Telcos Take Topper For Tv Turf Tussle

Howard Stringer has his work cut out for him.

As the new president of the media-technology consortium of Creative Artists Agency, Nynex, Bell Atlantic and Pac-Tel, Stringer’s essential mission is to convince Americans to cancel their cable subscriptions in favor of an alternative service delivered by each of the three telcos.

That’s not the only tough sell: The service will need a secondary revenue stream from the skeptics on Madison Avenue. Stringer anticipates a world where advertisers will be able to niche market products to a specific target audience.

Customers “are not going to want to see the kind of regular advertising they are currently forced to see on television,” says Stringer, who exits his job as president of CBS Broadcast Group this week. “It’s a new opportunity for advertisers to reach the consumer in targeted ways.”

The service could readily expand the already growing business of direct marketing, where the line between advertising and entertainment is becoming blurred. On the MTV show “The Goods,” viewers watch what appears to be a documentary about a band but in reality is an effort to sell T-shirts.

But the telephone companies envision using their powerful databases to hone in even closer on their customers.

First, of course, they have to sign up those customers. Blair Westlake, executive VP of the MCA Home Entertainment Group, says the telco-CAA alliance has told him that over the next decade it’s projecting that one-third of all cable subscribers will make the switch. If the Baby Bells fall short of that “ambitious” forecast, Westlake says, the media company could end up in deep financial trouble.

The telcos are counting on at least two advantages as they start the process of “overbuilding” cable systems in communities throughout the U.S.:

* High-tech interactivity that will allow subscribers to navigate through a video shopping mall offering everything from movies and TV series on demand to sophisticated home shopping to betting on a horse race, all at the touch of a button on the remote.

* New movies, specials and even series that Stringer, with guidance from CAA chairman Michael Ovitz, would commission from the major studios and other production companies for exclusive use. Since the telcos plan to buy the rights to all of the TV stations and cable networks that cable systems sell in various packages to their subscribers, this exclusive programming could make up a solidly promotable trump card.

Telco execs say they’d funnel interactivity to people’s homes sooner than cable systems for two reasons.

The first is that interactive services are just an extension of the switching technology that allows people to make phone calls.

Second, the huge financial resources of each Baby Bell dwarf those of even the biggest cable operator, so the telcos would be able to shoulder more easily the multibillion-dollar cost of laying the fiber-optic cable to accommodate interactivity.

But Marc Nathanson, chairman and CEO of Falcon Cable TV, atop-15 multisystem operator, says, “Cable operators already have the broadband lines in place.” Thus cable upgrades, while not cheap, would be far less expensive than telco rebuilds.

Observers predict the telcos will engineer their first overbuilds in markets where the cable systems are so underfunded that they’re years away from even thinking of testing the interactive waters.

But the question remains whether phone companies would be willing to spend the billions for interactivity on the hope that subscribers would gleefully embrace the new technology and launch their monthly bills into the three-digit stratosphere.

And as for the telcos’ promised exclusivity, Nathanson says: “No court in the land would uphold the argument that such powerful monopolies as the phone companies could get exclusive programming – particularly when the government says that cable operators cannot withhold any programming from their competitors.”

Nathanson is referring to the Cable Act of ’92, which prevents systems from buying exclusive rights to cable networks in their areas.

But various telco sources say they’d use the legal argument that each cable system is a monopoly in its community, and the only way for a new service to compete is to offer programming that a subscriber can’t get through cable.

Programming priority

Exclusive programming could become an early priority of Stringer’s because “interactivity is at least three or four years away,” says Bill Bluestein, a telco analyst at Forrester Research. He cites the out-of-control costs of interactive technology and says the telco-CAA alliance could very well decide to buy a network like CBS because “the media of today are where Stringer is going to have to operate in until 1998 or 1999, at the earliest.”

To some industry leaders, all of this speculation is jumping way ahead of the known facts. Bill Mechanic, president of Fox Filmed Entertainment, says he regards the Stringer appointment as a plus for Fox simply because “he offers the prospect of another buyer for our product.” And while this new buyer would be “competitive” to cable, direct-broadcast satellites and to video stores, “it wouldn’t drive any of these businesses away.”

“The pie will only get bigger,” adds Bob Friedman, president of New Line TV, although he goes on to acknowledge that if the telcos’ programming service carved out a lucrative niche it would inevitably reduce the market share of some of its competitors.

The bottom line for Hugh Panero, president and CEO of Request TV, the largest pay-per-view distributor, is that “CAA has hired a talented guy in Stringer who’ll have to balance the hyperbole of all of the things the media company wants to do on the information superhighway with the reality of long technological delays and heavy telco bureaucracies.”

The hiring of Stringer will if nothing else bring a huge amount of publicity to the yet unnamed company. And it puts another feather in the cap of CAA’s Ovitz.

Ovitz and Stringer became close when the CBS Broadcast Group president successfully lured CAA client David Letterman away from NBC to the Eye Web.

“It puts another person in the CAA pocket,” said one high ranking industry exec.

The venture also lines the agency’s pockets with money.

The monetary interest

Although Stringer and the telcos insist that CAA does not have an equity stake in the company, insiders say the agency does indeed have some sort of interest in the company.

According to Hollywood guild rules, an agency can – in lieu of commission – take an interest of 10% in a production. In this case, the value of that 10% would continually increase with the success of the venture, resulting in an extremely lucrative deal for CAA.

“I think we are in consultation,” says Stringer, “and it is a business arrangement as well as an entertainment arrangement. They are not equity owners in this venture. They are consulting on the navigator, marketing and branding and generally advising.”

Stringer adds, “it’s not just CAA clients that we will be going to; but we have to build the earth and the sky before we put the stars into it.”

The hiring of Stringer, while certainly an attention-getter, has many wondering what the 30-year CBS veteran brings to the venture besides stature. CBS is the only network that has not gotten involved in cable, a strategy that has been roundly criticized by Wall Street.

But that won’t matter, others counter.

First footprint

“This is the first major footprint on this moon. Everyone else has been limping around,” says Lee Rosenberg, senior VP of television at William Morris.

“This has been put together very wisely. I think hiring Howard Stringer was the best possible move that the consortium could have made. And were they to acquire a network or a strong interest in a network, he would be invaluable.”

Pacific Telesis Group chairman and CEO Phil Quigley denies the consortium is interested in acquiring a network. But Stringer couches his response, saying “there is a lot of potential for alliances. It’s too early to say who or what or when, but we don’t want to close any doors.”

While the CAA-telco venture moves forward, Walt Disney Co. is still trying to finalize its agreement with Baby Bells Ameritech, Bell South and South western Bell.

Last summer, Disney heralded its planned union with the Baby Bells but as of yet, no agreement is in place. So far, Disney has only acknowledged that it will be involved in the creation of building a navigator for the telcos. It remains unclear whether Disney will also work to provide exclusive programming to the phone companies.

An Ameritech executive said last week the telco is “optimistic” that a final agreement will be reached.

Anita Busch in Hollywood contributed to this report.

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