Mexican programmer stumbles with border crossing into U.S.

Three years ago, Mexico City-based television programmer TV Azteca SA launched an ambitious expansion into the United States, offering Spanish-speaking viewers reality shows such as "La Academia," an "American Idol" copycat.

Azteca had already been rebuffed in an attempt to acquire the Miami-based Telemundo network when it hooked up with Pappas Telecasting Cos., a Visalia-based station owner, to form Azteca America.

Under the agreement, TV Azteca was to own 20 percent of Azteca America and supply programming from its Mexican network, while Pappas agreed to add 32 U.S. stations over a two-year period, with the help of a $550 million war chest supplied by UBS A.G.'s UBS Warburg division.

But things didn't work out as planned.

First, competitor Univision Communications Inc. bought 17 targeted stations owned by Barry Diller's USA Networks (now InterActiveCorp.), to form its TeleFutura network. Then UBS withdrew its financing commitment, forcing Pappas to back out of several deals, including the acquisition of Dallas station KXTV-TV. Its owner, billionaire Tom Hicks, turned around and sold it to Telemundo.

The relationship with Pappas degenerated into a recently settled lawsuit, but it left TV Azteca in the unwanted position of controlling its U.S. network--and subject to Federal Communications Commission foreign-ownership restrictions.

Azteca America President Luis Echarte conceded that the network, whose 29 stations include L.A. flagship KAZA-TV (Channel 54), remains a work in progress. But he said that it is now getting out of the lurch.

"We're going to be 25 percent of the Hispanic market in the next four years," said Echarte from Azteca's Mexico City headquarters. "You may say we guys are crazy. But what we've done in Mexico, we will do here as well."

Azteca America managed to hit the airwaves in 2001 with just three stations. Frustrated with the lack of progress, TV Azteca broke up its partnership with Pappas and took control of the network that October. To keep Pappas in the fold, as well as help it develop new affiliates, it then spent $70 million to acquire stakes in two of the stations.

Because it is foreign company, TV Azteca is restricted from owning stations. Without a U.S. partner, Azteca had to embark on a strategy of luring affiliates--initially with generous 50-50 splits of commercial ad time, plus the option of programming parts of the day on their own.

But while those deals have helped Azteca expand, its affiliates are "low-power" stations that are not required to be placed on cable systems under the FCC's "must-carry" rules--so they are less attractive to local advertisers.

The network only reaches 57 percent of the country, far below the 70 percent that national advertisers demand before they will commit to a network. Azteca America expects revenues of just $25 million for the year ending Dec. 31.

"Some people say, 'Hey, we like your programming and we think it will do well. But we're waiting on the sidelines until you reach critical mass,'" said Philip Woodie, Azteca's president of sales and marketing.

Last year, Azteca was sued by EchoStar Communications Corp. for breach of contract; it claimed that the existence of the network violated EchoStar's exclusive right to carry Azteca programming on its Dish Network.

A year ago, Azteca sued Pappas in Delaware Chancery Court for breach of contract, demanding that it be allowed to exercise its option to buy a 25 percent stake in KAZA.

In a counterclaim, Pappas accused Azteca of failing to invest enough money in starting up the network. The two parties agreed to a settlement that ultimately gave Azteca control of KAZA, after Pappas couldn't repay a $130 million note related to the settlement.

From here, the challenge is to keep building out its presence with viewers and advertisers.

This month, it added three new affiliates. It's also negotiating with cable companies to get existing affiliates onto cable systems, recently striking deals with Cox Communications and Comcast Corp.

To lure advertisers, Azteca is playing up the fact its parent company also produces all its programs, unlike Univision and Telemundo, which depend on foreign producers.

Ad executives and their clients are flown to studios in Mexico City to meet with producers and brainstorm product placement ideas, such as revolving an entire episode of a novela around an expectant mother using pharmaceutical giant Johnson & Johnson's stable of baby products.

It has already done such deals with retailer Target Corp., including a series of promotional signings by cast members of "La Academia" at several of its stores.

The biggest step: bring some of its production to the United States. In July, TV Azteca sent Elisa Salinas, the former general director of its Novelas production unit, to L.A. to start up production stateside and run KAZA. By next year, it expects to produce a slate of shows, including a news show to be hosted by veteran newscaster Armando Guzman.