CBS Deal Will Cut Its Stake in Start-Up Channel

In a development that highlights CBS Corp.’s difficulties in the cable-TV business, the broadcasting company has struck an alliance with cable programmer Discovery Communications that will halve its ownership of the unprofitable CBS Eye on People television channel.

Analysts say CBS’ pullback from the only wholly owned cable channel it has launched raises questions about its commitment to a business that other broadcasters consider an important hedge against the erosion of their audience. It also underscores management’s preoccupation with other aspects of the company and Chief Executive Mel Karmazin’s efforts to cut costs to offset the television network’s new $4-billion contract with the National Football League.

In announcing the partnership, CBS executives admitted that the company could no longer justify the draining costs of a start-up channel. And they did not deny speculation that a partner is also being sought for the money-losing Spanish-language network TeleNoticias that it bought last year.

“There is a goal to reduce short-term losses,” said Donald Mitzner, president of CBS Cable. “This is not the early days of cable. The alliance with Discovery is a significant play to get a new network to economic viability. This recognized the vision of CBS Corp. to do whatever it takes to produce year-to-year cash-flow growth.”

In addition to underscoring the financial strains at CBS, the deal also casts light on the emerging landscape of haves and have-nots in cable as consolidation empowers a handful of giants with deep pockets, cable systems of their own or large families of channels that can be used as bargaining chips with operators. With limited shelf space on cable systems, the advantage typically goes to programmers that are willing to pay to launch new networks or those with at least one highly rated channel that can be bundled to drive growth of other networks.

For instance, Time Warner can offer such sweeteners as better rates on CNN, TBS and TNT, three highly rated channels, to get carriage for new services, such as its sports news and financial news networks. And when News Corp. launched its 24-hour Fox News Channel, at around the same time Eye on People started, it paid operators $10 per subscriber.

“Cable is not high on the radar screen for CBS management,” said Tom Wolzien, an analyst at investment bank Sanford Bernstein & Co. He pointed to the company’s huge radio acquisitions in the last two years and its efforts to turn around the historically underperforming TV station group and the network, whose older audience is not highly sought after by Madison Avenue.

Terms of the 50-50 joint venture were not disclosed, but the partners said Discovery will make an investment in the channel equal to CBS’ outlay, which sources estimate at about $80 million. Most start-up channels require an investment of $150 million or more to break even.

The alliance is seen by the partners as a way to expand the distribution of the channel, which focuses on people and personalities. Launched in March 1997, Eye on People reaches only 11 million of the nation’s 72 million cable households--far short of the estimated 40 million subscribers needed to attract substantial advertising revenue.

Under the partnership agreement, which will close in 40 to 60 days, the CBS name and logo will be dropped, and Discovery will take over the task of signing up cable operators. Discovery has more clout with operators than CBS because its flagship Discovery Channel is among the most highly rated networks and cable companies Tele-Communications Inc. and Cox Communications are its biggest backers.

“It’s a game of big players, and you have to either grow your business aggressively or sell to survive,” said Lee Masters, chief executive of E! Entertainment Television, whose owner, Comcast Corp., has tried unsuccessfully to grow through acquisition. “As more and more channels fractionalize the audience, you have to have more than one or two channels. Otherwise you lose market share.”

Privately held Discovery has been aggressively expanding, buying the Travel Channel, joint-venturing with British Broadcasting Corp. and starting a host of channels to bring its stable to 11, including Animal Planet and the Learning Channel.

For Discovery, the deal culminates a 10-year pursuit by founder John Hendricks, who has approached the network in the past about using its vast “60 Minutes” archive to launch a nonfiction channel about people that would round out its offerings.

Eye on People has been limited by its refusal to offer sweeteners to cable operators.

Though CBS’ two profitable cable channels, the Nashville Network and Country Music Television, are popular among country music lovers, they are niche services that lack the power to drive distribution of Eye on People.

CBS’ vulnerability in cable is underscored by the battle between Country Music Television and a new rival video channel owned by Denver cable pioneer Glenn Jones. Though CMT still dominates, reaching 42 million households, it has lost 1.5 million subscribers over the last year as cable operators drop the channel in favor of Jones’ more economical service, Great American Country.

The upstart channel is paying operators $1 or more per subscriber and giving the services away for free for five years, compared with the fee CMT charges. Great American, which has added 3.5 million subscribers since its launch in 1996, is also using the clout of its sister cable company, Jones Intercable.

Sources say that Jones has insisted that Great American be carried by operators, such as Time Warner and TCI, that have bought or swapped cable systems with Jones Intercable, which reaches roughly 1.5 million subscribers.

So far, CBS has more than made up for the subscribers lost to Great American, signing up 3 million new ones over the last year. But the defections have cost CBS an estimated $1.5 million in cash flow.

CBS executives say they are hard at work on a counterattack based on the company’s ownership of 26 of the nation’s top country music stations. Sources suggested that CMT could persuade artists featured on its radio stations to perform live for channel-sponsored events, helping to bring exclusive programming that would distinguish the network.

Mitzner said the deal with Discovery will free up resources needed to strengthen its two moneymaking country channels, which complement programming on the CBS network. Motor sports popular with country music fans are televised on CBS, and the Country Music Awards and the Grammys also air on the network.

CBS paid its country music partner, Gaylord Entertainment, $1.6 billion last year for control of the two networks. But some entertainment executives believe Karmazin, who treasures his reputation on Wall Street for meeting profit projections, might want to bring in a partner to run these channels. Sources say the company discussed such a possibility last year with Universal Studios.