Networks Need to Expand Revenue Sources, Panelists Say

Even the broadcasters represented on Wednesday’s opening panel of the cable industry’s annual show in Anaheim agreed that cable companies and consumers will be the biggest winners from the changing landscape of television.

Barry Diller, chief executive of USA Networks Inc., said to continue to pay for quality programming for prime time, the networks will have to distribute shows in ways other than through traditional broadcast stations.

Robert Wright, the chief executive of NBC Inc., went a step further at the California Cable Television Assn.’s Western Show.

“Advertising alone cannot support the fragmented audience structure we have today,” said Wright, stressing that his company has branched heavily into cable and most recently into the Internet business to offset the erosion of viewership in network television.

NBC owns CNBC and stakes in MSNBC, A&E;, Bravo, American Movie Classics, and several regional sports networks, in addition to interests in Internet companies such as the Snap portal company and the IVillage Web site. Earlier this week, Jack Welch, chairman of NBC’s parent company, General Electric Co., said spinning off NBC into a separate entity is an option being considered as a way to push into the cable business.

In fact, this summer, Diller and NBC discussed the possibility of a partnership that would have included a spinoff of NBC from GE. NBC is limited in its ability to launch new cable networks, make Internet investments, or jump into any new venture with huge start-up costs and uncertain payoffs because it could depress or dilute GE’s earnings.

“Nothing could be as unstable as the network business,” said Wright, referring to the cyclical nature of broadcasting that is now chipping away at NBC’s lead in the ratings. He said the cable business is more stable because of programmers’ ability to collect both advertising and fees from operators to cover costs.

Wright and Diller joined institutional investor Gordon Crawford, senior vice president of Los Angeles-based Capital Research & Management Co., and Leo Hindery, president of cable giant Tele-Communications Inc. on the opening panel of the trade show, which drew more than 30,000 executives to Orange Country this week.

While the cable industry is on a roll, with stocks buoyant and the first new services in 20 years starting to hit the market, the panelists warned that the sector should not get too cocky because of stiff competition and the continued threat of federal regulation.

“The industry has grown complacent about competition from satellite,” said Crawford, who manages funds that own as much as 10% of many of the leading cable and entertainment companies.

He said satellite services such as DirecTV and EchoStar are now among the largest pay television providers in the U.S. and have added 2.5 million subscribers this year compared with the 1.5 million added by cable companies. “Sixty percent of the growth is coming from satellite,” he said.

Wright countered that the cable industry’s ability to use its wires to deliver a bundle of services gives cable the advantage.

Crawford said his biggest concern with regard to cable’s future is the possibility of rate regulation and other changes in the law that could undermine growth.

America Online, which fears rival @Home (which will be owned by AT&T; as part of its proposed purchase of TCI) will have an unfair advantage, is asking Washington to force the telephone giant to unbundle high-speed Internet access.

AT&T; says giving America Online the same treatment as @Home could kill its incentive to buy TCI.

“If the government takes AOL’s side, this would be the first time regulators acted in anticipation of an outcome,” said Hindery, who said TCI has 22,000 high-speed Internet customers compared with AOL’s 15 million. “We don’t even know if we have a business here.”