The value of Family

Disney's check for Fox kids channel raises MSO, advertiser eyebrows

By Allison Romano and John M. Higgins -- Broadcasting & Cable, 7/30/2001

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]."

A diminishing return?

For the past two years, only network dramas have been given a second run on cable channels within the same season. Now, in the wake of Disney's deal to establish ABC Family, sitcoms appear headed in the same direction, and the lifeblood for top syndication studios may become anemic.

Some station executives believe that viewers will grow tired of repeated comedies and that stations would probably pay less for worn-out sitcoms than the high premiums syndicators have come to expect for such off-net programs.

Until now, stations have generally tolerated repurposing. All repurposed fare, such as ABC/Lifetime's Once and Again and USA Network's Law & Order: Special Victims Unit, have been dramas, which stations have never been enthusiastic about stripping.

But, if ABC's My Wife and Kids lands on ABC Family or Fox' midseason comedy Nathan's Choice heads over to co-owned FX, it could be a whole new ballgame, say station executives and sales reps.

"I will tell you point blank that I think any additional exposure for programs that are going to be syndicated will depreciate the value of those shows, period," warns Garnett Losak, Petry director and vice president of programming. "If Buena Vista comes out with My Wife and Kids, I will advise my stations to consider the value depreciated." To Losak, that means lower license fees and a smaller syndicator stake in the show's advertising revenue.

That could hurt. Some of TV's meatiest deals have been for off-net comedies. Sure, repeats of CSI sold to TNN for nearly $2 million an episode, a cable record, and West Wing flew to Bravo for $1.2 million. But that's peanuts compared with the $4 million per episode snagged for Seinfeld's second selling cycle. Several years ago, Home Improvement went for more than $3 million. The studios reportedly get an average $1 million to $1.5 million per episode for off-net sitcoms.

"Yeah, there could potentially be problems if a show like Malcolm in the Middle were all of a sudden repurposed," says one top station executive. "It's one thing if it's repurposed right off the bat, but it's another if it gets repurposed while it's working on the network. Once something works to the degree that Malcolm does, the fewer airings the better."

The devaluation of comedies has already begun, say some sources, noting Warner Bros.' current efforts to sell the second syndication cycle of Friends. The popular sitcom will air on TBS starting this fall, several seasons before the expected 2004 launch of its second cycle. "There's no question in my mind that this is what is slowing up the Friends sale," says Losak. Distributor Warner Bros. has not officially locked up deals in the major markets since it began selling in March.

Not everyone is worried by the trend. Studios USA's Steve Rosenberg says new shows will actually benefit from the exposure. "The best off-net shows are the ones that have the largest possible audience base in their first incarnation," he says. "And if it starts out on two platforms, it's of course going to have more of a chance to be successful in syndication."

Susanne Ault