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Fuzzy Picture for NBC’s Newest Cable Property

Times Staff Writer

When Comcast Corp. contemplated making a bid for Vivendi Universal’s entertainment assets this summer, it wasn’t exactly enamored of one of the properties on the block: USA Network.

Despite such hits as the quirky detective series “Monk,” USA lacks the devoted following that translates into cable success, Comcast executives contended during the negotiations. One of them dryly noted that the company could drop USA and suffer less viewer backlash than if it yanked the Weather Channel from its lineup.

Comcast ultimately backed away from making an offer to Vivendi. But as the country’s largest cable operator, it still is certain to play a big role in USA’s future.

Along with the rest of Vivendi’s U.S. entertainment operations, USA ultimately was snapped up by General Electric Co.'s NBC in a deal worth an estimated $14 billion -- one-third of which is attributed to the worth of the cable channel. Now, though, NBC must grapple with USA’s stagnant ratings and its steep subscription fees, which promise to make it a target for cable and satellite distributors determined to cut their costs. Chief among the companies gunning for USA: Comcast.

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USA is especially vulnerable now. Contracts with cable and satellite TV distributors that deliver USA to an estimated 80% of the channel’s subscribers have lapsed or are coming up for renewal in the next three years, according to industry sources. Comcast’s agreement with USA expires in two years.

USA is “charging ‘must-have’ prices, but it’s not a ‘must-have’ network,” one cable source said.

Neither Comcast nor NBC would comment about the potential showdown over USA.

Network insiders, however, say they aren’t worried. NBC Chief Executive Bob Wright, who is slated to run the new NBC Universal, “is great at figuring out ways to keep rates from going down,” one TV executive said.

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Still, the threat to USA underscores the fragile economics of cable channels, which are growing ever more anxious as half their revenue base -- subscription fees -- comes under attack by distributors.

Foremost in the distributors’ sights are Walt Disney Co.'s ESPN and News Corp.'s regional sports networks, because they charge the highest subscription fees in the industry.

But distributors are scrutinizing all channels. They are raising particularly tough questions about the relevance of broad-based “general entertainment networks” such as USA in a 500-channel universe overflowing with specialty outlets and on- demand services.

“We are not just talking about sports,” said Fred Dressler, programming chief at Time Warner Cable, the country’s second-largest cable operator. “All networks that don’t have good ratings or strong brand loyalty are going to have problems with operators that are trying to get their costs under control.”

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Already, Comcast has exercised its clout as the cable provider to 1 in 4 pay TV households, cutting its programming costs this year by $270 million, largely by slashing subscription fees. It is aiming for additional 5% annual reductions over the next several years.

“It’s a tough environment,” acknowledged David Zaslav, president of NBC Cable Networks.

“For this to work, we have to make each channel more important, give each a clear identity. People still watch only 14 or 15 channels -- and those are the ones we want to be.”

Cable channels long have been seen as the last growth engine of the entertainment business. That’s one reason NBC was so eager to gain control of not only Universal’s USA Network but also its Sci Fi Channel, Trio and its 50% stake in the Sundance Channel. The Universal deal promises to triple the revenue that NBC generates from its cable portfolio, which already includes CNBC, MSNBC and Bravo, as well as stakes in several other channels such as A&E.;

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But increasingly, the financial health of cable programmers is looking shaky.

Fragmented Audience

Although some channels such as Viacom Inc.'s MTV are going strong, others have been showing signs of weakness as the number of networks has proliferated. With viewers enjoying so many options these days -- from Animal Planet to the Zhong Tian Channel -- solid ratings have become tougher to achieve and advertising dollars more difficult to draw in.

At the same time, cable channels have seen the once-spectacular growth in their subscription revenues slow as pay TV has saturated the marketplace; more than 80% of all U.S. households now have pay TV.

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Faced with these trends, cable channels can ill afford to lower the fees that they charge distributors -- though that’s just the prospect they are up against.

One showdown occurred with Disney, which purchased the ABC Family Channel in 2001 and counted on steep subscription hikes to cover the $5.3-billion cost. Most operators have refused to give in to Disney’s demands, citing the channel’s lackluster ratings.

“USA could be the next Family Channel,” an executive at one major distributor said.

“Cable has traditionally been built on passionate audiences -- for sports, news, music, kids. USA gets eyeballs, but people don’t know what it stands for. It’s been searching a long time.”

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Indeed, USA’s ratings have declined since 1999, though it remains the second-highest-rated network on cable. Its long reliance on B-list reruns such as Chuck Norris’s 10-year-old western drama “Walker, Texas Ranger” and “JAG” has only reinforced its reputation as an oldies channel and a throwback to the days when cable could afford little else.

Founded in 1977 as the Madison Square Garden channel, USA started life as a sports outlet, securing the first professional baseball and basketball games for cable.

Five years later, it was transformed into one of the first general entertainment networks after its purchase by a consortium of Time Inc., Paramount Pictures and MCA Inc., then owner of Universal Studios. In 1997, an acrimonious breakup of the partnership then controlling USA led to several years of turmoil at the network.

At one point, media mogul Barry Diller bought the channel and spent heavily to recast its image, transforming it from a lowbrow outlet into a magnet for young hipsters. But the new programming bombed.

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What hurt ratings most, however, was the loss of USA’s most popular franchise, World Wrestling Entertainment, to Viacom.

Two years ago, Diller sold the TV assets, including USA, to Vivendi. The channel has been clawing its way back ever since.

With $500 million earmarked for original programming, USA has gained traction with new shows. Besides “Monk,” which just snared an Emmy award, its up-and-coming fare includes “The Dead Zone” and “Peacemakers.”

NBC could provide a further lift.

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The chief of NBC Entertainment, Jeff Zucker, will oversee programming for the new NBC Universal venture. That sets the stage for shows to flow easily between broadcast and cable channels, enjoying the kind of cross-promotional push that already has borne fruit.

Blurring the Lines

Since NBC took over the Bravo channel last year, for example, heavy promotion by the broadcaster has helped Bravo’s “Queer Eye for the Straight Guy” become a breakout hit. Recycling the show on NBC also has increased ratings for the cable channel.

“It shows the real ability to move viewers to cable using the NBC network,” Zaslav said.

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Such blurring of the lines between broadcast and cable is bound to become more prevalent industrywide, many believe, as media executives seek to wring more value from their programming investments.

“We’re in uncharted territory right now in television,” Zucker said.

As for shoring up USA’s financial position, NBC may have a few cards to play there as well.

For example, NBC could resort to putting some of its exclusive Olympics coverage on USA as a way to protect the cable property. Or the broadcaster could offer cable operators the kind of high-definition programming that they crave to compete with satellite rivals.

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In addition, rights to Universal movies someday could be used to turn the heads of cable distributors eager to get new releases for video-on-demand services.

Yet what traditionally has been the broadcast networks’ most powerful weapon is unavailable to NBC right now.

Typically, when a cable distributor threatens to drop a particular channel or seeks to lower the subscription fees it pays, a network such as NBC retaliates by threatening to withhold its signal. If it followed through, the cable distributor would be left with a gaping hole in its offerings.

Sources say, however, that because of its contractual obligations with the major cable operators, NBC cannot invoke that power until at least 2008, foisting USA into the distributors’ line of fire.

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“That means USA must stand on its own merits,” one cable executive said, “without NBC’s leverage.”


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