Eyeing an E!xpansion : As Entertainment Cable Network Grows, It Faces New Challenges

Successful cable channels often have turning points, lucky breaks or news events that shift the tide in the network’s favor. MTV, in the early 1980s, had Michael Jackson’s “Thriller” video. CNN received a big boost from the Gulf War.

E! Entertainment Television had “Dances With Wolves.”

Promoting his 1990 directorial debut, Kevin Costner granted an interview with the network, which was then struggling for recognition. Although it may have been just another media minuet for Costner, for E! the chat was a validating scoop--and best of all, it was free. The channel rebroadcast the interview ad infinitum, which got the attention of viewers--and more important, other celebrities.

“We played the daylights out of that show,” Lee Masters, E!’s president and chief executive, says with a laugh. “Soon we were getting phone calls from publicists. Their clients were saying, ‘Every time I switch on the TV, Kevin Costner is on E!’ ”

In the last six years, the Los Angeles-based cable network has grown rapidly with a melange of relatively inexpensive programming that could be described as pop culture lite. Typical shows include “Howard Stern,” a TV version of the popular DJ’s radio diatribe, and “Talk Soup,” a cheeky review of daytime talk shows.

As a kind of People magazine for the tube, E! has swelled from about 15 million cable subscribers in 1990 to about 40 million today.

Now the network is looking for another turning point, but this time it may not come as cheaply as the “Dancing With Wolves” interview.

While E!’s profits have been rising, so too have its costs, as it tries to grab attention in an ever more crowded cable menu. The network earlier this year paid big money, reportedly $200,000 per episode, for exclusive rerun rights to the youth soap “Melrose Place.”

Cable insiders buzzed about the estimated $1-million salary E! pays shock jock Stern, but Masters hinted in a recent interview that the actual figure is much higher. The network’s total production expenses this year will likely climb to about $37 million, up 61% from two years ago.

“Our goal is to not just cover the entertainment business, but to do it in a unique way, with a distinctive design and attitude,” says Masters, 45. Referring to the network’s brand-style efforts on behalf of Stern and “Talk Soup” host John Henson, Masters says, “We believe in our personalities and our personality approach.”

The challenges facing E! are typical among mid-tier cable networks. Although the market share of cable TV is growing relative to broadcast networks, the major cable networks are mature in the domestic market. Networks like CNN (with 68.1 million subscribers) and MTV (63.1 million) are in virtually every U.S. home with cable.

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Yet Masters still sees plenty of room for growth at E!. In fact, in terms of subscribers, the network ranks only 25th out of 60 major cable networks tracked by research firm Paul Kagan Associates in Carmel. The channel is jointly owned by media giant Time Warner Inc. (48%) and cable companies Tele-Communications Inc., Cox Communications Inc., Continental Cablevision Inc., Comcast Corp. and NewChannels Corp. (10% each). (The percentages do not total 100 due to rounding.)

“They’ve had really strong subscriber growth in the past couple of years, but they’re still a mid-sized network,” says Kagan analyst Bill Marchetti. “About 19 or 20 channels have 60 million or so [subscribers], and then there’s another batch of a dozen or so that have 30 [million] to 60 million.”

Earlier this month, the network launched the first international E! channel, serving Mexico, Brazil and other Central and South American countries. Ownership will be shared by E! and HBO Ole Partners. And domestically, the network can tap conventional cable systems and up-and-coming satellite TV.

“We still need to grow into 25 million homes in most of the major metropolitan areas” in the U.S., Masters notes. “A lot of people are aware of us but may not have seen us.”

So far, E! has provided a textbook example of how to build a cable network. Revenue for the privately held network is projected to leap to $97.2 million this year, up 19.6% from an estimated $81.3 million in 1995, according to Kagan researchers. Earnings before interest, taxes and depreciation are expected to reach $33 million this year--a return of 35 cents on the dollar, slightly better than the cable industry average--up from $23 million a year ago.

That’s a long way since 1990, when Masters arrived from MTV to take over the foundering operation then known as Movietime. Viewership was low, in part because film previews formed the bulk of programming. Masters says management was loose and the staff demoralized.

“You can’t even conceive how awful it was,” he says. “People were working in five rat-infested buildings all over Hollywood. The equipment was held together with bubble gum and binder tape. . . . It was not the fault of the people who were here at the time. The network was just undercapitalized.”

Masters began by building a strong management team. Fran Shea, a former HBO executive, was brought in to oversee programming. She and Masters reasoned that it would be cheaper and more effective to develop material in-house, rather than commission outside productions. So they hired a staff to create, write, shoot and edit new shows.

Among the first efforts was “E! News Daily,” a splashy mix of gossip and features patterned after the syndicated “Entertainment Tonight.” Masters says the show has remained a perennial favorite, both with the U.S. target viewers ages 18 to 49 and in the 120 foreign markets where E! sells its programming. (About 10% of revenue comes from sales overseas.)

But the hallmark to early E! programming was a tight rein on costs. During a run on the beach one day, Masters recalled the infamous footage of talk host Geraldo Rivera being beaned by a chair during an on-camera melee. Masters wondered if it might be possible to recycle clips of sensational talk shows into a daily review.

Thus, “Talk Soup” was born. The show features a host (first Greg Kinnear, now Henson) mildly poking fun at video from Sally Jessy Raphael, Rolonda and others; the talk-show producers yield the clips for free in exchange for the air time.

“I said, ‘What can we do that’s not gonna cost us a lot of money?’ ” Masters remembers. “Talk Soup” is now E!’s signature program and ties with “E! News Daily” as the second-highest-rated offering, after “Howard Stern.”

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There have been flops along the way. Masters says he was fond of “News Weasels,” a satirical look at current events. But even with a lead-in from Stern, viewers stayed away in droves. “It was a disaster,” Masters says. “Viewers found it too male, too young, too sophomoric.”

With an emphasis on new programming, the Wilshire Boulevard headquarters is a hub of activity. On a recent afternoon visit, twentysomething production assistants scurried through cubicles and a trendily designed second-floor lobby, where a visitor is greeted by a large portrait of Stern.

Shea points to early ratings success for “E! True Hollywood Story,” a docudrama series covering Tinseltown murders and scandals. More important, the network is looking beyond cable to the satellite dish market, which is likely to provide millions of new subscribers in the coming years.

Given the network’s promising finances, Masters has plenty of collateral with the nine-member board that runs E! (Each corporate investor has at least one seat.)

But the key, Masters says, is to allow his creative team room to try new things.

“I really do like to take chances,” he says. “The amazing thing about the entertainment business is that people are so frightened of taking chances, so afraid of failing. But the fact is, the odds of failing are always high in this business.”

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The Big Picture

E! Entertainment Television has seen its viewership grow dramatically. But in a bid to join the ranks of the biggest cable networks, the network is also stepping up spending on programming:

Year / Subscribers:

1987: 4.1 million

1988: 11.5 million

1989: 14.1 million

1990: 17.7 million

1991: 19.0 million

1992: 21.5 million

1993: 26.0 million

1994: 28.0 million

1995: 30.8 million

1996: 40.0 million

Year / Programming and production costs:

1991: $12 million

1992: $15 million

1993: $18 million

1994: $23 million

1995: $33 million

1996: $37 million*

* (projected)

Source: E! Entertainment Television , Paul Kagan Associates