The Network Starter Kit

By Richard Zoglin

No one would call Lowell (Bud) Paxson a dimwit. He is an unusual sort of TV executive, certainly: a born-again Christian who makes more money than headlines and counts among his achievements the Home Shopping Network, which he sold for a bundle in 1992. Nor would Barry Diller, a genuine TV honcho who makes a lot of money and headlines, qualify as anything less than bright. But each is about to embark on what would appear to be a fool's errand: starting a new television network in an era in which audiences are fragmenting and network profits disappearing. Paxson and Diller are joining upstarts UPN and the WB in trying to prove that the problem with TV is not the network but the financial model on which it is based.

So they are changing the model. Paxson is assembling his group of UHF stations into a no-frills national network offering family-friendly programming. When Pax TV makes its debut on Monday in about 75% of the country, it will become the seventh (count 'em) over-the-air network.

Diller, the free-lance mogul and former chief of the Fox network has long been the topic of one of the TV industry's most popular guessing games: What will Barry do next? Since leaving Fox in 1992, Diller has dabbled in home shopping, proselytized for the digital revolution, failed to buy Paramount and, last February, succeeded in acquiring the majority of Universal's TV operations. Despite persistent rumors that he is in the market for a major network, such as CBS, Diller says he is more interested in fashioning his latest collection of TV properties--including the USA cable network and a group of 16 UHF stations--into yet another TV network that features lots of local content. O.K., America, are you ready for eight?

Traditional TV networks have not made a lot of economic sense for years: most of the money generated has a way of going elsewhere. According to Broadcasting & Cable magazine, NBC was the only network among the Big Four to turn a sizable profit last year--$475 million, on revenues of $3.8 billion. CBS lost money; Fox did too after discounting special accounting benefits; ABC turned a small profit. This year they'll do worse.

Program suppliers, on the other hand, reap most of the lucrative back-end revenue from selling syndicated reruns of hit network shows (the nets were forbidden by FCC rules to share in that pool until recently). And local stations have much higher profit margins because they can benefit from network hits, in the form of increased ad revenue, without having to share in the costs; the networks instead pay the stations "compensation" as an inducement to carry their programming. This has put the networks in a squeeze, as license fees for hit shows and major sports events have soared (CBS just paid $4 billion for eight years of American Football Conference games--more than double the cost of the last contract) and advertising-rate increases have started to flatten. "The big-gauge networks are like Detroit in the 1970s," says Diller. "In the next three years, they will all be confronted with a massive retooling effort."

The newest nets are focused on owning programming and stations, where the profits are. "This year the six networks are probably going to do $14 billion worth of revenue combined and make no profit," asserts Jeff Sagansky, the former chief of CBS Entertainment who is Pax TV's president and CEO. "The local stations, however, will do about $23 billion in national spot and local ads and make anywhere between 35% and 40% in margins on that."

Three-year-old UPN and the WB (co-owned by TIME's parent company, Time Warner) have avoided some of the network pitfalls but are yet to break into the black. They benefit from lower overhead costs and do not pay traditional compensation to stations. Moreover, they are striving to establish distinctive profiles in the crowded marketplace. UPN sees itself as a smarter throwback to the mass-audience network approach of the 1960s and '70s (among its newest shows: an updated version of The Love Boat), while the WB, the more successful of the two, has targeted teenage viewers with such younger, hipper shows as Dawson's Creek and Buffy the Vampire Slayer.

Enter Pax TV, which wants to fill a niche as the network that parents can feel comfortable about watching with their kids. Its schedule is filled with reruns of such wholesome network shows as Dr. Quinn, Medicine Woman; Touched by an Angel; and Diagnosis Murder, along with original fare such as Woman's Day, a talk show with Phyllis George as co-host; Reel to Reel, a movie-trivia game show; and It's a Miracle, featuring true-life inspirational stories. "We want to be a safe haven for viewing: free of violence, free of overt sex and free of foul language," says Paxson, who runs his empire from West Palm Beach, Fla. Paxson insists, however, that he's not aiming for a new incarnation of the Christian Broadcasting Network. "We're not going to proselytize or evangelize in any way. Jesus gave only one sermon, the Sermon on the Mount. The rest of the time he told about his father in stories and parables. And we'd like to be the story and parable teller."

Money is agnostic, of course, so the key to Pax TV's success may lie less in its spiritual mission than in its business plan. Pax TV executives say the network can earn profits with even a cablelike 1 rating (attracting 1% of the available audience). One reason is that Paxson owns not just the network but also 78 of the 95 stations that will be carrying it, enabling him to make money at both ends of the pipeline. Another is the cost efficiencies made possible by programming and promoting a uniform schedule on all its stations, which will run only a tiny amount of local fare. "We operate our stations way more efficiently than any other broadcaster," says Sagansky, "and the reason is that every station is exactly the same as the next one." A Pax station can be run by 18 employees, vs. 100 or so for a large network affiliate.

That is almost diametrically opposed to Diller's plan. Touting greater localism as the key to standing out in the glutted world of network and cable, Diller wants to turn each of his UHF stations into a fount of local programming. His Miami station, WAMI, made the move in June, introducing 10 to 12 hours of fresh local fare daily, including live programming for children, talk shows, an attitude-filled nightly newscast and a Cops-style cinema-verite show, City Desk, in which cameras follow Miami Herald reporters as they pursue stories.

Much of WAMI's programming is ragged, bargain-basement stuff, and ratings so far have been minuscule, but Diller is confident that the ground-up approach will bear fruit. He foresees four more stations launching local schedules in 1999. Successful shows and formats will be exported to other stations and perhaps even to Diller's USA Network, which will, in turn, feed some of its programming to the local outlets. The result could be a hybrid broadcast-cable network, "a national programming venture," as Diller describes it, "that will be able to survive in an environment of fragmentation."

Unless Diller decides to unfragment that environment a bit. He can't shake rumors that his real agenda is to buy a major network. CBS would seem the most likely target. The former Tiffany Network is slashing budgets, and last week announced a plan to spin off its profitable radio stations into a separate, publicly traded company. Some view that as an effort to boost the company's stock price in preparation for a sale. CBS president Mel Karmazin last week denied, again, that the network is on the block, and Diller says, again, he is not out shopping. "I don't have a deep hunger for a big TV network," he says. "Our agenda is quite clear. I'm happy with our agenda." Still, he concedes, "if a network came to us opportunistically--which I doubt strongly is going to happen--that would be nice." And the game goes on.

--With reporting by Greg Aunapu/Miami, Jeanne McDowell/Los Angeles and William Tynan/New York

With reporting by Greg Aunapu/Miami, Jeanne McDowell/Los Angeles and William Tynan/New York