Sale of Comedy Central Stake Sure Is No Laughing Matter

Comedy Central was such a joke after it launched in 1989 that to stay afloat the cable channel had to merge the following year with its competitor, Ha! The Comedy Network.

Nobody’s laughing anymore.

After struggling for years to carve out an identity for itself, the channel has struck a chord with such offerings as the foul-mouthed cartoon “South Park,” reruns of “Saturday Night Live,” Jon Stewart’s “The Daily Show” and “The Man Show,” with its trademark flirty young women bouncing on trampolines.

As early as today, AOL Time Warner Inc.’s 50% stake in the comedy channel is expected to be snapped up by the network’s partner, Viacom Inc., for as much as $1.2 billion. AOL is selling reluctantly to pay off crippling debts.

The high price Viacom is willing to pay for Comedy Central is a testament to how precious cable channels have become as entertainment companies battle maturity and slower growth. These channels are the workhorses of the entertainment industry while Internet pirates plunder music sales, terrorist threats decimate theme park attendance, and soaring production and marketing costs keep moviemakers on edge.

As a result, they are prized by hungry media titans who already have gobbled up everything from studios to book publishers.

“It’s still the best segment of the business,” said Frank Biondi, the former chief executive of Viacom and an investor in one of the newest cable entries, the Tennis Channel. “The question is, ‘How much growth is there left?’ ”

Today, every major media company relies on cable programming as a locomotive.

The 6-year-old Fox News Channel, now the nation’s favorite cable news source, is expected to drive News Corp.’s growth for some time. And cable networks, led by ESPN and the Disney Channel, are one of the bright spots for Walt Disney Co., which is reeling from weakness at ABC, sluggish theme park attendance and the biggest flop in its movie history, “Treasure Planet.”

At Viacom, Chief Executive Sumner Redstone kicks the tires of virtually every cable channel that comes up for grabs. His No. 2, Mel Karmazin, has even tried, so far unsuccessfully, to persuade AOL to sell CNN, salivating over potential savings of an estimated $200 million by combining the cable channel with Viacom’s CBS News.

The future was foreseen by only a handful of entrepreneurs.

In the 1960s and ‘70s, when ABC, CBS and NBC controlled 90% of TV viewing, cable operators wired America simply as a way to provide better reception to the three broadcast networks.

Cable channels weren’t economical until such pioneers as CNN founder Ted Turner and Gerald Levin, the fallen architect of the AOL Time Warner merger, figured out that new satellite technology could be used to send signals to cable systems across the country.

Time Inc. was early on the scene, launching HBO in 1972 with a Pennsylvania polka contest. Other early entrants were Turner’s WTBS, which debuted in 1976, and Nickelodeon and ESPN, unveiled in 1979.

Cable operators soon jumped in -- and still own stakes in channels including Discovery, Animal Planet, Golf and E!

By the 1990s, hundreds of channels were available on cable. Their value surged as a majority of Americans subscribed and as a new technology -- digital satellite -- made pay TV even more popular.

As viewers migrated from the major networks to cable channels, national advertisers got serious about spending money to reach them. Cable channels allow advertisers to reach a more targeted audience than broadcasters, which bring in the masses.

More than 80% of American households now subscribe to satellite or cable services, compared with 59% in 1990. Cable advertising revenues ballooned to $14.5 billion in 2001, up from $2.5 billion in 1990, according to Kagan World Media.

As cable operators have upgraded their systems to carry more channels and compete with the digital offerings of satellite TV, channel choices have doubled, to about 290 today, with increasingly targeted programming. Now, there are networks for Filipinos, Vietnamese, Greeks and Russians, for pet owners, outer space lovers, western movie buffs and soap opera fanatics.

It wasn’t long before media giants with Hollywood studios and broadcast divisions became avid buyers, recognizing that cable channels provide an afterlife for output from their production factories.

Time Warner bought Turner Broadcasting in 1996, for example, bringing together a leading studio with cable outlets such as TBS, TNT and Cartoon Network. Today, reruns of “Friends,” which is produced by Warner Bros., are keeping TBS at the top of the ratings chart. The studio churns out animation for the Cartoon Network, which also draws on Warner Bros.’ Looney Tunes library.

The channels are also a remedy to runaway production costs, allowing broadcast networks or studios to reap more rewards by showing programs on more than one outlet. Disney paid a record $5.2 billion in 2001 to buy ABC Family as a secondary venue for the TV shows it makes for its ABC network.

Cable’s superior economic model continues to be the envy of broadcasters. Cable networks typically spend less on programming. And unlike broadcast networks, which rely solely on advertising, cable channels have an additional revenue stream from subscription fees. Those economics help explain how ESPN and TBS outbid NBC last year for rights to National Basketball Assn. games.

“Channels with low programming costs like MTV and Discovery have the best margins -- as high as 60%,” said Derek Baine, a media analyst at Kagan World Media in Carmel, Calif. “A broadcast network might have a 5% margin, and in publishing, you’re lucky to get 10%.”

AOL’s decision to sell its partnership in Comedy Central set off an emotional debate within the company’s top management.

No one at AOL relishes strengthening the hand of a formidable competitor. But AOL Time Warner chief Richard Parsons must sell assets to pare down the company’s staggering $28-billion debt. Turner, his vice chairman, and Jeffrey Bewkes, who oversees all cable programming, were reluctant to sell a channel that still is appreciating in value.

To be sure, the channel is no powerhouse like Disney’s ESPN, worth an estimated $15 billion. Comedy Central’s ratings are only a third of the fledgling WB’s. The channel is not even in cable’s top 10.

But it has a cult following among the hip young viewers that are in advertising’s sweet spot, and its low programming costs mean higher profit margins than most sports or movie-oriented channels. Combining it with the other youth-oriented networks in Viacom’s MTV Networks fold -- MTV, VH1, TV Land, SpikeTV and Country Music Television -- will give Viacom an even firmer hold on the demographic advertisers pay the most money to reach.

Some media executives wonder whether time is up on cable’s growth.

For cable programmers, their two sources of revenue are in jeopardy. The plethora of new channels has resulted in a glut of advertising inventory that could drive down rates. And TV advertising dollars have been put into the hands of three major agencies, giving them more leverage in setting prices.

At the same time, the cable industry has gone through its own consolidation. Now that Comcast Corp. controls one-third of all cable subscriptions, it is promising to drive down what it pays for programming.

Cable programmers say the only way to fight back is by bulking up. Viacom, with its nine major networks, has more power to fight these forces than Comedy Central standing alone.

“The big players -- Disney, Viacom, AOL Time Warner -- are going to always have terrific leverage,” said Jarl Mohn, who built E! Entertainment Television. “If you have a powerful brand that means something, like Comedy Central or the Food Network, there is a certain cachet to advertisers, and they’ll pay higher rates.”

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Switching channels

Viacom plans to purchase AOL Time Warner’s 50% share of Comedy Central. Here is a look at some recent channel sales:

*--* Purchase price Price per Network Buyer Date of sale (In billions) subscriber Fox Family Disney July 2001 $5.2 $65.43 BET Viacom Nov. 2000 $2.5 $40.06 Comedy Central Viacom April 2003 $1.2* $30.70 Bravo NBC/GE Nov. 2002 $1.3 $21.19

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*Estimated

Source: Merrill Lynch, Times research