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January 2, 1999

TV Networks Confront Need for Radical Change

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    The network television business will enter the last year of the century groping to find a strategy that will insure its future profitability, and even viability.

    But discovering such a strategy is becoming increasingly difficult, because the paradoxes about the networks almost outnumber the hit programs:

    -- There has never been more revenue in the network industry -- an estimated $15 billion plus. Yet there have never been bigger losses. Only one network, NBC, is truly profitable, and even its profits are in decline.

    -- Cable networks with fractions of ratings, like MTV and Nickelodeon, are making much more money than broadcast networks, which have several times as many viewers.

    -- Advertisers continue to pay increased rates for diminishing audiences, because they want to reach large groups of viewers at the same time. But they refuse to pay networks for all the viewers they have, paying them only for certain viewers, mainly young adults.

    -- To accommodate the desires of advertisers, broadcast networks are increasingly trying to brand themselves -- the young adult urban network (NBC and ABC), the young male network (Fox), the teen-age girl network -- even though that brings them closer in identity to cable networks, thus erasing the distinction that makes them more appealing to many advertisers.

    -- The kind of programming that still attracts reliably large audiences, sports events and hits like "E.R.," has become so expensive that it often makes sense only as a loss leader. But without it, viewers seem to drift away in even bigger numbers, meaning that the networks face a choice of either losing money to gain viewers or losing viewers, which eventually means losing money.

    Contemplating the implications of these challenges, many broadcast network executives now envision the need for nothing short of a reinvention of their business. The new model is centered on greater ownership of shows, much tighter cost controls on programming, new sources of programming that move the networks away from reliance on the big Hollywood studios and less (or no) money going to affiliated stations for carrying network shows.

    But accomplishing these goals can merely be started in the next year, even while the networks are in the midst of the same old ratings competition that has driven their decision-making for the last half of the century.

    "How bold do you think any of these executives can be when they know their jobs are on the line if they don't produce results in the next sweep month?" asked one former network president.

    Indeed, late last year two networks, NBC and Fox, removed their head programmers, replacing them with executives who built their careers at cable channels. Those moves were widely interpreted as the first sign that the broadcast networks have to adopt a "can't-beat-'em-join-'em" strategy.

    At Fox at least, where the new president of entertainment, Doug Herzog, is arriving with one cable program, the outrageous animated series "South Park" as the most prominent entry on his resume, the goal seems to be to play even more aggressively to the network's core audience, the young men who watch little television but love "The X-Files," "The Simpsons" and specials featuring elephants stomping their trainers and drivers crashing into abutments.

    Herzog said he would try to finesse the distance between risky ideas and broadly appealing programs.

    He also underscored his confidence that Fox was the place to be for the future of network television because of the carefully assembled assets of its parent, News Corp. It has brought all the production functions inside the company, achieving what is called vertical integration, which Herzog said is the only route to success. That means Fox will get a heavy quotient of its programs from the 20th Century Fox television studio. It will get movies from Fox's movie studio; news from Fox News Channel, and sports from News Corp.'s ever-expanding sports empire.

    The other network already set up for this asset alignment is ABC, which, thanks to its corporate parent, Walt Disney Co., enjoys similar access to movies and sports. The Disney television studio is openly committed to producing shows that will specifically help ABC.

    The two fledgling networks, WB and UPN, which spent this year going in opposite directions (up and down, respectively), exist specifically to establish a distribution system for their corporate family's studios (Time Warner's Warner Brothers and Viacom's Paramount), presaging a move by the networks to own most or all of their programs.

    "I think we and ABC just have advantages because of our vertical integration," Herzog said. "I'm sure it gives CBS and NBC something to think about."

    A lot of thinking is certain to go on at both CBS and NBC over the next year about whether to make an alliance, through a merger, sale or takeover, with a Hollywood studio or a cable network. Talks have already gone on between NBC and USA Network, CBS and Sony Corp., CNN and just about everybody. The issues can be complicated because foreign companies like Sony are not allowed to own more than 25 percent of a network, and companies like Time Warner that have cable systems are not permitted to own broadcast stations.

    Executives at NBC and CBS have stated publicly that they have no intention of relinquishing control of their companies. But the pressures of intensifying competition for shrinking audiences and profits could force a recalculation of the value of owning and operating a network in this environment at almost any time.

    More than ever, the real value of the network business resides in owning stations. The networks want to own more, and they will continue to press the Federal Communications Commission to change the current limits so they can buy more.

    Failing that, the networks are likely to press all the more for some other revenue stream, trying to match the advantage of cable channels, which receive revenue from both advertising and subscription fees. That may mean more direct sales appeals to viewers for videos of shows.

    And the networks will continue to look for ways to "repurpose" their programs, like sending off repeats to cable channels, as NBC has done, putting reruns from its "Dateline NBC" series on its MSNBC and CNBC cable channels. They may also begin moving more toward the idea of trying to sell accumulated audiences for shows repeated several times in a month, as cable has often done. Some of that is happening already. Fox ran the movie "The Lost World: Jurassic Park" twice in three weeks in November; NBC ran a wrestling special twice in the same month.

    But none of these tactics will diminish the ever-constant hunger for the next big hit. With the competition closer than it has ever been before, the difference between the top and bottom among the network competitors, between profits and no profits, may be determined by a single new hit show.

    The program makers say they are desperate for new ideas, new formats, something that will either excite the public or at least alter the program-cost formula.

    As the head of one major Hollywood television studio put it, "If my garbage man gives me a good idea, I'll take it; and I'll give him a 'created by' credit."

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