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A&E Nets Faces Uneasy Future

Sep 29, 2003  •  Post A Comment

As A&E Networks nears its 20th birthday this December, there is growing unease about what the future may bring for the group of three basic cable networks that has earned a lot of critical praise over the years.
In the past year, as a discussion among the three major investors about a plan to break up the company fizzled, A&E has been left as one of few major cable programmers not tied to a larger corporate group, a significant disadvantage in today’s market. Bigger players regularly use their combined muscle in ad sales and promotions and to win key retransmission agreements.
The partners in A&E are big, but they are not playing the same kind of role as with wholly owned properties. The major investors are The Walt Disney Co. (37.5 percent), Hearst Corp. (37.5 percent) and General Electric’s NBC (25 percent). Since none has a majority, A&E’s longtime management team-headed by President and CEO Nick Davatzes and Executive VP Whitney Goit-has enjoyed an unusually high degree of independence over the past two decades.
Tom Rogers, who represented NBC on the A&E board in the 1990s, praised Mr. Davatzes: “Given the underlying partners, it is remarkable that Nick has held the partnership together so well, without significant issues and conflicts.”
However, in an era of consolidation, questions remain whether A&E will stay independent. Many analysts doubt that it can in the long run. One problem that must be addressed quickly is that A&E today has one of the oldest audiences in cable. The average viewer is 59, which is considerably higher than the 18 to 49 and 25 to 54 demos advertisers chase. “It’s one of the bigger challenges we face,” Mr. Davatzes acknowledged in an interview with TelevisionWeek.
This past year, for the first time in the history of the partnership, sources said, A&E has not achieved the fiscal results expected by the owners, causing concern among them.
Ray Joslin, president and group head of Hearst Entertainment and Syndication, who is on the executive committee overseeing A&E, acknowledged A&E has not met the board’s financial goals. He cites as a reason the overall U.S. advertising downturnand the fact that A&E is already very widely distributed, which means it does not have as much room to grow its distribution.
Profit margins off the roughly $1 billion A&E Networks is slated to produce in revenue this year, once solidly 40 percent, have fallen to about 35 percent. While A&E is still highly profitable and delivers solid free cash flow returns to the three partners, that kind of decline could put in doubt its future as an independent.
The three partners held informal discussions earlier this year about breaking up A&E. Sources said neither NBC nor Disney is willing to let the other buy it out. The compromise proposed was to have Disney take over the A&E channel, while NBC would take the History Channel. Hearst, which would have taken a minority stake in both, apparently saw little benefit in such an arrangement and vetoed the split. According to an executive familiar with the partnership contract, there is no “buy/sell provision,” meaning that a change in equity ownership would have to be approved by all three partners.
Besides the regular A&E board, the three investors also have an executive committee that meets to discuss strategic matters, including equity changes. This committee comprises Anne Sweeney, president of ABC Cable Networks; NBC Cable President David Zaslav; and Hearst’s Mr. Joslin. However, no workable new structure has emerged so far, and talks have stalled over valuation and control issues. A proposal by A&E management four years ago to do a public stock offering, which would have allowed the equity owners to cash out if they wished, was quickly quashed by the investment partners.
“If there’s change, there’s change,” said Mr. Davatzes, who has enjoyed an unusually long tenure in his job. “There has been a lot of speculation. I can tell you this: All of our partners would like to have it all.”
Mr. Joslin acknowledged there has been a lot of discussion concerning possible realignment of the A&E partnership. However, he denied anything will happen soon.
“There’s always conversations, but no deal has gotten so far along as to be really serious,” he said.
Mr. Joslin and Mr. Davatzes both joke that they haven’t even taken a look at the finer details of the partnership agreement “in about 150 years.”
According to sources, NBC has assured A&E’s top management tier that it has too much on its plate right now to be seeking major change in the near term. Through spokeswoman Alyssa Donelan, NBC Cable had no comment. Eric Hollreiser, a spokeswoman for ABC Cable, said: “We are always looking for ways to strengthen the business but we can’t comment on any specific discussions.”
Others believe that once NBC digests Vivendi’s U.S. entertainment assets, it will look to expand even more. “NBC is on a tear now and sees the wisdom of spreading the wealth across as many compatible networks as possible. Don’t be surprised if you see A&E come into the new entity NBC is setting up with Vivendi Universal,” said Porter Bibb of Mediatech Capital.
For most of its history A&E has been highly profitable and enjoyed good ratings with high-quality programming that lived up to its latest tagline: “The Art of Entertainment.” The A&E channel has carved out a niche with an emphasis on three genres of programming: biography, documentary and drama.
The problem is that the market is changing rapidly, even as new competitors such as Trio appear and existing entities such as Bravo relaunch with notable success. That has led to erosion in A&E’s viewership.
According to data supplied by Nielsen Media Research, over the past year A&E’s prime-time household rating has fallen to 0.8, with a 1 share (for the period Sept. 23, 2002, through Sept. 23, 2003), with the network being watched in 880,000 homes in prime time. That contrasts with the same period in 1999, when A&E was scoring a 1.1 rating in prime time, and a 2 share. While 1.3 million people were watching A&E in prime time in 1999, today 1.1 million are.
One reason for this erosion is fairly clear-A&E has been copied to death. While “American Justice” is a pioneering show, its success has been duplicated endlessly, on Discovery, Court TV, The Learning Channel and other outlets. The “Biography” format has morphed into E!’s “True Hollywood Story,” VH1’s “Behind the Music,” Lifetime’s “Intimate Portrait” and even an MSNBC series, “Headliners & Legends.” “It’s nice to be cloned, but it’s like breaking a story [as a journalist] and having somebody else make a movie out of it,” said the Chicago-based Bill Kurtis, host and producer of “American Justice” and producer of A&E’s “Cold Case Files.”
Abbe Raven, executive VP and general manager of the A&E Network itself, acknowledged that her primary goal is to attract a younger audience.
“I have crafted a new vision, a new contemporary approach,” she said, noting there are about 30 pilots in development. She proudly points to current shows such as the British co-production “MI-5” as the direction the network is headed. It is a younger-skewing police drama.
A&E also beat out heady competition to acquire basic cable rights to the hit drama “CSI: Miami,” which will air starting in 2005, at a price considerably above what A&E has previously paid for off-net fare. (The loss of another off-net drama, “Law & Order,” a top 10 cable show now on TNT was a grievous blow to the channel.)
Ms. Raven said “Biography” is now featuring younger subjects such as Russell Crowe. A&E had a John Ritter “Biography” on the air the day after he died, she added, indicating a timely responsiveness not previously associated with the network.
A&E also has struggled to follow up “Biography” with another strong original franchise. “A&E needs to come up with a new signature show, which is the hardest thing to do in TV,” said Larry Gerbrandt, analyst at Paul Kagan Associates.
Andy Donchin, senior VP and director of national broadcast at media bu
yer Carat North America, added, “We’re a big supporter of A&E. We spend a lot of money with them, and we would like to see them re-establish their brand.”
A&E investor NBC has recently demonstrated what can be done. It has helped launch a hit, Bravo’s “Queer Eye for the Straight Guy,” through promotion on outlets such as “The Today Show,” “The Tonight Show With Jay Leno” and “Will & Grace.” Moreover, because of cross-promotions and other tools, large consolidated network groups now possess the power to virtually remake cable channels at will. Viacom, in an impressive move, lowered the age of the average viewer on Spike TV (formerly The National Network), from 57 to 37.
As a result of this marketing and promotion clout, the four biggest consolidated cable network groups (Fox, Disney, Viacom, Time Warner) completely dominate basic cable. In the week of Sept. 8 to14, as listed in TelevisionWeek, only one show came from a network that is not part of these groups. And that was an original movie on Lifetime (which has a simpler ownership structure, shared equally by Hearst and Disney).
Larry Divney, CEO of Comedy Central and a former A&E executive, cautioned that concern about retransmission clout and cross-promotions offered by being part of a large group can be overemphasized.
Mr. Davatzes likes sports metaphors, and he offered one to explain why A&E can prevail in a heavily consolidated world. “Look at all the money that the Yankees have, and you know they will be in the playoffs,” he said. “But the Mets [who are not doing well this season] spend just about as much money, and look where they are.”