Leverage IsKey IngredientFor CableNetwork Startups

Programmers press rebrand strategy in tough environment

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RELATED: New Fusion Boss Ready For Launch

Revolt Will Be Televised

Why This Matters
There's much as stake as new cable nets seek carriage from operators who know there's no such thing as a sure thing.

New cable networks have been popping up all over the dial. The outbreak comes at a time when distributors are looking to cut costs and eliminate the channels they are paying for that subscribers are not watching.

Char Beales, longtime president of CTAM, the cable industry’s marketing association, says the uptick in new channel activity is cyclical. “If you’ve got differentiated content that people want to watch, it’s a good time” to launch a network, she says. “Consumers just want more.”

This month two entirely new networks plan to launch: Fusion, a joint venture of Univision and Disney’s ABC News, and Revolt, backed by Sean Combs. Robert Rodriguez’s El Rey Network is due by year-end. And Fox Sports 1, FXX and Esquire Channel have recently debuted.

Beales and other industry observers note that there are two types of new networks being launched. One is networks starting as a result of a rebrand, such as Fox Sports 1 being forged from Speed by 21st Century Fox, or NBCUniversal replacing Style Network with Esquire.

“We’ve seen Discovery do this on a number of occasions,” says Derek Baine, analyst at SNL Kagan. “They had affiliation agreements coming up and they wanted to be proactive and make sure that when they got to the negotiation table they didn’t have networks that an operator would want to drop because they had distribution but no ratings.” Thus were born networks such as Investigation Discovery and OWN.

Subscription fees can sometimes increase if a weak network is replaced by a stronger one. For Fox Sports 1 and Fox Sports, fees are going up, says Baine, noting that when OWN replaced Discovery Health, carriage fees grew from almost nothing to 20 cents per subscriber per month.

Starting from the ground up is harder. It’s even more difficult without the leverage of an established parent company.

“All of these networks now face a higher bar to get over,” says Mike Egan, a consultant who spent years making programming decisions for Cablevision. “The cable or satellite distributor is really not, for the most part, seeking a lot of new programming. They may be seeking certain niches that fit a strategic initiative.”

The Big Sell

Networks must first sell cable operators on a network before they can hope to attract viewers, says Catherine Rasenberger, a consultant who has helped launch 28 channels in 14 years. It helps a great deal if a new network is aligned with an operator’s strategic goals. Comcast, for example, must launch minorityowned networks as part of the deal with the government that cleared the company to acquire NBCUniversal. A network such as Revolt helps Comcast fulfill that obligation.

“Independent cable networks have zero leverage,” Rasenberger says, making organic growth very slow. That explains why Al Jazeera and Pivot each bought weak networks that already have carriage. Al Jazeera tried to launch a channel in the U.S. for years. Getting 40 million subs by acquiring Current, “they were able to quickly get to market and then they could start proving they were a network consumers wanted,” Rasenberger says.

From a financial perspective, Fox’s decision to launch Fox Sports 1 and FXX on the backs of less successful channels was an example of the best defense being a good offense, says David Bank, analyst with RBC Capital. “They had fully distributed channels that were at risk of becoming somewhat irrelevant in a world where there’s increasing pressure,” he says. Launching Fox Sports 1 meant a small increase in costs—about $100 million—that had the potential for $1 billion in higher affiliate fees.

“It sounds ridiculous, but it already feels like one of the most successful channel launches in history,” Bank says.

Investing in cable networks isn’t always a home run. Discovery had to pour $300 million into OWN before that network turned around. But Bank says a cable network will work if it has brand equity, distribution, content and the ability to leverage advertising and subscriber fees off a bundle of existing channels. “If you have just one of them, I think it can be a real challenge,” he says.

Starting from scratch is even tougher, he adds. “If you’re launching today without any carriage, you probably are asking yourself what’s the upside to a traditional television launch versus a digital platform,” he says.

In the Upfront

Cable networks need to be big to generate ad revenue. Rasenberger says that when Outdoor Channel grew from 25 million to 35 million subs, ad revenue increased because they were included in upfront buys more often.

Media buyers say cable networks need to reach scale before national advertisers will buy them. “Just because people are adding more networks and fragmenting the world even further, that doesn’t mean our standards have changed and now we’re lining up to buy 25 million home networks that aren’t measured,” says Gary Carr, executive director, national broadcast at TargetCast TCM. Carr says buyers keep an eye on new networks and sometimes will invest a few dollars in them if the target fits. If the new network is part of a big group, there’s horse-trading. “Maybe we do something with them that may help us with some of their better networks,” Carr says.

Evan Shapiro, president of Pivot, says the August launch of his network went off without a hitch compared to other networks that have faced repeated delays; he has since added AT&T as a distributor. Pivot focuses on millennials and “as a result advertisers and operators have embraced the idea that we can help them [figure out] this next generation of consumers.”

Shapiro points to innovative deals with advertisers Monster.com and Stonyfield Farms in which Pivot is helping them create content that helps the client’s marketing efforts. Pivot also launched an app to help operators build relationships with millennials who are broadband- only customers. DirecTV is distributing the app and other providers are expected to follow. “The Pivot app will help retain this next generation of pay TV customers and win over the broadband only subscribers,” he says.

Steve Bellamy, who founded the Tennis Channel and the Ski Channel, expects to launch his surf channel before the end of the year. “It’s going to be a lot bigger and cooler than we anticipated,” he says. The new channel will launch on VOD. “VOD is pretty much the future of any independent cable TV launch. The linear model is just too expensive, and the numbers don’t pencil out any more,” he says.

“With sports beating up the operators, the days of surviving off big subscriber fees are over” for smaller networks, Bellamy adds. “The days of independent networks are pretty much over. Any new growth will be on the Web. There’ll be tons of creativity on the Web. It’s just that no one pays for it.”

Cable nets still appear to be a robust business. “But when you start analyzing the numbers, you realize that a half-dozen companies are doing awesome and everyone else is floundering at the bottom,” says Baine. “Some of these channels launch with the hope that Viacom or somebody will buy them after a few years.”