Mid-size Cable Nets Dial Drop-dead Deals

Cable systems are signing up channels at a near-record clip. But it’s the mid-sized networks – Court TV, E! Entertainment TV, the Learning Channel, etc. – that are piling up the choicest dial positions.

Brand-new services such as the History Channel, Romance Classics and Outdoor Life Channel will have to fend for themselves on tiers that show up as scrambled images on a subscriber’s TV set, unless that household wants to pay extra to get them unscrambled.

First, the good news. The mid-sized networks, which include TV Food Network, Country Music TV and America’s Talking, are still celebrating a Federal Communications Commission “going-forward” ruling issued three months ago. This ruling in effect galvanizes cable operators to add six networks to expanded basic, where the mass-circulation channels like CNN, ESPN and USA reside.

Doing deals for expanded basic is key to the survival of mid-sized networks because they’re advertiser-supported and need to get into the homes of all of the subscribers of a given cable system to enhance their Nielsen potential.

“Advertisers want eyeballs,” says Debra Green, senior VP of affiliate relations for E!. And Green says the last two months have given E! an eyeball fest, with cable systems representing 2.2 million subscribers coming on board just since the first of the year.

Another going-forward celebrant, Bob Rose, senior VP of affiliate relations for Court TV, says, “From December ’94 through November ’95, we’ll add 8 million new subs based on the commitments we’re getting from cable operators.”

The mid-sized networks doing best under the new FCC rules appear to have three elements in common: Well-funded parent companies, programming that appeals to at least a portion of the cable operator’s subscriber base and a willingness to offer sizable discounts. Since most of the mid-sized channels seeking expanded basic have fat bankrolls and schedule interesting shows, the third factor will often make the difference in whether the cable system says yes or no to a deal. “In order to get distribution,” says Lynne Buening, VP of programming for Falcon Cable TV, a top 15 multisystem operator, “a network has to give cost concessions to the cable system.”

Although Buening declines to spell out which mid-sized networks play hardball on the rate card they use to enumerate monthly subscriber fees, other cable operators say FX, ESPN2, the Cartoon Network and the Sci-Fi Channel are the toughest negotiators.

“These guys would rather walk away from an expanded-basic deal than get into a war with competing networks over who can lower his rate card the most,” says one top 10 MSO exec.

Those four networks tend to slip down to the bottom third in numbers of subscribers that midsized channels have gained – or are expected to gain – as a result of the FCC guidelines. While insisting that the Cartoon Network is “competitive and aggressive” in trying to strike an expanded-basic deal with cable operators, Carter Maguire, executive VP of Turner Cable Network Sales, says, “We’ve got to worry about the integrity of our business. We know the value of our networks.”

Maguire adds that Turner’s Cartoon Network, and the two newer Turner-owned channels CNN Intl. and Turner Classic Movies, will be profitable even if most of their subscriber base comes from separately priced tiers with limited circulation, because “we own the programming” that runs on the three networks. Turner has bought some of the movies and cartoons from outside suppliers, but the bulk of the inventory is under the ownership and control of Turner Broadcasting.

But if Cartoon, CNN Intl. and TCM stay restricted (mostly) to what the industry calls new-product tiers, they may never reach the critical mass that would pull them into the media-buying plans of the advertising agencies.

And that’s the bad news. For the next year or so, “new networks are going to face extremely tough sledding,” says Bill Goodwyn, senior VP of affiliate sales and marketing for the Discovery Networks, whose mid-sized Learning Channel will harvest more than 6 million new subscribers from the going-forward blueprint.

New nets such as Home & Garden TV, Classic Sports Network, Independent Film Channel and the Game Show Channel are, with very few exceptions, not candidates for expanded basic because they haven’t established brand identity.

Court TV’s Rose says cable systems will be very careful about which networks they add to expanded basic because the operators will be hiking their subscribers’ bills by up to $1.50 a month. These subscribers wouldn’t take kindly, Rose says, to shelling out the extra tariff for six “untested” new networks.

But whether cable operators add new networks to expanded-basic or to new-product tiers, the industry is bullish about the trend. A just-published survey from the Beta Research Corp. reports the surprising figure that 70% of cable operators either have extra channel capacity right now or are planning to upgrade their systems to create capacity by the end of 1995.

Plus, a whopping 46% of the cable operators who are upgrading their systems this year say they’ll add 10 or more channels, according to the Beta survey. But it’s still unclear if operators will fill these channels with more ad-supported nets or with pay-per-view channels.

“It all boils down to how much money the cable operator can pocket,” says Turner’s Maguire. “That’s the bottom line.”