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Burgess' Burden

There's some good news at Paxson Communications, which was recently renamed Ion Media Networks. In the six months since Brandon Burgess took the reins of the deeply troubled broadcaster, he has managed to head off the looming threat of a visit to Bankruptcy Court.

The bad news is that Burgess still faces enormous hurdles in the financial train wreck left behind by company founder and ex-Chairman Bud Paxson. Now he needs to come up with a programming model for Ion's core broadcast network—once Pax TV, renamed I network—and its myriad stations. Most station executives will, fortunately for them, never have to grapple with issues like Ion's financial restructuring, because hardly any are performing so precarious a high-wire act.

However, broadcasters should carefully watch what Burgess does in digital broadcasting. As with every U.S. station, the conversion from analog broadcasting to digital will give Ion several new channels to play with.

But Ion is different in three ways: No other station group can match its national reach; no large broadcaster is as free to experiment so aggressively; and no broadcaster is as desperate to make digital work. But Ion needs a plan—and fast. Even with its recent debt restructuring, Ion's obligations are accumulating at a staggering rate of $250 million a year.

Ion's financial condition and weak programming mask its potential strength. As B&C's current tally of the top 25 station groups (see page 30) shows, Ion is the third-largest broadcaster in the country.

The list is ranked using the FCC's quaint definition of coverage, which credits a weak-signaled UHF station with just half the number of homes in its market. Without that discount, Ion's 54 UHF stations cover 63% of the United States, or nearly 69 million homes. By comparison, the No. 1 station group—CBS—covers 43.6 million homes.

Ion's current distribution is strengthened by its ability to demand “must-carry” status for carriage on local cable systems. But operators aren't required to add stations' digital signals, so Ion is lobbying Congress and the FCC mightily for digital must-carry.

For now, Ion subsists on a heavy load of infomercials and religious programming by day and reruns of stale game shows (Balderdash), dramas (Diagnosis Murder) and reality shows (It's a Miracle!) by night. DirecTV is threatening to drop the network from its 18 million subscribers, but it's holding off while Burgess works out a programming plan.

Burgess has been approached by every major syndicator and numerous entrepreneurs with programming ideas. “I really don't have a definitive answer,” he says. “My hope is that we will do more entertainment programming over time. It might not be original.”

He passed on affiliating some stations with Fox's new My Network TV, because the network wanted only a few stations. Industry executives say Ion is talking to cable networks that are looking for exposure, including startups stymied in securing carriage by operators.

Burgess is also considering using some digital capacity for a data or communications service. Ion expects to set some of the pieces of a new programming plan within a few weeks.

Burgess has a big incentive to make it all work. Securities filings show that his four-year compensation package is worth $44 million if he can boost Ion's penny-stock shares to just $2 each. Right now, Ion trades for around $1.

But Ion's sad position is far from Bud Paxson's initial vision of an upstart network that would become a major force in television. The co-founder of the still successful Home Shopping Network (now owned by Barry Diller's InterActive Corp.) saw Ion's Pax TV as a network that could challenge the likes of The WB and Fox.

Initially, Paxson started snapping up UHF stations and programming them with infomercials and home shopping. In 1998, he sought to take on larger broadcast networks by counter-programming with family-friendly fare, often with a religious tint.

In the process, he amassed $2.7 billion in debt and preferred stock that carried some amazing costs. (Some notes called for interest payments at a rate of 12.25% beginning this summer; some preferred stock accumulates dividends at the rate of 14.25%.)

Burgess tackled the capital structure first. In January, he refinanced $1.1 billion, getting more flexibility and delaying maturities from 2008 (before the industry's transition to digital in 2009) to 2013. His next mission: negotiating to restructure $700 million worth of preferred-stock obligations.

In 1999, NBC Universal bought preferred stock equivalent to a 32% stake in Ion, plus the right to take full control. NBC U infuriated Bud Paxson by deciding to instead buy Telemundo and its stations. FCC station-ownership restrictions block NBC from taking over, but it can still assign that right to someone else who might be interested.

“We're very supportive of what Brandon's done to date,” says Bruce Campbell, who replaced Burgess as NBC U's executive VP of business development. “Next, he's going to embark on programming aspects.”

While other broadcasters have tiptoed into digital broadcasting, Ion's bleak financial situation could spur more-unorthodox ways to exploit the new digital channels. That's why they're the ones to watch.

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