On the Family Entertainment Map, Henson Co. Finds Itself at Crossroads

Jim Henson Co. blames last week's dismal debut of its latest movie, "Muppets From Space," on its ill-fated release during a highly competitive summer at the box office. The film's cool reception, coupled with the disappointment of the last Muppets TV series, "Muppets Tonight," which landed on the Disney Channel after bombing on ABC, underscores the difficulties of keeping evergreen characters, even those as lovable as Kermit and Miss Piggy, relevant in an age when young audiences crave edgier fare such as "The Rugrats" and "Pokemon."

"They have one of the world's greatest brands, but it's a brand that needs polishing and needs to be the centerpiece of the Thanksgiving table again," said Toper Taylor, president of Nelvana Communications, a Canadian-based company that specializes in children's programming. "If more time passes, they'll have a real uphill battle keeping their market share in the kids' business."

During the last five years, co-Presidents Brian Henson, 35, and Charles Rivkin, 37, have built Henson Co. into a profitable multimedia business, with an average 44.5% return on equity and more than $200 million in annual revenue.

The privately held company's special effects Creature Shop is a powerful profit center, with credits that range from "Babe" to "Dr. Dolittle." Its non-Muppet business has grown as fast as its core Muppets business, thanks to forays into interactive, plus international library sales and license fees from cable-TV hits such as "Bear in the Big Blue House" and "Farscape."

But the family concern is facing the toughest challenge yet in its history as one of the top suppliers of family entertainment. Since the unexpected death of "Muppets" creator Jim Henson a decade ago, family entertainment has become one of the fastest-growing and most competitive segments of the business, with stand-alone content providers such as Henson disadvantaged against deep-pocketed media giants such as Disney, Viacom, Time Warner and Fox that control both programming and distribution channels.

Even a programmer as powerful as Saban Entertainment, which produced such hit shows as "The X-Men" and "Teenage Mutant Ninja Turtles," was forced to partner with Fox Broadcasting Co. three years ago to survive the industry consolidation.

Rivkin, who Jim Henson hired out of Harvard Business School in 1988, has made strides expanding the company into distribution. In partnership with Hallmark Entertainment, the company bought and relaunched Odyssey Channel, a religious network, and started several Kermit Channels internationally.

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But partnerships with Disney and Sony are not expected to be renewed next year when they expire, leaving Henson Co. at a critical crossroads in terms of financing its core TV and film production. The production venture with ABC, formed in 1995, was stymied when the broadcaster was bought by Walt Disney Co., which was eager to see its own family fare on the network.

The same year, Henson struck a high-profile deal with Sony Pictures Entertainment to finance and distribute its theatrical movies. But the dynamic of that partnership also deteriorated when new management at the studio didn't share the same appetite for the arrangement as the previous regime.

Rivkin, who says the company has been profitable since 1995, following dark years of financial turmoil after Henson's death and a failed merger with Disney, readily acknowledges this as "a watershed year."

He said management is exploring private or public financing and strategic partnerships.

"We do not have a shortage of people interested in investing in our company," Rivkin said.

Disney was once a suitor. Disney chief Michael Eisner said he's "always been interested in expanding our relationship" with Henson. While he has never reconsidered buying the company, he allowed, "It certainly wouldn't be the last thing I'd think about. I wanted to buy it once."

Eisner agreed to buy the company for $150 million nine months before Jim Henson's death in May 1990. But the deal unraveled after Henson died, prompting the Hensons to sue Disney for exploiting the Muppets characters before owning them. Disney counter-sued, but it reached a settlement in May 1991, agreeing to pay $10 million for limited theme park rights to the Muppets.

The resulting "Muppet Vision 3D" attraction at Disney/MGM Studios in Florida will be replicated in 2001 as part of the planned Disney California Adventure in Anaheim.

And despite an ABC partnership that Eisner said "did not particularly work," Disney and Henson have also forged a strong relationship in cable TV.

In its third season on Disney Channel, "Bear in the Big Blue House" is one of the network's most popular shows among preschoolers. Disney Channel President Anne Sweeney said that parents and kids sit down together to watch the Emmy-award-winning program, created by Mitchell Kreigman, in much the same way "Sesame Street" audiences did.

"The genius of 'Sesame Street' is it works on two levels," she said, "and that's what I love about 'Bear.' "

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Yet the Henson clan has had difficulty inventing new characters with sticking power and in evolving the Muppets. No incarnation of "The Muppet Show"--which ran in first-run syndication from 1976 to 1981--has resonated with new generations of kids as the original episodes did about 30 years ago.

Nelvana's Taylor can recall rushing home at age 5 from the bus stop and plopping onto the living room carpet in front of the TV to watch the first episode of "Sesame Street," which aired Nov. 11, 1969. "Sesame Street" is produced by Children's Television Workshop using Henson puppetry and characters.

"I have the brand loyalty, but they now need the loyalty of my kids," Taylor said. "My 4-year-old daughter can't sing the 'Sesame Street' theme song and my 7-year-old son had no interest in seeing 'Muppets From Space.' "

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The film business has also changed significantly since "The Muppet Movie" premiered in 1979, with children gravitating toward edgier programming today. "Everyone in the traditional 'G' market has had to take note that there have been many PG-13-rated mega-hits such as 'Big Daddy' and "Dr. Dolittle' that have sucked up what used to be the 'Muppet' audience," said one studio distribution chief.

Rivkin conceded that while the Muppets are "timeless and ageless," the company is reinvigorating the characters, which made their network TV debut in 1956 on "The Steve Allen Show," by "portraying them in a way much more relevant to the '90s."

Henson, who like his late father is a puppeteer and movie director in his own right, said that takes finesse. "We're never about fads," he said. "We have to be careful."

He said the trick is to "maintain their irreverence, that sarcastic sense of humor they have that comes across as smart nonsense, without getting mean, cynical or trendy. We don't want our characters to be hip or trendy; that would kill them."

Casually dressed in a long-sleeved T-shirt and baggy khakis as contrasted with his more button-down partner's dark suit and tie, Henson said: "We grew out of the '70s, and the message and themes of the Muppets is always bringing people together by celebrating their differences and not their similarities."

Henson, whose directorial credits include "Muppet Treasure Island" and "The Muppet Christmas Carol," said he plans to direct another Muppets movie, after which "we'll have another go at a Muppet series with a totally different take, mixed with lots of new characters."

Rivkin insisted that the Muppets have not lost their appeal, pointing to the popularity of the theme park attraction and the Muppet business that is five times bigger than it was in 1995. He estimates that 25% to 30% of the company's total revenue is Muppet-related.

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But one industry source suggests that perhaps Henson relied too heavily on "Sesame Street" to continue the Muppets relationship with its audience, "forgetting every year they had lost a generation of kids and they didn't have anything to bridge the gap."

Disney's Sweeney compares the task of managing an evergreen brand to maintaining a lasting friendship: "You have to ask yourself, how current are you with your friends and how relevant are you to their lives? It's no different with Disney or Henson and their audience. How hard do you work to stay connected and relevant to the audience, or do you insist they accept you as you were 20 or 40 years ago?"

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Jim Henson Co.

Estimated annual revenue (from outside sources): About $200 million

Ownership: Privately held by five Henson children--Brian, 35; co-president; Lisa, 39; Cheryl, 38; John, 34; and Heather, 28. All sit on the board, along with co-President Charles Rivkin, 37; Bill Haber, director Frank Oz; and attorney Jonathan Kaufelt.

Library: More than 400 hours of TV programming

Various Business Sectors

Television: Currently producing five shows: "Bear in the Big Blue House" (Disney Channel); "Farscape" (Sci-Fi Channel); "Donna's Day" (Odyssey); and two for foreign markets.

Upcoming Movies: "The Adventures of Elmo in Grouchland" (Sony's Columbia Pictures, debuts Oct. 1); "Neverwhere" (Miramax's Dimension Films); "Astroboy" (Columbia); "Rat" (an Irish comedy for Universal Pictures International)

Cable network ownership:

Odyssey (U.S.)--22.5%, currently in 30 million households.

Kermit Channel (international)--50%, in 4 million households in 12 Pacific Rim countries.

Noggin (U.S.)--Passive interest of 16.67% in the Nickelodeon educational channel.

Interactive: Among the eight projects in production are:

Muppet Millennium Racing (Sony PlayStation)

Muppet Haunted House (Sony PlayStation)

"Bear in the Big Blue House Sense of Adventure" (PC-based multimedia)

(plus a handful of online sites including http://www.henson.com)

Jim Henson's Creature Shop (headquartered in London and Burbank):

Upcoming films include "The Flintstones II--Viva Rock Vegas" (Warner Bros.) and upcoming TV projects include "Animal Farm" (TNT) and "Arabian Nights" (ABC)

Consumer products (includes licensing, publishing and Muppet Press):

More than 5,000 licensed Muppet products have been introduced in the last 10 years.

Best-selling products: plush toys, T-shirts, greeting cards, posters, disposable diapers.

More than 1,500 book titles published.

More than 30 million books sold during the 1990s in about 45 countries and 16 languages.

More than 1.5 million "Bear in the Big Blue House" books are being shipped to stores nationwide.

Theme park attractions:

Muppet Vision 3D (Disney/MGM Studios, Orlando, Fla., and planned for Disney California Adventure, Anaheim, in 2001)

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