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Cover Story: What's Keeping Cable Network Execs Up at Night

Five things that they had better keep an eye on, or risk losing their lofty status within the TV industry 3/30/2009 02:16:00 PM Eastern

Posted March 29 at 4:00 p.m. ET

As cable executives congregate in our nation's capital this week for The Cable Show, they do so with chests puffed out slightly relative to their broadcast brethren. While the advertising slowdown resulting from the battered economy has undoubtedly taken its toll, the cable networks are still enjoying a continued run of good buzz, thanks in part to cable's dual-revenue-stream model and another year of hit originals. Cable chiefs are boasting of narrowing the CPM gap with the major broadcast networks as they continue to amass buzz-worthy hits and major sports properties, and NBC Universal now says its television side is a cable business that oh-by-the-way has a broadcast network. But there are some indications that if the cable networks do not mind their shops, they could quickly take on a slew of problems. Costs are rising, as is the pressure to keep up the string of hits, and now is hardly the time to be cocky. Just ask all the music and TV station executives who have had to adjust to a different way of life. So as the industry descends on Washington, B&C spoke with several cable network chiefs to take their temperature on the challenges they face. From those conversations emerged five things that they had better keep an eye on, or risk losing their lofty status within the TV industry.

EXPECTATIONS KEEP RISING

Cable has continued to close the quality gap with broadcast television; its scripted programming has not only earned rave reviews but increasingly broad appeal as well. But as the bar has been raised, so, too, have expectations.

For instance, HBO's True Blood gained momentum and eyeballs during its first season. But on that network, series get compared to a certain Mob drama, so any new show is going to take a hit unless it's a quantitative success.

TNT's Saving Grace was given a big boost with a Closer lead-in, but has dropped considerably without it. FX achieved ratings success with The Shield, Nip/Tuck, Rescue Me and more recently Sons of Anarchy, programs that define its brand of edgy, stylish television. But a winning streak is tough to maintain, and while series like Damages, Dirt and The Riches have fit the FX mold, they have failed to break into the mainstream.

And whether they admit it out loud or not, executives know the pressure is on. “There are 100 reasons [why programs fail],” says Steve Koonin, president of Turner Entertainment Networks. “Your lead-in wasn't compatible. Your messaging was wrong. And I worry about all of those. We're not infallible. We're going to make mistakes.”

Cable has made its mark by being formula-busting and attracting creative talent that rejects the hamster-wheel of derivative genres designed to appeal to mass audiences. A series like Showtime's United States of Tara, about a woman with dissociative identity disorder (including one personality that pees on people), could never exist on broadcast television.

But there are also risks. AMC's Mad Men has brought the network considerable acclaim, opened up conversations with advertisers who would have never considered buying on the network, and helped give AMC a brand identity. Despite the Emmys and all the buzz, the show's ratings have so far indicated there may be a finite audience for a drama about characters in the throes of post-war, pre-feminist-movement malaise. Likewise, after a first season distinguished by Emmy and Golden Globe awards, FX's Damages was renewed for two more seasons of 13 episodes each only after Sony Pictures Television stepped up with increased financing.

“There's a difference between a prestige hit and a quantitative hit,” says John Landgraf, president and GM of FX Networks.

And with smaller budgets overall, cable nets have to pick their shots wisely. “You have to bring proportionality into the equation,” says Bob DeBitetto, president and GM of A&E, which has only recently ventured into the scripted arena with The Cleaner and The Beast. “We aren't trying to replicate the broadcast model. I think some of our competitors have tried to stake that out. I believe that when it comes to this kind of programming, less is more.”

PRODUCTION AIN'T GETTING ANY CHEAPER

When NBC Universal announced that Jay Leno would move to primetime, saving the broadcast network millions on financing 10 p.m. dramas, Turner's Koonin said it made him smile. Whether it turns out to be a true bellwether for the broadcast industry and another opportunity for cable to siphon eyeballs depends on Leno's success—or failure. But it underscores the pressure on the production model that faces everyone. For cable, with its smaller budgets and smaller series orders, the rising cost of production has been exacerbated by the flagging economy as third-party financing has virtually dried up.

“A lot of companies don't have the capital to invest,” says Stephan Shelanski, executive VP of programming at Starz. “That makes it much more difficult to get a lot of shows underway. I think networks are going to stick with their core shows to make sure that those remain intact. But just in terms of sheer volume, it's really going to be limited.”

Others argue that cable's business model has been and will continue to be better suited to weather the economic downturn. “Even the cable networks that spend the most on programming like TNT and USA are still well below what is spent on broadcast,” says Jeff Gaspin, president and COO of Universal Television Group. On cable, he adds, “You also have 24/7 of your inventory to sell, yet your overall cost is much lower. Now your overall revenue is much lower, too. But again, the cost per hour that you're spending in cable is quite a bit less than you're spending on broadcast, even with the expensive shows thrown in there.”

That said, it's still a balancing act. “We're constantly struggling with the production model outpacing growth,” adds Nancy Dubuc, executive VP and general manager at History. “I always try to argue that an efficient series that runs for 10 years is far more profitable than a really expensive series that only runs for two.”

PROTECTING WHAT WORKS

The new technology graveyard is filling up with businesses that balked or mismanaged the realities of the wired world. “I think what is on the top of everybody's mind that run the networks is, 'I don't want to become the music industry,'” says John Ford, general manager of Discovery Channel. “I don't want to see my economic model crumble in front of my eyes because I didn't act to seize an opportunity instead of viewing it only as a threat.”

Many executives also worry that the industry may already have ceded too much control in an effort to compete on platforms where pay-for-play (especially for younger consumers) is anathema. “You're almost spoiling [consumers] out of the gate,” says Starz's Shelanski.

Ask anyone in the newspaper industry about the difficulties of changing consumer behavior, especially if that adjustment requires a cash outlay.

Cable networks are also involved in a delicate balance with MSOs that want to keep customers from fleeing to telecommunications and satellite providers by offering more choices on more platforms. “I am very focused in protecting the dual-feed model,” says Steve Schiffman, general manager of National Geographic Channel. “What I fear most is our competitors having the same discipline so the model doesn't somehow get broken. And those are things I can't control.”

But with online viewing still amounting to a tiny fraction of actual viewing (not to mention revenue), the debate over a viable business model may be a lot louder than it needs to be. Cable networks, however, have to work with their pipelines to protect everyone's interests.

“We're constantly looking at evolving our economic models on our shows to ensure that we're protected well into the future,” says Andrea Wong, president and CEO of Lifetime Networks. “I don't think anyone has the magic answer yet. I think that we're all trying to experiment and find new ways to do business together. I think we have to.”

ORIGINALS ARE HOT AND EVERYONE WANTS IN

It's hardly just the big NBCU, Viacom and Turner networks that are competing for buzz in cable. Now seemingly everyone is getting into the originals game, with AMC, A&E and Starz among the more recent scripted players diluting the playing field.

And that's just the competition among cable networks. Now throw in the Web. The increased competition for eyeballs across a dizzying array of platforms has only fueled the pursuit of the big, expensive buzz-worthy show with the potential to define a network brand.

“There's heightened pressure to produce things that break out,” says History's Dubuc. “We're a maturing business. There are a lot of media brands out there and there are a lot ofways for people to consume these brands, so you have to be delivering programming that rises above. That's just the new paradigm.”

And while the cable networks have mainly focused on primetime as their battleground, other dayparts could be next. Late night is already heating up, with TBS jumping into the fray with George Lopez later this year and E! re-upping Chelsea Handler for big bucks.

But expanding your portfolio is no easy task in a medium that already offers viewers a plethora of choices. “I don't think there's an infinite amount of audience that can be aggregated in the basic cable universe,” says FX's Landgraf. “Generally speaking, it's not the top 10 networks that are experiencing the most robust growth. If you look at where the audience growth is coming, it's coming at the bottom.”

DON'T GET COCKY

There is a palpable schadenfreude in the cable industry these days. Cable chiefs have for several seasons beat the drum for their increasing inventory of “broadcast replacement” programming, and the hum from many cable executives is getting louder this upfront season.

Bolstering the argument is that cable viewership was up 3% in 2008; Fox, ABC, CBS and NBC were down 6% collectively. Ad spending on cable was up nearly 8% in 2008 while broadcast experienced a decline of 3.5%, according to Nielsen. And while total domestic ad spending declined almost $3.7 billion to $136.8 billion last year, cable was the highest CPM-based revenue-generating medium with $26.6 billion in sales. Broadcast pulled in $22.1 billion. So little wonder that Turner's Koonin sees “nothing but blue skies.”

There have been positive steps toward addressing and acknowledging the obvious technological and distribution challenges of new technology. After all, notes NatGeo's Schiffman, “You shouldn't have to be hit in the face with a 2x4.”

Time Warner Chairman and CEO Jeff Bewkes' “TV Everywhere” initiative, which would make online content subscription-based, was well received by cable executives. And the industry has united to form Canoe Ventures, a consortium of the top six cable providers, to finally fulfill the promise of addressable, targeted advertising.

But if cable chiefs aren't careful, trouble could find them, too. While their business models are holding up, expectations, competition and costs are rising and the battlefield is moving every day. So the skies may be blue today, but it might not always be sunny in Philadelphia, or Universal City or New York. Boasting too much now could come back to haunt later.

With Alex Weprin and Claire Atkinson

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