It’s Not Easy Being a Brave New World

Westinghouse Electric Corp. might want to heed the lessons learned by Ronald Perelman. So might Walt Disney Co., as it verges on taking over Capital Cities/ABC Inc. next week, eyeing network time slots as comfortable homes for the shows developed by its television studio.

It was Perelman who rearranged the TV landscape in mid-1994 by agreeing to convert 10 of the 12 stations inside his New World Communications Group from CBS to Fox affiliates. He was eyeing time slots too, namely the additional hours available to Fox affiliates that could be filled with shows cooked up by his own New World production studio in a perfectly vertically integrated world.

But few worlds are perfect.

The conversion to Fox has been rocky, costing the stations’ ratings, managers and stable cash flow.

Stocking the stations with home-grown programs has also taken longer than some expected when Perelman hired superstar Brandon Tartikoff in 1994. The failure of the former NBC programmer and Paramount Pictures chief to cook up a blockbuster in short order keeps the rumor mill turning in prediction of his imminent departure.

New World’s stock price has languished in the mid- to high teens--far less than a peak of $23 last year.

Some sources believe the difficulties at New World could push Perelman to cash out and devote his attentions to taking his Revlon cosmetics empire public, or to fixing Marvel Entertainment, whose comic book business has suffered an industrywide downturn.

The liberalized station ownership rules that Congress passed last week have brought fresh speculation that Perelman is prepared to sell New World to Rupert Murdoch’s Fox Broadcasting Co., which already owns a 20% stake. Perelman owns 54% of the stock.

Says one source close to Murdoch: “It would be a good time for Rupert to buy, and he certainly has the appetite. New World cash flows are in disarray. Its stock is down. The company is not broken, but it has way underdelivered.”

Wall Street investors seem to view the time as ripe too. Trading in New World stock has been unusually heavy in recent weeks, fueled by the prospect of further broadcast consolidation.

When President Clinton signs the telecommunications reform bill this week, Fox and other broadcasters will be able to own stations that reach 35% of the nation’s viewers, up from the current 25%. Owning more stations gives broadcasters a bigger launching pad for new shows, and Murdoch, sources say, lusts after New World stations in top 10 markets such as Dallas, Atlanta and Detroit to build news and his planned 24-hour channel. What’s more, stations are the cash cows of the television business--and could help him finance his global ambitions.

“This would put Murdoch so far out ahead of Capital Cities and Disney and CBS-Westinghouse,” said John Tinker at Furman Selz, who figures it would cost the News Corp. chairman in the neighborhood of $2.5 billion for the remaining 80% of New World. “This is a no-brainer, a perfect win-win.”

Still, investment bankers and sources close to Perelman insist he has the patience of a builder. And New World executives wonder why he would sell when the biggest rewards lie ahead, now that several disparate station groups and production operations have been melded.

“We underestimated the time and effort it would take to convert the stations,” acknowledged Art Bilger, president and chief operating officer of New World. “But we have figured it out now and have the right personnel in place to move to the next level. We are very comfortable with where we are.”

Indeed, profit margins at the stations fell to 34% of revenue last year, from about 43%, but should bounce back to the low 40% range this year, according to Tinker.

And for the first time this fall, New World stations will have a complete set of three new programs from Tartikoff, including “Access Hollywood,” a joint venture with NBC that will air in the lucrative time slot before network prime-time on stations in half the country. On Monday night, ABC premiered “Second Noah,” New World’s second prime-time series in addition to Fox’s “Strange Luck.”

“No one can say all the projects will work, but we’re taking some interesting shots,” said Tartikoff, who says he intends to fulfill the 3 1/2 years remaining on his contract. “I came here for the express purpose of making a lot of shows and that’s what I’m doing. Syndication is a challenge and a mountain I haven’t climbed before. I’m having a ball.”

Perelman has been refining his broadcast strategy since he stepped into TV production in 1989 with the purchase of New World. Bridling at the big risks and uncertain payoffs of supplying the major networks, he quickly turned to syndication, where production costs are lower and returns quicker.

He accumulated stations to give New World shows a home and orchestrated the conversion from CBS to Fox, freeing up roughly seven more hours a day for stations to schedule and fill with advertising. The move earned Perelman $500 million from Murdoch for a 20% stake and the notice of fellow broadcasters who took in an additional $250 million in compensation from their networks for new oaths of loyalty.

The deal also promised to kick-start New World production by giving the studio commitments from Fox for prime-time pilots and movies and agreements to air syndicated product on the network-owned stations. Combined, the two groups reach 35% of television viewers, more than the CBS/Westinghouse 33%.

But the formula has been slow to pay off, meeting with resistance from many old-line CBS station managers. Stations were hard pressed to find good programming to fill the extra hours, having missed the buying cycle.

Viewers left in droves, wreaking havoc on New World cash flows, which should finish at $150 million for the year, about $50 million less than analyst expectations.

“Perelman can’t be happy,” Tinker said. “But there was no blueprint for this. No one has ever converted this number of stations at one time before.”

Several analysts expressed confidence in the New World strategy and in the new batch of syndicated shows delivered by Tartikoff last month.

In addition to “Access Hollywood” and returning shows such as “Real Stories of the Highway Patrol” and the talk show hosted by Mark Walberg, is a late-night series called “Loveline” that will also run on Fox, and “Two,” the first drama to come from New World’s pricey purchase last year of Stephen Cannell’s production company.

But many Hollywood executives believe Tartikoff is churning out product before it’s fully baked just to fill station air time in a vivid illustration of the hazards of vertical integration.

There was little buzz about either “Loveline” or “Two” at the recent television-buying confab in Las Vegas. And television executives say that with “Entertainment Tonight” and “Extra,” there are already too many Hollywood tabloid shows.

“The philosophy of airing in-house product on the stations is antithetical to a free-market system where only the best shows survive,” said one Wall Street source.

“It takes a long time to develop the infrastructure to compete with the marketplace. Just look at the networks.” Though the networks have long been permitted to develop 10% of their own shows and sell them into syndication, there are few successes outside of CBS’ “Dr. Quinn, Medicine Woman.”