Looking for an Outlet, Viacom to Buy Half of UPN

Confident that there is room for five television networks, Viacom Inc. has agreed to exercise its option to buy half of the United Paramount Network from Chris-Craft Industries for $160 million.

Viacom struck a deal when UPN was launched in January 1995 under which Chris-Craft would finance the first two years of start-up and allow Viacom to buy in before Dec. 15, 1996, by paying half the network’s losses, which have totaled $320 million to date. As part of the arrangement, Viacom agreed to sell UPN what remains its highest-rated show, “Star Trek: Voyager,” rather than syndicate the series, which is produced by its Paramount Pictures studio.

Viacom for the first time will share management control of the network when the purchase becomes effective Jan. 15.

The company is the latest owner of a Hollywood studio to purchase a television network. News Corp., the owner of 20th Century Fox, launched Fox as a fourth network, and Time Warner started the WB Network at the same time UPN launched in 1995. Earlier this year, Walt Disney bought ABC.

Studios are eager to own networks so they can guarantee air time for their shows now that federal law allows the networks to produce programs for their schedules.

But Paramount is unlikely to divert programs that can be sold to the major networks to UPN, whose ratings are a distant fifth. This season, UPN has been watched by an average of 5% of all television viewers, compared with the 18% average viewership of network leader NBC. As a result, Paramount would reap far less for the reruns of popular shows it owns, such as “Frasier,” by airing them on UPN instead of one of the major networks.

Still, UPN could be a valuable outlet for alternative programming from Paramount and for talent from within the Viacom family. At the moment, UPN is thought to have an inside track over an eager Fox for a show Paramount is developing with Jenny McCarthy, who made her name on MTV, Viacom’s cable channel.

In addition, Viacom hopes that owning UPN will give it greater control over the schedule aired by the nine UPN affiliates in its group of 11 television stations. Television stations are more profitable than networks, but their fortunes depend on the strength of their programming.

Before converting to UPN, many of Paramount’s stations were unaffiliated. But independent stations are finding it harder to compete for quality programming against powerful station groups, and that is one reason why Chris-Craft and Viacom formed UPN. Through its BHC Communications subsidiary, Chris-Craft owns eight stations, six of which are UPN affiliates.

But with the broadcast networks losing overall market share to cable, many analysts wonder whether all six networks can survive. The ratings of the two upstart networks are still fractions of the majors’, and there are not enough unaffiliated stations to provide both with the strong nationwide coverage enjoyed by the majors. Viacom and Time Warner have held discussions, so far fruitless, about merging the two upstarts.

While UPN enjoys a stronger station lineup than WB, some of those stations are also affiliated with major networks. That means they air UPN programming at less desirable times, making it difficult for UPN to expand its schedule beyond the current six hours of prime time over three nights.

Still, many on Wall Street view Viacom’s purchase from Chris-Craft as favorable to both partners. Christopher Dixon, an analyst at PaineWebber Inc., said Viacom was spending $160 million for an asset potentially worth $750 million. He based his calculation in part on the 92 million households that UPN reaches nationwide. He said that, if cable networks like USA Network that reach far fewer households are valued in the $3-billion range, UPN, which may not make money for several more years, may be worth at least half that.

Cable channels are valuable in part because of their ability to be shown around the world, Dixon said. But he said a well-defined broadcast channel could also be exported for sale to satellite and cable services internationally.

“What UPN and WB are doing is using the traditional broadcast model to build brand awareness so the channel can then be migrated to a multi-channel platform internationally,” he said.

Dixon said Viacom would bring its expertise in branding cable channels like MTV and Nickelodeon to help promote the broadcast network. No Viacom executives were available for comment.

It’s unclear whether Viacom will want to retain UPN chairman Lucy Salhany, who has had a stormy relationship with Paramount Television head Kerry McCluggage.

UPN has struggled from the start with its identity, scrapping every show developed in its first year but “Star Trek.” While it initially set out to target young males with one-hour dramas that would complement “Star Trek,” the network has found greater success this season by playing to young urban audiences that started tuning to its show “Moesha.”