This is something to examine, because of the transformation underway, it is not totally analogous, it is however, very relevant.
ACTV is beachfront. What do you think Fox Sports Net Plus is worth?
How about the advertising?
RAINING MONEY
Cable networks become valuable real estate
By Matt Stump
The cable industry uses several measures to gauge its financial health. MSOs like to use operating cash flow, along with subscriber growth and revenue per subscriber. When MSOs think more long term, they gauge their financial health on how much systems are selling for and what's happening to the stock price. Currently, system sales are still hovering in the $2,000-per-subscriber range and stock prices are rising, bolstered by Microsoft's $1-billion investment in Comcast. Cable's financial health is certainly stronger than it was several years ago during the dog days of rate regulation.
But there's an even bigger story this year: the escalating prices being paid for cable program networks. The Disney buyout of E! in January was valued at $550 million, according to Paul Kagan Associates Inc. The CBS purchase of TNN and CMT equated to $1.48 billion. February's Court TV buyout by Time Warner Inc. placed a $390-million value on the network. Now, with Liberty Media Group looking to exit, there may be another price tag hung on Court TV by year's end.
News Corp. purchased International Family Entertainment for $1.4 billion this summer. Paxson Communications bought The Travel Channel for $75 million. And Fox/Liberty bought 40% of Rainbow's regional sports division for $850 million.
Even smaller networks are getting attention: E.W. Scripps has taken a large stake in The Food Network, and America's Health Network has been on the receiving end of a $40-million cash infusion.
Disney will spend upwards of $200 million for Classic Sports Network. Bob Johnson wants to take BET private in a deal that some shareholders believe isn't sweet enough at $800 million. And Seagram topped the year off last week with its plan to buy Viacom's interest in USA Network for $1.7 billion.
That's about $7.5 billion in cable programming sales in 1997 alone - easily the largest amount ever spent in one year to buy cable networks. A few years ago, cable networks were selling for $7 to $8 per subscriber. The price has easily doubled this year.
What gives?
First, major media companies covet the dwindling amount of analog channel space left on cable systems. Cable economics won't allow for unlimited additions to the basic tier. Digital rollouts are so iffy that analog space is the only safe bet for programmers who have a lot riding on new network concepts.
Second, major media companies are bolstering their portfolios, while others are buying up competitors. It's all about leveraging programming assets and eliminating potential competition.
Third, the definition of a cable network now goes beyond video entertainment. Many stand as identifiable brands ready to be exploited across markets and across continents. BET is a perfect example: Bob Johnson is branching out beyond cable to magazines, clubs and other logical extensions for the BET brand.
Discovery, MTV, Nickelodeon, Cartoon Network and others are selling merchandise, generating substantial revenue for their bottom lines. Rarely does a business plan for any new network stop at subscriber and ad revenue. Ancillary production sales, international rights and merchandise are playing an increasingly vital role in the revenue picture.
Many brands that work domestically work well abroad, too. Even a new network like The Food Network is drawing a lot of interest from the Japanese. What does this mean to the cable operator? Program networks that extend their brand to other arenas raise the visibility of cable in general. Cable has the real estate and programming that people want.
The operators would like it even more if rate increases could be held in check as programmers diversify their revenue streams. But that isn't realistic. They say rising water lifts all boats. In this case, even the MSOs can feel good about their partnerships with program networks that are now selling for handsome premiums.
(September 29, 1997)
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