It's not HBO. It's TW. - Broadcasting & Cable

It's not HBO. It's TW.

At corporate, Jeff Bewkes strives to bring synergy—but not too much—to Time Warner's diverse TV assets
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Ask programming executives to name their dream job, and the dominant response will be "I'd like to run HBO." The pay network's creative freedom, financial resources and emancipation from the Nielsen meter is a powerful lure.

Jeff Bewkes gave up that job. After 23 years at the network, he was tapped by parent Time Warner in a massive management shuffle to step up and take on all of its TV-programming, film and movie operations, becoming chairman of the company's network and entertainment group in April 2002. HBO is still on his plate, but it's crowded with a lot of other things. Some are running well, like TNT, Cartoon Network and Warner Bros. Some are bigger challenges, like CNN, TBS Superstation and Warner Music (which Time Warner is selling).

Bewkes met with Deputy Editor John M. Higgins to talk about the TV side of Time Warner, how the studio and networks can work together, how he views CNN, why he's one of the few network executives who is not afraid of TiVo and isn't particularly worried about recent deals by media rivals NBC and Fox. An edited transcript follows:

Time Warner is coming out of a pretty bad funk. But the operations in your portfolio for the most part have been doing pretty well all along.

It shouldn't just be limited to my part of the company. Time Warner Cable has been performing tremendously well throughout, as was HBO. You take that cumulative position, that means Time Warner's business in 2001-2002 were up 25%-30%. No other company is anywhere close to that. So that's exactly the period that both of us know as the "period of funk." And it's a period of tremendous performance across the company with the exception of AOL, which was starting to go down instead of this stratospheric thing that we expected.

The movie studios, the movie companies are doing record business, both Warner and New Line. The network companies, Turner and HBO and WB, are doing record business, whether it's earnings, whether it's ratings, whether it's new revenue sources, whether it's their strategic position. They're all in very good shape. Even the music company increased share and earnings two years in a row.

TNT is great, and HBO is doing well.

I'd say great. HBO has a new aspect of revenue growth, the sale of content: syndication, DVDs, on-demand, ancillary sales. Overseas sales of Band of Brothers. They haven't even sold Sopranos
yet. So the long-term strategy, creating this distinctive programming, not only drives the network subscription business of HBO, it then provides programming assets to sell.

HBO's networks do $2.8 billion or so in revenues. How much comes from DVDs and syndication on top of that?

We don't detail that. It's hundreds of millions of dollars. And I would note that other pay-TV networks lost fairly dramatically subscriber counts this year.

The Starz company is in quite a difficult long-term position because they were essentially being held up by an artificial and never-to-be duplicated affiliate deal with TCI that they never earned in a negotiation. And now Comcast has those systems, and it's been adjusted. It's going to dramatically reduce Starz' current revenues and profits and put a ceiling on its future position.

Your biggest basic cable channels are general entertainment networks, which are falling out of favor.

TNT is the No. 1-rated network in cable. It's either the No. 6 or 7 among all television networks. It's No. 1 in total day, it's No. 1 in prime, it's No. 1 in key audience demographics. It's getting increasingly a distinctive position of quality. TNT and TBS are related because they share a superior access to Hollywood films, which is a powerful part of programming for these general-entertainment networks. They're kind of called that erroneously. There's a bit of conventional wisdom floating around that says general-entertainment networks—I would call them "big ratings" channels—are not as desirable as niche networks. It's actually a more interesting and a better opportunity.

There are now five or six basic-cable networks that are, loosely described, aiming for that general, broad reach, trying to go for big numbers. Therefore, there's been a lot of ad inventory, keeping CPM rates relatively flat and not closing the price gap with broadcast networks. Well, as broadcast declines, which it certainly is, where's the audience going? It's not going to niche cable. It's disproportionately going to TBS or TNT. Why and where and who is that? What are the broadest-reach shows? Well, you have Friends, ER, Drew Carey, etc. Where are those shows? Turner.

Right. Except that, when I'm watching a new episode of Friends
on NBC, my eyeballs get sold for twice the price that they get sold for watching the rerun on TBS. Cable's CPM gap is getting wider because general-entertainment networks are considered a commodity. But a niche network like MTV gets pretty close CPM parity with, say, The WB.

But how many niche networks are there, 200? They don't all get CPM premiums. And they don't get any dollar volume. They don't have any reach. The money's not there. So, if you say, "Where's the money in ad-supported cable networks?" It's where TBS and TNT are, by and large. That's where the money is. And that's where the increases are going to be because that's where the audience is going to go.

And if you take the programming lineup at TBS or TNT and compare it to its alleged competitors, you'll see there is a real superiority in what TBS has. You take those killer series and then TNT's drama series, and increasingly its originals, and a huge inventory of Hollywood movies that none of the other networks have. TBS and TNT networks are going to differentiate themselves as higher-quality. You know how networks work: One thing can reinforce another in terms of flow and promotion. So having Sex and the City
come to TBS will strengthen Friends.

No other networks in cable have the access to that kind of programming that TBS and TNT have, not only now, but five years from now, because, if you look now at the television-production business, Warner Bros. has just done an unprecedented thing, selling 29 series in prime time, 50-55 in total. We have shows on all six networks. Warner Bros. has more things in the pipeline that can go, if appropriate, to our other networks. That's more than any other combination of studio and networks can put together. So there is real growing advantage in the Warner/New Line/Turner/HBO/WB combination.

It gives you a lot of leverage.

Well, you could sell the shows to somebody else. And in some cases, we will. We're not going to sell all the stuff we make to our own networks. Some of it may not match appropriately. We definitely want to be in the business of supplying the other networks with shows. We want our networks buying shows from other producers.

Now, it's true that, this year, seven new shows from Warner production are on WB. But we were absolutely trying to buy shows from other networks. And we did sell a couple of shows, very important shows, to other networks, because it's very necessary. If you look at the failure rate in television-series production, it always gets harder as the networks get tighter.

WB's reminding me a bit of HBO when it comes to developing programming. The WB is developing such a clear focus on the 12-34 demographic, doing so well, having so many young shows, developing writer relationships. Writers know where to go, to The WB Warner place, to try to make certain stories come alive.

That's a little different than if you're just in the business of making shows of every kind at some other TV production company and you're going to go over to ABC and try to sell it. If you're thinking, "All right, I know what that network, The WB, is," you can really create a kind of ecosystem, a community that knows what they're trying to do. That's the kind of thing HBO did, distinctive, defining television. TNT and TBS will soon be doing that also.

For years, though, they've done horribly at developing original products.

Witchblade
worked for a while, and then Bull
was actually pretty interesting.

But it failed.

And you know why? First of all, they weren't that committed to originals at the time.

Well, they claimed to be. They talked the talk.

If they weren't really committed, that isn't my fault. Every year is different, and we're getting to a time when there have been management changes at TBS/TNT and it's a far more focused company now. We have fairly successfully defined and programmed TNT to be very successful, and it's the No. 1 network on every measure: Prime and total day, it's got some clear definition.

That's not really true. The NFL always makes ESPN first during the fourth quarter.

But who cares? It's true for the year to date. ESPN's fourth quarter is not relevant to what TNT and TBS do. No one's going to repeal the football season. So, as you add distinctive original programming into a very strong lineup of off-network dramas or comedies on TBS or TNT, you have a better launching pad in the cable world than any other network. And that increases your chance of success.

So TBS and TNT are tops in viewers. Then why bother doing original series? Why make the investment and take the risk? Just do more of what's working: more movies or Law & Orders?

To add to the lead. It balances everything.

TNT has become very Law & Order-heavy: 11 evening hours Monday through Wednesday.

It's working very well. And, over time, they'll add more to them.

What is your assessment of CNN?

CNN's ratings for the year to date are the highest they've been in 10 years. That's true in total viewers, 25-54s, in prime time and in total day. CNN is also the only news network to grow in both prime time and total day in November. We've put a lot of new shows on, including Anderson Cooper and Paula Zahn. Maybe that's a one-month trend, but it's the first good indication of how the evening stuff is doing.

It's pretty complicated, the news business. You have the entry of Fox News into the category. They've had fairly high aggregate numbers in ratings, higher than CNN's. Those numbers for Fox are going down lately for the 25-54 category, across all the shows. They're losing younger adults and gaining older audiences. But they do have a high number.

What CNN needs to do is increase the time spent viewing by the many people tuning in. The issue isn't getting people to sample CNN; they go there. The issue is, when they go there, what is the right thing get them to decide to stay longer.

To some extent it's a fundamental question about hard news, which CNN is doing better than anyone else. Once you've seen what you came to get, you aren't necessarily hanging around to watch an interviewer go into the feature. That says something about the audience, what it wants and why it came there.

On the other hand, we don't have our heads in the sand at all. CNN has done, is doing and needs to do an ever better job at producing compelling television, telling the stories in an effective way. If people come and have an interest in news, we have an obligation to take that interest and bring you something. It may be more depth or length then you originally intended to stay for. That would be a real adding of value.

To do that, we changed the structure of the journalism side. For years, there was a newsgathering side that essentially put out a buffet for the producers, for the network schedulers, for CNN International or Headline News to take things from. We're now organized so that newsgathering works for CNN USA or International and there is more guidance, planning and direction from both the network chiefs and the producers saying, "I need more focus on this story or subject." Fewer hands touching it, more focus on the story.

I still see CNN as kind of adrift. Paula Zahn playing the cello isn't getting me to watch an extra 15 minutes. And then there's Laci Peterson, over and over.

I share some of your opinions. As for Laci Peterson, I'm personally bored of it. But that isn't true of everyone. Hey, those new shows are up. They're great, and there's some energy in them.

Are you happy with them?

Yeah. That doesn't mean we can't improve them. We're heading in the right direction. We have work to do at CNN—as we always have.

How do you feel about Fox News?

Fox is relevant. But this is not some sort of binary battle between CNN and Fox News. Think about it the way you should think about TBS and TNT. Where they compete, primarily, is against, NBC, ABC, CBS and Fox Broadcast. It isn't USA and A&E. That's where the money is.

CNN competes with network news. The ratings on network news is huge compared to Fox and CNN. I'm much more interested in getting viewers off that than off of Fox. The people that watch Fox have certain points of view they want to see, which is fine, and they want to see the long-form interview and host shows. We'll do some of that, but we're not going to spend our life aiming at that because that's not where the audience is. The audience is going to and coming off of the main broadcast networks. I think there are 30 million viewers of network news each night.

But if Fox viewers are watching twice as long, why not do what works for them? How do you keep the viewers?

Better stories, better production, better pacing.

TNT and TBS have paid big to get the first broadcast window for theatrical movies, from Warner Bros. and others. Has the return on investment paid off?

Those networks don't need that many first-available broadcast-window airings, given the money that it costs. Some of that is probably better matched up with broadcast-network economics. They probably should share more of those windows with broadcasters, particularly high–box-office movies. The broadcast nets probably ought to pick up a little more of it because they'll make money out of it. And the cable networks—I don't really call them cable networks anymore because they're not. Everything is a cable network. NBC is a cable network.

Some people get license fees from cable systems; some don't.

The good ones are getting license fees.

The WB is a bad one? Isn't 12-34 a bad place to be this month?

I think 12-34 is the absolute best place to be over the next number of years.

But they're down for the fall season.

Yeah, they are. And they've been dramatically, dramatically up every year for the last six years. They led the upfronts this year and had the highest ratings book last year. So, yeah, they're down, and everyone across all the networks is a little surprised. But, in the structural and strategic sense, WB is where it ought to be.

Do you think it's a Nielsen problem or a programming problem?

It's more of a programming issue for all of broadcast nets, including The WB. Then it is a Nielsen problem. I don't think it's a long-term problem for The WB. They're coming off a high base, and some of the shows may not have yet worked as well as they hoped. It would be better if they did, but we got some successes there, and it will continue to be a real success story.

After a career at pay networks, how is it overseeing a bunch of advertising-supported networks?

I don't get to write as many shows. I can't write the Sopranos
episodes anymore. (Laughs)

But you keep working on Sex and the City?

Yeah, I write all the key dialogue. No, seriously. It's a broader thing. The advertising television world is going through very big changes. Audience fragmentation. Big changes in deficit financing of series. Supply and self-producing of programming. Ad-skipping with TiVos and PVRs. There's a lot going on, and it's interesting.

Are you as terrified of TiVo and commercial skipping as Jamie Kellner is?

No. It will be a real change as you get consumers who can timeshift, schedule their own stuff and skip commercials. But there are economic needs of everyone involved. How is the audience going to get the program and support it, whether through advertising or payments? Advertising has to reach its audience. So I think there will be adjustments.

There are some hints from publishing. Certain high-end magazines, like Vogue, are all advertising. Readers aren't skipping the ads; they're buying them. It depends on the demo and the nature of the show. Look at movie trailers, which are a big part of Thursday-night advertising. People like movie trailers; they don't skip them. And they watch them over and over again. And young people don't skip fashion ads. So there are ways to make the ads. The extent to which people skip things is because they recorded it and watched it in playback. Are people going to tape the episode of Friends
on TBS and then skip the ads?

Sure, like crazy.

I don't know. It may take them a while. People use their favorite show and watch it again. They know it's on every night stripped; they just watch it in real time. They don't need to tape it every time.

Do you watch the commercials on your TiVo out of loyalty?

I do. But I watch them out of laziness.

So you're not worried about Time Warner Cable's Glen Britt's deploying 800,000 PVRs in the next two years.

I'm not worried. They won't have the ability to take the program and send it somewhere. And they won't have automatic commercial skipping. So that will happen, and the world of message-supported television will adapt to it.

So how do people put on good ads?

They'll do all kinds of things. Better ads, different PODs, embedding, product placements, sponsorships.

Don't you think product placement is pretty lame and affects the programming?

It does affect the programming, and it can only be done in certain cases without being a problem.

Are you upset that you didn't get a fee out of Manolo Blahnik for Sex and the City?

I personally refused to take a fee from Manolo Blahnik or any of the things mentioned on Sex and the City. There were various high-end products that sought placement. We said no. It has to do with what the producers and writers thought had integrity for those characters, and it's one of the reasons people got into the show, because they talked about the fads.

So why isn't product placement going to hurt broadcast or basic-cable networks?

It could depending on where, what, when. You're right if you're saying it has limited utility to replace interruption ads.

The traditional tensions between programmers and operators seem to be hitting new highs. Are you going to be able to increase your license fees at the pace that you have been? If not, how do you cope with that economically?

HBO will be and has been able to do that and did a mutually beneficial deal with Comcast with healthy rate increases.

Not as healthy as you'd like.

Well, we'd like 50%, if that's what you're saying, but it was healthy and in line with the historical and projected earnings growth of HBO. I'm not going to give a number, but HBO is doing fine, and I think Turner will do the same. Essentially, you have stronger and weaker networks. The reason HBO is a foundation service is there are very few high-priced digital packages that don't have HBO. And because there is so much loaded into those packages, there is a structural limit in cable—though not in satellite—on HBO unit-penetration growth. It gets replaced by price growth because HBO is driving $50-$70 packages for the cable operator. And, by the nature and price of that package, it won't get 50% penetration, so it has to be paid in general license-fee increases. Cinemax gets added into that.

As for the Turner networks, they're doing fine on renewals and price increases. I see our networks doing well basically in ratings, image and brand, and I don't think anyone is going to drop them. So I guess the tension you're referring to is certain things in sports.

It's more than just Cox and ESPN. Comcast is trying to whack all programmers.

This gets into what you do in the press and what you do in life. They're going to try and use their size to take money back from whomever they can get it from.

Are they getting cuts from networks?

From others. Yes. How much? I don't know. Not my fight.

Are they getting it from you?

By and large, no.

Let's talk consolidation. Your competitors are getting bigger and more integrated. Rupert Murdoch is getting DirecTV. NBC is buying Vivendi Universal. Does that hurt you? Does Time Warner need to go out and buy stuff?

Not for that reason. NBC/Vivendi raises the question, will NBC buy more programs from Universal and less from us. We sell quite well to NBC, and we just put in a record number of shows to all six networks. Will NBC/Vivendi crowd us out to a significant enough extent that it presents a particular problem? I don't think so. All of us, all the networks and producers, have figured out that you can do yourself real harm if you produce only for yourself.

Notably Disney and ABC.

Yes. Now, with Fox owning DirecTV's distribution, that's similar to us owning Time Warner Cable. Remember they only have 35% or so of DirecTV. Their interests are higher on the programming side, so they probably want DirecTV as an outlet. There's a little bit of defensive power to address their concerns that their programming over the long run will be treated well by US cable operators, of which we are one. That's OK. That doesn't present a tremendous challenge.

So you don't see it as a dramatic advantage for their networks and ones they would start over your networks.

We have 11 million cable subs ourselves.

That didn't help CNN/SI, which failed.

It shouldn't have helped. Subsidizing yourself in ways that's not repeatable across 100 million homes doesn't make any sense at all. There's no advantage to selling to yourself on terms that are not market terms that you would try to do with an unrelated cable company like Cox.

You have to make a deal that works for you financially on 10 operators, not just one.

If you do a special in-house deal, you've just figured out how to make your cable company pay for something it would never pay for. You've created a false profit in your network that will deceive you in underinvesting in what you need to do to make it work in the rest of the company. Do it as you would at Cox and use whatever the appropriate best deal is inside your own cable systems so you can keep track of where you need to invest and where your returns are.

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