Jeffrey Bewkes

March 23, 2009 World Screen
Chairman & CEO
Time Warner
 
When Jeffrey Bewkes became CEO of Time Warner last year, he took over a content powerhouse. The Warner Bros. studio produces and distributes a constant output of hit feature films and TV series. Turner Broadcasting’s portfolio of channels, such as CNN, Cartoon Network, TNT, TBS, TCM and Boomerang, are among the strongest performers in the cable industry. The pay-TV service HBO has been a pioneer in groundbreaking quality original programming. 
And, of course, there is AOL, the Internet portal that provides interactive and e-commerce services. In 2000, AOL rocked the media world with its pronouncements that “old media” was dead and “new media” would dominate as it acquired Time Warner—a merger that proved to be one of the biggest mistakes in the history of corporate America. Bewkes’s predecessor, Richard Parsons, had to clean up the mess caused by the merger, and Bewkes now has to decide whether or not to keep AOL.
Another area of concern for Bewkes is Time Warner’s stock price—like all media companies, Time Warner is undervalued by Wall Street. Investors and analysts are expecting Bewkes to restructure the company in an effort to boost its share price, which is now about 10 percent of what it was before the merger. The first such move is nearly complete. Time Warner management has announced the spinoff of Time Warner Cable, which is expected to bring in some $9.25 billion.
Bewkes has been with Time Warner much of his career, starting at HBO in 1986 as CFO. He was part of the team that made the company the leading pay-TV service in the U.S. HBO revolutionized the concept of cable programming with its original series and movies, which regularly snatch the lions’ share of Primetime Emmy Awards each year. As Bewkes moved up to president and COO and then CEO of HBO, the service went on to pioneer multiplex channels and on-demand services, and expanded into territories overseas.
Bewkes served as the chairman of Time Warner’s entertainment and networks group, then as the president of Time Warner before being named CEO in January 2008. Earlier this year, he took on the title of chairman as well. Today, he oversees a media conglomerate with revenues in 2008 of $47 billion.
On Bewkes’s watch, Turner Broadcasting’s TNT and TBS have been producing a slew of critically acclaimed and rating-grabbing series, such as The Closer, Saving Grace and, most recently, Trust Me. CNN had a record-breaking year in 2008, thanks to the presidential campaign, and on election night it pioneered some eye-catching special effects that enhanced its coverage. Cartoon Network has established itself as a leading destination for young boys during the day, and its Adult Swim block pulls in older viewers in the late-night hours.
These channels are not only thriving in the U.S., they are driving Time Warner’s international businesses, as is Warner Bros.’s slate of feature films and television series, which include The Dark Knight and The Mentalist.
Bewkes loves talking about his passion for the movies, programs and channels that are the jewels in the Time Warner crown. He met with World Screen’s editorial board in the Time Warner Center in Manhattan.
 
WS: What are you going to do with all the cash from the spinoff of the cable division?
BEWKES: In this current stressed economic environment, we are fortunate to have not just the cash coming in from the cable dividend, $9.25 billion, but we have a pretty strong balance sheet. It’s not over-leveraged with debt. We also have a steady and strong cash flow. And our cash flow, in relation to our earnings, is usually at the top of the media business. So with the cable dividend, our ongoing cash flow, and our already strong balance sheet, we can do all three things that you want to do on capital management. First, strengthen our balance sheet, which basically means reducing the debt level so we have plenty of liquidity and access to capital. Second, maintain strategic flexibility for acquisitions if we find bargains that strengthen our businesses. And third, we can provide a return to shareholders through dividends and buybacks, making Time Warner a superior investment for the current period. Those are distinct advantages that Time Warner has that most of the other media companies don’t have.

WS: What happened to the concept that a media company must control content and the distribution pipes? Didn’t Wall Street value the leverage of owning distribution?
BEWKES: It probably was helpful in the past, but it hasn’t been particularly important for at least five years, and it depends which com-pany you are talking about. In our case, the theory was that we needed to own cable systems in order to get optimal position and price for CNN, HBO and TNT on other cable and satellite systems that we didn’t own. Well, at this point, we don’t need to own distribution because our networks are so strong in terms of ratings and distinctiveness of their programming, that they can get, and they do get, good distribution position and price terms and so forth, just on the strength of what they are as content brands. And the proof of it is that the distribution terms for CNN or HBO are the same at Time Warner Cable as they are at Cox, Comcast or DIRECTV.
To go to the second point, even when that argument was being made five or ten years ago, no network company had an ownership of cable or satellite distribution to prove the theory. The only one close was us, and our cable ownership, at most, was 15 percent of the households in the U.S. Because we were running the number one pay channel with HBO, the number one news channel with CNN, and TNT and TBS had been at the top of the general basic channels, we got the same strong distribution carriage in cable and satellite systems—whether we owned them or not. Even when we owned cable, 85 percent of our household distribution comes from companies that we do not own, and we still had the same position that got us into the lead in all those categories.
 
WS: Even before the whole financial meltdown, why is it that media companies have not been perceived as good investments by Wall Street?
BEWKES: That’s a very good question. If we leave out the financial crisis that started last year, and look at the preceding three or four years, your question would stand: Why is it that media stocks during those years—2005, 2006, 2007—didn’t go anywhere? If you look at most of that period, we were growing earnings around the 8- to 12-percent range quite regularly. In a normal long-term average, the value of your company would go up somewhat in line with the growth in your earnings, 8 to 12 percent. But that didn’t happen for most of the media companies, even though they were hitting expectations. And the reason is that when investors looked out three, four or five years, they assumed that the earnings would stop and go flat. They thought that media earnings from advertising on networks, movie tickets, DVD sales, etc., would go flat because piracy and digital convergence would hollow out the revenues.
 
WS: Were they scared that what happened to the music industry would happen to media companies?
BEWKES: Yes, although music was different because the music industry was selling CDs for $14. It didn’t have advertising, and everybody worried that people would do in films what they did in music, which was steal the CDs. The media business—video, film, etc.—has two sides. One was advertising, and that would get hollowed out by DVR machines or by Internet ads taking away television ads. The other was equivalent to music, which was, OK, they’re not going to buy DVDs anymore, they are going to steal them. And there are two forms of piracy. One form is commercial piracy, where you can buy a copy of The Curious Case of Benjamin Button for $1 on a blanket on the street in a less-developed country. It’s a physical DVD that somebody made and sold for money. It’s almost like having your truckload of goods get hijacked and sold by those who stole the truck. That’s one kind of piracy, and it accounts for most of the piracy in the less-developed countries. The second kind of piracy is the music type, which is file-sharing Internet piracy, where you are essentially taking copies digitally, putting them up on the Internet, and people are “sharing” them—watching them without paying. For that you need a decent broadband infrastructure, like they have in Germany, parts of Western Europe or Korea. And that is a bit different, because generally the intermediaries on that piracy are not making money, whereas the guys selling DVDs on a blanket are. Those were the fears analysts had regarding the media industry: advertising and piracy.
 
WS: What about Google—do you think Wall Street became too enamored with this “new” media company and investors decided it was more sexy and a better investment than “traditional” media companies?
BEWKES: Public company investment wants growth, and so when they bid up Google to $700 to $800 a share, they were putting a growth assumption into that for the future, which was relatively much higher than the assumption for media earnings. Google since that peak is off 50 percent or more. We’re off less, so there’s your relative good news.
 
WS: Considering the bad economic climate, are your international businesses still good drivers for you? And what territories are you looking at?
BEWKES: The international businesses are growing quite well even in this financial crisis. We do think that in the medium and long-term they will continue to be strong drivers with growth above what you get in the developed countries. In the very short term, it varies depending on what country you are talking about. There’s that saying, There is no international, there is Brazil, or Ukraine or India. It’s different in each place. In some of the highest growth areas, Brazil, Russia, India, China and Eastern Europe, there has been in the last six months a lot of dislocation, because as the financial crisis has pulled the developed industrial countries into supporting their banking systems, that has pulled capital from the fringe economies.
If you looked at share-price drops in the “emerging market” countries, the drop in stock-price indexes has been more than in the U.S. Now, that doesn’t change the fact that the demographic and industrial growth figures for those countries will be better and faster, particularly for media, than the ones for the developed world, once you get through this crisis. And so we are going to keep investing with resolve in all our international operations: in new networks, local production of films and television shows. We’ll be focusing on India, Eastern Europe and South America. And we already have large incumbent operating positions in Western Europe, U.K. and Japan.
 
WS: Your cable channels are doing very well. As a cable channel garners larger and larger audiences, at times even better than broadcast networks, does it become less willing to take risks?
BEWKES: TNT has more original programming in development this year than it’s ever had before. If you look at its original programming risk strategy, right now, they’ve got six new series and ten original shows on the air. And the shows fit the TNT consumer promise, which is, this is about drama; it’s about authenticity. A TNT show is not necessarily going to be made, cast and shaped the same way as you would shape a broadcast series that aims for the widest possible audience. We’re not aiming for that. You could go over to MTV Networks or Discovery and find some of the same strategy. Because we are able to look for programming that fits the brand of our network, the economic risk involved in having hits and misses goes down. So we can take more risks, because we have permission from our viewers. They want to see exciting new things. They want to see us push the envelope on the promise we’ve made to give them new drama forms, not just the old ones.
So if you look at the series The Closer or Saving Grace or Raising the Bar or the new one Trust Me, they are less explanatory to their audience than they would need to be at one of the broadcast networks, because the broadcast network has to get the biggest possible audience. They’ve got to get the marginal viewer who may or may not be that interested, or who’s not right in the main area of either demo or interest in that kind of programming. That is not what a branded cable network needs to do. They need to deliver the more accentuated promise of what that show and what that network is trying to be.
 
WS: What synergies are there between Warner Bros. and Turner Broadcasting?
BEWKES: Warner is Turner’s lead supplier and Turner is Warner’s biggest customer. TNT and TBS’s acquired programming leads all the other networks. And that is because they have the reach and financial income, from fees and ads, to be able to pay the highest license fees for hits produced for the big networks.
Warner Bros. is the biggest producer of hit TV series. It’s in the business of making hits and selling them to the highest bidder, so we are able to sell a certain amount to our own networks. But we also need to sell a fair amount of our hit TV series to competitors, because if we didn’t, then we would no longer be able to be the leading producer or seller. The other channels would see us as essentially too much of an interested party that wasn’t offering a fair break. Warner Bros. is so big in making films and TV shows that we need to have open-supply relations with all networks. For example, we made Nip/Tuck, and it’s one of the leading shows on FX. We could have put it on TBS or TNT, but it didn’t fit our programming brands as well as it fit FX, so we put it there. The runner-up network to carry The Sopranos in basic cable was TNT, but it was not perfect for TNT, given the originals they wanted to do. And A&E Network wanted to pay much more for it. So we made the decision to sell it there, which had two benefits. One is, we made more money. And the second is, it keeps alive and healthy the desire for other networks to look to us for programming, because you can’t be the world’s biggest maker of TV series if you don’t sell to anybody outside your own house.
 
WS: How is Warner Bros.’s business doing?
BEWKES: We have the most consistent high earnings and most consistent high cash flow in the movie business. It’s a business that is supposed to be erratic, but it isn’t for us. Why? Because the TV business has the scale we just talked about, which is a big contributor to steady earnings, and on the movie side, we have a bigger slate with more tent poles and a bigger distribution system worldwide than our competition does.
We essentially are putting out four a year of the Harry Potter–, Dark Knight–size movies in terms of budgets, position in theaters and dominance of DVD sales. And our competitors are putting out, at most, two. These big franchise movies take two or three years lead time to make. We create a lot of distribution leverage when we take our films out because we have a lot of things that make money for the entire chain of theater owners and DVD suppliers, so it gives us a good position. Producers know they can essentially make more money producing and marketing through Warner’s than most of our competition, which gives us access to better projects. And if you then take that output and add it to the biggest TV series output, you have an even bigger advantage. And then those films and TV shows become available to HBO, TNT and TBS to give them an advantage, which then fuels back through the economics of the production side of Warner’s. So that is essentially the integration of Time Warner.
 
WS: With the evolution of all those franchise movies, will the mid-sized movies become less desirable to a company like yours because of the price of marketing?
BEWKES: No, it improves the economics of the mid-sized films. The challenge in the movie business, for American commercial global product, is that you have to have movies that can cross all languages and cultures. And that means that if you take certain films that are more specific to a given culture, or more sophisticated, or more character-driven, they may or may not work as well as a simpler movie would, in purely commercial terms, around the world. So the need for some kind of global commercial aspects for the tent-pole movies is fairly evident. Once you have those, it enables you then to get distribution on television and in movie theaters for the more sophisticated mid-range movies, which otherwise you would have some trouble supporting economically. Here are great examples this year: Gran Torino and The Curious Case of Benjamin Button. Neither of them are tent poles or sequel movies. Gran Torino came in at over $100 million at the box office; that is normally blockbuster territory. Gran Torino was not made for commercial purposes by Clint Eastwood, and yet it is that successful. Why? Because it’s a very fine film released in that distribution system that knows how to market movies and it is also aided by the power of those giant commercial tent poles.
We have a studio that deals with the global trends for mass-appeal movies, which then can bring in directors, character-specific movies, and have them be viable, and it’s hard to do that. We’re trying to do both. Because in Hollywood, if you ask,
Is Warner’s a directors’ studio, they’ll say, Yes, that’s the directors’ studio. Even though it has the Potters.
Warner has [a greater] ability to support director projects and provide financial support for those visions than some of our competitors, who are a little tighter financially and don’t have as big a slate, so they can’t afford as many mid-range shots for quality as we can. 

WS: How has HBO constantly been an innovator in the cable universe?
BEWKES: If I think back 20 years, satellite delivery was invented at HBO. Original programming on cable was invented at HBO. Multiplex channels, invented at HBO. Video on demand, launched and invented at HBO. And I love that HBO continues this tradition of innovation in broadband.
Just as it was first in VOD, HBO is first in a service that will soon be launched by the cable industry, led by Time Warner Cable. It’s called HBO on Broadband. The proposition is that if you pay for a premium channel you should have access to the programming anytime and anywhere you’d like. For one price, HBO will make its content available to you via the HBO networks, via HBO on Demand and via HBO on Broadband.
 
WS: Why is that important?
BEWKES: Cable operators and satellite companies no longer need to be worried that a network is placing its programming on broadband if you have to remain a video subscriber to watch the programming on broadband.
And the second issue is that when advertising-supported content is made available on broadband, the advertising load should not be too much less than what it is on broadcast or cable networks. So we are making the viewer experience better, driving viewers over to something with no carriage fees. And the cable industry is building an ad system that is similar to Google’s. The ads don’t interrupt the programming and they are relevant to what you are interested in. So when you have all the programming on demand with essentially nonintrusive advertising, you now have an effective medium that is identical to what YouTube is trying to do, but YouTube doesn’t have the programming.
 
WS: How has HBO’s programming evolved over the years?
BEWKES: HBO has more original programming in development this year than it’s ever had before. In its earlier days, HBO acquired movies and concerts from other sources and replayed them. It was a great place to get movies uninterrupted by commercials, in a very efficient buy, if you were paying, say, $10 a month. But as the other methods of getting movies, the VCR, DVDs and so on, came in, HBO needed to broaden. It became a key risk-seeking activity for HBO to pioneer original programming. Which it did in most of the forms that you are familiar with in network TV: mini-series, original movies, half-hour comedies, hour dramas, talk shows, documentaries, sports journalism. But as you are watching these genres on HBO, is it the same risk that a program on a network would be? No—and this is the key difference in premium or pay TV.
The economic motivation of HBO in taking a risk on making a program is not to get the widest audience, because the economic aim of HBO is not to sell the audience to an advertiser. They’re not selling the breadth of the audience, and they are not selling the demo either, which is all of what advertising-supported networks do. HBO is selling a programming service to its viewers. This enables HBO to focus programming risks into the authentic nature of whatever the subject is. So if it’s a drama, it can be made in a certain way—you can think of The Sopranos—where they were just going for the excellent realization of that show. HBO didn’t care that much whether Sopranos had more ratings or fewer ratings. They don’t make any money with more ratings. The way they make money is by having a programming slate that, across many, many programs, has enough distinctiveness that people sign up for the service.
There is a bit of a mitigating factor. If you have a hit that happens to have wide appeal, you can maybe sell more DVDs in aftermarkets. And if you takeSopranos, or True Blood, to England to try to sell it to TV broadcasters, you might be more successful than with another show.
 
WS: What are some of the risks HBO has taken with its original programming?
BEWKES: When we were casting The Sopranos, we took a risk on relative un-knowns—we chose James Gandolfini as the lead. Now stop for a second and think whether any commercially driven ad-supported network would cast James Gandolfini as Tony Soprano? Time and time again—Sex and the City, Six Feet Under, Deadwood, True Blood—HBO focuses on finding the best talent for the role. Some make the mistake of looking for marquee names just for the sake of the name. HBO has always focused on quality.         

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