The branding of BET: B.E. company of the year.

IT SEEMS APPROPRIATE THAT BET HOLDINGS INC. IS headquartered in Washington, D.C., Chocolate City. For over 16 years, BET has been the only African American-controlled cable programming outlet available--a lone gateway for black-oriented programming on the vast cable landscape. The gleaming, six-story, black-mirrored building is hard to miss and more majestic than any nearby structure. Upon entering, one is reminded of the movie Boomerang, in which Eddie Murphy starred as an executive at a highly successful black-owned and operated advertising agency. Unfortunately, Murphy's firm was located in a fictional metropolis somewhere between Hollywood and Madison Avenue.

But BET is not in the land of make-believe. Here, an army of well-groomed, articulate African Americans go about the business of making BET the "preeminent provider of black entertainment, information and images." As we continue to be bombarded with negative images of African Americans, BET Holdings offers a glimpse of our society suddenly gone right--a testament to the leadership of Bob Johnson, the company's founder, chairman and CEO, who has grown the company from a fledgling cable station, with only one night of programming into a media behemoth. "We set out to create a network that would showcase black talent and creativity," says Johnson, 51. "The BET of today is consistent with what I planned at its launch, but it s also more."

More indeed. An IPO on the New York Stock Exchange (BTV) in 1991 netted the company $72 million. A year later, BET debuted on our BE 100s at No. 15, and has remained among the higher echelon of African American-owned companies. In recent years, BET, with a current market capitalization of nearly $500 million, has become more than just "the black music video channel." It has extended its brand into other markets beyond its programming roots.

A large portion of BET's expansion has occurred since January 1996, much of it focusing on Johnson's three key areas: entertainment, information and leisure products and services. Its offerings include four cable channels: BET Cable network, BET on Jazz, Action Pay Per View and BET Movies/Starz3. On the information front, Emerge magazine and BET Weekend, a monthly newspaper insert, are its publishing vehicles, and MSBET is an online service providing a mix of information and entertainment. The BET SoundStage restaurant in Largo, Maryland, and a proposed BET-themed casino-hotel in Las Vegas, target Johnson's third key market--leisure activities. BET Holdings has also entered the financial services market and the cosmetics and apparel industries, all unexpected moves for a business built around cable programming.

Wall Street seems enamored with BET's recent efforts to increase its hold on the African American market. Though optimistic about the company's diversification, some analysts express concern with their moves into areas outside the entertainment realm. But Spencer Grimes, an analyst with investment firm, Smith Barney, points to the recent performance of the BET Holdings' stock, which was trading near its all-time high of $32.125 in April. After an initial purchase price of $17 per share in 1991, the stock languished in the low-to-mid-teens for three years before again climbing upward.

Analysts say that part of the reason for BET's low valuation was its high amount of free cash flow, which had neither been reinvested nor paid out to shareholders as dividends. A lack of reinvestment is generally viewed by investors as a sign of a company's stagnation.

Stagnant no more. In the past year, BET Holdings has initiated a flurry of joint ventures and start-ups designed to grow the company, extend its brand and increase shareholder value. William Gordon, 44, BET's chief financial officer, estimates the company has spent nearly $20 million in the past year on business investments. "How do you keep a business growing if you don't put money into it?" asks Johnson rhetorically.

The CEO's desire to grow the company is illustrated in his approach to the company's December 1995 repurchase of $58 million worth of stock (approximately 15%) from Time Warner (one of the original investors in BET along with John Malone, CEO of TeleCommunications Inc. (TCI), which owns approximately 22% of BET's stock through its ownership of Liberty Media Corp.). Time Warner chose to sell off its stock ownership for companies in which it did not have a controlling interest. Wall Street applauded Bet's repurchase. Less publicly held stock increases the equity of the remaining shares. BET's stock jumped several points, but Johnson, who controls the company through ownership of 48% of the stock and 55% of the voting shares, was less than elated.

"I didn't want them to sell the stock because I believe BET is a good investment and there were several good opportunities to joint venture with HBO (the unit of Time Warner that owned the stock)," says Johnson, who wisely decided to buy back the stock and increase shareholder equity rather than have it diluted in the market. "I would rather increase shareholder value by growing the business than repurchasing stock." Malone deems it somewhat of a miracle that Johnson has maintained such tight control of the publicly held company. But he is not disappointed. "He [Bob] is what creates value for BET. Without him, I wouldn't want to be involved," affirms the cable magnate, who hasn't sold any of BET's stock in 16 years.

Managing rapid and widespread expansion is no easy task--especially outside of one's core competency. A drain on cash flow is inevitable, and potentially crippling. Rather than trying to manage these ventures alone, BET entered into various strategic partnerships such as those it has with Encore Media Corp. (a subsidiary of Liberty Media Corp.) and Microsoft to defray capital expenditures and acquire expertise in areas in which they had no prior experience. "The smartest strategy BET has employed is their pursuit of strategic alliances in which they find solid partners that are doing well in their respective fields," says Clayton Banks, president of the National Association for Minorities in Communications (NAMIC).

For BET's part, it has relied on the cash flow generated by its 800-pound gorilla--BET Cable Network--whose relatively low operating costs and high revenues have provided the company with ample capital for its expansion. The channel now boasts availability in over 45 million U.S. households (out of a total 70 million), and 98% of the 7 million African American cable households. BET Holdings reported 1996 revenues of $132 million--up more than 20% from $ 109 million in 1995 and nearly 40% from $97 million in 1994.

BET Holdings has managed to continue growing its core business of cable programming while laying the groundwork for becoming a multimedia entertainment conglomerate. At press time, it had outperformed the S&P 500 by 6% year to date, and 30% for the past two years. Investment analyst Grimes expects the company to continue that trend by outperforming the market over the next few years. Accordingly, the securities firm Donaldson, Lufkin & Jenrette considers the stock undervalued, and labeled it a buy.

While it's still too early for many of the company's ventures to have created a profit--most are not expected to break even for three to five years--they have good long-term-earnings potential and bode well for the company's future. Their sustained revenue growth, while undergoing considerable capital-intensive expansion, has led BLACK ENTERPRISE to choose BET Holdings Inc. as our 1997 BE 100s Company of the Year.

APPETITE FOR EXPANSION

"By the year 2000, BET Holdings will have a market valuation of a billion dollars," muses Johnson. However, there is currently not much more room for growth in the cable programming industry to fuel that kind of boost. That's due, in part, to the limited channel capacity of cable service providers. "In order to grow the business, BET has to find new avenues beyond cable programming to supply additional sources of revenue," says Dob Bennett, president of Liberty Media Corp. which owns 22% of BET Holdings.

To focus more on the strategic long-term development of the company, and less on its day-to-day operations, Johnson appointed Debra Lee, 42, executive vice president of strategic development and general counsel, president and COO of the company in March of 1996.

He was then able to clear his desk and concentrate on how to send BET's stock value soaring. "In the process of the last 16 years, we have created a brand that has found a level of acceptance that we can leverage into new business opportunities," says Johnson, who is confident that the BET brand name can become the company's greatest asset. Clearly communicated throughout the organization, "extending the brand" is now the company's mantra, punctuating conversations with executive vice presidents and mid-level managers alike.

Similar to strategies employed by companies such as Nickelodeon and Disney that have leveraged their brand names to extend their businesses, BET Holdings believes it can capitalize on the name recognition and quality associated with its brand in myriad ways. "Diversification is never easy, and one of the hardest challenges of management is to reinvest the company's revenues," says Bennett, who views some of BET's recent ventures, such as its Visa card, as a way of experimenting to see how far the brand name will take them.

Lee, who's now president and COO, agrees that some of their ventures could be considered research and development. "Whenever we see an opportunity to expand our reach, we're going to pursue it." However, BET is not abandoning its African American constituency. In fact just as it did in the cable programming industry, the company is focusing on the African American market (and its $427 billion income), which no one is currently targeting.

This strategy has led the company into several previously uncharted waters for an African American media company. "Expanding on the brand is exactly the right thing for him [Johnson] to be doing at this stage of the company's development," adds Malone. For example, Color Code, the company's line of cosmetic products for African American women introduced by its subsidiary, BET Direct, is being run by Janis Thomas, 41 executive vice president, marketing and merchandise--all of it made possible by the company's cash cow, BET Cable Network.

PROVIDING THE CAPITAL

It's no secret that the BET Cable Network (www.betnetworks.com) generates the lion's share of revenues for BET Holdings (roughly 90%). Much of its success is due to the company's ability to keep costs down. Videos, provided free of charge by record companies (in return for the exposure of their artists), constitute up to 65% of its offerings. Another cost-saving recourse: the majority of BET's non-video programming, including Teen Summit, BET Talk and Planet Groove, is created on site in their own production facilities.

"We create most of our programming in house rather than purchase it because it's more cost-effective," says Jefferi Lee, executive vice president, network operations and programming. However, BET does purchase sitcoms such as Sanford and Son, Thea and Benson, which are relatively inexpensive, costing about $35,000 an episode as opposed to the million-dollar price tag on many of the more widely broadcast syndicated sitcoms.

According to Jefferi Lee, the network also shies away from producing its own sitcoms or other shows that, because of the high cost, would limit the number of episodes they air in a season. In response to criticism that BET's programming should be more diverse, he maintains that BET was created primarily as a music channel and will continue to serve the purpose for which it was created. "Most cable channels serve a distinct niche, and BET seems to be the only one that gets asked to serve the entire spectrum of African American viewing needs," says the 40-year-old Lee. "Our parent company, BET Holdings, offers a wide variety of content for diverse African American needs through its cable, publishing and entertainment subsidiaries." Nonetheless, cable systems and advertisers don't seem to have a problem with their content.

BET's revenues, which have had an annual increase of nearly 20% over the past three years, are generated primarily by advertising and the fees it receives from its cable distributors and its affiliates. Cable distributors currency pay BET a per-subscriber fee of around 12 cents, somewhat low for the industry. But most of BET's agreements with cable distributors last well into the next century and include incremental increases in the per-subscriber rate. These increases will help to grow revenues over the next few years.

In 1996, advertising fees for the cable network were raised to reflect the company's widening subscriber base, and accounted for 57% of the company's total revenues. The cable network has consistently achieved its goal of adding two million subscribers per year,: from 39.4 million in 1994 to 42.3 million in 1995 and 45.2 for 1996. Net profits have grown steadily as well, from $14.8 million in 1994 to $19.9 million in 1995 and $22 million in 1996. The addition of media properties encompassing cable television, print and the Internet, has given BET the ability to offer cross-promotion vehicles in several venues to its advertisers.

"The advertising lifespan of a particular product can extend through all of our mediums," explains Executive Vice President of Corporate Sales Management James Ebron. Based in BET's New York City satellite media sales office high atop Madison Avenue, Ebron, 42, says, "It becomes more than an advertising commitment but a strategic commitment."

Being able to serve viewers in various entertainment mediums enables BET's advertising department to maximize the benefit to both the advertiser and the larger holding company. For instance, an interview with rapper LL Cool J was featured on both MSBET, the company's online subsidiary, and BET network. Sponsors for that program then received impressions on both television and the Internet.

Infomercials, while not always popular with many viewers, play a part in the revenue stream of the company. "They [infomercials] allow BET to sell air time that would otherwise have to be filled with programming," says NAMIC's Banks, who is also vice president of sales and marketing for the Sega Channel. "Infomercials are an important part of our revenue model because they offset the lower premium paid by advertisers for BET's target African American audience," adds Jefferi Lee. Most of the infomercials aired on BET are during time slots that have traditionally been hard to sell to advertisers, thus taking advantage of a slow time to increase the station's earnings potential.

In another move to boost the company's revenues, BET Holdings discontinued its Young Sisters and Brothers magazine. Initially, YSB targeted African American teens and enjoyed a loyal following, including African American parents who subscribed for their children because the magazine addressed their needs. It consistently won awards for its content and relevance to the market which it served. However, facing a dearth of advertising sponsorship, the magazine eventually changed its focus from teen issues to young adult-oriented topics in the hopes of reaching the more advertiser-friendly 18-34 age demographic.

But the switch, reflected in its February 1996 issue, did not significantly increase the subscriber base of the magazine, which peaked around 100,000. The dwindling number of teen subscribers was not buttressed by the increase in older readers. And after six years of operating at a yearly loss of nearly $2 million, the parent company ceased publishing YSB in October 1996.

"One of YSB's main problems was its difficulty in attracting and maintaining subscribers," says Debra Lee. She also notes that the high cost of producing the art-intensive and colorful magazine contributed to its demise. Publishing industry insiders--and some YSB former staff members who point to the success of Source and Vibe magazines--believe it was more likely due to poor marketing . YSB also seemingly fell victim to BET Holdings' need to increase shareholder value, and dosed down as a result of taking too long to reach profitability.

Emerge, its older sibling, is an issue-oriented magazine providing news, commentary and analysis for an adult audience. Launched in 1991, it, too, has operated at a loss for most of its lifetime--though circulation has now reached 140,000. But Emerge is very dose to contributing its share of profits to the conglomerate, says Lee. She maintains that Emerge is not in danger of following in the footsteps of YSB. "We couldn't maintain two publications that were losing money so we made a corporate decision to discontinue YSB," she clarifies--especially not with so many cash-intensive new ventures.

BET AND BEYOND

One of BET's most promising new ventures is its entertainment-themed BET SoundStage restaurant. Opened in Largo, Maryland, just outside of D.C., this past January, SoundStage has had brisk business from Day 1. "I think the restaurants should reach profitability very quickly," says analyst Grimes. Similar to other themed restaurants such as Hard Rock Cafe, SoundStage seeks to make eating an entertainment experience. And it does. The sights and sounds of BET's variety of music programming permeate the establishment, with sports video consoles in each booth. The restaurant, which cost $6.5 million to build including the purchase of the land, is outfitted to resemble a traditional entertainment soundstage.

"We saw an opportunity in the theme restaurant business to extend our brand because no one was targeting the African American community," says Dan Spikes, BET Holdings' vice president of restaurant development. The company has plans to build 20 BET SoundStage Restaurants in select cities around the country over the next three to five years. By year's end, Bob Johnson expects to have a major partner to help roll out the new restaurants throughout the U.S.

He also has continuing plans to expand on the success of its crown jewel, BET Cable Network. Since 1994, the holding company has added three new channels to its BET Networks stable: Action Pay Per View (1994), BET on Jazz (1996), BET Movies/Starz3 (1997). However, growing those networks to a profitable subscriber base will not be easy. "There are many channel-locked cable systems around the country that just don't have the capacity for new channels," says Ann Cohen, vice president of communications for the Cable Telecommunications Association.

Don garden, CEO of Barden Companies Inc.--a Detroit-based cable distributor and BE Company of the Year in 1992--believes BET's relationship with TCI, the largest cable distributor in the country with more than 25% of

U.S. cable subscribers, will aid the company in getting these stations up and running.

Bennett, president of Liberty Media Corp.--the TCI subsidiary that owns 22% of BET--disagrees. "In the early stages of BET's existence, that may have been true, but TCI has too many cable programming outlets to give preferential treatment to one." Liberty Media is the parent company of Encore media, the nation's largest supplier of cable movies, which has over eight cable movie channels.

BET Movies/Starz3, the company's latest cable channel, which began airing in February 1997, is a joint venture with Encore Media to air movies with African American themes and/or stars. However, limited channel capacity and the nature of the partnership--requiring cable distributors to carry two additional Encore channels (which the distributor pays for) before it can carry BET Movies/Starz3--will present a significant challenge to growing the subscriber base. And only 300,000 subscribers have signed on to the channel since its launch.

The joint venture will enable BET to benefit from Encore's vast library of current Hollywood films which it could not otherwise afford. In addition to its proven access to African American audiences, BET will contribute $24 million in cash to the venture, a 50/50 equity split, over the next three years. "We wouldn't have launched this channel without BET's involvement," asserts Bennett. The operational end of the venture will be run from Encore's headquarters and programming decisions will be made jointly by the two companies.

Of BET's new channels the closest to reaching profitability is Action Pay Per View. BET acquired Action from Avalon Pictures in 1993. It is a satellite-based channel that airs Hollywood's latest action and adventure releases. Action's subscriber base has climbed from 5 million in 1993 to nearly 9 million last year. "Action has generated positive cash flow since last year, and we expect it to be the first of our new ventures to break even," says Curtis Symonds, 41, BET Holdings executive vice president, affiliate sales and marketing, and president of Action Pay Per View. Adds NAMIC's Banks: "It is not unusual for a cable channel to take four to five years to become profitable."

BET on Jazz, launched in January 1996, is an attempt to capitalize on BET's proven model of providing music-oriented programming at a high profit. The station is now available in over one million households, although somewhat short of its two million subscriber goal by the end of its first year. In order to build up its initial subscriber base, BET is providing the network free of charge to its distributors for the first two years.

"BET on Jazz (which is beamed digitally via satellite to distributors) will really begin to take off when digital bandwidth arrives," says Symonds. "Digital cable bandwidth will allow cable operators to offer nearly tenfold more channels than currently available," Cohen explains. "Because of jazz's worldwide appeal, we believe we can market it extensively outside of the U.S.," says Bob Johnson, anxious to extend the company's reach abroad. In June 1996, the jazz channel became available in the United Kingdom and parts of South Africa, and has over 300,000 international subscribers. Johnson is also looking Stateside to grow the business, and he's finding many companies eager to join him.

STRATEGIC PARTNERING FOR PROFITS

"The high visibility of being a publicly traded company has made BET the partner of choice for companies who want to reach the black consumer and are looking for a highly-visible, high-profile brand," states Johnson. "We're an open book. Companies can look up our 10(k) and find out our earnings and everything else with ease rather than relying on the word of the management of a privately held firm." And the company isn't reticent to take advantage of that fact.

"All of our joint ventures either extend our brand recognition and/or add promotional value to our existing properties", explains Lee. In all but one of its partnerships, BET has negotiated approximately a 50/50 equity and investment arrangement. "We don't want to simply license our brand to companies, we want to be completely involved in the process," says Debra Lee. She cites a recent partnership with apparel manufacturer GIII to create BET brand clothing, in which BET assumes 50% of the manufacturing costs as well as revenues, rather than simply licensing the BET name--lessening BET's initial investment and risk in the project.

In February 1996, BET Weekend, a publication focused mainly on entertainment, was established in partnership with New York's Daily News. While BET contributes the editorial content and marketing expertise, The Daily News provides printing, distribution and the majority of the ad sales. "The Daily News also provided the relationships with other newspapers which made it easier to get the product launched," says Lee.

Originally scheduled for quarterly distribution to 1 million targeted African American homes, in February the company increased the frequency of the magazine-style newspaper insert to 10 times a year. Newspapers in Atlanta, Chicago, Detroit, Los Angeles and New York deliver the advertiser-driven Sunday newspaper supplement to their constituents. Eventually, BET hopes to distribute the supplement weekly.

Another of BET's joint ventures--t his one with software giant Microsoft--makes its home in cyberspace but is based in BET's headquarters. MSBET (www.msbet.com) is an online service that will embrace and extend BET Holdings' media properties in the physical world into the virtual one. "We want to be the great aggregate of African American content on the Web," says Barry Johnson, MSBET's president. No small statement when you have the computing power of Microsoft to back you up. The firms will contribute equally to the costs of running the venture.

"BET is the premier brand to provide us a reach into the African American consumer community," says Sandy Thomas, business development manager of strategic partnerships for Microsoft. BET will provide most of the content for the venture and Microsoft will provide much of the technical hardware and expertise. Initially, the venture plans to base revenues on an advertising-driven model but will eventually phase in subscription fees. Barry Johnson says the venture will also seek to produce CD-ROMs and other multimedia entertainment products.

Far removed from the vagaries of cyberspace, BET Holdings and Hilton Hotels Corp. are currently developing plans for a BET SoundStage-themed casino in Las Vegas, Nevada to be built from the ground up. BET will handle the entertainment and marketing aspects of the hotel, while Hilton Hotels Corp. will manage the hotel and gaming.

The proposed $17-$200 million project intends to capitalize on the estimated 2.5 million African Americans who travel to Las Vegas each year. All expenses and revenues will be split equally by the partners. The seemingly never tired Johnson hopes to break ground for the hotel later this year and have it open to the public by early 1999.

But the latest of BET's co-ventures is a little out of its general expertise, and the only one in which it didn't provide any of the initial capital--while still receiving 50% of the profits. The BET Visa card is a co-branded credit card developed with Maryland-based Chevy Chase Bank. "If this is successful, we may move into other financial service areas such as mortgages and investments," says Johnson, who believes that there is a large credit-worthy African American population that is being underserved.

These "deal-a-minute" new ventures are the wild card, states Grimes, because any of them could be a boon or bust. Regardless, every move that BET Holdings makes is a calculated risk intended to increase the brand's loyalty among African Americans and turning his company into a diversified multimedia entertainment powerhouse. If it succeeds, Johnson will have turned a $15,000 personal loan into the largest African American-owned media company in history. And along the way, he will have scripted a success story better than anything Hollywood ever produced.