PROGRAMMING WOES Comsat's hotel video link struggles to stay on the air

THE BALTIMORE SUN

Two hours before he was scheduled to sit down for a interview with a reporter, Robert J. Wussler, chief executive officer of Comsat Video Enterprises, sent word through a spokesman that he had changed his mind and didn't want to talk.

"He said he has nothing to say," Richard McGraw, a spokesman, said of the CVE executive. "He said nothing's changed, that there's nothing new for him to talk about."

Unfortunately, that has pretty much been the story with Comsat Video since the unit was created by Washington-based Communications Satellite Corp., known as Comsat, in 1985. The unit, based in Clarksburg, about halfway between Rockville and Frederick, provides satellite-delivered television programming and pay-per-view entertainment to hotels.

Mr. Wussler, who agreed to talk one day after his no-show, said, "I want to stop putting those [loss] brackets around our numbers. . . . Once we stop being a $15 million or $25 million loss and start being a break-even business, that will go a long way around here."

Indeed, the news out of CVE has been depressingly consistent: Despite the best efforts of seasoned broadcasting executives like Mr. Wussler, the unit has been unable to snag any major contracts in the past year. Losses have continued to mount, topping out last year at $125 million, which included a $98 million

write-down by the parent company, Comsat.

Comsat applied a tourniquet to CVE earlier this year, restructuring the unit to slash a third of its work force and table all capital-intensive projects. That put a number of Wussler-inspired ideas for expanding the hotel business and home broadcasting on hold.

According to Irving Goldstein, chairman and chief executive officer of Comsat, the goal of CVE now is to continue to contain costs and get its video house in order. Once the unit gets to the break-even point, he said, Comsat will have some hard decisions to make.

"We are not looking at getting out of the hotel business," Mr. Goldstein said. "But beyond that, next year, or whenever, I just can't judge. If somebody walks in, makes an offer and hands us a check, we'd consider it, sure. But as of right now, CVE is not for sale."

So for now, CVE will concentrate on smaller, niche deals that don't cost much. Toward that end, the subsidiary is currently trying to acquire broadcast rights to motion pictures, sporting events and concerts.

That puts CVE in the role of being a program distributor, a middle-man role that will capitalize on Mr. Wussler's extensive industry contacts, made over a 30-year career in broadcasting and the sports business.

CVE also is working with its sister units on small deals in other parts of the world, Mr. Wussler said. That would include satellite programming jobs in Eastern Europe and Third World countries where commercial television isn't available. There's also talk of striking some video deals with cruise ships, where Comsat already has a near-lock on the communications market. "We're not moving away from the hotel business, but we want what we have to work better," Mr. Wussler said.

Wall Street apparently shares the view that a restructured CVE would work better. Since the restructuring was announced in January, the New York Stock Exchange-listed shares have climbed from $23.25 to $27.25 a share.

George Dellinger, vice president of Washington Analysis Corp., a Washington-based consultancy, said he welcomed CVE's restructuring. In fact, he said Comsat probably should have done it a year ago.

But he said the burden remains on CVE's management to turn the unit around. "They've spent three years exploring, exploring," Mr. Dellinger said. "Except for a Whitney Houston concert and a prize fight, I'd be hard-pressed to come up with anything CVE's done that has resulted in any significant contribution to Comsat's earnings during the period."

Julian Menear, senior vice president of Young Capital Group Inc. in Chicago, said he wouldn't be surprised to see CVE go on the selling block later this year if things don't improve soon.

"If they don't get a large contract by the end of summer, I wouldn't be surprised to see some further restructuring or some private attempts to sell the group," Mr. Menear said. "I suppose they could write it off, but the whole point was to make a go of things. Anybody can take care of a problem with a stroke of a pen, but Comsat is supposed to have more talent than that."

At least that's what Comsat thought when it set up the unit as a joint venture between Comsat and Holiday Inn Corp., the hotelier, in 1985. Comsat assumed full ownership of CVE the following year and set the goal of becoming the largest purveyor of satellite programming in the hotel industry. The idea was to allowom its installed base of satellites.

For the first few years of its corporate life, CVE was headed by Comsat executives who were well-versed in the satellite business but were learning on the job about the nuances of pay-per-view.

That changed in the fall of 1989, when Comsat was successful in recruiting Mr. Wussler away from Turner Broadcasting Corp. in Atlanta to head the unit. As a senior executive at Turner, Mr. Wussler engineered the landmark Soviet programming deals that led to the telecasts of the Goodwill Games, an Olympics-type contest.

Within weeks of arriving at CVE, Mr. Wussler found out about an opportunity to buy a major stake in the Denver Nuggets basketball team. In short order, Comsat had a 63 percent stake in the then-profitable National Basketball Association franchise. Comsat will not say what it paid, but the sports press has pegged the cost at $69 million.

nTC The Nuggets deal was supposed to lead to lucrative sports programming contracts for CVE, deals that would eventually line the pockets of the corporate parent.

With the Nuggets in their back pocket and Mr. Wussler in their corner, Comsat's senior executives sat back and waited for the contracts -- and profits -- to roll in.

They're still waiting.

CVE has built up its hotel business to a respectable size, but the big payoff from pay-per-view has never materialized. Some Comsat-watchers believe the company has long overestimated demand for pay-per-view, which has never taken off the way many thought it would.

CVE currently services about 315,000 rooms nationwide. That figure hasn't changed much since Mr. Wussler arrived, though some rooms have been added and others dropped since he took over.

The economic recession, meanwhile, hasn't helped matters any. Both the travel and hotel industries have been hit hard by the recession, and that has had a trickle-down effect on companies like CVE.

Compounding the problem is the influx of low-priced motels into the market. These motels have siphoned off business from the mid-priced hotels served by CVE. Holiday Inns, for example, CVE's largest customer, is getting stiff competition today from the likes of Motel 6 and other no-frills motel chains.

These factors, combined with CVE's seeming inability to ferret out new business, have left a gusher of red ink on CVE's bottom line.

CVE, which accounts for less than 10 percent of Comsat's overall revenues, lost $125 million on revenues of $52 million last year. That figure included a $98 million write-down by Comsat, which has invested about $160 million to date to keep the unit afloat.

CVE's dismal performance had a dramatic impact on its parent and stockholders.

Comsat, which had an otherwise banner year in 1990 with revenues of nearly half a billion dollars, finished the year with a $16 million loss. Earnings per share self-destructed almost overnight, with each share of fully diluted stock losing 87 cents in 1990. That's in stark contrast to the previous year, when stockholders earned $3 per share.

The Nuggets, meanwhile, have begun to lose money -- $1 million so far this year, according to the National, a daily sports paper -- andno sports programming deals have been announced. To add insult to injury, the Nuggets are dead last in the National Basketball Association, with the worst record of any team in the east or west conference.

To top it all off, CVE was hit with a software programming bug last summer that enabled customers in client hotels to peek in on pay-per-view shows for free. CVE finally had to call in engineering experts from a sister division to help straighten out the problem, which was corrected only recently.

James McCabe, an analyst with Nomura Securities in New York, said the Nuggets purchase is particularly troubling given Comsat's dismal track record with projects that stray too far from its core satellite business. Comsat racked up similar losses in the early 1980s, he noted, when it tried to enter the home broadcasting market.

"It typifies the kinds of mistake Comsat has been making over the years," Mr. McCabe said. "There was no reason in the world to be investors in something like the Nuggets. That's not their strength."

Analysts expect CVE's losses to be greatly reduced in the first quarter, probably in the $5 million range. That's a vast improvement over the unit's dismal $25 million loss in the fourth quarter of last year.

But profitability, by most accounts, is still a long way off.

It's anybody's guess as to how long Comsat is willing to wait for CVE to break into the black. The corporate parent has been patient for five years, but that patience won't last forever.

If Comsat's chairman knows the answer to that question, he isn't saying.

Mr. Goldstein makes it clear he is interested in diversifying into other businesses as part of Comsat's long-term strategy for growth. But he makes it equally clear the company isn't interested in carrying debt for any part of the business that doesn't contribute its fair share to the bottom line. "I don't want to be in non-profitable businesses," he said.

Mr. Wussler has been in the broadcasting business long enough to be able to read the handwriting on the wall. And he knows the imperative now is to turn CVE into a profitable enterprise.

"The difficult measures we took at the end of last year and early this year are beginning to pay handsome dividends," Mr. Wussler said. "One quarter is not two quarters, and it's not four quarters, but we are beginning to establish a model that, if we can repeat it for several quarters, we'll have a profitable business on our hands."

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