The Channel Explosion

October 2007

By Peter Caranicas

History is full of irony.
Back in 1993, Howard Stringer warned of the dangers that “the future world of
500 channels” would pose for television. Speaking at the National Association
of Broadcasters convention, he warned that the proliferation of channels didn’t
necessarily lead to more and better programming. With so many time slots to
fill, he argued, the quality of the programming on those channels could be
diluted.

That outlook now seems a
bit quaint. The media world has changed immeasurably in the 14 years since
Stringer’s pronouncement. The number of channels has exploded and program
diversity has done nothing but rise to fill the multiplying hours of television
time.

When Stringer issued his
caveat, he was president of the CBS Broadcast Group, leading a giant U.S. TV
network in the fight against the multi–channel cable and satellite services that were
nipping at its heels.

He has since been knighted
and has joined the opposition. Sir Howard Stringer is now chairman and CEO of
the Sony Corporation. The media giant he now runs is not only a major
contributor to today’s worldwide channel explosion, but also manufactures many
of the devices on which consumers can view these new channels.

Sony develops and launches
channel brands through its Sony Pictures Television International (SPTI) unit.
These include: the entertainment programming of Sony Entertainment Television
(SET), available to 54 million households in 34 countries; the Animax anime
channel, which reaches 40 million homes in 42 countries; and the
action-adventure channels of AXN, which is celebrating its tenth anniversary
this year, reaching over 120 million households in more than 60 countries.

“There’s a tremendous
appetite everywhere in the world” for Sony’s channels, says Andy Kaplan, the
president of international networks for SPTI. Indeed, there’s demand not only
for Sony’s channels, but also for those of other major media companies like
Viacom, Time Warner, Disney and BBC—not to mention a host of other
channels launched by smaller, independent operators.

It is this demand for
alternatives to traditional TV viewing in many territories that has spurred an
exponential rise in the number of channels around the world in recent years.
But if this proliferation is being pulled by demand, it is also helped by
advancing digital technology, which has made the task of launching a channel
easier in some ways.

DIGITAL HELP

“The key issue of any
channel is distribution,” says Bhavneet Singh, the managing director and senior
VP of Emerging Markets at MTV Networks International (MTVNI). “Currently we
have to supply cable affiliates with a signal via satellites, and that means transponders.
As digitalization increases—which is beginning to happen—we are
increasingly able to just run a fiber line to a ‘super cable head-end’ in
markets such as the Netherlands, and therefore no satellites are required,
which makes the economics more compelling.”

Four new MTV channels are
making their appearance this year: MTV Ukraine launched in August; the
free-to-air MTV Arabiya is now becoming available to 26 million households
across the Middle East; MTV Hungary was scheduled to launch on September 29;
and a broadband MTV service is scheduled to be available in Israel in October.

Others agree that these
launches are helped by technology. “Digital provides more channel capacity, so
more opportunities for channel real estate,” says Sony’s Kaplan. “Expenses like
launch service costs and channel playout are decreasing,” says Sean Cohan, the
senior VP of international at A&E Television Networks (AETN), “especially
if you look at it on a global basis. Also, with more and more players like us
and other media companies distributing globally, there’s more synergy, and more
of a foundation on which to launch other channels.”

AETN is in the process of
launching several channel brands—including Crime & Investigation
Network, The History Channel and The Biography Channel—both in HD and in
standard definition, in many territories. In fact, AETN is on something of a
launching spree: in the first eight months of 2007 the company has debuted a
number of channels.

CONTENT AND TALENT

But while dropping costs
for technology have made the physical launch of new channels easier, they have
not necessarily made their development less costly.

“Basically you have two
issues: infrastructure and programming.” says Kaplan. “The more channels you
operate out of one place, the more economies of scale you have, so you can
spread your costs. But programming is always the biggest component, and the
higher-quality the programming, the more it will cost. But this should also
[lead to] higher revenues.”

Kaplan adds that “certain
things are conspiring to make launching a channel at least as expensive” as it
always has been. While certain physical production costs may be falling, other
costs are rising. “If you weren’t producing on HD five years ago and you’re
producing on HD now, that’s a cost driver. While HD might be cheaper now than
it was three years ago, if you’re doing more in HD your costs are rising a
little bit.”

“The cost of capacity in
the sky has come down,” says Russell Wolff, the executive VP and managing
director of ESPN International. “From that point of view, it’s less expensive
to launch a channel. But to launch a good channel that has quality content and
that is well-–produced, well, I don’t think the cost of that has
changed dramatically over the years. Your biggest cost is going to be the cost
of programming, production and talent, and those have generally not come down.”

ESPN owns and/or operates
more than 30 sports channels around the world in addition to its six channels
in the U.S., according to Wolff. The relationship with these channels ranges “from
full ownership to a partnership where we have an equity stake,” he says.
Although most are ESPN-branded, some are branded differently because they’re
joint ventures with other large media companies.

For Dean Possenniskie, the
senior VP of Global Channels for Europe, the Middle East and Africa at BBC
Worldwide, launching quality channels around the world remains an expensive
proposition. “Technology costs and some operating costs have come down,” he
says, “but I don’t think it has become cheaper, depending on the league you
want to operate in, and we want to be right at the top. The new channels we’re
launching now will be more expensive than channels launched in the past.”

BBC Worldwide’s
new-channel plans are ambitious. The company has created a portfolio of new
brands—including BBC Entertainment, CBeebies, BBC Knowledge and BBC
Lifestyle—to be distributed in several territories.

“The channels we’re
launching will be expensive because we’re so focused on the best content,” says
Possenniskie. “Forty percent of [our costs are] driven by content—and by
the fact that we’re going after the best [programs], both from our parent
company and from other suppliers.”

The cost of talent is also
an issue for channel developer Zonemedia, creator of such international
channels as Zone Reality, Zone Romantica and Zone Horror. “There may be savings
on the technical side,” says Chris Sharp, Zonemedia’s chief programming officer
and general manager, “but on the other side, costs go up. To get good people,
to get some of the top people in the business—that cost is always high.
Plus, content gets more expensive every year.”

There is universal
agreement that launching new channels cannot be accomplished merely by beaming
content to a new territory and then blitzing viewers with promotional material.
The key to a successful launch is localizing the content and, in some cases,
supplementing it with original productions.

“All [our new channels] are identifiably part of the MTV family, but all are localized,” says Singh. “They
start with a certain amount of international production, and the language is
localized either by dubbing or subtitling—whatever the preferred option
might be in that market. But, the channels also include local production:
localized versions of popular MTV formats, such as TRL, and also original local
productions.”

“We’ve always seen
localization of our content as really critical,” says AETN’s Cohan. “That’s in part
because our genres are very personal, and they lend themselves naturally to
local content. With The History Channel, it’s important to appeal to local
countries, to make it their History Channel. So a significant part of the
programming is either locally acquired or locally produced. That goes across
our channels, and across countries.”

Needless to say, such
customization does not come cheap. “It certainly adds to our expenses,” Cohan
continues, “and, depending on the territory, it can be hard to find or produce
content that is up to our quality standards. But it’s critical. We’ve got
genres—history, biography, crime—that people are passionate about.”

Like those of many
international channel developers, AETN’s costs extend to setting up operations
in several of the countries where it broadcasts. “It’s like we’re assembled
locally, we often produce or acquire locally, and we’re distributed locally. So
we’ve got large pockets of operations in a lot of the major markets.”

“There are still content
providers out there who are doing it more centrally than we are,” adds Cohan. “That’s
not a luxury that we have. We need to be perceived as being a local channel.”

LOCAL COMPETITION

Much of this customization
appears to be driven by home-grown competition to many of the new channels
distributed to local markets by large media companies. “When we were first
launching these channels, the market was quite different,” recalls Sharp of
Zonemedia, a former independent that is now 90-percent owned by Liberty Global’s
Chellomedia subsidiary. “There was not quite so much competition, not so many
other players—certainly not local players.”

Like many other
channel-brand companies, Zonemedia’s response was to make its channels appear
more local. “We go against that competition by localizing our channels more and
more,” Sharp explains. “We do that not just through programs, but with on-air
branding, local voices, interstitials and so on. We’ve been working hard on
those areas in the last year.”

Zonemedia now has more
than 20 feeds across its portfolio of brands, according to Sharp. These include
separate Zone Reality channels for Latin America, Asia and the U.K. “There’s
some commonality of programming among them,” he says, “but there’s also strong
localization.”

Original production is
often necessary for authentic localization, and this can add to the expenses of
a newly launched channel. Nevertheless, like others, Zonemedia has embraced
local production in order to make its offerings more relevant to their
respective markets. The company commissioned the reality show Psychic Private
Eyes last year, ordering 15 episodes to start and then another ten. “We’ve also
done smaller things like series of shorts,” says Sharp. “Producing additional
content is a new area for us.”

Sports—a national
and local passion—is another area where localization is essential.
Cricket is hugely popular in India; football evokes emotion in Brazil; South
Africans love rugby. Different regions support different teams. ESPN’s various
channels could not work without localization.

“We’ve spent much of the
last five years making our channels more locally relevant,” says ESPN’s Wolff. “There
are now 13 localized versions of SportsCenter. Some of them serve single
countries, some serve regions, but our sports news-and-information franchises
are now much more local than they were five years ago, when we had only one
version of the show.”

NARROW VS. TOO NARROW

Then there’s the question
of when a channel is too narrow to be viable. Like the answer to many other
questions, it depends on the size of the territory. “Some of the bigger players
need to reach as many eyeballs as they can, in the most efficient way,” notes
Sony’s Kaplan. “So, in most cases, broader is better. But for some very
targeted advertisers, niche is the perfect solution.”

Niche and genre can also
deliver desired demographics. ESPN, for example, is well-positioned to deliver
the coveted male 18-to-35 and 18-to-49 age groups. “It’s a hard demographic to
reach,” says ESPN’s Wolff. “Sports is the sweet spot for reaching them, and
ESPN is at the sweet spot of sports. Men are not watching telenovelas.”

Advertising is an
important driver for many new channels, although they follow a variety of
revenue models, depending on a host of factors. “Our core business has two
revenue streams,” notes ESPN’s Wolff, “affiliate revenue and advertising
revenue. The split between those two changes market by market.”

MTV’s experience is
similarly mixed. “The financial model tends to be a combination,” says Singh. “If
you look at most of our channels, we’ve built on both pillars: advertising and
subscription. In some markets, it’s more advertising-based, whereas others are
more subscription.

“The mix depends on the
market,” Singh continues. “MTV Arabiya is a case where there is no subscription
because it’s a free-to-air channel, as is MTV Turkey, which was launched in
October last year. In Poland we have Viva, VH1 and MTV. Viva is free-to-air,
completely ad-funded, and it has the biggest distribution. MTV and VH1 are
subscription channels but also advertising-supported.”

BBC’s new channels are
following a pure advertiser-supported model. “We’re investing to create local
feeds for each market, so we can open up a local ad window in Poland, Africa,
Italy and other territories,” says BBC’s Possenniskie. “There will be
advertising support in every market we launch in.”

Possenniskie acknowledges
that this commercial model is “a big change from most people’s perception of
the BBC as a noncommercial entity in the U.K. These new channels will be fully
commercial, which is why you’ll find many more commercial people such as myself
arriving at BBC Worldwide. We’re absolutely gearing up for a successful ad
sales business.” Prior to joining BBC Worldwide, Possenniskie worked at MTV
Networks Europe, where he helped develop some of the channels that are now
being overseen by Singh.

Likewise, Zonemedia is
mostly going down the commercial path with its genre channels. “In bigger
markets, advertisers recognize that digital channels are really useful for
them,” says Zonemedia’s Sharp. We don’t have the large amounts of wastage that
terrestrial channels have. Our audience is much smaller, but we’re quite
targeted—women of a certain age, for example. With Zone Romantica we’re
delivering an older woman; on Zone Club, we’re delivering a younger woman. It
was difficult in the beginning because we were dealing in small audiences, but
audiences have grown and advertisers realize that channels like ours are very
useful.”

DISTRIBUTION &
BRANDING

“It’s not an exaggeration
to say that [the explosion of new channels] is the best thing that’s ever
happened,” to distributors, says Herb Lazarus the president of Carsey-Werner
International. “Plus, when you add to that the new technology like VOD, SVOD,
mobile—most of which is not yet fully developed, but it’s coming—that’s
terrific for a company like Carsey-Werner, with the extensive library we have.”

While it is not in the
business of developing new programs, Carsey-Werner distributes hit American
sitcoms like Cosby, The Cosby Show, Roseanne, 3rd Rock from the Sun and That ’70s
Show. In addition, Carsey-Werner handles distribution for the Stephen J. Cannell
catalogue of one-hour action-adventure series like 21 Jump Street and
Hardcastle & McCormick.

With its double library,
Carsey-Werner is well-positioned as new, niche channels continue to
proliferate, says Lazarus. “The comedy channels and the action channels that
have arisen around the world both fit in beautifully with what we’re doing. We’ve
got Cannell programs for action channels, and sitcoms for comedy channels. When
they’re developing a new channel, we’re the first one they call.”

Channels call Carsey-Werner
because its programs are proven brands. Indeed, the importance of branding
cannot be overestimated, and in some cases it will extend to channels as well
as shows.

Philippe Dauman, the
president and CEO of Viacom, makes the point that, while in the world of
network broadcasting, the program rather than the network is the brand to which
viewers gravitate, in the cable arena, “people will go to our network because
it is MTV or because it is Nickelodeon.”

In addition to MTV and
Nickelodeon, Viacom has successfully established Comedy Central as a brand in
several territories, including Germany, which Dauman describes as “an example
of a territory where we can reinforce our presence in a market that has a lot
of advertising revenue.” Viacom is now “looking for international opportunities
for BET,” Dauman adds, referring to the U.S. cable network geared to black
Americans.

Branding is also critical
to the BBC’s strategy for launching new channels. “They’ll all be BBC-branded
channels,” says Possenniskie. “We’re competing with the other major brands… and
we’ll be running major marketing campaigns” leveraging the recognition of the
BBC.

Does the optimism at
Viacom and BBC Worldwide signal that channel launching is a game for major
players? Being big helps, according to Sony’s Kaplan. “I’m a big believer in
real estate,” he says. “The more space you can grab, the more costs you can
spread and the more cross-channel promoting you can do, which is a big
advantage. Getting the word out and establishing your brand is key and the more
efficient you can be in doing this, the farther you can stretch your dollars.”

“If you’re part of a big
media corporation, it helps because you can play a longer game,” agrees MTVNI’s
Singh. But from the vantage point of MTV, which faces youth-oriented
competition around the world, “there are a lot of examples of successful
locally bred channels that have done very well in the market.”

ESPN also competes
vigorously against local channels. “It’s on a market-by-market basis, but we’re
up against local competitors in many territories,” says ESPN’s Wolff. “It’s not
just cable channels. In many places there’s still a fair amount of sports on
terrestrial tele–vision.” Wolff cites India and Latin America as
markets where ESPN faces its stiffest competition.

SUPPLY AND DEMAND

Sony’s Kaplan also
believes that the channel explosion can, in a sense, perpetuate itself because
demand creates supply and vice versa. “There’s no question about it. More channels
mean more buyers,” he says. “In the supply-and-demand equation, more buyers
means more selling opportunities for all of the distributors, including the
smaller ones.”

Cathy Payne, the chief
executive of Southern Star International, isn’t quite so sanguine. The channel
explosion can cut both ways for distributors, she says, with prices going up
for some product but not for other content.

Payne divides channels
into two camps. “Free-to-air television has become all about big brands and big
hits,” she explains. “In free-to-air they will pay a huge amount of money for
the shows they really want and that will really make a difference, and the rest
of the schedule has to be filled quite economically. That’s happening more and
more. If it’s a show that is a really big hit, sure, people will pay a lot.

“When it comes to the
digital channels,” she continues, “the ones that are associated with
terrestrial channels—say ITV’s ITV2 and ITV3, or Channel 4’s E4 or More4
or Five’s Five Life and Five U.S.—enjoy the benefits from the big brands
that their parent channels can acquire. Those broadcasters amortize the cost of
programming across their channels. And when they control the assets, they can
pull the viewers across from channel to channel. They can premiere the first
episodes on their digital channels to drive viewers.”

Southern Star has been
digitally re-mastering its library for the past few years. “We have kept
control of all our language versions,” says Payne. “This allows us to service
the growing free-to-air digital platforms both time-efficiently and
economically.”

The launch of all these
new channels naturally brings several questions into focus. Will the market
become oversaturated? And, more fundamentally, even as linear TV channels
continue to proliferate, could new distribution technologies render them less
relevant in the future?

“Yes, it’s a crowded
market now, with channels launching nearly every month, if not every week,”
acknowledges BBC’s Possenniskie. “But we’re taking it on and making a major
investment in it. We’re setting up infrastructure. Very few channel networks
would jump into the deep end to this extent. [Our new] channels will take up to
three years to break even. Our goal is to be the number-one channel in the
market, and to get to that level we’re investing in a commercial team,
scheduling, programming, marketing and local production.”

The potential saturation
point also varies by territory. “In some places that aren’t yet mature and
fully penetrated, there are clearly opportunities for more general
entertainment channels,” says Sony’s Kaplan. “In places that are saturated with
general entertainment, niche is the way to go.”

Saturation or no
saturation, AETN plans to go ahead with several more launches. “We’re
definitely planning on launching new brands,” says AETN’s Cohan. “There are
still territories that don’t yet have any AETN properties; we’re selling
programming into those markets, but don’t have any channels yet. You’ll see us
take our existing brands to all territories, and you may see us launch
additional brands in the future.”

Zonemedia’s Sharp believes
there may be a saturation point, but that it has not yet been reached. “If you
look at some of the bigger markets, channels like ours are taking audience from
some of the more established players. But I don’t think it has really reached
saturation yet, because some markets are still underdeveloped.” Case in point:
Zonemedia recently launched a local version of Zone Romantica in Romania.

But no smart channel
executive should ever become complacent about the future because the very
perception of what constitutes a TV channel is changing—especially among
younger viewers. “The days of
linear channels are numbered,” says Harold Gronenthal, the senior VP of program
acquisitions and international development at Rainbow Media Holdings, whose
channel brands include AMC, The Independent Film Channel and WE tv.

“Young kids don’t watch
channels anymore,” Gronenthal adds. “They just watch shows. They find them
wherever they are, and watch them whenever they like. So somewhere down the
road, linear channels may be doomed, but I don’t know if we are there yet.”

In the meantime, the
channel explosion continues.