LOS ANGELES (AdAge.com) -- As NBC retrenches from its latest attempt to reinvent broadcast TV, perhaps it should look to its soon-to-be corporate sibling E!. Since 2007, the Comcast Entertainment cable network has developed a successful, highly profitable take on the old broadcast network formula -- find and create accessible stars and watch the viewers pour in, but for fractions of the cost of a single episode of "Heroes" or "Law & Order."
Meanwhile, cable TV has excelled at creating the next celebrity from scratch through much cheaper, unscripted reality TV. Enter E!, which has always been in the business of Hollywood news and entertainment coverage, but up until three years ago never had any talent it could call its own beyond Joel McHale ("The Soup") or E! News' Giuliana Rancic and Ryan Seacrest, himself already an established host of "American Idol."
An experimental summer of new programming in 2007, featuring the likes of Denise Richards ("Denise Richards: It's Complicated"), Ali and Dina Lohan ("Living Lohan"), Chelsea Handler ("Chelsea Lately") and Kim Kardashian ("Keeping Up With the Kardashians"), changed that. Within months, E!'s homegrown talent was being mentioned in the pages of the tabloids that E! had spent years competing with, while simultaneously being covered by its own news team.
E!'s formula is to create an alternate universe of reality-based celebrities who have become just as famous as the sitcom and drama stars in network prime-time, but with more impact on E!'s brand and bottom line than any sitcom, medical procedural or legal drama could for broadcast.
Bang for the buck
"The thing about reality TV is, if you go about your development right, people will make the news, and eventually they'll make the covers," said Ted Harbert, CEO of Comcast Entertainment.
Mr. Harbert was elevated to president of E! in 2006 (he joined in 2004) with a pedigree for discovering and building some of broadcast's biggest talent from his days as president of NBC Studios and chairman of ABC Entertainment. As broadcast continues to become a nearly zero-sum game in cash flow, Mr. Harbert saw the opportunity to create something far more organic and profitable at E!*
"If you look at broadcast, take the ratio of hits to the unsuccessful shows. Then look at what they're paying their cast, $20,000 to $50,000 a week, and that cost per rating point, that doesn't pan out," he said. "You're better off in every single respect if you grow talent from within."
However, E! has a bit of a ways to go before it becomes one of the most cash-flow-positive networks on cable. Derek Baine, a cable analyst for SNL Kagan, said virtually all cable networks are more profitable than broadcast networks, which eke out a 5% to 10% profit margin these days "if they are lucky." Mature cable networks such as VH1, TLC and E!'s future corporate sibling Bravo all have cash-flow margins in the 50% to 60% range, while E!'s was at 36.5% in 2009, putting it in the upper middle tier of 180-plus cable networks tracked by SNL Kagan.
"One of the issues is they have a really tiny license fee, so they don't have as big of a budget as some of the other cable networks," Mr. Baine added, referring to the cost-per-subscriber fees paid by cable operators. E! gets a much smaller license fee for its content than, say, ESPN, and as those fees make up half of E!'s revenue, it contributes to a smaller budget.
It was the "Kardashians" that proved the homegrown talent formula could really work for reality shows in 2009. In less than three years and five seasons, the show has shattered virtually every ratings record in the network's history -- thanks in large part to the sports-star engagements and pregnancies of its stars Kim, Kourtney and Khloe.
The real-time interest in E! celebs' personal lives has created a conundrum of sorts for Lisa Berger, E!'s head of programming, and her team of programmers and producers: Will fans still want to watch shows about real-life events they've already read about months ago in People?
"The viewers actually wait for it in show-time vs. real-time," Ms. Berger said. "We can tell the story ... with details that the tabloids don't get, and we also have a family at 'E! News' who can tell the story the next day, too."
As proof, the fifth season of "Kardashians" continues to achieve series-high ratings on a weekly basis, and a December special of "Girls Next Door" veteran Kendra Wilkinson's, "Kendra: Here Comes Baby," was watched by a series-record 2.7 million viewers.
Having its own name-brand talent inspired E! to create its first on-air image campaign using only the network's stars, debuting this week to the tune of Adam Lambert's "For Your Entertainment."
Those stars' newfound fame has helped E!'s stars attract endorsement deals they almost certainly wouldn't have attained on their own. Kim Kardashian has become the poster child of this new model, booking a Carl's Jr. ad, a spokeswoman deal with Quick Trim and a controversial Twitter account that charges sponsors $10,000 a tweet.
"It's like a jigsaw puzzle sometimes," said Kris Jenner, the mother and manager of the Kardashian clan and co-creator of "Keeping Up With the Kardashians," of the demand for her daughters' endorsements and personal appearances. "When I get a product that comes across my desk, you have to stop and say, 'Does this really make sense for my brand? Is this something the girls would actually use?"
It's that demand among marketers and event promoters to become associated with E!'s biggest stars, as well as their side consumer-product launches, that has Mr. Harbert angling for a way to get a cut of stars' ancillary revenues through new methods of contract negotiations.
"Kim Kardashian goes and makes a fortune on her clothing line and her new perfume and Quick Trim commercials, all these side businesses I don't participate in. I'm trying desperately. We're trying to say to talent, 'Hey man, if we're making you rich, maybe we should start getting a cut off it.' But at the same time, if people have a business of their own, we don't go sticking our hands in their pockets."
Still, E!'s cachet is rising among advertisers, with ad revenue expected to surpass the $200 million mark for the first time in 2009, up 6% from $192 million in 2008, and a 50% increase from 2004, according to SNL Kagan estimates. Based on ad revenue, E! is on par with NBCU's Bravo, which was also around the $200 million mark in 2009, according to SNL Kagan.
Although some advertisers may be skittish about some E! shows, the overall zeitgeist effect generated by shows like "Kardashians" and "Chelsea Lately" can make many brands hold their noses when placing media buys.
Said Shelley Watson, senior VP-entertainment at Santa Monica-based media agency RPA: "There are some advertisers who would probably be more content-sensitive and more apt to be cautious, but if you're a young, hip culture brand, a network that pretty much over-delivers females from the age of 12 up to 49 can be a pretty valuable network."
E! by the numbers55 MAGAZINE COVERS
In the last six months, E! talent has been on more magazine covers (55) than that of any other cable net.
Eonline.com was up 57% year-over-year in 2009 to 11.1 million monthly unique visitors.
"KEEPING UP WITH THE KARDASHIANS"
E!'s highest-rated show in network history attracted 4 million viewers a week in its fourth season. It also banked $18.4 million in measured-ad spending during the first 11 months of 2009, according to Kantar Media.
"KOURTNEY & KHLOE TAKE MIAMI"
The "Kardashians" spinoff attracted an average 2.1 million weekly viewers, breaking the previous record for its timeslot set by "Kendra." The show made $10.8 million through November 2009.
The "Girls Next Door" spinoff became E!'s highest-rated series in seven years on Sunday nights. The show grossed $8.3 million through November 2009.
The talk-show roundup attracts an average 1.1 million weekly viewers during its initial airings on Friday nights. E!'s most-DVRed show adds an extra 400,000 viewers after seven days of time-shifted viewing are factored in.
Comedian Chelsea Handler and her talk show are watched by an average 800,000 viewers a night, but she attracts the youngest median age (36) and more 18- to 34-year-old women than any of her male network peers.