POWER BEHIND FARE SHIFTS TO TV STATIONS;HOW DISTRIBUTION SYSTEM CRIPPLED CBS AND CHANGED SYNDICATION

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Distribution is an issue whenever a product moves from a producer to an end-user by way of a retailer.

Consider what would happen if the product is offered exclusively at one retailer in any given market. Logic suggests the value of that retailer would grow exponentially in the mix as competition increases among producers.

That distribution model may seem like an unlikely scenario for some industries, but it is, in fact, how the national TV programming marketplace has operated for nearly 50 years. A handful of national TV programming wholesalers-primarily the Big 3 networks-controlled the supply of the most precious programming brands and doled them out to a single retailer (station) per market.

But unlike the theoretical model, TV stations actually began to lose value in the eyes of their biggest suppliers and supposed partners, the Big 3 networks, as new competitors such as the Fox network and powerful national syndicators like Paramount, Warner Bros., King World and Walt Disney Co. entered the market.

At least until last year. That's when Rupert Murdoch hooked up with high-flying investor Ronald Perelman to set a"new world order" in motion, turning national TV programming business topsy-turvy.

A year after Mr. Perelman's New World Communications Co. was given a $500 million investment infusion by Mr. Murdoch-in the process converting the allegiances of eight Big 3 network affiliates to Fox-the two partners appear to have created a "new world disorder" that has leveled the national TV playing field.

Mr. Perelman recently said New World wasn't "consciously trying to rearrange the industry" with its Fox deal, but did it to drive up the value of its 12 TV stations.

"We realized broadcasters were controlling the game for us," he said. "Now we can link production and distribution."

Nowhere is the disruption more evident than the past season's performance of the Fox and CBS television networks.

To date, CBS has had defections of affiliates in 13 markets and is scheduled to lose at least eight more soon. Many of the defectors switched to Fox and in some cases, CBS was left with weaker stations in the areas, including some UHF stations that had less coverage than previous affiliates.

Fox, conversely, has picked up 10 Big 3 network affiliates to date and is scheduled to pick up at least a dozen more.

Exactly how much the change in coverage has affected the performance of the two networks isn't entirely clear, but one thing is certain, their performances have reflected the change.

During the 1994-95 TV season, CBS' prime-time Nielsen ratings fell 21% to an 11.1, while Fox rose 6% to a 7.6.

While a host of factors were involved in that shift, including a comparison to CBS' 1994 Winter Olympics the previous season and CBS' loss of Major League Baseball and the National Football League-the latter to Fox-the distribution of each network's programming is definitely one of the factors.

Just consider CBS' recent performance in a so-called switch market with one of its biggest guns during the recent May ratings sweeps.

In Atlanta, where CBS recently converted to a relatively weak UHF station, WGNX, the network pulled only a 9 rating for its powerhouse Western miniseries "Buffalo Girls." By comparison, CBS' telecast of "Lonesome Dove" a couple of years earlier on former Atlanta affiliate WAGA averaged a 25 rating.

"It's been a factor," conceded CBS VP-National TV Research Greg Kasparian.

However, he said CBS still has the same level of national U.S. coverage as it had before the Fox/New World deal, though in some markets like Atlanta it is cleared on somewhat weaker stations.

"When those markets are weighted into the full national average, there is some impact on our ratings, but we're not talking rating points here," he said.

But the full impact of these shifts has yet to be played out. According to Nielsen Media Research's "Affiliate Shuffle" analysis, affiliations have changed or are scheduled to change soon for nearly 100 TV stations in 41 markets representing more than 40% of national TV audiences.

Those changes are disrupting distribution patterns not just for network TV shows, but for syndicated and locally produced programming.

In the process, it's creating both opportunities and obstacles for program marketers. But in almost all cases, the power behind programming clearances is shifting from the supplier to the retailer.

"Distribution has become the name of the game," said Michael Wolf, a partner and head of the media and entertainment division of management consultant Booz Allen & Hamilton. "It's a critical part of the equation for any product destined for consumers, but in the TV business, it's been taken for granted until last year."

Ultimately, Mr. Wolf believes the events begun last year-combined with other simultaneous developments-will transform the distribution of national TV programming, virtually squeezing out independent program suppliers who lack guaranteed retail access from local TV stations.

"If you're an independent producer, it's going to be very tough times going ahead," said Mr. Wolf. "The creation of the Fox network, as well as the linkages with New World, combined with the end of the Financial Interest & Syndication Rules, has totally changed the economics of TV distribution.

"Today, the backend for even the most popular TV shows is a lot less certain. In addition, the creation of the WB [Warner Bros.] and UPN [Paramount] networks is changing the distribution system. Those studios are creating networks to make sure they can distribute their product."

The problem, said Mr. Wolf, is that there is only a finite number of retail outlets and a growing number of suppliers, making shelf space a critical element in the success of marketing new shows, whether they're network or syndicated.

Access has always been an issue for network-programmed dayparts, especially for prime time, but Mr. Wolf believes other changes sparked by the Fox/New World deal will begin constricting the distribution of syndicated programming in other dayparts, including ones traditionally regarded as syndicated turf, like prime access, and early and late fringe.

"An offshoot of these deals has been the creation of programming alliances between TV station groups," explained Mr. Wolf.

"If you are a program producer and you are a part of these alliances, you can get your program cleared. If you're not, your chances are less certain."

In fact, all of the major networks have established station group alliances that potentially could curtail access to station time slots in non-network dayparts. To date, however, only the Fox/New World station groups and another formed between CBS and Group W represent what could be called a new breed of quasi-networks that can collectively leverage their marketplace coverage to guarantee clearance of shows in which they hold an interest.

New World and Fox, for example, have enough combined marketplace coverage to guarantee the launch of any shows developed by subsidiary New World Entertainment or sister company Genesis Entertainment, a TV syndicator.

A year ago, New World recruited former NBC Entertainment President Brandon Tartikoff to head the New World Entertainment and begin developing shows that would be launched nationally via the station group alliance, some of which ultimately may end up as Fox network shows.

CBS and Group W also have entered the game with "Day & Date," a new syndicated newsmagazine effort debuting this fall.

Mr. Wolf believes such development will only escalate once the federal syndication rules lapse in November.

That appears likely, considering that under current regulations, an alliance of just two station groups has the potential of reach upwards of 50% of U.S. TV homes.

Regulators also are considering raising the national coverage limit on station ownership to upwards of 50% of TV households for a single group, meaning an alliance of two station groups theoretically would be able to cover the entire country within a single partnership.

Such changes are bound to have a profound affect on the way TV shows are distributed nationally. It's already affecting the "retailers."

"It's been wonderful for us," said Mike Carson, VP-general manager of WHDH, Boston, a station that until January was a CBS affiliate but now is a lucrative NBC affiliate.

That came about indirectly as a result of the Fox/New World deal and directly as a result of the CBS/Group W deal, which shifted affiliation for NBC's former Boston affiliate, Group W's WBZ, to CBS. That left WHDH the only unaffiliated VHF station in the Boston market and forced NBC to pay what is believed to be record affiliate compensation to sign WHDH as a long-term affiliate.

Mr. Carson wouldn't comment about the deal, though it's reported that WHDH receives $15 million annually from NBC.

"All I can say is we got a nice deal and it was good for them," said Mr. Carson.

Whereas the station routinely preempted CBS prime-time fare for occasional syndicated programming, Mr. Carson said the station has become very loyal to NBC's lineup. The fact that NBC has emerged as a powerhouse prime-time programmer may have something to do with that, but just as significantly, Mr. Carson said it's a result of the deal the station formed with NBC.

"I'm not sure we know what the long-term affect will be, but as a result of these long-term affiliation deals, I think stations will be more reluctant to preempt network programming for syndicated shows," he explained.

"I know that as a result of this, I'm not in the market to buy any syndicated movie packages because I'm not going to preempt NBC to run any movies.

"That's something I would have done a year ago if I needed to increase my local advertising inventory, but I just won't do that now.

"The same thing is true of one-hour specials in prime time. My programming shelf is much leaner right now."

"Shelf space is a good analogy," said Tim Duncan, executive director of Advertiser Syndicated Television Association. "In effect, the increases in affiliate compensation could be called slotting allowances. And just as packaged goods marketers pay grocery stores for distribution, the networks are paying stations to get facings, or shelf space for their programs."

In that sense, Mr. Duncan said the Fox/New World deal was the equivalent of the scanner data boom of the 1980s in the grocery industry. That technology shifted the distribution power in the business from the product manufacturer to the retailer.

"Where P&G [Procter & Gamble Co.] once dictated to Wal-Mart [Stores] how many cases of Tide they would sell, the people at Wal-Mart suddenly had better information about what moved off their shelves and they began forcing their suppliers to pay slotting allowances to get on their shelves," said Mr. Duncan.

How pervasive that change has been is debatable. Jerry Dominus, exec VP-director of national programming at J. Walter Thompson USA, New York, acknowledges that it's become a factor, but said its still a "blip" in terms of its impact on national TV programming clearances and ratings.

"It's a nudging over the line, but it's not a monster shift. It's three degrees of difference; it's not 180 degrees," he said.

But tell that to CBS, which saw its ratings fall more than 20% in one season and still hasn't experienced the full impact of the station shifts.

"If you want a reason why CBS is off, it ain't programming-the subject is distribution," said Mr. Duncan. "Yes you've got to have good programming, but we're learning that distribution is also key. And distribution in programming means getting your product on the supermarket shelf, which is the local station.

"In effect, CBS' ratings are down because they've moved from Wal-Mart to mom-and-pop stores in a lot of markets. It's the difference between being on a VHF station and a UHF."

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