A dramatic change in the U.S. Spanish-language television industry may be around the corner, resulting from the Televisa versus Univision litigation now being heard in Los Angeles Federal Court.
The litigation arises from Televisa's attempt to annul a contractual obligation under which it provides Univision of Los Angeles with its highly effective television content on an exclusive basis. The contract, known as the programming license agreement or PLA, normally would end in 2017.
Univision has historically bested ABC, CBS, NBC, Fox and the CW television networks in many ratings battles among adults ages 18 to 34, and not just among Hispanics, but all viewers. That's largely because of Televisa's
According to Univision's 2007 public filings, Televisa's shows account for 15 of the 20 hours of Monday through Friday prime-time programming with profit margins of 73 percent ($517 million in revenues minus $138 million in PLA payments). Univision's overall television division profit margin is 39 percent and non-Televisa programming accounts for a paltry 22 percent margin.
If Televisa were to prevail in the litigation, a likely appeal by Univision would tie up the matter in the courts for an additional 18 months to two years, so clearly this is not a situation that will result in an immediate change of structure. Nevertheless, over the longer term, this remains a crucial matter for Univision.
No other entity, in Mexico or elsewhere, produces programming that is as consistently viable in its appeal to U.S. Hispanics as Televisa.
Univision's most recent attempt at a dramatic genre production is a Spanish-language adaptation of "Desperate Housewives" ("Amas de Casa Desesperadas") that airs only one hour a week in prime time. Thus, it is a departure from the unique prime-time strip programming strategy used by U.S. Spanish-language television networks that more closely resembles U.S. soap operas in which a show appears several times each week. After a healthy ratings start backed by heavy promotion, the "Desperate Housewives"-type show has dropped in the ratings.
If the deal with Univision were to end, Televisa's valuable programming would be coveted not only by Univision's rival Telemundo, but by the Ion Network, the Tribune Co. or even a new consortium of independent U.S. television stations that would give Televisa many and varied choices. Televisa could therefore easily replace the 67 percent of export revenues it now gets from Univision.
So it seems that this is a question of "who needs who more" in any potential negotiations to settle the dispute outside the courts.
If it prevails, Televisa's choices are more extensive and economically viable than those of Univision and its financial backers who acquired the company for $13.7 billion and have leveraged it with a debt of $11 billion.
Hence, what is Univision's Plan B to produce and/or aggregate content to replace Televisa's content were Televisa to prevail in litigation?
As there are simply no other Spanish-language programming sources equal to Televisa, Univision would have to replace the more than 40 percent of its programming from Televisa, including three of its four Monday through Friday prime-time hours with original productions. That's what its competitor, Telemundo, has done over the past five years. However, these are high-cost programs that have principally contributed to erasing all operating profit from this NBC Universal unit last year.
So Univision will have a tough road if it has to go to Plan B. Univision's Plan B may well be to become a counterprogrammer to Televisa's soap operas. That means producing reality, variety and other programming genres, but those are simply not the ratings boosters that prime-time soap operas are.
Further complicating Univision's near-term outlook and negotiating position with Televisa are the high leverage of Univision, upcoming debt service payments, the downturn in the economy, the slowing of U.S. Hispanic market ad-spend growth and the realities of retransmission consent fee pricing that lately have dropped substantially below Univision's original projections.
Hence, as the stakes are very high, a potential settlement which may be the best of all Plan B's for Univision may come in one of three scenarios:
- Televisa agrees to at least a substantial increase of the PLA payments and an equity stake altering Univision's cost structure and diluting its present owners.
- Univision does a financial reorganization and Televisa buys into Univision at an advantageous price, with more influence on the management within Federal Communications Commission rules.
- Univision's five financial sponsors sell control of Univision to cash-rich Televisa, backed by the private equity firms that were previously willing to fund Televisa's earlier attempt to buy Univision, including Bill Gates' Cascade Investment and Bain Capital.
Julio Rumbaut is president of Rumbaut & Co., a media advisory and consulting firm in Miami.
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