FNN Attempts to Mix ‘Bargains’ and Business : Shopping Show May Aid Network

On the set in a Santa Monica television studio, sportscaster-turned-TV salesman Todd Donoho took a break from pitching video cassettes and wine glasses to take a late night telephone call from one viewer who had just finished a breathless, long-distance buying spree.

“I have Anita from Chicago on the line,” Donoho announced to his television audience, as he stood against a stark white panel studded with dozens of blinking electric light bulbs. “Hello, Anita.”

Anita’s voice gushed with enthusiasm. “I can’t believe the prices,” said Anita, who had just spent nearly $100 on three gold necklaces. “I almost ordered the stereo cassette recorder”--it cost $39--”but I just had to stop myself.”

Donoho winced, as if wounded. “Oh, don’t do that Anita,” he said. “Don’t stop.”

Welcome to TelShop, a home shopping show on the Financial News Network--a network that until now, at least, was better known to stockbrokers than to late-night bargain hunters.

That may be changing, however. Since Aug. 2, Financial News Network has devoted as much time to hawking such items as coffee makers, exercise bikes and trips to Mexico as it has to business news.

TelShop isn’t FNN’s first diversification move. Last year, the network and Anheuser-Busch resuscitated an ailing cable-TV sports service which Anheuser had originated with another partner and had nearly given up.

It also made a failed bid last November for United Press International, the financially troubled general news service, to bolster a new information service that is partly owned by FNN.

FNN executives insist that the network will continue to live up to its name. “Business and financial coverage will always be the core of our business,” says Mark J. Estren, senior vice president for programming at FNN. Estren says, for example, that FNN plans to hire eight new business reporters this year.

But it is TelShop, with its teams of enthusiastic salesmen and its carnival atmosphere, that has the potential to transform FNN. Analysts say TelShop could also boost profits for FNN, which is just now starting to make money after four years of staggering losses.

Cable industry experts say sales in the TV home-shopping market could exceed $1 billion yearly, more than the $800 million advertisers are expected to spend on cable television commercials this year, according to an estimate by Hamershlag, Kempner & Co., a New York investment firm. Cable industry analysts say FNN is getting into TelShop at a critical time. FNN’s business news programs face increased competition for advertising dollars from new business shows that are being launched by such industry giants as Capital Cities/ABC and Walt Disney Co.

“The advertising dollars are getting spread around in more ways,” said Michael Krieg, a media buyer for the N. W. Ayer advertising agency in New York. “That has to make it harder for FNN.”

There are other pressures. For one thing, FNN’s network isn’t likely to grow much. Its financial programs already reach 22 million homes, or 60% of the homes with cable television, through the nation’s largest cable systems; but few people seem to be watching.

Adding more households means signing up many smaller cable operators, notes Daniel G. W. del Rio, an analyst with Hamershlag, Kempner. That process is especially difficult since many smaller operators don’t have an open channel for FNN to use.

FNN’s executives are hoping that some of the success experienced by Home Shopping Network, the company that invented the home shop market on a small cable operation in Clearwater, Fla., rubs off on them.

Home Shopping Network went nationwide in July, 1985, and has been ringing up huge sales since. For the nine months ended May 31, it earned $11.4 million on sales of $106.7 million. FNN’s sales for the same period totaled $11.2 million with profits of $870,396.

Similar Operations

Most of the home shopping shows are essentially the same. Each features merchandise at supposedly bargain prices that customers order through the use of toll-free telephone numbers. The merchandise sold on TelShop, for example, ranges from $10 bracelets to $799 exercise machines.

Much of the merchandise sold on many of the programs is obtained from distress sales by off-price retailers, although FNN’s TelShop is an exception.

One of the partners in Cable Value Network, a leading home shop show, is C.O.M.B, a leading off-price merchandiser. FNN’s partner in TelShop is Comp-U-Card, which operates a large computerized data base that contains information on about 200,000 items offered by various vendors around the country.

Unlike C.O.M.B, Comp-U-Card is a shopping service and doesn’t buy any merchandise itself.

The items for sale on FNN are displayed on the television screen for an average of seven minutes.

The “discounted” price is displayed along with what FNN says is the suggested retail price.

To order an item, viewers simply call the toll-free number that is shown on the television screen, while a computer monitors sales. If an item sells more quickly or more slowly than expected, it is yanked from the screen before the seven minutes are up.

FNN executives say TelShop offers mostly name-brand merchandise and features some big-ticket items to appeal to the same upscale viewers that watch FNN during the day.

However, TelShop’s producer, Bill Regan, has noticed that some pricey merchandise doesn’t sell very well because it is too expensive to be “impulse buys.”

“No one is going to spend $700 unless it was something they had already planned to buy,” he says.

Earl W. Brian, chairman of FNN, says it is too soon to predict how TelShop will do, although he says he expects the show to make money in its first year after recovering “a seven figure investment.” If successful, he says, TelShop’s earnings growth “could exceed that of either business or sports.”

Could Double Earnings

Analyst del Rio says a successful TelShop could double FNN’s earnings by next year. “It certainly has more potential than anything else they are doing,” says Larry Gerbrandt, an analyst with Paul Kagan Associates, a Carmel, Calif., firm that specializes in studying cable TV.

Such optimism is new for FNN, which just two years ago was in serious financial trouble. Its operating costs ran well ahead of revenue and by late 1984, the network was losing $500,000 a month.

Bill Griffeth, a newscaster with FNN and one of a dozen FNN employees (it now has 180) that have worked at the network since the beginning, said the network during the first few years “was a sweat shop.”

He said news and production crews worked long days, and always worried that their paychecks wouldn’t come--and at least once, they didn’t. “It was a nightmare,” he said. When staff cutbacks came in late 1984, “no one was sure who the lucky ones were--those who stayed, or those who left,” Griffeth said.

“I always thought of its as swivel-your-hips management,” said former FNN President Paul Steinle, who likened his old job at the network to that of a football running back.

“You analyze the situation, write your plan, start to execute it, and when you run into a new experience, you react and adjust it as you go.”

Cuts Saved Company

Steinle, an FNN director and president of Data Broadcasting Corp., the information service partly owned by FNN, said the painful 1984 decision to cut FNN’s work force by one-third “saved the company,” by reducing operating costs by $1.5 million.

FNN expects to report a profit when its fiscal year ends today after losing $22 million during its first four years. It declines to estimate how big a profit it may have.

“This place is a country club now compared to what it was then,” Griffeth says.

FNN has struggled to overcome not only losses, but a clouded past. Less than a year after the network was launched as a private company by a pair of children’s television show producers, one of its founders was forced to resign after The Times disclosed his past business dealings had been the target of a Securities and Exchange Commission investigation, and the subject of more than 40 lawsuits.

The founder, Glen H. Taylor, quit the day before the company was scheduled to sell its shares to the public.

Brian, who was California health and welfare secretary while President Reagan was governor, took over as FNN chairman in 1983 after his Biotech Capital Corp. had invested millions of dollars in the network.

Brian hired executives with network experience, including Steinle, and led the drive to cut costs. “Much of the directional thrust of the company and the big ideas are his,” says del Rio.

Biotech owns 13% of FNN and is FNN’s corporate parent. It provides seed capital to start-up biotechnology companies, but also has an interest in the Learning Channel, another cable network, and in Data Broadcasting Corp.

During Edwin Meese’s confirmation hearings for attorney general in March, 1984, it was revealed that Meese’s wife borrowed $15,000 interest-free from longtime Meese associate, Edwin Thomas, and invested it in Biotech.

Thomas later served under Meese in the White House and was named regional administrator of the General Services Administration in San Francisco.

Backed by Brokerage

FNN has also received a large amount of financing from Merrill Lynch Communications Investments, a unit of the New York investment firm. Merrill Lynch owns 9% of FNN’s shares, and it leased a New York broadcast studio to FNN between 1983 and 1985 in exchange for $375,000 worth of advertising time.

Though FNN is now edging into profitability, the massive 1984 firings left some scars.

With a smaller news staff, FNN was forced to rely on outside wire service reports for news, rather than information gathered by its own journalists.

To supplement those news reports, it added low-budget features such as commentary on financial developments by Wall Street analysts or viewer call-in shows on personal finance which featured money fund managers.

Some aren’t impressed with FNN’s news coverage. “It’s just a bunch of interviews as far as I can see,” said Andrew Stern, director of the broadcasting program at UC Berkeley.

“One thing they should do is more reporting. Instead of having an analyst--who could be right or wrong--come in and talk about where we stand on oil, for example, they should take an in-depth look at it themselves.”

Estren, FNN’s programming director, says the minute-by-minute coverage of Wall Street “for hard core investors” was never intended as the permanent focus of FNN.

He says the network is moving to provide more consumer features--”TelShop is an extension of that” and plans to increase its reporting staff by up to eight people next year. Still, he says, “We are not trying to compete with the evening news shows. We are not interested in being on the scene in Chernobyl.”

Some Problems Persist

Though the network has made significant inroads with advertisers and viewers--it is now the nation’s 10th-largest cable network--some problems persist.

Despite low advertising rates--FNN charges between $500 and $1,500 for a 30-second spot--it can’t sell all its advertising slots. One reason is its terrible ratings. Its best-watched program, Wall Street Final, an evening business news wrap-up, has--by FNN’s estimate--between 2 million to 3 million viewers a week, although the program reaches 22 million homes.

A January, 1986, survey by A. C. Nielsen Co. showed that just 82,000 viewers watched the program during an average three-minute segment.

Even some of those who make their living in the financial markets don’t watch it. Executives who have cable television at work say they can’t take time away from their jobs to watch FNN.

“I don’t know any money managers who watch it,” said Andrew Cox, a vice president with Founders Mutual Fund in Denver who said he is “too busy with work to watch the program.”

For much the same reason, Charles Rogers, a senior vice president at the Pacific Stock Exchange, doesn’t watch FNN and isn’t sure how many small investors find time to watch it. Despite that, the exchange plans to start trading options based on FNN’s stock index--an index based on the shares of 30 highly capitalized companies, similar to the Dow Jones Industrials.

“We think that once there is a trading vehicle, people will take an interest,” he said.

A. Scott Hults, an FNN advertising vice president, argues that the size of FNN’s audience isn’t important because it is so homogenous.

Hults says FNN viewers are mostly middle-aged, upper middle-class, college-educated men. From the advertisers’ standpoint “there is no waste” Hults says. “You either watch FNN, or you don’t. You’re either interested in the market, or you’re not.”

Hults’ arguments have persuaded some. “We feel FNN is effective to reach upscale, older men who invest in the stock market,” said Tim Corrigan, a senior vice president at the Ted Bates advertising agency in New York.

For instance, Corrigan said Bates recently placed some commercials for Prudential-Bache Securities, a brokerage and investment firm, on FNN.

Revenue Increased

FNN’s advertising revenue increased to $9.2 million in fiscal 1985 from $6.4 million a year earlier, although some of the gains can be explained by the network’s expansion from 65 hours of air time a week to a round-the-clock operation.

A significant chunk of its advertising revenue, about 11% according to its 1985 annual report, is the result of a barter arrangement with Business Week magazine.

Under the arrangement, Business Week’s editors provide business commentary on FNN, while FNN gives Business Week advertising slots, which the magazine offers to its own advertisers.

Some advertising executives remain skeptical about FNN. Though Young & Rubicom has placed commercials for Nynex on FNN, Paul Isacsson, an executive vice president at the agency says: “The research they have done you have to take with a great deal of faith and assume that the audience they say you are getting is the audience you are getting.”

When it comes to TelShop, however, analysts say FNN has a number of advantages.

It already has a television studio in Santa Monica, and it has a channel available on cable systems in many well-populated urban areas. Its partner in TelShop, Comp-U-Card, is the nation’s largest electronic retailer. It reported sales of $85 million last year.

If nothing else, TelShop fills a late-night programming void for FNN.

Before TelShop, FNN sold its late night and weekend hours to independent producers, including the Home Shopping Network. In fact, it was the success of Home Shopping Network on FNN that partly inspired FNN to look into a show of its own. “We could see they were doing very well,” said FNN Chairman Brian.

If the stock market is any barometer, the home shop shows should continue to do well.

Home Shopping Network, for example, closed Friday at $119. The company sold its shares for $18 apiece to the public in May, the price immediately soared to $42 on the American Stock Exchange.

Stock Price Jumped

FNN shares rose by more than $3 a share to $20 in over-the-counter trading after the company said it was thinking about forming a home shop venture. Its share prices have dropped somewhat since, closing at $14.425 on Friday.

TelShop faces plenty of competition from at least four other programs. Two networks, Cable Value Network and Home Shopping Network, came out with cable television shows before FNN and expect to reach several million more homes.

Home Shopping Network has even started buying UHF stations to further increase the size of its potential audience. As many as five companies plan to start home shop ventures next year, according to some analysts.

FNN’s TelShop now reaches about 11 million homes, about half of the homes that receive FNN’s business shows. Though FNN chairman Brian says he is pleased with the response, one analyst says it appears the network may have encountered some resistance from cable system operators. Mark Riely, a broadcast analyst with the New York investment firm Eberstadt, Fleming, says he believes many operators are looking for a 24-hour home shopping network, because the cable operators receive a percentage of sales. With a 24-hour network, such as Cable Value Network and Home Shopping Network, cable systems have the potential to make more money.

Partly to overcome that resistance, FNN is offering cable operators up to 5% of sales, more than other competing home shop shows offer, according to FNN chairman Brian.

Though FNN has tried to differentiate TelShop from other home shop shows by selling mostly name-brand merchandise and some big-ticket items, others are moving in that direction as well.

Home Shopping Network has created a second network that specializes in pricier merchandise. And Tele-Communications, a partner in Cable Value Network, has said its show might sell one-of-a-kind merchandise and such things as fishing boats.

Thomas Rauh, national services director for retail consulting for Touche Ross in San Francisco, says eventually just three or four home shop shows will survive the competition for customers and for discount merchandise.

He says the likeliest survivors are those who own the cable systems, such as Cable Value Network, which is partly owned by the nation’s largest cable operator, Tele-Communications and American Television and Communications, the nation’s third-largest cable operator.

“To the extent (FNN) doesn’t control the cable systems, they are vulnerable,” Rauh says.

He adds that the growth of home-shopping shows is also limited by the amount of low cost merchandise available through distress sales or production overruns and the willingness of viewers to sit through an entire program to see whether there’s something they want to buy. “It’s a very inefficient way to shop,” he says.

One analyst suggests that home shopping may be just fad. “It’s a newly invented need the American people are being told they have,” said Jack Sullivan, an analyst with Van Kasper & Co. in San Francisco. “Who knows whether they do?”