StockTalk:
TMF Interview With Paxson Communications CEO Jeff Sagansky
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

September 9, 1998

Our guest today comes to us from West Palm Beach, Florida. He's Jeff Sagansky, president and CEO of TV station and now network operator Paxson Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAX)") else Response.Write("(NYSE: PAX)") end if %>. On August 31, the company launched the nation's seventh broadcast network, PAX TV, whose family-friendly programming features such reruns as "Highway to Heaven," "Flipper," and "Touched by an Angel." Mr. Sagansky served as co-president of Sony Pictures Entertainment, president of CBS Entertainment, and president of TriStar Productions prior to joining Paxson Communications.

TMF: Thank you for taking the time to talk to us.

Sagansky: Thank you.

TMF: Let's start off with the name PAX TV. Is this just short for Paxson or are you also using it as the Latin for peace?

Sagansky: Yeah, actually we had the good fortune that the man who founded the company, Bud Paxson, his name also became the name of the network. It really became the name of the network because it sort of symbolized what we were trying to be to the viewer and to the advertiser, and that is having peace of mind when people watch television, and the word "pax" really does it.

TMF: What was the rationale behind the launch of the network, and how does it fit into Paxson's overall corporate strategy?

"We also feel that by putting on positive television -- inspirational television -- we could maybe even make television better."

Sagansky: Well, we are the owners of 80 television stations across the United States. The television station business has always been a very good one. In fact, this year, if you look at the national advertising market, the six major networks will probably make about $14 billion and won't make any profit on that $14 billion. On the other hand, the 1,600 television stations will probably do about $23 billion in revenue and do anywhere from a 30% to 35% margin. So, the television stations are where the good economics are, the reason being that local advertising has always been the bulk of the national broadcast advertising market.

So for us, we had these 80 stations and the question is what would we program on them. It was our determination that the best thing to do would be to link all these 80 stations and instead of having them each carry different programming, we would create one brand for all of these stations that we own, that cover in and of themselves about 70% of the United States.

When we looked at the kind of programming we thought was missing from network television, it was really family programming, which network television was built on. If you go back to the beginning of broadcasting and even up until about five or six years ago, network television was built on family viewing. Today, it's missing, really, from the network landscape, so that's the hole that we feel we wanted to fill. We also feel that by putting on positive television -- inspirational television -- we could maybe even make television better.

TMF: How has PAX TV been received? Has it exceeded your expectations?

Sagansky: Well, we're only one week old, as it were, because we only started broadcasting on Monday, August 31. But the ratings, I think, have surprised everybody. Because of our emphasis on local market sales and because of the way that we really efficiently operate our television stations, all we really need is a "one" rating to be profitable, and we thought that that one rating would come over the first broadcast year. But in fact in our first week in 31 metered markets -- the 31 stations in which we have Nielsen overnights -- we got a one rating in prime time, so this is only the beginning. We have a lot of work to do, but the reception by the viewers has really surprised everyone.

TMF: Does that mean you're already making money?

Sagansky: No, now we've got to convert that rating to revenue, and we're going to do that over the year. Also, it's a question of how our ratings hold up. But even in our second week, we're still continuing to generate the ratings that we got the first week, so over time -- over this first year -- as our sales force goes out, they're going to convert that rating that we've got now into revenue. This week I had a conference call with all of our sales managers all over the country, and we're starting to get many, many inquiries from advertising agencies and clients about our avails [available slots] -- of course, prior to a week ago we didn't exist, so it's very encouraging.

TMF: Do you have more set goals for your ratings down the road, or are you just happy with that one rating?

Sagansky: No, in the first year what we want to do is solidify our brand, this PAX TV brand, in the minds of the viewers. We also want to convert that one rating to dollars. Mostly our advertising is sold at the local level, so a normal network like a CBS or ABC or any of the networks, they only sell network time. The reason they do is because they only own up to 35% of distribution because most of them have VHF stations, and the most they can cover under FCC law is 35% of the country.

"In the first year what we want to do is solidify our brand, this PAX TV brand, in the minds of the viewers... So, we want to establish our brand, and we want to make profit in our first year."

But because we own UHF stations, we can cover 70% of the nation. So, unlike the normal, traditional networks, we can take our ads and sell them locally. And that's really what we're doing. We're concentrating on local ad sales, and at the local level, the premiums per viewer are anywhere from 60% to 100% higher than they are at the network. So, you really have a big advantage of taking an ad unit and selling it locally than you do at the network.

Our second goal, which is as important as our goal in establishing our brand in the consumer's mind, is our economic goal, and that is to convert that one rating into revenue. I think that overall what we want to do in our first broadcast year -- we want to be cash flow positive. I don't think any network has ever started in that way, but we feel confident that we can achieve that. So, we want to establish our brand, and we want to make a profit in our first year.

TMF: Who is your target audience? Would you agree that the family-oriented programming largely appeals to young kids and older viewers, not teenagers and young adults, for the most part?

Sagansky: Our target audience is really women 25 to 54. Even though advertisers pay a premium for an 18- to 34-year-old audience and a 12- to 34-year-old audience, which is the younger audience, the fact of the matter is that half of all the advertising time in the country is sold against the 25- to 54-year-old demographic, which people call the "older" demographic. But there's a lot of money in that segment. That's really what we're going for.

So, we really want to put on programming that not only moms and dads can watch, but they can also watch with their kids -- there's something in it for everybody. That's why we've got shows like "Flipper" or like this new show that we've got called "Little Men." "Medicine Woman" is something that fits into that category -- it's something that the whole family can watch together. And even if they're not watching together, if they watch it separately, there's something there in the program for all of them to enjoy.

TMF: What sets PAX TV apart from all the channels with similar demographics such as Lifetime or News Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> Fox Family Channel?

Sagansky: I think Family Channel is really going for a much, much younger demographic. They have cartoons all day long, and at night they're going for teenagers and much, much younger segments of the family. We're really going right square for that 25- to 54-year-old female demographic, and yet we're trying to appeal to the whole family. Lifetime, they really just appeal to women. We're really trying to cast a slightly larger net. We're really trying to get moms, dads, and kids, and I think that's what we see in our ratings for the first couple of weeks. I think that's pretty much what we're going to appeal to.

TMF: As an industry veteran who's been on the inside at NBC and CBS, what old tricks are you using to grow PAX TV and what new tricks have you come up with?

Sagansky: I'll answer the second one first because in this era you've got six other networks, you've got 100 different cable channels. The one new trick that we're using is we're trying to be extremely targeted in our message. We recently saw a survey by Myers Group, which is one of the advertising agency newsletters, and they had polled all the ad agencies, and the ad agencies thought that even though we weren't on the air, they recognized PAX TV as the best environment for their advertising.

I think that's a tribute to the fact that our advertising has been so targeted to say to people, "Look, we've got a safe environment for viewing," or, "We've got an environment where there's not going to be gratuitous sex, which is free of violence, and free of foul language." So, we've sort of made a promise to the viewer right up front.

I think when you go around and ask people about PAX TV, even though we're only a week old, people really know and can tell you the kind of programming that we're putting on. And I don't think that any of the other networks, maybe except for Fox, can really say that. Again, we're only a week old, and obviously there's a lot of the viewing audience that doesn't know us.

On the other side, one of the old tricks that we're using -- I would say that as we roll out our programming, I'm going to do a lot of stunting and a lot of specials and things that are going to be proprietary to PAX TV. We'll bring people to sample, even though they may not be watching on a regular basis, but we'll use those specials to introduce them to some of our regular fare.

"Half of all the advertising time in the country is sold against the 25- to 54-year-old demographic, which people call the 'older' demographic. But there's a lot of money in that segment. That's really what we're going for."

TMF: Can you describe what "stunting" is? We're not into that TV lingo.

Sagansky: It's putting on special programming, programs that are single-night events rather than regular series.

TMF: Like the Mrs. America pageant that you're doing?

Sagansky: Exactly. Like the Mrs. America pageant. In the end, I think the shows that brand your network are series. Whether you look at "Seventh Heaven" or "Dawson's Creek" that did the trick for WB or "La Femme Nikita" which did it for USA or even "South Park" which has done it for the Comedy Channel, it's the series that in the end bring the network the kind of recognition that you need to get to the next level.

But I think along the way to get the people into sample, you need that kind of special one-night programming, so you can introduce the series programming and get viewers to watch us on a regular basis. So, we're really sort of looking at that kind of programming that would be PAX-friendly, the kind of shows like Mrs. America -- we're working on a number of others -- where people that aren't regularly watching -- of course, right now we're only a week old, so most people aren't regularly watching -- to bring people in, using this programming.

TMF: So, what will be your "South Park" or "La Femme Nikita"?

Sagansky: I think you'll sort of have to ask me that in a year because we're not there yet. We're developing those shows. Really, I think you should be asking me what is going to be our "Touched By an Angel" or our "Medicine Woman" -- that is, made exclusively for PAX TV. Having said that, we've got one show which we're going to be introducing beginning of November called "Little Men," which is based on the Louise May Alcott classic, which so far we've just started shooting. But I'm very, very high on it. I think it could be fabulous programming, really bring in the viewer that misses "Medicine Woman."

TMF: In your opinion, what do you think the TV programming field in general is going to look like in five or 10 years down the road?

Sagansky: I think it's going to look drastically different than it does now in two respects. One, I think you're going to see networks clustered together and be managed by one group. So, in other words, much in the same way Discovery [does] --- that group manages three or four cable networks -- I think you're going to see that happen on the broadcast side as well.

So far, the law of the land is that a group can only own one network, but I think the economics of these traditional networks are so deteriorating, and I think you're going to see in the future several of these networks getting together. Even though the same group -- the same sales force -- will be selling several different brands, I think you're going to have to see that economy for the network business to get back onto the profitable side again. So, I think that's going to be one big change.

I think that the other big change is that you're going to see more and more of the networks trying to own their own distribution. As I said, the one huge advantage we have -- one thing that drives our economics and makes us different from the traditional networks -- is that we own our own distribution. And that is critical today because the economics of the stations are so much more favorable than the economics of running a network. The money is made at the local level and yet if you only own 35% distribution, you really can't fully get the revenue at the local level because you can only capture 35% of it. So, I think you're going to see that these networks are going to be petitioning the FCC to get those rules of station ownership increased beyond the 35% cap.

TMF: I'm afraid that's all the time that we have. Thank you so much for joining us today.

Sagansky: OK. It's a pleasure. Thank you.

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