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MBPT Spotlight: Leverage is Key Ingredient For Cable Network Startups—Programmers press rebrand strategy in tough environment | @jlafayette

RELATED:New Fusion Boss Ready For Launch

Revolt Will Be Televised

New cable networks have been popping up all over the dial. The
outbreak comes at a time when distributors are looking to cut costs and eliminate the channels they are
paying for that subscribers are
not watching.

Char Beales, longtime president
of CTAM, the cable industry’s
marketing association,
says the uptick in new channel
activity is cyclical. “If you’ve
got differentiated content that people want to
watch, it’s a good time” to launch a network,
she says. “Consumers just want more.”

This month two entirely new networks plan to
launch: Fusion, a joint venture
of Univision and Disney’s ABC News, and
Revolt, backed by Sean
Combs. Robert Rodriguez’s El Rey Network
is due by year-end. And Fox Sports 1, FXX and
Esquire Channel have recently debuted.

Beales and other industry observers note
that there are two types of new networks being
launched. One is networks starting as a result
of a rebrand, such as Fox Sports 1 being forged
from Speed by 21st Century Fox, or NBCUniversal
replacing Style Network with Esquire.

“We’ve seen Discovery do this on a number
of occasions,” says Derek Baine,
analyst at SNL Kagan. “They
had affiliation agreements coming
up and they wanted to be
proactive and make sure that
when they got to the negotiation
table they didn’t have networks
that an operator would want to
drop because they had distribution but no ratings.”
Thus were born networks such as Investigation
Discovery and OWN.

Subscription fees can sometimes increase
if a weak network is replaced by a stronger
one. For Fox Sports 1 and Fox Sports, fees
are going up, says Baine, noting that when
OWN replaced Discovery Health, carriage
fees grew from almost nothing to 20 cents per
subscriber per month.

Starting from the ground up is harder. It’s
even more difficult without the leverage of an
established parent company.

“All of these networks now face a higher bar
to get over,” says Mike Egan, a consultant who
spent years making programming decisions for
Cablevision. “The cable or satellite distributor
is really not, for the most part, seeking a lot of
new programming. They may be seeking certain
niches that fit a strategic initiative.”

The Big Sell

Networks must first sell cable operators
on a network before they can hope to attract
viewers, says Catherine Rasenberger, a consultant who has helped launch 28 channels in 14
years. It helps a great deal if a new network
is aligned with an operator’s strategic goals.
Comcast, for example, must launch minorityowned
networks as part of the deal with the
government that cleared the company to acquire
NBCUniversal. A network such as Revolt
helps Comcast fulfill that obligation.

“Independent cable networks have zero
leverage,” Rasenberger says, making organic
growth very slow. That explains
why Al Jazeera and Pivot
each bought weak networks
that already have carriage. Al
Jazeera tried to launch a channel
in the U.S. for years. Getting
40 million subs by acquiring
Current, “they were able
to quickly get to market and
then they could start proving
they were a network consumers
wanted,” Rasenberger says.

From a financial perspective,
Fox’s decision to launch Fox
Sports 1 and FXX on the backs
of less successful channels was
an example of the best defense
being a good offense, says David
Bank, analyst with RBC Capital. “They
had fully distributed channels that were at risk
of becoming somewhat irrelevant in a world
where there’s increasing pressure,” he says.
Launching Fox Sports 1 meant a small increase
in costs—about $100 million—that had the
potential for $1 billion in higher affiliate fees.

“It sounds ridiculous, but it already feels like
one of the most successful channel launches in
history,” Bank says.

Investing in cable networks isn’t always a
home run. Discovery had to pour $300 million
into OWN before that network turned around.
But Bank says a cable network will work if it
has brand equity, distribution, content and the
ability to leverage advertising and subscriber
fees off a bundle of existing channels. “If you
have just one of them, I think it can be a real
challenge,” he says.

Starting from scratch is even tougher, he
adds. “If you’re launching today without any
carriage, you probably are asking yourself
what’s the upside to a traditional television
launch versus a digital platform,” he says.

In the Upfront

Cable networks need to be big to generate
ad revenue. Rasenberger says that when Outdoor
Channel grew from 25 million to 35 million
subs, ad revenue increased because they
were included in upfront buys more often.

Media buyers say cable networks need to
reach scale before national advertisers will
buy them. “Just because people are adding
more networks and fragmenting the world
even further, that doesn’t mean our standards
have changed and now we’re lining up to buy
25 million home networks that aren’t measured,”
says Gary Carr, executive director,
national broadcast at TargetCast TCM. Carr
says buyers keep an eye on new networks and
sometimes will invest a few dollars in them if
the target fits. If the new network is part of
a big group, there’s horse-trading. “Maybe we
do something with them that may help us with
some of their better networks,” Carr says.

Evan Shapiro, president of Pivot, says the August
launch of his network went off without a hitch
compared to other networks that have faced
repeated delays; he has since added AT&T as
a distributor. Pivot focuses on millennials and
“as a result advertisers and operators have embraced
the idea that we can help them [figure
out] this next generation of consumers.”

Shapiro points to innovative deals with advertisers and Stonyfield Farms
in which Pivot is helping them create content
that helps the client’s marketing efforts. Pivot
also launched an app to help operators build
relationships with millennials who are broadband-
only customers. DirecTV is distributing
the app and other providers are expected to
follow. “The Pivot app will help retain this
next generation of pay TV customers and win
over the broadband only subscribers,” he says.

Steve Bellamy, who founded the Tennis
Channel and the Ski Channel, expects to
launch his surf channel before the end of the
year. “It’s going to be a lot bigger and cooler
than we anticipated,” he says. The new channel
will launch on VOD. “VOD is pretty much
the future of any independent cable TV launch.
The linear model is just too expensive, and the
numbers don’t pencil out any more,” he says.

“With sports beating up the operators, the
days of surviving off big subscriber fees are
over” for smaller networks, Bellamy adds.
“The days of independent networks are pretty
much over. Any new growth will be on the
Web. There’ll be tons of creativity on the Web.
It’s just that no one pays for it.”

Cable nets still appear to be a robust business.
“But when you start analyzing the numbers,
you realize that a half-dozen companies are
doing awesome and everyone else is floundering
at the bottom,” says Baine. “Some of these
channels launch with the hope that Viacom or
somebody will buy them after a few years.”