Disney plans new TV model

Oct 7, 2002  •  Post A Comment

Faced with pressure from Wall Street to offset an unprecedented $584 million in estimated losses at the ABC TV network in the just-ended fiscal year, Walt Disney Chairman and CEO Michael Eisner says he has devised a plan to stop the bleeding at ABC, save his job, and create a new business model that could mean the demise of the broadcast TV network model as we know it.
His strategy? To create comprehensive horizontal integration of the management, programs, resources, marketing and advertising of ABC’s primary dayparts and Disney’s corresponding niche cable networks.
Part of the plan, according to executives with knowledge of the discussions, is the eventual bundling of national advertising sales for ABC prime-time programming and ABC Family Channel.
Disney already combines ad sales for ABC Sports and ESPN, and to a lesser extent, ABC daytime and SoapNet.
One key to the plan is the repurposing of programs on the various Disney-owned outlets.
Sorting out the logistics of repurposing programs will largely become the task of three brand czars who will be appointed soon to oversee the closer alignment of ABC prime time with ABC Family, ABC daytime with SoapNet and ABC Saturday morning with Disney Channel, Playhouse Disney and Toon Disney. The model will be the successful gradual integration of ABC Sports and ESPN’s cable services under the command of George Bodenheimer, ESPN president, who already is functioning as ESPN brand chief.
A possible internal candidate to be the brand czar for ABC prime time and ABC Family, according to some familiar with the discussions, is ABC Television Network President Alex Wallau, who would continue to report to Disney President and Chief Operating Officer Bob Iger. Mr. Wallau received a major internal boost earlier this year when Steve Bornstein was ousted from the company.
Anne Sweeney, president of ABC Cable, will likely be appointed to oversee all of the Disney-branded television channels and product, including SoapNet, sources said.
Disney officials declined to comment on any potential management restructuring.
The $584 million loss figure was calculated by Morgan Stanley Dean Witter analyst Richard Bilotti.
He estimates the ABC TV Network also will lose more than $500 million in fiscal 2003, reflecting a weak economy, escalating program costs, an absence of off-network syndicated revenues and struggling ratings-factors that ultimately make the forecast an indictment of the old stand-alone broadcast network model. By comparison, ESPN, with its dual revenues, is generating an estimated $700 million in cash flow, and even ABC’s owned TV stations generate more than $400 million in annual cash flow, analysts say.
Pressure’s on
“The whole point of our strategy is the marriage of dual-revenue cable services with a 110 million-home broadcast network being run together with the same management, sharing creativity and research and development,” Mr. Eisner said at Goldman Sachs’ Communacopia XI media conference in New York Oct. 1.
“A national duopoly of dayparts and platforms means we no longer think about the ABC Television Network alone,” Mr. Eisner told attendees at the conference. “We think of ABC Sports and ESPN in the same breath. We think of ABC prime time and ABC Family in the same breath. We think of ABC daytime and SoapNet in the same breath.”
“This represents an important step to reconciling the economic changes broadcast networks have undergone and how operating these businesses has to be different in the future if they are to survive,” said Spencer Wang, analyst at JP Morgan, who heard Mr. Eisner’s new game plan during a private meeting with JP Morgan analysts on Sept. 30.
“While the ABC broadcast network will remain Disney’s primary broadcast programming mechanism, the company clearly will use ABC’s various daypart programming to create and strengthen national cable program platforms,” Mr. Wang said.
But it will take time and luck to implement. Both are in short supply for Mr. Eisner and ABC. Mr. Eisner has been given one year by Disney’s board of directors to reverse ABC’s fortunes.
A big part of Disney’s new strategy hinges on the repurposing of programs in their original state or some modestly altered form-a practice that has become more prevalent and controversial for all media companies. The two examples Disney officials use in illustrating their strategy are “Bachelor,” which was modified slightly before a second broadcast on “ABC Family,” and “Monk,” which airs in its original form on USA Network and then is repeated on ABC prime time.
Disney is in negotiations with ABC affiliates to expand the limits of how much ABC TV Network programming it can rebroadcast on its cable platforms, which is held to 25 percent in prime time but can be as much as 100 percent for daytime. (See story on Page 2.)
Disney already is catching flak from cable and satellite operators, who complain about paying hefty carriage fees for cable services that increasingly include repurposed programs off the broadcast networks.
`Not about repurposing’
However, Disney executives point to USA’s rebroadcast of NBC’s “Law & Order” franchise series as being lucrative for all concerned.
“This strategy is not about repurposing, although that is a component,” Tom Staggs, Disney chief financial officer, told Electronic Media. “It is about operating these businesses and thinking about them on a horizontal basis to maximize what we have. It’s not about one being helped at the expense of the other.”
“We have distribution platforms that, when they are coordinated, allow us to be more effective at developing programs that can be leveraged across those platforms. Series have a better chance of succeeding because they have different ways of finding their audience,” Mr. Staggs said.
Some analysts agree that multiple use of programs is an economic imperative.
“Spreading the cost of producing one hour of prime-time programming across two hours on two different platforms is the only way the math works anymore for these guys,” said Christopher Dixon, analyst at UBS Warburg.
Although Disney executives decline comment on specific economics, sources say a series produced for ABC TV Network might cost 30 percent less if it is also broadcast on one of Disney’s cable networks, with expenses being handily offset by cable’s dual revenue streams.
If Mr. Eisner succeeds in fully carrying out his plan, which is likely to take several years to implement, it could mean the end of stand-alone broadcast TV networks such as ABC-once considered the apex of the television world.
Despite bullish comments to the contrary from Disney, Viacom and News Corp. executives last week about the state of television advertising, analysts remain wary of whether the recent uptick in ad spending is sustainable-an issue that is particularly critical to Disney and ABC.
Prudential analyst Katherine Styponias on Friday reduced her revenue and earnings estimates for Disney’s broadcast and even cable networks based on a “more tempered advertising outlook,” defying more bullish ad sales forecasts from Disney and its competitors Fox and CBS last week. She noted that niche and general cable networks also are finding their advertising and subscriber fees are also being challenged. Disney’s media networks unit, as it is called, contributes about 40 percent to Disney’s overall revenues and cash flow.
Ms. Styponias also said she does not expect Disney’s weakening theme park and film operations to be able to offset declines in its cable and broadcast network operations in 2003, as in the past.
Indeed, Mr. Eisner’s “national duopoly network” plan will not solve all of Disney’s problems.
Mr. Eisner confirmed last week that the company is seeking to sell its professional sports teams (valued at about $350 million) and its radio stations and networks (valued at about $3 billion) as it continues to miss quarterly earnings and revenue targets.
Competitive disadvantage
But Mr. Bilotti pointed out in his report that “Disney’s commitment to decreasing leverage is
the most significant obstacle to its ability to expand its asset base or to reinvest internally for the next 18 months.
“The company has been pursuing a strategy of repurposing programming onto its cable networks. However it has not been able to purchase television stations and build duopoly markets.” He believes this places the company at a competitive disadvantage relative to its key competitors-Viacom and News Corp.
Disney has been prevented from moving faster with its new plan because of existing individual personnel contracts and union agreements, sources said. Although company executives say the plan does not initially call for any radical streamlining of personnel or operations, a streamlining would eventually be accomplished as broadcast and cable network operations become seamless.
The “national duopoly” strategy also has been the impetus behind joint venture talks between ABC News and CNN, behind Disney’s acquisition of Fox Family for $5.2 billion last year, and behind broader preliminary discussions between Disney and AOL Time Warner on other ways they can align their operations to save and make more money, sources said. Those talks have led to speculation that Disney and AOL Time Warner might merge, which officials from both companies deny.