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What Recession?

During the Winter Olympics on NBC, one brief on-screen graphic urged viewers to click on to buy an official Olympic beret. It wasn't much of a plug—just a visual that lasted a few seconds—and NBC marketers expected that, if they were lucky, about 10,000 viewers would visit the Web site to order.

Wrong. Way wrong.

"We got a 10-second [message] and sold 78,000 berets," marvels Gene McCaffery, chairman of cable network ValueVision, which is 40% owned by NBC and has been rebranded ShopNBC. The sale convinced him that, "if you do it right and there is some demand and you create good marketing, the power of the network [NBC] from a commerce standpoint is pretty amazing."

NBC officials "were just blown away" by the beret sales. "We had this massive surprise success during the Olympics," says Brandon Burgess, NBC's executive vice president of business development. "We said, 'OK, obviously there is a linkage between television and shopping behavior.'"

In fact, there's quite a lot of "shopping behavior" going on right under the upturned noses of consumers who sneer at cable shopping channels, or their Web sites, as the butt of jokes, not an instrument of commerce. Executives in the television business know better.

Last year, for example, NBC, the network of Friends
and The West Wing, was No. 1 of BROADCASTING & CABLE's Top 25 TV networks in terms of revenue. No. 2, though, wasn't one of the other members of the Big Four broadcast nets—CBS, Fox or ABC—but rather shopping channel QVC. Indeed, for the past year, while traditional broadcast and cable networks struggled to maintain ad sales, the shopping networks seemed only vaguely aware that there was a recession going on.

As their business matures, home-shopping networks like QVC are ringing up record sales. They have been beating the pants off many traditional cable and broadcast channels, racking up double-digit growth in revenue—gains immune to the lingering ad downturn.

In 2001, QVC generated $3.9 billion in revenue, an 11%
increase from 2002; NBC took in $4.4 billion last year. "We bypassed CBS and ABC this past year," says QVC President of U.S. Commerce Darlene Daggett. "We have quietly generated a $4 billion business."

When Comcast, which (along with John Malone's Liberty Media) owns QVC, has meetings with analysts, it boasts about the electronic retailer's sales, which have been fortified by increasing the number of national brands it offers and by maintaining a slicker on-air look than its competitors.

"QVC's just been a cash cow for Comcast," says SunTrust Robinson Humphrey analystBarry Farber. "It's not leveraged, and it's grown at a double-digit rate." He projects that QVC will hit $4.4 billion in revenue this year. In the first quarter, it posted $993.5 million in revenue, up 12.4% from a year ago.

The players in the competitive home-shopping arena have all been sprucing up, trying to boost their sales to the levels that QVC, the Tiffany of the segment, enjoys.

HSN (which is technically not
called Home Shopping Network anymore) generated roughly $1.9 billion in revenue last year, just half what QVC did. It has also become more upscale, in its on-air look and merchandise, and has stepped up its marketing. It has even poached QVC's former top host, attracting Kathy Levine into its fold starting this summer.

The smallest national participant in the $7 billion home-shopping–network arena, Shop at Home, is retooling, moving away from offering male-targeted collectibles. And ShopNBC, which ranks third behind QVC and HSN, is launching more initiatives with its mighty strategic partner, NBC, which is using ShopNBC as a gateway to electronic commerce, as a way to generate product sales from NBC programming.

"Our view is, if the other guys can basically make a billion dollars of profit in that space," says NBC's Burgess, "there ought to be room for another store."

It remains to be seen how much NBC's gamble on ValueVision pays off.

It worked with those Olympics berets. The experimentation will continue July 27, when ShopNBC debuts the show Soap Style,
hawking merchandise that has appeared, as product placements, on NBC soaps, such as Days of Our Lives
and Passions.
The cross-marketing is two-way: Soap Style
will also feature live appearances by NBC soap stars.

HSN claims that it beat ShopNBC and NBC to the punch with its "Shop the Soaps" project, which began as a test last August with ABC. HSN, which is part of Barry Diller's USA Interactive,
is selling such merchandise as jewelry worn by characters on the ABC soaps All My Children, One Life to Live
and General Hospital.
ShopNBC is also testing with the novela El Clon
on NBC's recent acquisition, Spanish-language broadcaster Telemundo.


"With the soft ad market, these broadcasters are looking for other ways to generate revenue," says HSN President and CEO Mark Bozek. "We've proven over the past year or so, with a variety of products, that it works."

HSN and Shop at Home have had their rough patches. HSN pulled the plug on HSN Español this spring: The Hispanic-targeted service couldn't get enough cable distribution. Shop at Home, which saw sales drop last year as it tried to sell collectibles like sports items, knives and coins to men, abandoned that strategy. Now it's offering more of the female-oriented goods that QVC and HSN sell.

"We kind of lost our way two years ago," says Shop at Home Co-CEO Frank Woods. "We made some management changes last year, and now we've changed our vision of who we want to be."

Besides fine-tuning their pitch and launching robust Web sites, each of the electronic retailers is increasingly using celebrities—from Joan Rivers to Susan Lucci to Wolfgang Puck—to sell merchandise.

Their strategies also hinge on featuring national brands ranging from Dell Computers (see box, page 26) to KitchenAid appliances. That builds credibility with skeptical consumers, who still associate shopping networks with ersatz diamonds.

Electronic retailers are endeavoring to grab the fleeting attention of channel surfers by making their programming entertaining, with QVC going on location to places like Italy.

Viewers are buying in, mainly. Cash flow has been growing for the three biggest players. In the first quarter, for example, QVC's domestic business saw EBITDA (earnings before interest, taxes, depreciation and amortization) increase to $190 million, an 11.6% gain.

However, gross margin was flat at 22.6%, a situation that QVC blamed on its product mix that quarter, which was weighted toward computers rather than higher-margin jewelry. The rest of this year, QVC expects its margin to increase.

At No. 2 HSN, first-quarter EBITDA was up 26%, to $57.7 million. The network's gross profit margin also increased, to 35.5% from 33.5% a year ago. Like QVC and HSN, ShopNBC saw double-digit gains in cash flow. In the first quarter, its EBITDA hit $5.3 million, up 34% from the year-ago quarter. ShopNBC's gross margin was 39%, up from 37.7% in 2001.

Bozek's management team has polished HSN's look and upgraded and expanded its product roster, adding more national brands to its inventory, much like QVC. It has backed up those improvements with a major consumer ad campaign and, taking "imitation-is-the-sincerest-form-of-flattery" to new heights, has recruited Levine, who had left QVC to develop a talk show with Studios USA, to go on-air this August with her own line of clothes and accessories.

On HSN, Levine will be competing head to head against her former employer.

What's the reaction at QVC? "I would have to reserve judgment and say it's all about the product," Daggett says. "You can have all the personality in the world—and don't get me wrong, Kathy is wonderful; I have nothing but good things to say—but the customer ends up voting with their credit card or with a mouse click, and they'll get to decide."


There are many reasons that ka-ching!
sound is coming from home-shopping channels,
which have caught the attention of broadcasters such as NBC and ABC. In part, home-shopping network sales have grown because distribution for the channels is on the rise.

"They are on more MSOs, so they are getting a wider swath of the American public tuning in," says Elissa Myers, president of the Electronic Retailing Association.

When NBC invested in ValueVision, the media giant's NBC Cable unit took over affiliate sales for the home-shopping service. Since then, using its leverage, NBC Cable has jump-started ShopNBC's carriage to 45 million full-time homes, a gain of roughly 20 million subscribers during the past two years.

NBC Cable packaged ShopNBC with long-term contract renewals for CNBC, MSNBC and the Olympics and, in some cases, with retransmission consent for NBC-owned TV stations.

"Part of our pitch to the industry was that we were going to develop ValueVision to be a more compelling and competitive service and we were going to try and grow it in some non-traditional directions," says NBC Cable President David Zaslav. "We were going to look at doing some nice synergies with the [NBC] network, and we're starting to do that now."

HSN has 75 million subscribers, while QVC has 83.9 million. Shop at Home is at 40 million.

For cable operators complaining about rising programming fees, home-shopping networks offer an attractive deal: Cable operators get paid to carry them. QVC and HSN give cable operators a 5% commission on sales.

ShopNBC and Shop at Home pay operators a flat yearly rate per home. It ranges from $1.50 to $2 a subscriber for ShopNBC, to $1.50 to $3 for Shop at Home, according to home-shopping officials.

"Cable operators are more attuned to electronic retailing than ever before," Bozek says, "because we pay out great commissions and nobody else does that."

QVC, which has paid more than $1 billion in commissions to cable operators, has waged a "Go Low/Go Smart" campaign during the past three years. As a result, it has managed to get more than 75% of its distribution on channel slots below 35, according to Al Ulozas, senior vice president of affiliate sales and marketing. Cable systems earn on average 23% higher commission when QVC has a channel slot below 35.

"We've been preaching this to cable operators for years," Ulozas says.


Home-shopping services have evolved over the years to carry a broader array of wares, like brick-and-mortar department stores.

McCaffery likens QVC to a Macy's and describes HSN as comparable to a Sears. Product mix for both QVC and HSN today includes not just jewelry but cookware, beauty products, accessories, gardening goods, rugs, exercise equipment, food, linens, general housewares, and consumer electronics such as computers and cameras.

ShopNBC's main product has been pricier fine jewelry; McCaffery describes his channel as similar to a Fortunoff.

QVC is champ in terms of annual sales per cable home, at about $40. HSN takes in $20 to $22, ShopNBC $12 to $14, and Shop at Home an estimated $6, according to several network officials.

"The number of great products and the sophistication of the production on the TV shopping channels are growing," Myers says. "And the tie-ins to both celebrities and broadcasters are growing."

Both QVC and HSN have long lists of celebrities who tout products on their networks, although QVC seems to be downplaying their importance.

"At this point, what we're seeking out is really great products and guests and designers that are really passionate about the product, who are deeply involved in its development and are very knowledgeable about it," Daggett says. "That's not to say we don't have celebrities in our mix, like Joan Rivers and Emeril. But those celebrities have become national brands for us."

Home-shopping services have seen phenomenal sales growth via their Web sites. Unlike start-up dotcoms, the electronic retailers already have inventory in stock, an infrastructure in place to fulfill orders, and an established customer base from TV. "We did not have an Internet business two years ago," Bozek says. "Now we have a business that will do upwards of $200 million this year."