The Final Frontier

6 steps to digital cable success

Call it cable's rite of spring. At the National Cable & Telecommunications Association's annual gathering, wannabe cable networks pitch—hard. But few will turn up on your cable listings. Hype is the easy part, says one cable vet: "Until you get funded, you are not a network." New channels typically need $100 million to $150 million to break even.

There was a time when operators needed networks to populate their digital packages. Not any more. "We're looking to leverage the relationships we already have," says Cox Vice President of Programming Bob Wilson.

Industry consultant Cathy Rasenberger, who specializes in startup networks, has heard an estimated 200 proposals in the past few years. The odds of their success are slim, she cautions prospective clients.

About a dozen recently launched channels are making it. Among them: G4, Fine Living, Sí TV, and sports diginets Fuel, CSTV, and Tennis Channel (see list at right). New networks associated with a big media company or distributor stand the best chance. Independents face an uphill climb.

National Cable Television Cooperative President and CEO Mike Pandzick says operators are focused on growing their businesses, not taking on more costs. "Most look at new networks and ask, How much it is going to cost me? How many new subs is it going to get me?"

Adds Pandzick, "That's why most new networks are almost dead in the water. There are so few interests that are not already being met."

But if you want to brave the odds, do it with Rasenberger's help. Here is B&C's tip sheet for starting a digital network.

1. Demonstrate a demand

Cable already offers a dizzying array of niche networks. There are channels for foodies, videogamers, and history buffs. Aspiring outlets must find something new—and prove that people want it.

Launching a channel "is about the hardest thing to do in the world," says Brad Siegel, formerly a Turner Entertainment executive and now vice chairman for startup Gospel Music Channel. "If you don't have a large, passionate fan base, it's a nonstarter."

You need to identify the target and then find data to back up your plan. For the Gospel Music Channel, Siegel and network founder Charles Humbard, a Discovery Networks vet, see a wide-open space. (BET offers some gospel programming, but only a few shows a week.) More important, Gospel Music Channel says this is a proven marketplace: 80 million people a week tune in to such programming. And 8% of all U.S. music sales are for gospel music. Jazz, in contrast, makes up 4% of sales.

2. Avoid the competition

"It can disturb or destroy your business if someone else is competing for distribution and programming," says Rasenberger. Operators and advertisers might say they want alternatives to big, established cable networks, but it's tough going up against major players.

Stand Up Comedy Television, another first-time exhibitor at this week's NCTA show, will offer a lot of standup specials. Remember, Comedy Central has carved out the standup turf; even HBO and Bravo do it. In the gaming space, Game Show Network (now called GSN) and G4 are already up. Two new channels: Casino & Gaming Television is still looking for carriage deals, while Edge TV is joining the fray (see page 32). The channel is eyeing an early-2005 launch and has enlisted the expertise of former ABC Family distribution exec John Burns III, distribution specialist Hot House Media, and talent agency Creative Artists Agency.

Consider diversity. The National Football League's channel is everything NFL, while The Football Network will offer the rest (college, high school, women's football). But do operators want two football-themed channels? Do viewers want all football all the time? Clearly, only the strong survive. So far, The NFL Network has major deals on DirecTV, Charter, and Insight. TFN has secured deals with MSOs Time Warner and NCTC. The NFL Network kicked off last November, but TFN has been plagued by financial problems and may not run till year's end.

3. Hire pros

TV people are good. Cable people are better. There is nothing like the personal touch. It helps open the right doors at Comcast and Time Warner. Take CSTV, for example. Co-founder Brian Bedol is a familiar face in the cable industry. He started Classic Sports, then sold it to ESPN. He's calling on many of the same cable operators pitching his new channel.

Most new channels recruit an industry vet in their executive ranks or on their boards. The reason is simple: Cable can be a frustrating business. "You need to be prepared for a marathon," says TFN chief Jerry Solomon, a former sports agent. "I've negotiated a lot of deals, but I've never seen deals take as long to materialize as [carriage deals]."

4. Build a realistic model

Cable can be a great business, thanks to the dual revenue streams from subscriber fees and ad sales. But that model doesn't apply to many new diginets. With programming costs soaring for existing services, operators don't want expensive new services. They might be willing to shell out a few pennies per subscriber, but not immediately. Maybe not ever.

And don't count on advertising as a stable revenue stream. Sure, a few advertisers will take a leap early. "Some ideas are so interesting, you can take a flyer on it" and make a small buy, says Doug Seay, senior vice president for Publicis & Hal Riney. An early investment can pay off. Buyers usually get in for a dirt-cheap CPM and try to grandfather the rate. If a channel grows, the gamble is a good one.

Most advertisers want to see Nielsen ratings first. Says Seay, "A lot of people won't buy on concept." With hard data, they see who is watching and when.

It's also wise to consider other revenue streams. Rasenberger is keen on concepts with merchandising extensions. She's handling distribution for lifestyle startup Wine Network, which plans to sell wine and travel packages as a way to intoxicate coffers.

5. Raise beaucoup bucks

To begin, you'll need about $5 million in hand. The initial funds go for research, programming, and a road show to woo potential investors, as well as cable and DBS operators. But seed money goes only so far. The building blocks of a channel—more research, acquiring programs, commissioning originals, launch fees—run into a lot of money. The benchmark is at least $100 million. If you plan a lot of originals or live events, kick it up.

Trouble is, venture-capital money is hard to get. And startups face a tough predicament: Cable operators often want to know there is funding before they'll seal a deal. Investors want to see distribution before committing. It takes time to finesse both ends. Budget for at least three years to launch. It could take six to eight years to break even. Some networks die out because they can't sustain the investment. Jokevision, intended to show jokes 24/7 and commercial-free, has put the brakes on development. Backers are devising a sustainable business model.

6. Sweeten the deal

Understand what the operators want and need. Many distributors are pushing specialty tiers like Hispanic and sports packages. That has helped CSTV and the Tennis Channel get carriage. Startup Spanish-language kids network Sorpresa is finding a home on Hispanic tiers.

Other enticements may help sway an operator. Proposed young-adult network says it will share ad revenue with early distributors. A few channels, including Wine Network, would share revenue from merchandise sales. Many are offering high-definition and video-on-demand content.

High-tech boondoggles may also work. Take the Anime Network. The channel's parent company A.D. Vision Inc. already owns a vast library of anime
programs that it produces and sells on DVD. Starting a cable channel seemed a logical extension. Except that operators pushed back. To prove Anime Network's worth, the channel started as a video-on-demand service. Big MSOs like Comcast, Time Warner, and Cablevision—all eager to push VOD—were hooked.

Going VOD first, says President Kevin Corcoran, "allows us to demonstrate there is a sufficient demand for a 24/7 channel." At least one operator agrees. Anime is expected to announce its first deal, with Insight Communications, this week at the National Show.

Rasenberger's best advice: "Find a model that is expense-neutral and revenue-positive for the operator."

Then you can tackle world peace.