Partners Patch Up a Family Dispute

When two titans of television--Rupert Murdoch and Haim Saban--formed Fox Family Worldwide five years ago, they took on the Disney Channel and Nickelodeon.

Saban brought a library that included “Mighty Morphin Power Rangers,” and Murdoch contributed News Corp.’s weekday and Saturday morning blocks on the Fox network in a 50-50 partnership that was going to dominate kids TV. Together they bought a cable channel to expand their reach beyond their competitors.

Sometimes a great notion, however, takes a while to gel. As ratings spiraled down, the partnership strained. Murdoch and Saban looked as though they were headed to divorce court this spring.

Now, the two partners say they are resolved to move ahead with Fox Family Worldwide. Hoping to end speculation about the future of their joint venture, Saban and Murdoch’s second in command, Peter Chernin, chief operating officer of Fox parent News Corp., recently sat down to talk about the struggling Fox Family Channel, the Fox Kids Network and their growing international business.

In June, Saban agreed to stay put as half-owner of Fox Family Worldwide even though he could have forced News Corp. to buy him out. The founder of Saban Entertainment, who is also chairman and chief executive of Fox Family, said that the 5-year-old partnership is just getting traction in cable and international markets and that he would be leaving money on the table by cashing out early.

A split appears to have been forestalled rather than avoided, however. Chernin concedes that Fox ultimately will take control of Fox Family--and could do so even before 2002, when the partnership gives Fox the right to buy out Saban’s shares. News Corp. might have bought out Saban in the spring, but Murdoch balked at Saban’s target value of more than $6 billion for Fox Family, Fox sources say. Saban approached USA Networks Inc. in an unsuccessful attempt to set off a bidding war but then agreed with News Corp. to reconsider a breakup in January, sources say.

It’s hard to argue that these assets are the gold standard Saban supposes. Wall Street analysts value Fox Family at $3.2 billion today.

The Fox Kids Network, the broadcasting block that was the partnership’s founding asset, has fallen from first in the ratings since its creative visionary, Margaret Loesch, was forced out in 1997 by Saban. A downturn in the toy business has hurt advertising sales for all children’s outlets, and Fox affiliates are threatening to cut back because the programming isn’t making them money.

To get into the increasingly dominant cable arena, the partners paid evangelist Pat Robertson $1.9 billion in 1997 for International Family Entertainment, owner of the Family Channel. But in steering the channel away from its religious roots, the partners burned through more than $500 million and lost nearly 30% of its viewers.

Madison Avenue wonders whether Fox’s split focus on kids during the day and adults at night is schizophrenic. The channel, which Saban says accounts for about 40% of the partnership’s revenue, now has shifted from originals to costly network reruns such as NBC’s “Providence” to get traction in the ratings.

Q: Has the kids business changed since your acquisition of the Family Channel? Some analysts doubt there is room for all this competition.

Chernin: We look at it reasonably holistically. There are a lot of different pieces to the so-called kids business: broadcasting, cable, merchandising, syndication, international. There’s no question that the domestic broadcasting business is under pressure this year. But if you look at the whole, it’s a big business--particularly internationally, where we’ve established a real position of dominance and there’s a lot of growth for us.

In terms of the channel, we’ve been pretty consistent in saying we look at the channel as a kids outlet during the day and as a general entertainment channel from 6 p.m. on. We’ve always said 6 p.m. and on is where the money is going to be made. The economics of the business will be built on our ability to transform prime time from [age] 60-plus, which it was when we bought it [to a younger adult viewer].

Saban: We are compared with Nickelodeon and the Cartoon [Network], but we are not a kid channel. We cater to different parts of the family, so we should be compared to other channels, like Discovery. And remember, we have only been around for two years; it took VH1 five years to find its voice. Internationally, we are a pure kid channel, and an unprecedented success story because we are Pan-European. Nick is not in every single European country and neither is Cartoon Network.

The company has evolved in more than one way. We started with a kids library of 3,200 negatives. We now have 6,200 negatives. When we started our partnership, we reached 98 million homes in the U.S. We now reach almost 200 million homes worldwide. Fox Kids is either No. 1 or No. 2 in France, Spain, Netherlands, Poland and Norway.

Q: Why are you more successful in Europe?

Chernin: It’s less competitive. If you look at the cable business here, we are by a significant margin the last player in. You’ve got Nickelodeon, which has been around 20 years, the Disney Channel, which has been there 15-20 years, Cartoon Network, at 10 years, and us in there for two years.

If you look at Europe, you have local players and the rest of us have been there about the same amount of time. There’s a big advantage to having time to evolve.

Q: Isn’t one of the problems that your library doesn’t measure up?

Saban: It is true, this library has a filler function that works OK, but it definitely didn’t have any breakthrough hits.

Q: So how do you stop the ratings declines?

Saban: You have to realize, we did something that has never been done in the history of television. We launched a network in 75 million homes. We closed one network and opened a new one. We told this older audience that has been there all these years, “Thank you very much, go in good health, we want new people,” because you couldn’t build your business on that. We’ve committed $400 million to [programming] acquisitions over the next five years, and we’re going to commit more, but there was nothing to buy when we launched, so we were forced to go with all original programs. But with “Providence,” “7th Heaven” and “Early Edition” we will have an unbelievable promotional platform for our originals. This is a channel that is about to burst.

Q: With multi-set homes, is family viewing a thing of the past?

Chernin: I don’t think we have any illusions about people sitting around the hearth, sipping hot cocoa together and watching TV. What we’re really trying to say is we are doing programming for all members of the family. The people who watch “Providence” are very different from the people who watch “7th Heaven.”

There’s one big challenge that we face, and we don’t face it alone. The single biggest issue is the incredible difficulty of successfully launching original scripted programming on cable. If you look at basic cable, there are networks that are far bigger, far wealthier--name me the great original shows that have come off USA, TNT or TBS? The number of successful scripted shows basic cable has created--a pretty good argument for broadcasting--is pretty small.

Q: Turning to the Fox Kids Network, affiliates would rather use the time periods for programming that generates higher advertising revenues. Will the broadcast piece be there indefinitely?

Chernin: We have no plans for it not being there. Clearly there is an issue with the affiliates right now, which has nothing to do with anything other than the rough ad marketplace. We’re working it out.

Q: Would it be a crippling blow if you no longer had kids programming on the Fox network?

Saban: No. It would change the way we do some other things. Thirty percent of all boys’ toys sold in America are based on shows that air on Fox Kids, so Fox Kids is a brand.

This company has a contract with the affiliates for the next nine years to program 3 p.m. to 5 p.m. . . . The [loss] of exposure would impact the merchandising revenues, but if there is a problem from 3 to 5 with kids, would that be an opportunity for us [to put other programming in there]? We don’t know.

Q: So Haim, you have waived the “put” option so you can no longer force Fox to buy your shares?

Saban: There’s no more put this year. The next put comes in December 2002. I’m not going to . . . tell you what we’re discussing among ourselves. If we decide to be very aggressive and spend $3 billion, $4 billion acquiring various businesses, would that change the relationship between us? Yes, because I don’t have the resources Fox has. . . .

Q: And 2002 is the next time we could see any action?

Chernin: We could always choose to negotiate something before that. At some point, we’d like to own the business. It’s been set up that way from the beginning, that sooner or later it could become a Fox-controlled entity. The question is when.

Q: Haim, what would you do?

Saban: Everybody’s assuming if there’s a change in percentages of ownership, what will you do? I honestly don’t know. I have an employment agreement that survives by two years my put rights.

Q: Do you have political aspirations rising out of your contributions to the Democratic Party? What about rumors that you want to be appointed ambassador to Israel?

Saban: [Long pause] I really like the weather in California. . . . I’m leaving my options open. Look, I’m just a humble cartoon schlepper.

Q: You’ve lost all of your top management at the Family Channel. Are you going to fill [former President] Rich Cronin’s position?

Chernin: I’m not sure we’ve lost that much management. We’ve had a reasonably average track record: Some people work, some people don’t work. That’s true at any of these places. God knows we’ve had a little executive turnover at Fox recently. That’s the nature of running these businesses.

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United They Stand ... for Now

News Corp. and Saban Entertainment are moving forward with their children’s television partnership, formed five years ago, after talk of a possible split. A red-hot public offering in Europe has helped the bottom line for their 50-50 partnership in Fox Family Worldwide even as their U.S. properties struggle.

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More kids are tuning into cable since the relaunch...

Fox Family Channel

Overall viewership is down despite heavy spending on original shows. Household Nielsen rating points for day and evening:

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... but they are tuning out Fox network

Fox Kids Network

Broadcast block from 3 p.m.--5 p.m. weekday afternoons and Saturday morning programming.

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*Fox Family relaunched the channel in August 1998 *

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Source: Fox Family Worldwide