The value of Family
As Disney adds another cable network to its arsenal, the huge price it is paying for Fox Family Worldwide has cable operators worrying and advertisers questioning how the new network will play.
Paying $5.3 billion, or 32 times Fox Family's annual cash flow, Disney lands coveted real estate in front of 81 million basic-cable subscribers. For now, the newly christened ABC Family channel lacks a clear identity. But, if the programming is well orchestrated, the reward could be a successful family net.
"Repurposed content should fall into the brand identity. If it doesn't, it deters," said TN Media's Stacey Lynn Koerner. "Economically, there are a lot of pluses, but you walk a tightrope with brand identity."
Cable operators are wary. Fox and partner Saban Entertainment clearly muffed Fox Family's programming. But Disney aggressively leans on operators for rate hikes and fast rollouts of start-up nets, happily using ESPN and retransmission consent of its ABC stations as clubs.
And Disney executives openly acknowledge that one way they expect to justify the big price is through license-fee hikes to operators.
"[Disney Chairman Michael] Eisner doesn't like the thought of anyone making a dime off of his intellectual property," said the CEO of one cable operator, adding, "Other network groups raise rates but are easier to deal with."
Analysts are, however, worried about Disney's relationships with cable operators. Fox Family is already fully distributed, but Disney has gone to war with three large operators—Time Warner, Comcast and Charter—over distribution and license fees of ESPN, SoapNet, Disney Channel and Toon Disney.
Neither operators nor Disney executives would comment on the status of distribution contracts.
Disney's move does have operators checking their Fox Family affiliation agreements to make sure Disney's planned programming changes match the terms of the contract. If Disney needs waivers, operators will have more leverage. "We could drop Fox Family tomorrow, and not one subscriber would call," said the marketing chief of another MSO.
Disney hopes to build some viewer interest in ABC Family, repurposing news, sports and library from its stable of networks, including ABC's old Friday-night TGIF block, Good Morning America
and The View.
Disney execs say this strategy allows Disney to spread rising production costs and attract another audience to sample its products.
"This acquisition, giving us several venues to distribute that content, means we can still make expensive Hollywood filmed entertainment, which is getting more and more difficult to make economically when you only have one source of distribution," Eisner said.
Under a deal with broadcast affiliates, Disney can repurpose 25% of its prime time lineup.
ABC Family's programming and scheduling plans are murky. Most likely, some Fox Family shows, including State of Grace
and an upcoming show starring teen twins Mary-Kate and Ashley Olsen, will stay, running alongside rebroadcast ABC shows, Disney theatricals and series, and some originals. A potential embarrassment in the deal is Pat Robertson's Christian news show 700 Club, a holdover from Family's days as a religious network.
Another wrinkle is that no one person has been charged with reshaping the network. Fox Family President Maureen Smith and her team are being kept on—at least for now. Sources say Disney is happy with Smith and would be interested in keeping her.
ABC Broadcasting President Steve Bornstein will oversee programming, while the ABC Cable Group, under President Anne Sweeney, is charged with the channel's financials and cable distribution.
Disney is acquiring Fox Family for $3 billion in cash and $2.3 billion in assumed debt. The deal also includes 76% of Fox Kids Europe, Fox Kids Latin America and the Saban kids library. Lehman Bros. analyst Stuart Linde estimates that the deal values the U.S. cable network alone at $3.4 billion, or $43 to $48 per subscriber. "This is a ridiculous valuation," said one media analyst.
Some Wall Streeters aren't sweating the price. "This asset is worth more in the Disney empire than it was before," said AG Edwards media analyst Laura Martin. "We think, if they can double the cash flow over the next three to five years, then they would double the value [of the channel]."
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