Mexican sidekick: Grupo Televisa fights typecast as supporting actor in the growing U.S. Hispanic market. (Televisa).

Televisa Chairman and CEO Emilio Azcarraga Jean wants in on the growing U.S. Hispanic market. So badly, say well-informed sources, that the Mexican media mogul is considering becoming a U.S. citizen a in News Corp. CEO Rupert Murdoch.

If he pulls that off, Azcarraga Jean can make a bid for Univision Communications Group, the market-leading network his own company started. And he can bury an albatross of a deal that has seen Univision's market value soar past Televisa largely on the Mexican media giant's programming strength.

Such radical thinking reflects frustration from enduring what has to be one of the most difficult business developments in the world: Televisa's programs have been wildly successful in the U.S. Hispanic market but the Mexican media company remains typecast as a supporting player to Univision.

Grupo Televisa's sales are more than twice that of Univision, but the Mexican company's market value is roughly US$2 billion less than its U.S. counterpart. Televisa's telenovelas and other TV programs power Univision's red-hot primetime lineup, yet the Mexican company receives $0.09 of each dollar of the U.S. company's overall revenue and is locked into selling its shows to Univision through 2017.

As if that's not enough, Azcarraga Jean is struggling with a stagnant advertising market at home, while Univision--which his grandfather founded in 1961--thrives in the emerging U.S. Hispanic market. Univision expects its existing broadcast network, its recently launched second broadcast network Telefutura plus its online and music businesses to sell this year almost $1.2 billion--roughly 20% more than in 2001. In contrast, Televisa will post less than 3% sales growth, to $2.2 billion this year, according to LATIN TRADE's Consensus Forecast.

To buy Univision, however, Azcarraga Jean faces a number of challenges, not the least of which is financial. Televisa would have to take on enormous debt--if it can get financing. Its recent $300 million, 30-year bond issue made Mexican financial history, but that's a drop in the bucket compared to what Univision might command. "It's too big of a deal for them," says J.P. Morgan Chase media analyst Jean Charles Lemardeley.

Currently trading at around $40 a share, Univision's market capitalization alone is $9 billion, compared to Televisa's $7 billion. Word on the street is that Viacom made an offer of $55 a share last year, which Univision chairman, CEO and controlling shareholder Jerry Perenchio, is said to have rejected, though not before reportedly countering with a demand of $65 a share.

Certainly the stakes for U.S. Hispanic media were upped considerably when NBC revealed its $2.7 billion purchase price for Univision's smaller rival Telemundo, the distant No. 2 Spanish-language network in the United States. Telemundo has less than 25% of the Spanish-language broadcast market. Univision holds the rest.

Both Univision and Telemundo predict they will get a bigger piece of the U.S. ad market once ratings agency ACNielsen adjusts its TV measurement system to reflect Hispanic viewers more accurately. Spanish-language broadcasters believe the changes will reveal smaller Hispanic audiences for the English networks, to their advantage. Univision estimates that advertisers have been collectively overpaying English-language broadcasters for audiences that aren't there to the tune of $680 million.

American pastelito. Even if Azcarraga Jean could raise the money to purchase Univision, he would have to become a U.S. citizen to close the deal. U.S. law restricts foreign ownership in television to 25%. Or, he could structure a partnership that would let him take a leadership role.

It gets worse for the Mexican media mogul: Perenchio can move forward on a sale. For the right price, observers say, he will sell--without consulting either Azcarraga Jean or Gustavo Cisneros, the Venezuelan media mogul whose Venevision owns 19% of Univision. If Univision were sold, Televisa would still be tied to the group. The Mexican company s programming supply agreement remains intact through 2017, even if ownership changes hands.

In exchange for concessions extracted by the Univision team during intense 2001 negotiations, Televisa won a bigger slice of the expanding American pie. A revised accord signed in December gives Televisa a greater share of Univision's future growth, including the new Telefutura network, launched in mid-January.

As part of the new Univision deal, Televisa paid $375 million in cash and traded its Fonovisa music subsidiary--worth approximately $240 million--to increase its stake in Univision from to 15% from 6%. Televisa and Univision separately announced a joint venture to launch Spanish-language cable channels in the United States, several of them existing Televisa properties, an effort not expected to bear fruit for some time.

Yet the joint venture does not fundamentally change the nature of their relationship: Televisa's Mexican-made shows are rebroadcast in the United States.

In renegotiating its programming supply contract, Televisa did win better terms from Univision for its programming. Azcarraga Jean's father Emilio Azcarraga Milmo and his executive team arguably underestimated the potential of the U.S. market and the role Televisa would play in Univision's success when they set the original terms in 1991.

The U.S. Hispanic population increased 58% in the 1990s to 35.3 million, or 13% of the total, according to the U.S. Census Bureau. Research company Standard & Poor's/DRI, meanwhile, estimates that the purchasing power of U.S. Hispanics doubled to more than $440 billion by 2000, from US$215 billion in 1990.

In the past, Televisa received 9% of total Univision revenue. This year it will receive a base amount equal to about 9% of the 2001 revenues of the Univision broadcast and Galavision cable networks plus 12% of any incremental revenue.

Televisa will also receive a straight 12% share of Telefutura revenue, after Univision deducts its costs for programming bought elsewhere. Univision has estimated it will sell as much as $100 million in advertising on the new network in its first year.

The Univision contract currently represents about 3.5% of Televisa's total revenue. J.P. Morgan Chase's Lemardeley estimates the new deal could up income 15% to 20% in the next three to four years. "Since they are leveraging existing programming, it is pure profit," says Lemardeley.

Televisa sells its programming, mostly telenovelas, to countries around the world. But the United States--via Univision--is its single most important market. Last year it reported $153 million in program licensing fees, $70 million of which came from Univision, Lemardeley says.

Entertaining cooperation. Nonetheless, Azcarraga Jean aroused the ire of the notoriously anti-press Perenchio last year when Televisa undertook a highly public campaign to complain about the terms of its contract--including reports that Univision had rebuffed offers of a partial merger or acquisition--and to lobby for changes.

At one point, the two sides were barely speaking. But by the time the deal was announced, a detente had been established. Perenchio has invited Azcarrage Jean to join the Univision board as vice chairman.

There are also signs of thawing among the troops. Earlier this year, for the first time, the producers of Univision's talk show El Gordoy La Flaca began to hold joint story conferences with their counterparts at Televisa to coordinate coverage and avoid duplicating efforts.

Previously, the two companies did not seek to share resources, with the notable exception of Univision's news coverage of big Mexican stories, such as the 2000 presidential elections.

The new spirit of cooperation has extended to sports; the networks are working together on World Cup coverage. "We are meeting with them [Televisa] over the summer to discuss" other potential programming collaborations, Mario Rodriguez, president of entertainment for Univision Television Networks, told reporters in mid May.

The soap, Te Amare en Silencio (I Will Love You Silently), is set and filmed entirely in and around Los Angeles by Paloma Productions, a company owned by Perenchio. Its story focuses on Celeste, who is deaf and suffers considerably before she finds true love and happiness. Borrowing a page from Televisa, the telenovela's theme song is performed by Univision Music Group artist Jaime Camil.

Made in the USA. Univision has no intention of abandoning its proven formula of Televisa soaps from 7 p.m. through 10 p.m. However, it will test a original, U.S.-made telenovela in prime time.

Univision has not yet set a launch date for Te Amare, expected for sometime in early 2003, but, if successful, the series could pave the way for more original U.S. telenovela productions--a possible blow to Televisa's role as pre-eminent content provider.

With rival Telemundo co-producing soaps with partners in Mexico, Colombia and Brazil, and Univision dependent on soaps from Mexico, Venezuela and, more recently, Colombia, both U.S. Spanish-language networks have been criticized for serving up telenovela programming that reflects Latin America rather than U.S. Latin society.

Televisa's pat Cinderella telenovela story line--poor white servant girl meets rich prince and lives happily ever after--still knocks them dead, however, and the Mexican producer is updating storylines. Univision had great success in the United States, as Televisa did in Mexico, with Amigas y Rivales, which was centered around four young female friends, and the U.S. network is bullish on the prospects for El Juego de la Vida, about a high school girls' soccer team, with a launch during the World Cup.

It remains to be seen if, in the long run, U.S. Hispanic audiences--particularly bilingual, bicultural ones--will keep tuning in when they have other options in English.

Univision is taking some chances. It plans to launch an upcoming comedy show, La Playa Tropical, on Saturday nights, and a Sunday night two-hour game show Quien Dijo Miedo, adapted by Venevision International and Nostromo Producciones from a proven Spanish format but with all U.S. contestants.

Univision's track record for original productions is spotty. Its game show A Millon, a spin on Who Wants to be a Millionaire, and the sitcom Estamos Unidos both bombed, and it never came through on promised mini-series or made-for-TV movies that would have addressed U.S. audiences directly. Yet its news department, long-running talk shows like Cristina or variety shows like Sabado Gigante have been very successful.

Baldo is Univision's boldest attempt to tap into the U.S. Hispanic psyche. The original animated program is based on an English-language comic strip about a Mexican-American teenager and his family--his father, younger sister and a great aunt who is the keeper of traditions. Still in production, with Paloma Productions, Baldo is on a constant quest to be cool, impress the prettiest girl at his multi-ethnic high school and put enough money together to exchange his bicycle for a low-rider car.

Ironically, Televisa may be closer to cracking open new audiences than Univision with its reality television foray. The Mexican version of "Big Brother" was a runaway success, attracting viewers who weren't tuning in to Mexican TV. The Mexican network also has high hopes for its new, music-oriented formats. Univision executives say that they are watching Televisa programming closely for crossover potential in the U.S. Hispanic market.

Admittedly reluctant to mess with the success of their mix on Univision, such programming innovations will more likely find a home on Telefutura. And it's possible Univision could have Televisa produce them in Mexico, where production costs are lower Pay-TV dreams. Univision has also called on Televisa's programming talents to replace its hodge-podge of U.S.-produced Spanglish programming on cable channel Galavision. "Ratings are up between 100% and 400% depending on the time slot since they re-programmed," says Merrill Lynch analyst Jessica Reif Cohen.

High on the agenda for summer meetings between Televisa and Univision is their pay-TV joint venture. "We are working on launching five new cable channels, which we hope to do by the end of the third quarter of this year," Ray Rodriguez, president of Univision Television Networks, said at a press conference.

In fact, three of the channels are not new: They are existing Televisa music channels. The idea is to resell the networks into a new market with virtually no incremental costs. The other two will be movie channels, with one dedicated to classic Mexican and Spanish-language cinema.

Televisa will use the new outlets to grow outside of Mexico, where its channels are already carried on almost every available system. Televisa does not sell its channels to Mexico City-based MVS or to satellite operator DirecTV, which compete directly with its pay-TV systems Cablevision and Sky Mexico, so its growth at home depends on the cable operators' abilities to sign up more subscribers. And cable growth in the rest of Latin America has stalled.

Though the U.S. pay-TV business overall may not have much room for rapid growth, Univision estimates that only about 6.25 million homes--out of 11 million Hispanic households--have some form of pay TV.

Televisa and Univision have not yet announced any specific dates or plans for the channels. However, given the current trends in the U.S. cable market, they will likely be marketed on digital platforms, which are cheaper to distribute.

Cable operators in the United States have virtually run out of bandwidth to add more analog channels to their least expensive packages. The Televisa channels do not seem like a premium service for which Hispanic consumers would be willing to pay significantly more, like they might for a movie channel such as HBO or Showtime.

However, digital cable can feature many more channels in the least expensive program packages. On the negative side for the channel suppliers, the operators pay far less for each one--between five and 10 cents per subscriber versus an estimated 80 cents per subscriber for a popular basic analog offering such as the Disney Channel.

The joint venture will, therefore, need to ramp up distribution and ratings quickly in order to develop ad-sales business for the pay-TV channels. But even ad sales won't be as compelling as they are on broadcast networks, where most TV advertising dollars are still spent.

Broadcast, however, is exactly where Televisa continues to be relegated to a supporting role. Azcarraga Jean's reported bet on U.S. citizenship, or a bid to buy Univision, would change his role as content supplier. Short of such radical moves, he will have to get used to playing the Mexican sidekick in the U.S. Hispanic market.