A Decent BET

Not three weeks into his tenure as Viacom's CEO, a year ago Philippe Dauman faced a skeptical Wall Street crowd eager to know if he could handle the mercurial Sumner Redstone and navigate the ever-changing digital minefield. But the facile Dauman had a diversionary tactic in his back pocket: BET Networks.

While touting Viacom's growth engines, he cited the brand acquired for a jaw-dropping $3 billion six years before as offering “huge potential going forward.” Never mind that BET only accounts for about 4% of the company's revenue. It is an oft-forgotten asset he could take a flier on to try to inspire investors.

He cited more dollars from advertisers who don't fully “appreciate” the value of BET's audience. He promised international expansion, and even a BET film line under the Paramount banner, as opportunities. Later, he touted BET.com. But is it all smoke and mirrors–an attempt to generate excitement while Viacom struggles to find its would-be soaring growth?

“BET is too small to impact Viacom's share price one way or the other,” said Laura Martin, an analyst with Soleil-Media Metrics.

Much of Dauman's optimism came from a strategic plan presented to him by BET's Chairman-CEO Debra Lee, a 21-year veteran who had succeeded founder Bob Johnson in January 2006. At the core of Lee's strategy, which had its roots under ousted Viacom CEO Tom Freston, was a major upgrade in original programming that BET would own.

That would in turn bring more viewers and ad dollars to the network—and fuel downstream exploiting of the content online, abroad, through VOD and via home video. Soon after, Dauman was promising as much as a 50% increase in the programming budget.

“Philippe has been extraordinarily supportive in every key initiative Debra has outlined,” said Scott Mills, president-COO of BET. “And he backs it up with actions.”

Under Lee, BET has looked for new revenue streams. Dauman and Freston supported her view. Much of the opportunity came as Johnson, who was fiercely protective of BET's autonomy, segued out in 2005 and Viacom was able to make some changes in its operations.

Chief among them was the July 2005 hiring of Reginald Hudlin, a respected Hollywood veteran, to serve as entertainment president, and an increased programming budget for him to use. These days, Hudlin may be the most-watched executive in cable as he seeks to attract top-notch talent in front of and behind the camera and turn BET into an appointment viewing destination.

BET launched five original series this summer with some success, including two shows in the vein of MTV's Punk'd: Hell Date and S.O.B. –Socially Offensive Behavior. Baldwin Hills chronicled teenagers in that affluent African-American neighborhood in Los Angeles. But Hot Ghetto Mess was criticized before launch for perpetuating a negative black image that BET says was an unfair characterization to begin with. Nonetheless, it was renamed We Got to Do Better and controversy subsided.

This fall Hudlin is bringing 10 more originals to the network, including its first animated comedy, Bufu; a reality competition show to find a gospel-singing star; a spinoff of reality series College Hill; and Judge Mooney, a daily court show hosted by comedian Paul Mooney. BET also plans a three-part series exploring the complexities of hip-hop music, conducted in a town-hall setting. Next year comes BET's first scripted comedy series, Somebodies, and two more animated shows.

Lee's new vision marked a sharp contrast to the Johnson era at BET, when the executive showed little willingness to invest in homemade comedies or dramas, preferring the low-cost, high-margin flood of sexy and, to some, repugnant music videos and amateur comic performances.

As BET nears 30, the landscape is different. Though it remains the leading African-American network by far, its ratings are flat to down; the ad growth rate may be ebbing; MSOs are fighting to pay less in affiliate fees; and even with the launch of broadband channel BET on Blast, traffic to BET.com is down slightly.

In short, BET has competition.

Most prominent is TV One, a three year-old joint venture between Comcast and Radio One–the largest radio broadcaster targeting African-Americans. General entertainment networks have also amped up their appeal to African-Americans, notably TBS with the launch of sitcom Tyler Perry's House of Payne this summer.

There's the Monday comedy block on the CW and America's Next Top Model, which perform well among BET's target of African-Americans in the 18-to-34 demo. So do the shows featuring icon Flavor Flav on sister network VH1. Similarly, general market Websites such as MySpace and YouTube attract a large African-American user base.

In just three years, TV One, which targets an older 18-to-49 demo, has risen to 40 million subscribers (BET has 85 million-plus). Meanwhile, its ad sales are expected to jump 34% this year to $42.1 million, according to SNL Kagan. Still, the network has a long way to go to in every category to overtake BET.

TV One head of ad sales Keith Bowen said, “Our objective is to get advertisers to move more general-market dollars into the dedicated African-American networks.” With an estimated 1% of the overall marketplace, a combined increase to even 1½%-2% could mean an additional $500 million in added revenue.

Advertisers and MSOs appreciate TV One for providing another option. Telisa Yancy, who recently joined Burger King's marketing group from Ford, said Radio One chief Catherine Hughes has proved adept at targeting the African-American population through stations with a variety of formats.

“To see her go to TV was refreshing and a breath of fresh air,” Yancy said. “She has done a great job of developing programming to pretty much reach across the entire African-American community and I expect TV One to pretty much follow the same path.”

On the MSO side, Kagan analyst Derek Baine said, “It will take time, but I think operators will use the network as leverage against BET when they ask for a big license fee increase.” Baine pegs BET's license fee at 15 cents per subscriber, expected to increase to 16 cents in 2009. He has TV One at 1 cent, but predicted an increase to 7 cents in two years.

Meanwhile, TBS is also making a major play for a slice of the ad dollars aimed at African-Americans with 100 original episodes of House of Payne. Steve Koonin, head of Turner's entertainment networks, said he was attracted to the series in part to reach an “underserved audience.”

TBS says ad sales have been robust, so much so that Perry himself couldn't get a slot to promote his upcoming film. Ad sales head Linda Yaccarino received a frantic call on vacation and Perry was accommodated.

Allstate and Clorox used the show to target an African-American audience through multi-platform campaigns. “It's really answering a need for African-American programming at a time when there's kind of a dearth of it,” said Allstate's Steven White.

One potential competitor that both BET and TV One have overcome, at least for now, is the Black Family Channel, which struggled to gain distribution. In May, the operators sold their access to 16 million homes to the Gospel Music Channel. Now, under CEO Rick Newberger, BFC will re-launch as an ad-supported broadband channel in November with no need to appeal to MSOs.

Another Internet-only venture, the AfricanAmericanChannel.com, had a soft launch in May and plans a full-fledged debut next year, featuring documentaries and other programming with more of a historical focus.

At the same time, BET.com has not seen traffic to its site grow lately, even with its video-rich broadband offering. Unique users in July were 2.29 million, just about the same as a year ago, according to comScore Media Metrix. Dauman has pledged to bring in $500 million in digital revenue this year.

Back on air, as BET seeks to persuade blue-chip advertisers to spend more, there are other figures in its favor. Nielsen data shows that African-Americans watch considerably more television than the total U.S. population, with households averaging 79 minutes a day, compared to 57 minutes for the population at-large. And African-American buying power is booming, expected to total $845 billion in 2007 and increase 34% to $1.1 trillion in 2012, according to research from the University of Georgia.

Yet, core-demo ratings for BET are flat this season compared to last year, averaging a 0.3 in primetime and 0.2 in total day, according to Nielsen. Those are the same figures as in 2002-03, though the actual viewers in the demo are up, from 177,000 in primetime in 2002-03 to 211,000 this season.

Still, even as ad sales face an uncertain future with consumer fragmentation, BET continues to post solid growth, up 20% in 2005 and 18% to $403.7 million last year. Projected growth is just 5% this year and then 6% in 2008 (to $447.7 million), according to Kagan. Cash flow, however, has been strong, up 16% last year to $282 million.

BET's Mills said the potential ROI on programming upgrades is “greater advertising growth and monetizing the programs on other platforms, in digital, international and home video. Extracting the highest value for our ad inventory is our ability to sell the distinct and unique attributes of our platforms and audience.”