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public TV and radio in the United States

Bob the Builder helped put together the venture with four partners
Married with children
PBS, producers, Comcast wed to create digital kids’ channel

Originally published in Current, Nov. 1, 2004
By Karen Everhart

Sesame Workshop President Gary Knell describes plans to create a PBS-branded digital cable service for preschoolers as a “renewed marriage vow” for PBS and the famed producer of Sesame Street, partners over three decades in teaching young kids about letters and numbers and getting along.

It’s a four-way marriage, however, and the two for-profit partners are cable giant Comcast and Hit Entertainment, the London-based owner of Barney, Bob the Builder, Thomas the Tank Engine and other kid brands.

The deal gives public TV stations on-screen credit — “brought to you by your local public TV station” — and access to future shows from Sesame and Hit, but it associates public TV with a new digital channel that carries ads during program breaks and that’s available only to cable subscribers who pay extra for digital-tier service. [The channel was later named PBS Kids Sprout.]

When the 24-hour channel starts next fall, moreover, PBS will discontinue its packaged PBS Kids channel, leaving stations to package their own kids’ services if they don’t participate with the partnership.

For PBS and Sesame Workshop, the agreement announced Oct. 20 [2004] is based on pragmatism about each other’s long-term financial interests and the value they ascribe to high-quality, noncommercial media for kids. In the audience-fragmenting world of cable and satellite, they also share an increasingly urgent need to make their programs available to more viewers through specialized digital channels and video on-demand.

By joining hands in a commercial cable venture with Hit and Comcast, PBS and the Workshop stand to strengthen their competitive position within the children’s media environment and reap financial gains.

As minority partners in the venture, they also risk compromising their mission-based values, although Knell and PBS execs say they negotiated hard and got veto power over programming standards and advertising guidelines.

Comcast and Hit Entertainment each have 30 percent stakes in the venture, which launches a preschool video-on-demand package in April and a 24-hour digital channel in September. Neither PBS nor Sesame will invest cash in the service, but they’ll put valuable broadcast cross-promotion and the PBS brand name, relationships and goodwill into it and split a 30 percent share, according to execs from both companies.

In financial statements to investors, Hit Entertainment disclosed a $32 million investment and forecast that the venture would turn a profit in its third year. One of its most popular international properties, Bob the Builder, will migrate to PBS for weekend broadcasts in January 2005.

“We believe that, with Bob on PBS, it can be grown into a very significant TV series,” says Peter Orton, Hit chairman and interim director. “The PBS reach and the quality of other shows on PBS is absolutely the right positioning for us to be alongside.”

Within public TV, station execs describe PBS as a reluctant bride in this modern new arrangement, going along with its longtime partners Sesame and Hit so that it doesn’t lose the television magic they created together.

Nickelodeon, Disney and other children’s channels have made the kid’s TV business so competitive that producers can’t afford to sit on their program libraries. They’re also vulnerable to having their programs taken off the air by media conglomerates that own both content and distribution platforms, say executives from Hit Entertainment and Sesame Workshop.

“It’s critically important that content producers have a predictable ability to distribute their content, and one that is being promoted so the content can cut through the clutter of children programming,” explains Knell.

“These partners have been working with us over a long time, and they need more capacity if they want to continue producing for public television,” says Larry Rifkin, senior programming exec at Connecticut Public Television, a partner with Hit on Barney & Friends and other series. “We might not have their talents available to us if we aren’t able to utilize their services.”

For Sesame Workshop, this option probably is not a bluff. In 1998 it partnered with Nickelodeon to create Noggin, a digital channel for preschoolers that ran both old and new shows drawn from the Sesame Street library. Though the workshop sold its half share in the cable venture two years ago, the production company still cannot rely on a single unspecialized PBS channel as the prime outlet for its major programs. Well-regarded series from other makers, including Scholastic Productions, also have left PBS in the past.

“We believe it’s really important that we provide a home for other like-minded producers who are focused on educational programming,” Knell says. Nickelodeon’s license to old Sesame Street episodes expires next year, he says, and the spin-off Play with Me Sesame can play on Noggin for another three years.

To stay in business, PBS producers have to recoup their program investments by selling second-run rights, says Deron Triff, PBS v.p. of digital ventures. “We heard this from all of our children’s producers, and we sort of felt other producers would be exiting as well to a second-run cable home.”

“We tried to negotiate from a position of wisdom, and were sensitive to the fact that, if we impede or damage the producers that provide to us, what gets damaged is the product and the product that comes to us,” says Wayne Godwin, PBS c.o.o.

By joining the deal, PBS has some control over how second runs of signature series such as Sesame Street and Barney & Friends are packaged for digital telecasts and video-on-demand plays, Godwin says. Stations in the top 60 markets will be compensated for cross-promoting the channel in analog broadcasts.

Godwin challenges the view that PBS was forced into the partnership from a “position of weakness.”

“This was brought to us by producers’ need to and ability to sustain their businesses,” he says. “We had to exercise judgment that we need to become partners with them.” He describes several assets that PBS brought to the negotiating table: a broadcast service reaching “substantially more households than this service will reach in its first five to seven years” and a “tremendously popular, trusted and valued brand.” It also has longstanding relationships with producers who have benefited from PBS exposure over the years.

With its name and other assets on the table, the network negotiated for program rights, protections for its noncommercial brand, and financial incentives for its member stations.

PBS retains exclusive first-run broadcast rights to its present programs from Sesame Workshop and Hit Entertainment and gains first-look rights for new properties developed by the partners, Godwin says. New program concepts bought from the companies by PBS will run exclusively on public TV stations for three years. “In an environment that’s very competitive and growing in distribution platforms, we think that’s a very generous period of time to reaffirm a relationship between a program and its home on public television,” he says.

The partners also agreed on mission-statement language drafted by PBS and Sesame Workshop asserting that the venture aims to present “educational, high-quality children’s programs,” according to Triff, and a program policy that can’t be altered without the approval of both the Workshop and PBS. “All programs have to meet certain curricular objectives and have been tested for educational efficacy,” says Triff. “The process of selecting programs is very consistent with PBS’s values.”

A separate document dealing with sponsorship permits ads only if they are directed at adults and bans interruption of programs. PBS and the Workshop can veto changes of ad guidelines, and disputes over problematic ads will go to arbitration, Triff says. Within five years or less, the channel will have enough penetration to attract advertisers, he predicts.

“We believe the channel can be very distinctive because the competition, which is Nick and Disney, are carrying a lot of commercials,” says Orton. “I’m sure parents, when they watch with their children, will appreciate lack of commercial interruption. We believe that’s important and will give us a unique position in the marketplace.” [Excerpts from Orton's statement on the cable venture.]

Although the U.S. partners didn’t disclose financial terms of the deal, PBS will receive and distribute “several million dollars” over the first six years to stations that sign on as cross-promotional affiliates, according to Triff. Stations in the top 60 markets — or those necessary to reach 75 percent of TV households — are eligible to participate. Cross-promotions for the 24-hour digital channel will comply with FCC noncommercial guidelines, he says.

In some markets, stations will be able to insert their own promos on the preschool channel on a barter arrangement, says Triff. At launch, the channel will run at least 15 spots a day promoting the service as “brought to you by your local public TV station” and encouraging viewers to support their local PBS outlet.

PBS stations in the top markets have a choice: They can sign on for the cross-promotion and co-brand and get paid for it, or they can use their rights to kids’ shows in the National Program Service to assemble their own channel.
If they choose the latter, they’ll be turning down cash and a share in eventual profits, Triff says. The existing digital PBS Kids channel of repeats, carried by 74 stations, will end next September when the new digital channel starts.

“Funding for that was in jeopardy anyway,” Triff says. “DBS operators were not going to continue to pay for a service that their competitors — the cable operators — were not paying for.” Direct TV pays several million dollars a year to carry PBS Kids, but many cable systems pick up the channel for free from their local PBS stations. PBS is negotiating with Direct TV to beam the new partnership’s kid channel, he says.

But pubTV stations may want to keep offering commercial-free kids’ channels that viewers can receive without paying extra for digital-tier cable. For stations that secured digital transition aid from state governments and other donors by pledging to multicast educational children’s services, a commercial channel for preschoolers may not be a viable alternative.

For example, WGBH programs 18 hours of mostly preschool programming daily on the Boston Kids and Family Channel in collaboration with a mayoral early learning initiative. “Our hope is that what PBS launches will be additive to what we already have,” says Jon Abbott, executive v.p. “I’d like not to be in a position to be told I can’t do something I’m already doing.” The station already offers ‘GBH Kids, a separate digital kids channel launched earlier this year, with fare for school-aged kids.

But San Francisco’s KQED is enthusiastic about replacing its recently launched digital kids channel with PBS’s new offer. Viewers will perceive the channel as coming from KQED, and the station can use its DTV spectrum for other, to-be-determined services, says John Boland, executive v.p. and chief content officer.

“This is a very smart thing for PBS to be doing,” Boland says. “We need to be there with the cable channels that have been taking viewers away and offer a service that competes effectively.”

In cities where there are two or more public TV stations, PBS faces its own difficult choices. It will have to choose which station to enlist as a cross-promotion partner. “We have the challenge of being business-savvy and equitable,” says Triff. He acknowledges a shift in the business relationship for the station-controlled network.

“We have to have discussions,” he says, “that we don’t have when we’re trying to satisfy everybody.”

Excerpt from statement by HIT Entertainment Chairman Peter Orton, October 2004

The financial year under review has been one of significant strategic achievement. As announced today, we will be launching a dedicated 24-hour digital pre-school channel in the US in 2005, together with three very strong partners. This will create a secure home for our brands and give HIT greater influence over the scheduling of our programming as well as an equity share in a potentially very valuable asset. In addition, we also achieved our important goal of repositioning Bob the Builder™ in the US by securing new primary broadcast and toy partners committed to the long-term support of the property. We are confident that the change in primary broadcast partner and the new pre-school channel will help to protect against the detrimental impact on revenue which occurred as the result of Bob the Builder being without regular network exposure during the year. Taken together, the new positioning of Bob, the new channel and other recent US network broadcast agreements for Thomas & Friends™ and Barney & Friends™ mean that the prospects for HIT are very encouraging. . . .

We announced today our plans to launch the first dedicated US pre-school digital channel, alongside some of the most renowned names in US television: Comcast Corporation (the largest US cable company), PBS (the US public broadcasting service) and Sesame Workshop (creators of Sesame Street and other award-winning series). This is a transforming deal that gives HIT direct input on the scheduling and transmission of our high quality content portfolio, as well as allowing participation in growing subscription, sponsorship and advertising revenues. With an investment commitment of US$32 million over five years, we have a 30% equity stake in this exciting venture which is forecast to achieve profitability three years from its scheduled launch in September 2005. Coordination between transmission on the new digital channel and broadcast on PBS also allowed us to extend the PBS agreement for Barney & Friends and to enter into long-term agreements for PBS broadcast of Bob the Builder and Thomas & Friends on the PBS analogue channel, which reaches 105 million homes in the US.

The new channel will present a formidable pre-school offering, delivering the highest quality programming both through the new digital network and a companion VOD (video on demand) service due to launch in spring 2005. The channel will show Barney & Friends, Thomas & Friends, Bob the Builder and other HIT titles, together with PBS pre-school programming, including Teletubbies and Caillou, as well as Sesame Workshop productions. At launch, the channel will be accessible to a substantial proportion of current US digital subscribers and we are confident that, as other cable operators take up the service and digital penetration accelerates in the US, the channel’s reach will grow and its value appreciate.

This deal, which has taken over 18 months to come to fruition since we initiated the strategy, heralds the transformation of HIT into a vertically-integrated content owner/broadcaster. Given the strength of the partnership and the quality of the content, we are confident the service will become the channel of choice for U.S. pre-schoolers and their parents and caregivers.

Web page published with correction Nov. 3, 2004
Copyright 2004 by Current Publishing Committee

EARLIER ARTICLES

In May 2004, PBS's cable venture with producers and a cable giant was hailed as a new business model for public TV because the partners would receive some "box office" from cable's extra-cost digital tier.

LATER ARTICLE

With the preschool shows going to the new cable channel, PBS Kids Sprout, too few PBS member stations wanted to broadcast a PBS Kids channel for older kids.

LINKS

Hit Entertainment's corporate website and its cast of brandname characters.

Of Hit's fiscal 2004 revenues [PDF file], 22 percent comes from Bob the Builder, 23 percent from Barney, 18 percent from Thomas, 13 percent from an Australian singing group, The Wiggles, and 10 percent from Guiness World Records.

Joint press release from partners.

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