series that are driving our ratings, with acquisitions lined up behind them to keep the momentum going. We have a very strong and very differentiated movie package that we've acquired. With NASCAR, we probably have the fastest-growing sport on television. Then you combine that with a very focused and very distinct original programming strategy, which has quietly become one of the most successful original programming stories on television, not just cable, but on television. Add that all up, and you have the mix of a pretty interesting and pretty well-defined and branded network.

CW: What's the time frame to 60 million, 70 million subscribers?

We will be well north of 60 million subscribers by this time next year. I would say that if we're not in 70 million homes by the end of 2003, we've done something wrong. I would hope to do it a lot quicker than that, but it all depends on rollout.

CW: Going back a year or more, you didn't use the re-transmission consent chip for FX. Did you get 25 to 28 cents per subscriber? Is that real, and does that validate FX as a network on the climb?

It is real. FX is getting just short of 30 cents a subscriber. I think there's no question that FX, when it first launched, was too expensive for the value proposition of operators. And we had been candid with the operators that it was. I think the fact that we are not using re-transmission against that and that not only are we getting acceptance for the operators, but we're getting increasing momentum to launch it is a validation of our approach.

The reality is that we're spending north of $200 million, approaching $300 million on programming FX. We're investing heavily in original programming. We just aired our second original film. It drew a very, very good audience.

We're investing in the channel. Whereas the 30 cents was a very expensive price initially, I think now you're seeing the fact that it may actually be a bargain given what we're providing to cable operators and the ratings we're starting to generate. So, yeah, I do think it is a validation of our investment.

CW: You alluded to some of the off-network series. Are you going to continue to go in the acquisition mode or move more toward original?

I think we're going to continue to go in that mode, and we're going to be selective with acquisitions. As I said, Peter's strategy is distinctive, something different. We're looking for shows, you know, primarily from our sister network, Fox, that are distinctive. Buffy the Vampire Slayer is a distinctive show. The Practice has really defined itself at 10 p.m. on ABC. It is a very distinctive, different show.

So we're looking at shows that are something different for people when they turn to cable. And then, complementing that with original programming on the back end. I think that's going to continue to be our strategy. I think you need a mixture between those two things on cable. It doesn't work when you just have all originals.

CW: What's audience composition like these days?

Peter Liguori and his team have been very successful initially with original programming, like Tough Man, Son of the Beach, The X Show, that are driving men and the younger people to the network. The average age of the network is down 10 years; I mean it's a really phenomenal drop in the average age of the viewer.

FX has gone from very female skew to an adult skew, with a much more male composition. NASCAR will clearly take the network even further in that direction. NASCAR, particularly the Busch series, is a younger and much more male sport.

CW: Really?

Yeah. Back on the original programming front, it's no coincidence the stuff that has worked has been in that vein, Son of the Beach and Tough Man. Our commitment to originals is also to really have high-quality and distinctive programming across the whole range.

If you look at the films Peter has put out, they're at the opposite end of the spectrum: very high quality, excellent casts, excellent directors and producers, and dealing with issue-oriented topics. So you have the spectrum from the very male-oriented, original series to the adult-skewing, high-quality films.

I think the challenge Peter and Kevin O'Reilly (president-entertainment FX) have is to really fill out that original programming slate with high-quality programming that's more broad-based, that will play across the whole spectrum of viewer base.

CW: How big do you think NASCAR will be for FX?

The reality is, first of all, that men are looking for sports to watch on Saturdays. If you're going to be a general entertainment channel, you want to offer that genre to men.

Baseball will be back on FX. It worked well for us this year, and we'll continue on the back of the network's games on Saturday afternoons, going into FX on Saturday nights.

NASCAR extends our sports year a bit. We're doing baseball from April to September on FX. NASCAR will be from February to July. It fits the brand. Most of the Busch racing will be on Saturdays. Busch races tend to be a little bit more freewheeling, maybe a few more crashes, maybe more risk-taking. It fits the FX image. It's up and coming, it's different, it's distinctive, and it's high quality. The other thing is I think NASCAR will be a tremendous driver to allow us to get into some of those homes that we're not in.

CW: Let's switch over to Fox Sports Net. Most of the rights deals are long term?

Yes. Our average deal length for the regional rights is about eight years. More importantly, virtually every one of our regions has locked in a tent pole for even longer than that, 10 to 15 years. We are now in a window of opportunity where we have locked up a lot of the original rights and need to continue the momentum of building the business around those rights.

When we bought these regional sports networks, people watched them for the games but then didn't watch any other daypart. The challenge is how you get them to start watching different parts of the day. Most networks have the conundrum: `How do you get people to come into primetime?' With Fox Sports Net, we're getting huge viewership in primetime. Our challenge is how you take that and leverage it into other dayparts.

The first part of our strategy was to clean up the schedules of all the regionals, make them more standard and really launch a quality network scene around them, which I think we've done. We've built a network business in three years, which is going to generate $100 million in ad sales this year. The next challenge is really to take that along with the regional news base and continue to evolve that out until you can drive the revenue into other dayparts. While our teams are locked in, a lot of our cable deals are also locked in, so we have pretty good increases year-on-year with affiliate rates.

The challenge is how do we continue to get the 20, 30, 40% annual growth I expect out of this business. The answer is really driving advertising and driving sponsors to the dayparts where we haven't been successful in the past.

CW: Fox now has baseball's entire post-season broadcast right. Where do some of the divisional series games wind up on cable?

The divisional series are a very valuable, exciting product to have. We're in the midst of evaluating all the potential options for that. The divisional series don't really fit with Fox Sports Net-based models that are really built on regional events and national programming built around them. We'll look at putting it on Fox Sports Net with our partners, but I don't know if it's going to make sense for Fox Sports Net. Clearly, we'll look across all our other cable outlets; we'll look across our station group and see the potential there, and we'll probably also talk to some of our colleagues and competitors to see if it's something that's more valuable to somebody else.

CW: Your assessment of the local regional newscast that began this summer.

First of all, we're perfectionists at Fox Sports News, and we're probably as much sports fans as all our viewers are. And we do the same thing, we turn it on and say, `God, you know, the show at 11 p.m. stunk. We should have talked more about Ohio State.'

The reality is that we launched a massive undertaking to get a news operation on all our regional sports networks. We got it on schedule, right on time, with very few, if any, technical glitches. We hired a huge staff, building probably the biggest sports news gathering operation in the world almost overnight. I couldn't be more thrilled with how we got that on the air. I think David Hill (chairman/CEO Fox Sports) and Milt Weiss (executive producer for regional sports news) and Tracy Dolgin (president-Fox Sports Net) and their team did a phenomenal job of getting that on the air.

Now that it's on the air, it's really just the first step. Some of the shows are inconsistent. They need to get better, focusing more on the home team information fans want.

I think we had a tendency in the beginning, because we had produced something, to put features on that the fans may not have been interested in that night. They wanted to hear people complaining about the Dodgers or talking about how the As are doing.

This is a unique product that's never been done before. We've got to find our way and make the show better. Be relentless perfectionists about it. But I'm thrilled so far. We're very happy with the ratings, which have been very, very good.

The challenge now is to set up the third tent pole to our business. If you say the first tent pole is really the regional rights, the second tent pole is the national programming, and that's worked very well. The third tent pole now is the regional news capability. How do we take that tent pole and expand it? How do we do more with it? How do we think about how that fits with our national programming? How do we figure out our business and see what maximizes the viewership?

CW: Speaking of maximizing ... Some of the figures I've seen indicate that advertising across the regionals was up about 40% last year to $240 million...

That's about right.

CW: How quickly do you grow?

Some of that growth has to come from our home team games. We continue to see benefits there, particularly given that the station group now is selling that product. Really the growth has to come from relentlessly expanding the other dayparts. I'm pretty confident we can continue to get double-digit growth. Because of the regional news rollout and because of the regional capabilities, we have much more to sell locally. Local CPMs are higher than national CPMs.

CW: Projections? $500,000 million in pre-tax profit 2003?

I can't give any forward-looking statements, but I don't think that's an inaccurate or unrealistic goal.

CW: Let's move over to Fox Family. There have been stops and starts with different programming strategies. (Former president/CEO Fox Family Channels) Rich Cronin took a long time to get there. He's gone. (President-Fox Kids Network and Fox Family Channel) Maureen Smith is running it day to day. What's your take on Fox Family at this juncture?

Well, we don't manage it, so it's a little bit of a different story there. That being said, though, I think they obviously have struggled. They've had a lot of trouble, particularly in primetime, with their ratings. I think they tried to do too many things too quickly, as opposed to transitioning the channel in a more measured and calculated way.

In my opinion, now under Maureen's leadership, they are starting to hit their stride. They have the right strategy, which is a broad-based mainstream channel that appeals to all the different demographics, maybe a little bit more female-skewing.

It's going to take some time. Some of the acquisitions they have made are clearly home runs, like Providence, which is a show that's really doing well. Some of the things they have on the horizon are really going to drive the ratings: Dharma and Greg. I think they're are on the right track right now. A long way to go, though.

CW: Fox Family has obviously gone after kids. That's a crowded business. Is it a smart thing to be there? Is it more a push toward complementing Fox Kids?

An interesting question. The kids business is a very, very competitive business, probably one of the most competitive businesses out there. I mean, you have seven, eight channels all fighting it out and an advertising market that has been spotty at best.

In that particular vacuum, I don't know what they would be thinking about doing with kids going forward. That being said, you have to look at Fox Family Channel in the context of a larger international business. The reality is if you look outside the United States, Fox Kids is the leader in 30, 40 countries across the world. We're building incredible assets in Europe and Latin America. You need to have that revenue.

The United States is the driver for that international business. I think in that context, we don't have to be quite as successful as everybody else, although Fox Kids has gained some momentum as of late. It's part of a larger global strategy I don't think we can afford, or they can afford, to really abandon.

CW: Was it a good idea to abandon the Boyz and Girlz digital channels?

Absolutely. I think the channels were/are very good ideas, potentially as part of a longer-term broadband strategy. They haven't abandoned the programming. But I think that when they were launched, they were really launched on the backs of the leverage of Fox Family Channel, and the reality is that the poor performance of Fox Family made it difficult. You need to use that leverage to get rates. They didn't have enough leverage remaining for those two channels, which were not extremely well-received by the cable operators.

CW: How have things been going with distribution? Fox Family is looking to get up to about 20 cents per subscriber.

I think it'll be a real interesting thing to see what happens. I am bullish on it. I think they're going to be able to do very well in their renewals.

They will hear from the cable operators all the usual stories, of how the ratings are down and the channel is down, and we hear the same things. You know, there is always the spin that operators can give you on why they shouldn't pay you what you think you're worth.

The reality with Family channel is, first, that despite the ratings decline, it is still a very highly penetrated, very highly rated channel. Second, in the world of 10 adult channels and pay-per-view, X-rated movies, can you really afford to throw a family channel off the air in this regulatory environment? I don't think you can.

Therefore, I think Fox Family has incredible leverage to get the rate it's worth. I'm bullish on their ability to get the rates they're asking for.

CW: Fox Movie Channel. I think you leveraged some re-transmission deals with Time Warner and maybe a couple of other operators. Where does the network stand with distribution?

Fox Movie Channel is probably one of the channels I'm most excited about. There have been some fits and starts with it because it was originally launched as kind of a mini-pay service that was a distribution give-away to help drive FX distribution. After that, that strategy went by the wayside, and the channel wallowed for a bit. We started to really focus on it a couple years ago, re-launched it as Fox Movie Channel. It really is a terrific channel. It comes out at the top of all the surveys when you're asking people what they want. Operators like it. I'm very, very bullish about that channel. I think we're close to breaking even with it right now, and it could be an incredibly valuable asset to us. I see it riding the digital rollout up to 20, 30, 40 million subscribers. Right now, it's in about 11 million homes.

The other channel I'm most excited about is Fox Sports World. If you look at the consumer surveys across channels, that is the other one that tends to come out near the top of the list of what people want.

CW: That's the international sports channel?

It's a perfect digital channel. It's live sports. It's a genre that has an incredibly passionate following. There are minority groups of fans across the country who are rabid for it, whether it's the expatriate Brits, Hispanics or whether it's the people who have gotten the soccer bug through the various startup leagues in the U.S. We do pay-per-view at seven in the morning in pubs, and we get lines out the door.

CW: I guess National Geo, that has to be foremost on your mind now ...

Yes, we launch Jan. 7. We are ready, which is a shocking thing to say about the channel. (Laughs.)

There is one set, our studios built, which is ready to go. We have a library, three years, at minimum, worth of high-quality programming to air. We've been in production with some original productions for the last year-and-a-half, gearing up for launch.

It is going to be one of the most high-quality new channel launches you've seen. This channel is not just retreads. We'll launch with more than 10 million, which is a conservative assumption. We're going to bring in a lot more; some of those are even going to be analog subscribers.

We have commitments that if we don't do anything else to get into the mid-30s of distribution. I am confident the channel will be 50 million subscribers in five years. It's a tremendous brand.

CW: All things being equal, if you could only get space for one channel, which one?

It all depends on the deal. That is a question we deal with everyday, and it really depends on what channel we're getting the most money for, what channel strategically affects distribution. It really varies by system. Clearly, our priorities have been in the last year or two to really drive Fox News Channel and FX to full distribution. Our priorities will now transition a bit to driving National Geographic and to help that work forward.