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Pappas takes on Univision and Telemundo Room for tres?

Stakes $1.5 billion on the launch of Azteca America 12/03/2000 07:00:00 PM Eastern

Back in 1964, Harry Pappas placed his first bet on broadcasting, investing $5,000 with his older twin brothers, Mike and Pete, in a radio station in rural California. Seven years later, Pappas built his first independent TV station,
KMPH-TV

Visalia, Calif., in the Fresno-Visalia market.
Over the next 30 years, Pappas invested hundreds of millions in TV properties at some risk, backing Fox affiliates when that network was started 15 years ago, as well as WB and UPN affiliates when those two networks started out five years ago.
Today, Pappas Telecasting is the largest privately held TV-station operator in the country, with 30 stations either owned or in the process of being acquired or built.
But the fun is just beginning. Pappas is making the single biggest entrepreneurial bet of his career. With Mexico-based minority partner TV Azteca, he has set out on a $1.5 billion effort to launch a third U.S. Hispanic television network, called Azteca
America.
For Pappas, the move into Hispanic TV represents a strategy shift from a singular focus on mainstream U.S. television to a two-pronged offensive that focuses equally on the core U.S. business and Spanish-language television.

While he's still a big believer in the core business, the move into Spanish-language TV is one that Pappas has been mulling for nearly a decade, having developed conventional stations in markets with rapidly growing Hispanic-population segments.

In fact, although the Azteca America venture was announced in September, the two partners had initiated conversations almost two years earlier and actually had what Pappas describes as the "framework of an agreement" by spring '99. For more than a year, the parties kept their agreement private as they ironed out details and Pappas went about acquiring stations and construction permits needed for the new network's distribution system. He's contributing 13 stations to the venture; the 17 others in his stable will remain English-language affiliates and independents.

"Fortunately, we were able to maintain confidentiality," Pappas says. "That allowed us to make some extraordinary arrangements for television stations that were key to the establishment of our distribution system."

Case in point: KXTX(TV) Dallas, which Pappas recently purchased from billionaire investor Thomas O. Hicks for $86 million. That's a relative bargain for a well-established top-10 independent station-and one that Hicks spent millions on to digitally upgrade. Indeed, at one time, he had network plans of his own: a regional sports network built around the Texas Rangers and Dallas Stars.

KXTX serves multiple purposes for Azteca America. Located in one of the top Hispanic markets, the station will serve as the network's flagship and will also house its technical-operations center. An IBM computer system will automatically feed the rest of the network its programming, promotion and commercial spots.

The IBM system is key from a cost standpoint. Pappas estimates that the venture will have just under 1,000 employees. The automated system will save the network from having to hire "several hundred" more employees, or 25% to 35% additional positions, he says.

Pappas gushes when talking about what a great buy KXTX was. "It was almost this serendipitous finding. Here was this enormous infrastructure that just needed some additional facilities layered onto this incredible base, so that we could operate a typical network-operation center with the usual time-zone feeds and all of that."

Ironically, the previous owner of KXTX -Christian Broadcasting Network-had little use or even tolerance for the Spanish language. Hicks operated the station as an LMA before acquiring it from CBN earlier this year. As part of the LMA, Hicks had to agree to an all-English-language format, because CBN founder Pat Robertson endorsed the position that English should be the official language of the U.S.

The Spanish-language restrictions on KXTX expire at the end of the year, just in time for a pre-launch of the network on both the Dallas and Houston stations. That will happen in January. The full network launch is set for April.

Meanwhile, Pappas has tapped two key outsiders and a coterie of company insiders to get the network going. Stuart Livingston, a former Univision and Telemundo executive has been tapped to run Azteca America as president and COO of the network and stations group. And Peter Chrisanthopoulos joined the crusade last month as president and COO of network and spot sales and marketing.

Chrisanthopoulos joined the network from New York media buyer Mindshare, where he was president, national broadcast and programming, and oversaw some $2.6 billion in annual spending by advertisers.

Livingston was senior vice president, operations and business affairs, at Telemundo for four years before joining Pappas last year as a consultant to the new network. Prior to that, he was head of affiliate relations for Univision and ran the network's cable network Galavision before that.

Livingston, a Mexican-American who grew up in Houston, says job one at the network is to get the rest of the distribution in place-particularly in New York (where a recent deal to buy Shop at Home's WSAH-TV fell through), Chicago and Miami, the big Hispanic markets where Azteca America still has to establish outlets. Livingston hopes to have deals to announce for those markets by January.

Meanwhile, the programming schedule for the January pre-launch is just about set. Telenovellas, the Spanish-language equivalent of serial melodramas, will be the prime time staple, says Livingston. No real surprise there: Both Univision and Telemundo have shown that novellas tend to drive Hispanic viewership higher than any other format in prime time.

What comes as somewhat of a surprise is that TV Azteca will produce a slate of original talk shows and magazines to fill the daytime schedule.

The deal that Pappas has with TV Azteca is complete access to the Mexican broadcaster's production facilities and program library, which is growing at an annual rate of about 10,000 hours that the network produces. In exchange, TV Azteca gets a 20% equity stake in the network and a fixed percentage of the network's annual revenues, starting at 10% and climbing to 15% after several years.

Plans also call for local and national newscasts at the stations and the network. The national newscast would utilize the resources of TV Azteca's existing news operation in Mexico. It produces newscasts for both of the company's Mexican Networks (Azteca 13 and Azteca 7).

Plans also call for lots of sports programming on the weekends. TV Azteca has the rights to Mexican League Football, the soccer league. Those matches will also air on Azteca America.

Pappas has maintained that there will be little in the way of original entertainment production to start. But sources say the new venture probably feels some pressure to do some original programming to compete effectively with Univision and Telemundo, both of which produce significant amounts of first-run fare.

Even so, Azteca America will struggle in the first year or two to get advertising revenue. Pappas says he'd be happy to take a modest single-digit share in the first year, although he also believes that the venture can reach break-even after just two years.

Pappas also expects the network's individual stations to be the bigger revenue drivers to start, with the network gaining momentum as its distribution builds. And the business plan calls for the network to own most or all of its distribution, the way Pax TV does. At launch, Pappas expects to cover 57% to 60% of the U.S. Hispanic population.

Such coverage may not seem appealing to advertisers that have two other network options in Univision and Telemundo. But Chrisanthopoulos says Azteca America has several things going for it. First, advertisers love to see as much competition on the distribution side as possible, which is why they supported Fox when it launched (for greater negotiating leverage with the Big Three) and why they supported The WB and UPN when they launched (for greater negotiating leverage with the Big Four).

"Agencies are always looking for ways to encourage competition among networks," he says. "It's in their best interests, and I feel this opportunity is one they will want to support as well." He argues that advertisers buy cable networks with 50% coverage of the country or less "because it's the right audience or programming."

Soon Chrisanthopoulos will be preparing for what will be the network's first upfront presentation in New York next spring. His pitch to advertisers: growing Hispanic spending power ($440 billion and counting) and the fact that research shows that, even in bilingual households-a growing segment within the Hispanic-household universe-recall of specific commercials is higher when they are in Spanish. "People know you are deliberately trying to communicate with them," he says.

Still, the advertising market has been full of uncertainty in recent months. Even the dominant Hispanic network, Univision, hasn't been unaffected. Last summer, when its upfront advertising take underwhelmed Wall Street, its stock took a one-day 13% plunge. And since peaking in August at about $62, the company's stock sank to $26 in October and has only recently climbed back past the $35 mark.

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