IN NEW GROWTH PHASE, CABLE FEEDING ON ITSELF

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After 20 years of nearly unabated growth, basic cable TV is experiencing its first real competition.

The threat isn't coming from the broadcast establishment, or even new media options like direct broadcast satellite, but from within.

Increasingly, emerging cable networks are fighting established channels for access and share of viewer's minds-if not rating points.

Conversely, veteran networks are facing cannibalization from within as the newer niche services threaten to fragment the audience even further.

At first glance, the turmoil isn't obvious. Basic cable viewership is surging.

Through the first 25 weeks of the 1994-95 TV season, basic cable's share of prime-time viewing is up 11% to a 15.1 Nielsen rating. By comparison, the four broadcast networks dropped 7% to a 42.9 gross prime-time rating.

"I suspect this is the largest year in growth for cable audience ever," says Tim Brooks, senior VP-director of research of USA Networks.

Cable's growth masks underlying problems.

For one thing, the prime-time comparison to the broadcast networks isn't fair. During the 1993-94 prime-time season, the Big 3 networks carried special one-time-only programming, such as CBS' coverage of the 1994 Winter Olympics, which artificially boost the base for that season.

Also, many cable networks' growth is flat and at least one major one-TBS-is down.

While averages often are deceiving, basic cable's growth also comes from new channels, many of which don't account for a significant share individually, but in aggregate boost cable's audience.

By most accounts, there currently are about 150 cable channels occupying the basic cable spectrum. Some, like the fledgling Golf Channel, reach only thousands of subscribers. Most of the newer channels have only a few million.

A few launched by major broadcasting entities- Capital Cities/-ABC's and Hearst's ESPN2, NBC's America's Talking and Fox's fX-have gotten considerably better coverage, leveraging the retransmission consent of their broadcast signals with cable operators.

But even those new channels, with coverage ranging from 10 million to less than 20 million subscribers, will have a difficult time breaking through to the critical mass levels of the first cable generation.

Invariably, emerging channels claim to be the "last true basic network."

"There was a period where it looked like A&E [launched February 1984] was the last big network in," says Mr. Brooks. "And for a long time that was true. But then Cartoon Network [October 1992] and Sci-Fi Channel (September 1992] came along. Now fX launches and they're doing respectable numbers right out of the box."

These newer channels are contributing to basic cable's growth. In 1994, prime-time ratings for the 31 basic cable networks measured in the Nielsen Cable Activity Report rose 10% to a 12.1 gross rating.

Five other established networks-A&E, Lifetime, Nickelodeon, Learning Channel and Nashville Network-also averaged about a 0.1 ratings gain. Combined with Sci-Fi and Cartoon, these seven networks accounted for more than half of basic cable's growth in 1994.

The rest of basic cable's growth-half a rating point-was divided among 24 networks, most of which were flat.

But the established networks tell only half of basic cable's story. The rest of the universe is comprised of tiny little pieces which, when totaled, add another few rating points to basic's tally.

It's these chunks that, very possibly, represent the future of TV as we know it.

In 1994, total cable-originated programming averaged a 14.2 Nielsen rating in prime time. Subtract the 31 individually measured NCAR networks from that total, and that leaves something like 120 cable channels divvying up the 2.1 rating point balance of Nielson's cable estimates.

Divide that rating by the number of networks and the average rating is 0.0175, a number that most statisticians would say is too small to be considered valid, even if those were in a sufficient number of Nielsen households to be rated individually. And many are not.

Currently, Nielsen requires a channel to be available in about 3.3% of U.S. TV households-about 3.2 million homes-to qualify for its national TV ratings report.

Even then, Nielsen can't guarantee the report will show any ratings. To qualify for a number, the channel has to generate at least a 0.1 rating in their coverage area (the number of households a channel is carried in) to qualify for the report.

Often, even fairly established networks don't pass that threshold, particularly if the rating is for a specific demographic that comprises only a small portion of the ratings total.

When that happens, networks are listed in the report, but instead of ratings points, they get a typographic symbol that the cable industry euphemistically refers to as "chicken tracks," because it looks like the marks chicken leave with their feet.

"If you're a new network and you're only in a few million homes, your numbers will be very unstable and you will get a lot of chicken tracks," says Mr. Brooks. "You don't want to be a chicken network."

Indeed, some networks have produced data that are so unstable they've ultimately dropped out of Nielsen's NCAR reports.

But even relatively established networks appear to be getting by on the cusp. Four-year-old Court TV, for example, is already in about 20 million homes, but averages only about a 0.1 rating when it's not airing high-profile cases like the O.J. Simpson trial.

What's the value of that rating?

"Who knows?" says Steve Sternberg, senior VP-director of broadcast research at BJK&E Media Group, New York. "When you're talking about error, it's a function of sample size and how large the rating is. With a 0.1 rating for some of these newer channels, you could be talking about three people that overall contribute to that rating."

Moreover, when that 0.1 rating is factored against a new cable network's coverage area, Mr. Sternberg says, "They're really doing like a 0.01 rating or less. I mean, basically nobody is watching it."

This dilemma leaves national advertisers with a decision to make. If an emerging cable network offers a focused enough niche to deliver specialized, hard-to-reach targets, advertisers might suspend their need for quantitative ratings documentation. It was just such logic that Robert Wehling, Procter & Gamble Co. senior VP-advertising, market research and public affairs, says led to P&G's decison to be a charter advertiser of CNN in 1980.

But while such risks often provide tremendous rewards, many advertisers will simply stick with the tried and true, leaving many fledgling networks scraping for ad dollars and relying initially on cable subscriber fees for most of their revenues.

So, while cable overall continues to chop away at broadcast network share, it also apparently is beginning to cut into itself.

Since only a relatively few of the total number of channels available currently qualify for Nielsen ratings, it's impossible to see what their actual impact is on each other. But as more cable networks launch, and as they gain broader household coverage, it's expected cable will begin to eat away at itself much the way it has consumed broadcast network share.

"Cable is cannibalizing on itself," admits Mr. Brooks. "But the cannibals are the established networks that are eating the new kids. The new networks are the ones that .... are getting chewed up because they can't attract an audience in the first place."

That may be true for now, but there is evidence that as newer niche channels expand into the established cable network market, they will nibble at their older siblings' share.

In November 1993, Court TV, of all networks, analyzed what happens to TV ratings as the number of TV channels available to viewers increases.

Court TV divided the cable universe into two levels: homes that had up to 54 channels available to them; and homes that had 55 or more channels.

Not surprisingly, Court found that the ratings differential between new and emerging channels changed dramatically depending on the number of channels available.

"That's where the growth has been. That's where the new channels are being added, and that's where you would expect the fragmentation to be taking place," says Richard Zakon, VP-research of Court TV.

According to the channel's analysis, there was a significant drop in the reach and frequency of established cable networks within this so-called "channel-rich" universe-which in November 1993 represented about 20% of all TV households. It's believed to have grown substantially since then.

Mr. Zakon says Court TV is just about to embark on another study to learn what the patterns are like in 1995.

"In the late 1980s, there was a sense that cable was just growing and that the established networks would continue to go up forever, but that's not been the case," notes Mr. Zakon.

"As the cable universe transforms from a low-channel-density universe to a higher-channel-density universe, the established networks will be affected. It has almost nothing to do with the programming itself. It has to do with where the networks are distributed," he says.

Put another way, BJK&E's Mr. Sternberg points out: "When you start getting multiple niches of the same niche, the smaller niche is going to take away from the larger niche."

Currently, Discovery Channel executives believe they need about 5 million homes to launch each of its new niche services (see story on Page S-2), much less than basic cable programmers would normally seek, especially if they have hopes of attracting significant national ad share.

"We're not saying that we could do a break-even situation with less than 5 million subscribers, but with 5 million we will .*.*. launch the channels," says Discovery President-CEO Greg Moyer.

Part of the optimism for the channels, as well as that of other new niche-channel programmers ranging from Times Mirror's Outdoor Life Channel to Multimedia's NewsTalk Television, is that new forms of distribution other than traditional wired cable will help make them viable.

NewsTalk Television, for example, currently has only 1.5 million basic cable TV homes, but it's picked up by another 2 million homes via alternative means such as backyard satellite dishes and it's negotiating with direct broadcast satellite operators to build on that.

It also is carried two hours daily on Tele-Communications Inc.'s TV Network, a channel that samples other emerging programming networks.

"I consider ourselves to be the third-generation of basic cable networks," says NewsTalk president Paul FitzPatrick. "I think it will be very difficult for a service like ours to achieve the kind of mass that we saw in the first or even second generation of channels on cable."

But instead of two different universes, basic cable might best be described as a multitude of universes: one reaching most cable households, another reaching portions of those households and yet another reaching non-cable households.

As DBS and any other new forms of TV distribution begin offering cable programming services, the distinctions will be less and less about cable and more and more about programming and niches.

"I don't think any of us think that our niche channels .... [will] put pressure on Discovery or USA or CNN for viewers. But at the same time, we have to keep our established networks competitive with the broadcast networks. Otherwise, cable will end up eating our young," says Mr. Moyer.

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