In the TV business, ratings are supposed to drive the business. The higher the ratings, the theory goes, the more money you make.

But that theory doesn’t hold true in cable. E! Entertainment Television – the basic cable network known for shows such as “Talk Soup,” an irreverent look at talkshows, “The Gossip Show” and “Howard Stern” – usually a blip in the ratings book unable to crack a 1, has broken into the black after five years of losses.

Driving E! are increases in its dual revenue stream of ad revenues and subscriber fees and, lately, ratings growth. The basic cable web has added more than 6 million new subscribers in the last year.

The general rule among cable networks is that once you make that first profit, you never look back.

“We’re a year ahead of schedule,” declares president/CEO Lee Masters from his Los Angeles office. “Once you pass the break-even point, this is a wonderful business.”

While much of the cable industry continues to struggle, E! appears to be turning the corner on its five-year struggle to establish itself.

Not only has the cable industry been under the cloud of rate regulation for the last five years, but until the last two years, the ad market for all media was on the decline.

It was an incredibly vibrant business that stopped. As significant as our growth has been, the next five years will make this look like chopped liver,” declares Masters.

Circulation for E! is now at 31.2 million subs – 1.2 million more than what is considered the break-even point for a basic-cable network.

Masters and Debra Green, senior VP of affiliate relations, expect the network to add at least another 4 million subs this year. The network has clearly benefited from the FCC’s going-forward rules, which allow cable operators to add new services and increase rates. With Republicans now in charge of the House and Senate and looking to undo much of the rate regulations, E! and the rest of the industry are primed for further growth.

The improved circulation and the ad revenues that come with it have taken E! out of the loss column. According to reliable industry estimates, E! had an operating profit of more than $2 million on revenues of $65 million-plus.

After about $125 million in losses over the last several years, profits are good news to E!’s corporate parents. These include Time Warner (it owns 48%) and cable giants Tele- Communications Inc., Continental Cablevision, Comcast Corp. and Cox Cable, which each have a 10% stake in the network. E!’s value is now estimated between $250 million and $325 million – about one-third the value of a network, such as Lifetime, that reaches more than 60 million homes, and well over the $50 million E! was valued at a few years ago.

“The perception of the owners is that the network is hitting its stride,” says one board member.

It’s tough to find someone to say something negative about the channel. Programming chiefs at cable systems, usually quick to criticize the cable networks, are pleased with E!.

“I applaud E!’s efforts to be innovative in an industry that is often static,” says John Clark, VP of programming and marketing at MSO Crown Media. “There will be forays they will go into that won’t be productive, but at least they’re trying.”

The increased revenues are allowing E! to make some surprising moves on the programming front. The cable web surprised the industry last month when it acquired the off-network rights to the Fox hit “Melrose Place,” which Masters and programming chief Fran Shea will use to bring in new viewers.

“Melrose Place” didn’t come cheap. E! is said to be paying a hefty $200,000 per episode for 100-plus installments of the Spelling primetime soap, which will make its premiere on the cable web in fall ’96.

With the acquisition of “Melrose Place,” many in the syndication biz expect E! to be a bidder for other shows, including “Picket Fences” and “X-Files,” but don’t count on it.

“Our intention is not to add a lot of syndicated product,” says Masters. “We were looking for an anchor show that would work for our young female demos and the only show there was ‘Melrose Place.'”

E! also has a deal with Brandon Tartikoff that allows the New World Entertainment chairman use of E!’s production facilities as a testing lab for new shows and gives the network original product. E! is looking to strike similar deals with other producers in an effort to supply the network with new product while offering the freedom to producers to shop their shows from E! as well.

While the “Melrose Place” acquisition got E! attention, its decision to cover the O.J. Simpson trial gavel-to-gavel is an even greater risk.

The decision of a network whose primary focus is the entertainment industry to cover a double-homicide trial seemed certain to lead to scrutiny from media critics. So far, though, few E!-bashers have emerged. At the Television Critics Assn. press tour last month, Shea argued that the network would not trivialize the trial and pointed out that E! can’t take the blame for turning the trial into a media circus.

While academics can debate whether it’s proper coverage of a murder trial to have news-woman-turned-pitchwoman Kathleen Sullivan read faxes about the trial from viewers on the air, or compare what the lawyers are wearing, the gamble is paying off for E! in terms of viewers.

“On the merits, it’s a tough call,” says one cable industry insider. “In the past, when the stuff was on, CNN and Court TV covered it and E! viewers disappeared.”

“They had to cover the O.J. trial,” adds another observer. “It’s a smart move.”

Since covering the trial, E!’s sign-on-to-sign-off has averaged a 0.31 compared to its 0.2 before the trial, according to Nielsen. Ratings during daytime have jumped from 0.2 in E! homes to 0.5, and last week E! posted a 1.8 during one afternoon of coverage compared to its usual blip. The boost from the trial is trickling into primetime, which has seen ratings gains from a 0.3 to a 0.6. On Tuesday, Jan. 31, E! broke a 1.0 every quarter-hour from 5 p.m. to 7 p.m. and at one point last week posted a 2, according to Nielsen. A cable rating point represents 1% of E!’s total universe of 31.2 million homes.

CNN and Court TV have seen even larger jumps in viewership since the trial started, but Masters points out that viewers know to turn to those channels for the trial and expects E!’s numbers to grow.

“We did it to protect what we have and bring in more viewers, and it’s worked,” says Masters. “Court TV loses viewers whenever a trial is over; our viewers stay.”

While much has been made about E!’s programming moves for the network, Masters is also looking very hard at taking E! shows into the syndication market.

“Syndication is very much in our future. We get a lot of unsolicited interest from syndicators and there are a lot of opportunities,” says Masters.

Last summer, E! inked a deal with Columbia TriStar Television Distribution to distribute the net’s daily entertainment news show “E! News Daily.” The hope was to launch the show nationally, but when Warner Bros, decided to rollout “Extra – The Entertainment Magazine” to compete with Paramount’s “Entertainment Tonight,” E! held off even though its plans were in the works well before the studio’s.

Masters says “The Gossip Show,” in which the nation’s leading dishers dish, is getting a lot of interest, as are the network’s one-hour specials on the entertainment industry. Two networks are talking to E! about licensing some of its specials.

E! already has a deal with NBC to provide entertainment news for the Peacock web’s news feed to affiliates. “We get the promotion and ad inventory valued at $6 million,” says Dale Hopkins, E! senior VP, marketing.

Entering the syndication biz could create problems for E! with cable operators if the syndie product takes viewers away from the network. But Masters is betting that syndicating E! shows would only create more awareness of the network and enhance viewership. If it does turn out to have a negative impact, making a decision will be easy.

“The syndication licensing business is good but the money pales compared to the cable network,” explains Masters.

Programming packaging is also El’s plan for the international market, which accounts for 10% of the network’s bottom line. While other domestic cable networks are busy launching new networks abroad, E! is content to sell its programming and not deal with the startup costs of a new service.

“Between 1993 and 1994 we tripled our international revenue,” says Chris Fager, senior VP, business and legal affairs. “We’re not so much interested in creating networks, which is an investment opportunity. Our strategy is to earn revenue.”

E! has more than 50 international clients, according to Fager, including Sky Channel in the U.K., Star TV in Asia and Orbit in the Middle East.

The cable network also produces shows strictly for the foreign markets, often around films whose domestic box office appeal may be limited. E!’s programming reaches 150 million viewers in 120 countries, according to Fager.

It’s not all a bed of roses for E!. While the cable web has broken the 30 million barrier in subscribers, Masters and affiliate chief Green know it will never hit the 60 million-plus mark of older networks, including MTV and USA.

“It will be very tough,” concedes Green. “But 40 million to 45 million is very realistic.” E! charges operators 10¢s; per subscriber with a 1¢ increase annually. That is considerably lower than other networks and has played a key role in El’s tremendous subscriber growth.

Masters is confident that while cable growth may be limited, the entry of direct broadcast satellites and the telcos will further E!’s reach.

“Right now, cable penetration is at 60% of TV homes. When the telcos get in, penetration for all multichannel homes will be at 80% to 85%. That is the upside.”

Even the loss of E!’s most famous homegrown personality, “Talk Soup” host Greg Kinnear, to the silver screen and NBC hasn’t hurt. Ratings for the show are actually up with new host John Henson – obviously a beneficiary of its Simpson leadin, making it clear that lawyers aren’t the only ones benefiting from the trial.

As the ultimate sign that it has crossed over to the land of the profitable, E! this month started scrambling its signal to cut down on theft.

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