Murdoch Empire’s Chief Engineer

As chief operating officer of News Corp. since 1996, Peter Chernin has had to make sense of the dizzying assortment of assets that his boss, Chairman Rupert Murdoch, has assembled at breakneck speed.

Through a series of back-to-back transactions, Murdoch has transformed the newspaper company he inherited into one of the world’s premier purveyors of news, sports and television.

News Corp.’s formula of securing rights to marquee sports has established the company as a dominant satellite television provider and key entertainment gatekeeper outside the United States. In the U.S., News Corp. has used sports to put the company’s Fox broadcast network, its regional sports networks and its FX cable channel on the map.

Chernin is credited with bringing structure and management to an organization that suffered from the chaos of such fast-and-furious expansion.

At the same time, Chernin has invested heavily in television writing and producing talent, catapulting Twentieth Century Fox Television to the top of the prime-time production ranks. That has, in turn, provided the company with the content to build cable channels and television stations.

Two more deals--one just completed and another in the last stages of negotiations--promise to further transform the media landscape and the company Chernin manages.

In a recent interview, Murdoch’s second-in-command discussed the importance of the company’s recent purchase of Chris-Craft Industries. The acquisition makes Fox the nation’s leading TV broadcaster and the only one with two stations in the top markets of New York and Los Angeles.

Although Chernin would not discuss the bidding war over DirecTV with EchoStar Communications Corp., he explained the strategy behind News Corp.’s interest in the nation’s leading satellite service and the company’s yearlong negotiations with its owner, Hughes Electronics Corp., a unit of General Motors Corp. To raise cash for the deal, News Corp. recently agreed to sell to Walt Disney Co. a children’s cable operation including the Family Channel that it purchased in 1997.

Question: With movies having some of the worst economics in entertainment, why is it important for News Corp. to be in that business?

Answer: The economics are lousy. It requires a minimum of $1 billion a year of cash for a pretty low rate of return. Most movie studios are running at a loss. If you do a 10% return, you are doing great. However, two things drive the pay television business, which is fundamentally the business we are in. They are movies and sports. There are probably 20 million to 25 million digital television households in the world today--households capable of getting 200, 300, 400 channels of video content. That number is expected to grow to 150 million in the next three or four years. There will be a voracious appetite for movie content. More channels demanding content, higher rates paid by pay television services.

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Question: Fox is the largest producer of prime-time television, with 26 programs, not all of which are on Fox networks. Why so many, and why produce for other networks?

Answer: We are a big television machine, and we think owning the negatives is pretty profitable in the first run and will have increasing value as there are more channels to go on.

We would limit the creative talent we are in business with if we only produced for the Fox network. There are shows like “The Practice,” which we produce for someone else’s network [ABC], but is now going into syndication on our cable channel and our stations. We like “Judging Amy,” which we are producing for someone else’s network [CBS] and will probably syndicate to someone else’s cable channel. There are plenty of profits to be derived at all different parts of this chain, and we don’t have to control every piece of it. In an ideal world, we would be producing about 50% of the shows for our own network and 50% for the other networks.

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Question: Disney will reuse ABC programming on the Family Channel. With rising production costs, is this the future?

Answer: Nobody knows. But the model for television is changing and has to change. Ten years ago, the networks each had an average share of 20% to 25%. A network show would air twice over a year, 40% of the American public would get a chance to see it, and then it would sit on the shelves for four or five years before it went to syndication. I don’t think that model is viable in a business where networks have a 45% to 50% share in combination. With two network runs, these shows are lucky to have 15% to 20% of the American population seeing them. We have a bigger investment in broadcasting than anyone, so we are not going to do anything to hurt the network or our television stations.

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Question: How else are you containing production costs?

Answer: We started a show on one of our Texas stations called “Texas Justice,” and we are rolling that out on a national basis. We are looking at lower-cost models on the network production side--reality and soap operas that are cheaper than things we have done in the past. We are trying to do shows together: Two sitcoms shooting different nights on the same sound stage to reduce our costs, or certain dramas shooting episodes back to back with the same director so you don’t have to prep for two shows.

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Question: Was buying Fox Family a mistake?

Answer: It was a good investment. We had a net cash investment of a couple hundred million dollars, and we ended up selling for $5.2 billion. Did we succeed wildly from a programming point of view? No. But these things take a long time. It took Nickelodeon eight to 10 years to hit its stride. We improved every single demographic measurement dramatically. But we looked around and said, “Are we desperate to be in the kids business?” and said “No.” It’s such a competitive business that unless we were prepared to duke it out to be No. 1, we figured we should get out.

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Question: What are the biggest benefits of duopolies--owning multiple stations in a market?

Answer: One is the ability to gain greater leverage with advertisers. If you are selling two television stations and one or two sports networks in a city like New York or L.A., you’re in a position to have a powerful voice with advertisers. Two, there are tremendous cost-control implications, whether it is in the buying of programming, running the stations out of one physical facility or big savings in news operations. Certainly, we’ll have different on-air personalities, but in terms of news-gathering assets, we can have 30% to 40% greater news-gathering assets than either of those stations had individually. The one duopoly we’ve operated prior to [the Chris-Craft acquisition] is in Dallas. Fox stations run at an average 40% to 50% margin. That [second] Dallas station runs at about 65%.

Third, it gives us an amazing position in the syndication business. Given the near impossibility of launching a national syndicated show without a New York presence, it gives us enormous opportunity to either grow our own syndication business or to be in a stronger position in dealing with third parties.

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Question: But Fox has been criticized for not using its huge station group to launch new syndicated shows.

Answer: It’s an area that we were disappointed in and where we’ve decided to be more aggressive. The No. 1 new syndicated launch over the last two years was a Fox show: “Divorce Court” two years ago and “Power of Attorney” last year.

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Question: Newspapers are Murdoch’s first love. Would he be interested in owning them in markets where News Corp. owns TV stations?

Answer: I’m not saying we’re drooling at the prospect, but we would certainly look at it if a big newspaper became available. It’s part of our genetic makeup.

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Question: Why buy DirecTV?

Answer: The one thing that is tremendously appealing to us is that DirecTV is one of only two national footprints, which we believe is very meaningful in leveling the playing field with the cable guys.

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Question: Does size matter?

Answer: You have to be big enough so that you can’t be pushed around, but we’re not desperate to be the biggest.

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Question: Do you see a time when major sports now on free TV are offered exclusively on a pay basis on cable or satellite?

Answer: I believe in advertising, but a secondary revenue stream [such as cable subscriptions] is a good thing to have. Inevitably, that will lead to major sporting events’ being available only on pay TV. But it’s not something we would like to do as a company. It would be a terrible thing for this country if free television became a secondary distribution outlet, which is essentially what it is in the movie business. Broadcasters run movies only after they air on pay television.

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Question: How will you remain in the good graces of cable operators if you become their biggest rival by buying DirecTV?

Answer: We think we are as good as the quality of the channels we have. I don’t think there are many cable operators who would want our channels to be exclusive to DirecTV.

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Question: What evidence is there that vertical integration works?

Answer: The evidence is the big television series. We generate profits as the producer and from advertising on local television stations, cable channels and international channels around the world. In failures, you are more exposed. Failure is going to happen to all of us all the time. But if you believe you are going to succeed more than you fail, those successes will be amplified in a vertically integrated structure.

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Question: Has consolidation among advertising agencies contributed to the recent slide in prime-time advertising revenues?

Answer: Most of what we’re seeing this year is the economy. But what we have seen already is greater information flow among advertisers. It used to be that you made hundreds of different discrete deals. Now, you are making a series of deals with seven or eight players and everybody knows about each deal, which tends to drive pricing down.

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Question: If Rupert were to die tomorrow, I’m told you are his immediate successor.

Answer: I don’t know about that. And Rupert isn’t going anywhere. He’s healthier than he’s been in years.

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Question: How many years before Murdoch’s eldest son, Lachlan, takes your job?

Answer: If people are looking at it like that I’d be surprised. Rupert has made it very clear that he would eventually like Lachlan to succeed him. At some point, Lachlan will run this company, and he will be better prepared than anybody because he will have spent so many years inside this company.