Page 1 BN 11/02 Time Warner Enlists Meatwad, Talking Fries in Late-Night TV War Time Warner Enlists Meatwad, Talking Fries in Late-Night TV War (Published in Bloomberg Markets magazine.) By Jonathan Berr Nov. 2 (Bloomberg) -- In 2001, Mike Lazzo, programming head at Time Warner Inc.'s Cartoon Network, pitched a late-night show to John Muszynski, a potential advertiser. The stars: a domineering milkshake called Master Shake and a shape-changing hamburger named Meatwad. ``I looked at him and said, `I don't get it,''' recalls Muszynski, managing director of Chicago-based media buyer Starcom USA, which counts Coca-Cola Co. and Kellogg Co. as clients. Three years later, Muszynski still doesn't get ``Aqua Teen Hunger Force,'' which airs opposite late-night fixtures ``The Tonight Show'' and ``Late Show with David Letterman.'' That hasn't stopped him from advertising as Cartoon Network's ratings climb. The all-animation channel's offbeat fare topped Walt Disney Co.'s ESPN sports programs and Time Warner's TNT network among 18- to 34-year-old cable TV viewers during 19 of the first 39 weeks of 2004, according to Nielsen Media Research, which tracks TV habits. ``I don't have to get it,'' says Muszynski, 46. ``The viewer has to get it.'' From DreamWorks Animation SKG Inc.'s ``Shark Tale'' to ``SpongeBob SquarePants'' on Viacom Inc.'s Nickelodeon network, cartoons are reeling in big audiences. `Tremendous Value' ``Shark Tale,'' the story of a fish that evades undersea gangsters, generated $147.4 million in ticket sales in the five weeks that ended on Oct. 31, according to Exhibitor Relations Co., a box-office tracker. In its first three weeks, ``Shark Tale'' was the top movie in the U.S. and Canada. On Oct. 27, Glendale, California-based DreamWorks raised $812 million in an initial public offering. DreamWorks shares traded at $37.01 yesterday, up 32 percent from their $28 IPO price. Rival Pixar Animation Studios, creator of ``Finding Nemo,'' which stars a lost clownfish, has seen its net income soar an average of 144 percent since 1999. Shares of Emeryville, California-based Pixar have gained 16 percent this year to $80.19 yesterday. The Standard & Poor's 500 Index has risen 1.7 percent. ``There's tremendous value in those franchises,'' says Patrick Russo, a principal at Los Angeles-based Salter Group LLC, which provides financial advice to media companies. Betting on a similar payoff from cartoons for grownups isn't as wacky as it may sound. Scripted shows on broadcast TV -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 2 typically cost $1 million to $2.5 million an episode to produce, says Hal Vogel, author of ``Entertainment Industry Economics'' (Cambridge University Press, 2004) and chief executive officer of New York hedge fund firm Vogel Capital Inc. Atlanta Carpet Factory Cartoon Network's staff of 30 writers, animators and producers for adult shows turn out ``Sealab 2021'' and ``Harvey Birdman, Attorney at Law'' in a converted carpet factory in Atlanta for $50,000 to $200,000 an episode. The adult cartoons will generate $100 million in annual revenue for Time Warner in the next few years, predicts Mark Lazarus, president of the New York-based media company's Turner Entertainment Group. ``We do expensive things on the cheap,'' says ``Aqua Teen'' co-creator Matt Maiellaro, seated in a room plastered with staff- drawn cartoon murals. One way Cartoon Network trims costs is by doubling up on jobs. Maiellaro, 38, a former production assistant on low-budget films such as ``Hellraiser 3,'' and writing partner Dave Willis, 34, sing backup on the show's theme, performed by rapper Schoolly D. Dimwitted Hamburger Writers create their own promotions that air between a show and a commercial. That can save $500,000 a year and provide a venue for potshots. One so-called bumper advised General Electric Co.'s NBC network to revamp its new animated comedy ``Father of the Pride,'' which stars a troupe of lions in the Siegfried and Roy magic show. If Pixar's ``Toy Story'' strives for realism with its bedroom of perfectly rendered playthings, Cartoon Network takes the opposite tack. Meatwad, a dimwitted hamburger with circles for eyes, changes into three shapes: a bridge, an igloo and a hot dog. Frylock, a talking order of french fries, has no legs. Master Shake, who swims uninvited in a neighbor's pool, bosses both of them around. ``He does what people want to do and have the restraint not to do,'' says Dana Snyder, 30, the actor who provides the voice of Master Shake. In the 1960s and 1970s, cartoons reflected the state of the American living room on Saturday mornings, says Bob Thompson, director of the Center for the Study of Popular Television at Syracuse University in Syracuse, New York. `There's No Limit' That began to change with shows like ``The Simpsons'' and their commentary on society and politics. Today, ``there's no -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 3 limit to what a cartoon can show,'' Thompson says. ``They are able to go into territory that a movie or a standup comic couldn't go.'' Michael Maynard, chairman of Philadelphia-based Temple University's advertising department, says cartoons have worked their way into the mainstream. ``The kids that are 19 years old now grew up with cartoons,'' he says. Today, 27 percent of 18- to 34-year-old men regularly watch cartoons; 35 percent are white-collar professionals; and 37 percent are members of households with annual incomes of $50,000 or more, according to market research firm Yankelovich Partners Inc. in Chapel Hill, North Carolina. ``That's a prime audience for advertisers,'' says Peter Jankovskis, director of research at Oakbrook Investments LLC in Lisle, Illinois, which owns 150,000 shares of Time Warner among its $1.3 billion in assets. Profit Rising Cartoon Network is becoming a boon to its parent, too. It contributed $650 million of the $4.6 billion in revenue at Time Warner's Turner Broadcasting System cable channels last year. Profit excluding costs for depreciation and amortization rose to $241 million. Time Warner spokeswoman Tricia Primrose Wallace declined to provide a year-earlier comparison. What Time Warner will say is that Cartoon Network's profit has increased faster than that of any of the 11 other Turner domestic U.S. networks during the past five years, including CNN, the all-news channel, and TBS, which airs reruns of ``Seinfeld.'' During the same period, Time Warner itself had losses totaling $110 billion, led by a $98.7 billion loss in 2002, a U.S. record, after the company wrote down the value of its America Online division. Time Warner shares peaked at $75.86 in December 1999. Yesterday they traded at $16.38. Analysts surveyed by Thomson Financial expect Time Warner to report third-quarter net income of about $679 million tomorrow, a 26 percent increase from a year ago. Sales from continuing operations are expected to rise 3.6 percent to $9.8 billion. Bright Spot For investors, Time Warner's unique -- if unconventional -- cable programming is a bright spot, says Daniel Poole, vice president of equity research at Cleveland-based National City Corp. ``If you have exclusive content that's hot, then you're in a good position,'' says Poole, whose firm owns 2.4 million Time Warner shares among its $23 billion in assets. For TV's major broadcast networks, Cartoon Network is one more irritant. News Corp.'s Fox, Disney's ABC, General Electric's -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 4 NBC and Viacom's CBS are already struggling to stem defections to cable shows, including crime drama ``The Sopranos.'' Now, Cartoon Network's programs for adults are pulling in more 18- to 34-year- olds than any advertising-supported cable network in their time period, according to Nielsen data. Advertisers are putting their money where the growth is. Ad revenue from cable networks will jump 14 percent to $19.5 billion this year, according to the Cable Television Advertising Bureau, which tracks ad sales. At the four broadcast networks, ad revenue will rise about 7 percent to about $16 billion, Vogel estimates. Not a Threat NBC Universal President Jeff Zucker, 39, says he doesn't consider Cartoon Network a threat in the late-night arena. One reason: It's small. Cartoon Network draws about 17 percent of the 8.3 million viewers who tune in to NBC's ``Tonight Show'' and ``Late Night with Conan O'Brien.'' As for the rivalry between cable and broadcast television, Zucker says, cable enjoys faster growth because it's starting from a smaller base. ``If you're looking to know where the 18- to 34-year-old viewers are in late night, they are on NBC,'' says Zucker, seated in his office on the 25th floor of 30 Rockefeller Center in New York, a whiteboard schedule of NBC's lineup hanging in an adjoining conference room. When Ted Turner bought the archives of animators William Hanna and Joseph Barbera in 1991, he says, he knew he was onto something big. Hanna and Barbera ``The purchase of the Hanna-Barbera library was one of my best business decisions,'' Turner, 65, says in an e-mail. ``People thought it was crazy to launch a 24-hour cartoon network, and they were wrong.'' Hanna and Barbera started their careers hand-creating the Tom and Jerry cat-and-mouse cartoons in the 1930s for Metro- Goldwyn-Mayer Inc. They stayed until MGM shut its animation division in 1956. ``When Hanna-Barbera were in their heyday at MGM, they were doing eight to 10 cartoons a year,'' film historian Leonard Maltin says. ``When MGM decided to close their cartoon studios, they were suddenly faced with the daunting reality of producing a half hour a week.'' The TV networks demanded more shows to feed their growing audiences, he says. In the 1960s, Hanna-Barbera created ``The Flintstones,'' a prehistoric sitcom, and ``The Jetsons,'' a comedy set in the future. Quality slipped as the animators churned out show after show. By 1991, both partners wanted to sell the studio, Los -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 5 show. By 1991, both partners wanted to sell the studio, Los Angeles-based animation historian Jerry Beck says. Hanna died in 2001; Barbera is 93. `Huckleberry Hound' Turner, who'd started his cable TV business in 1970, was looking to bolster his expanding empire. Lazzo, a high school dropout, had joined Turner's studio at age 26, delivering packages for the boss. Away from the mailroom, Lazzo began to teach himself animation, fulfilling a childhood passion. Lazzo says he knew all about the Hanna-Barbera archive. ``Huckleberry Hound,'' starring a dog with a Southern drawl, had been a favorite show. Lazzo says he encouraged Turner executives to buy the library when it came up for sale. ``The studio had just passed the golden age,'' he recalls. ``Most of its value was in its past glory.'' Turner paid $320 million for Hanna-Barbera and named Lazzo head of cartoon programming. Lazzo says one of his biggest thrills was sitting down with Hanna and Barbera. `I had met Joe 15 minutes, and he was pitching me a show,'' Lazzo says. Powerpuff Girls In his new job, Lazzo oversaw ``The Powerpuff Girls,'' a children's show about superheroes named Blossom, Bubbles and Buttercup. The show took off, leading Cartoon Network to a No. 2 ranking, behind Nickelodeon, among children ages 6 to 11. Lazzo says his real interest was in cartoons for adults. Even more, he hated Cartoon Network's reputation as a home for old reruns. ``We were tired of being disrespected in the media,'' he says. Combing through the Hanna-Barbera library, Lazzo and his team discovered Space Ghost and Harvey Birdman, characters from the 1960s and 1970s and long since forgotten. In the original ``Space Ghost and Dino Boy,'' which ran from 1966 to 1968, Space Ghost was a conventional superhero. He battled Zorak, a talking mantis, and Moltar, who hailed from a planet of molten rock. Lazzo and five writers transformed Space Ghost into a talk show host -- one of the first digs at late-night rivals. Zorak led Space Ghost's band, and Moltar became the show's director. Space Ghost In the renamed ``Space Ghost Coast to Coast,'' the cartoon host interviews real people, including singer Tony Bennett, who appear on a screen spliced into the animation. In one episode, Space Ghost asked actress Carol Channing to go steady. Channing, -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 6 now 83, turned him down. Space Ghost interviewed New York Times television reporter Bill Carter about TV talk shows. Carter's 1994 book, ``The Late Shift: Letterman, Leno & the Network Battle for the Night'' (Hyperion Press), chronicles NBC's choice of Jay Leno to replace Johnny Carson on ``The Tonight Show.'' Lazzo says he created Space Ghost to spoof the late-night battle. Then, his show got in the thick of it. ``I never thought it would come to that,'' he says. Cartoon Network converted more old shows and added new ones. Lazzo's colleague Michael Ouweleen helped change winged action hero Harvey Birdman into a lawyer. ``Harvey files motions, cross examines and occasionally blasts opposing counsel with a solar ray,'' Cartoon Network's Web site says. `Adult Swim' Lazzo pushed the network to air the shows in a package called ``Adult Swim,'' a reference to a time when children are banned from a pool, leaving grownups free to play. Last year, ``Adult Swim'' began airing in a regular 11 p.m.- to-2 a.m. slot five days a week. In the past year, the ratings have shot up 40 percent among viewers 18 to 34, according to Nielsen. Jimmy Kimmel competes against ``Adult Swim'' with his ``Jimmy Kimmel Live'' talk show on ABC. He says some of Cartoon Network's shows are funny. Are they his biggest worry? No. ``I've got Leno kicking my ass every night,'' he says. Kimmel says ABC is pressuring him to reach a broad audience. ``I don't want just young guys watching my show,'' he says. ``The key is in guest booking. If you get a wider range of guests, that's the way to go.'' Targeting Youth For advertisers, the opposite may be true. Companies that want to reach younger viewers won't waste money on shows that attract older ones, says Susan Nathan, a vice president at New York advertising agency Universal McCann, a unit of Interpublic Group of Cos. ``You want to have a highly concentrated audience so you have less waste,'' she says. Broadcasters are fighting the incursion by adding to their cable holdings and targeting youth. Last year, Viacom acquired Time Warner's 50 percent stake in Comedy Central for $1.2 billion. Comedy Central plans an animated spoof of reality TV called ``Drawn Together.'' The channel already airs ``South Park,'' about smart-mouthed kids in Colorado. Fox is developing ``American Dad,'' about a CIA agent, hoping for another hit like ``The Simpsons,'' TV's longest- -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 7 running comedy, at 15 years. Even NBC's Leno is getting into the act. In October, he aired an animated clip of U.S. presidential candidates George W. Bush and John Kerry trading insults to the tune of Woody Guthrie's ``This Land Is Your Land,'' which had been making the rounds on the Internet. `Family Guy' Lazzo is betting on one of Fox's castoffs, ``Family Guy,'' created by former Cartoon Network writer Seth MacFarlane. The show features Stewie, a baby who plots world domination in a voice that sounds like the late British actor Rex Harrison. ``Daily Variety'' critic Ray Richmond called the show ``both undeniably clever and utterly bizarre.'' When Fox canceled ``Family Guy'' two years ago, Lazzo persuaded his boss to pick it up, as he'd done with the Hanna- Barbera archives a decade earlier. Family Guy went on to sell 3 million DVDs at a suggested price of $49.98. Now, Fox plans to air new episodes under an agreement with Cartoon Network. When Lazzo isn't scouting new programs or retooling old ones, he reads scripts, polishes dialogue and hangs out with his crew in Atlanta. A three-foot model of Astro Boy, a Japanese character, greets visitors to the ``Adult Swim'' offices, and a model of Harrison Ford from the movie ``The Empire Strikes Back'' stands nearby. A Show of Their Own ``Aqua Teen Hunger Force'' sprang to life when writers were working on a ``Space Ghost'' episode. Space Ghost couldn't pay for his fast food. Instead, he agreed to let the restaurant's mascots -- a milkshake, french fries and hamburger -- appear on his talk show. After that, Lazzo decided the characters deserved a show of their own. Cartoon Network General Manager Jim Samples, 41, keeps an eye on the writers from a corporate office park across Interstate 75/85. He says he makes sure ``Adult Swim'' adheres to Turner's standards for taste. ``We tend to get notes on anything concerning overt sexuality or religion,'' says Lazzo, who cut a line from ``Futurama'' that used the phrase ``sweet zombie Jesus.'' When writers ran a pirate flag up the flagpole, Samples made them take it down. For about a month, Lazzo's team gave phony information to the network's public relations staff, says Laurie Goldberg, Cartoon Network's head spokeswoman. In one case, the writers said Master Shake was going to catch schizophrenia from a toilet seat -- a fabrication at the time. Later, they based an episode on the idea. -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 8 Bikini-Clad Women Other unconventional notions slide through, too. When ``Sealab 2021'' co-creator Matt Thompson, 34, was compiling shows for a DVD, he searched Atlanta's bars for the right promotion concept. He returned with bikini-clad women to read one of his scripts and added the session to the video. ``It was one of the most fun days of my life,'' he says. Given the growing audience for Cartoon Network, big broadcasters are starting to circle. Ouweleen, 37, a former advertising copywriter for online condom store Condomania and Bubblicious bubble gum who oversees ``Harvey Birdman,'' says several networks have offered him jobs. He says he's not interested in leaving Atlanta. Matt Harrigan, 34, worked on the other side. He quit Cartoon Network in 1994 for ``Late Show with David Letterman,'' thinking he'd landed a dream job helping create Letterman's top 10 lists. ``It was a lot more money,'' says Harrigan, who declines to disclose the amount. He returned to Cartoon Network this year because he missed his old job. Harrigan says writers and cast members at ``Adult Swim'' are becoming celebrities. That may make it easier to attract advertisers for a new show called ``Squidbillies,'' the story of a family of squid in -- where else -- rural Georgia. With such characters on the horizon, Cartoon Network may find that advertisers like Muszynski start to consider talking milkshakes run of the mill. --Editors: Roche, Henkoff Story Illustration: To review Time Warner's balance sheet, See {TWX US FA }. For a customized tour of Time Warner functions, see {CNP 02216770103 }. For the web site for Cartoon Network's Adult Swim shows, see http://www.adultswim.com For more Bloomberg Markets stories, see {MAG } To contact the reporter on this story: Jonathan Berr at (1) (609) 750-4516 or jberr@bloomberg.net To contact the editor responsible for this story: Ronald Henkoff at (1) (212) 318-2347 or rhenkoff@bloomberg.net [TAGINFO] TWX US CN VIA/B US CN GE US CN DIS US CN DIS US CN -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. Page 9 NWS US CN NI COS NI US NI ENT NI TVNEWS NI FILM NI ADV NI WIN NI CAB NI INT NI NY NI CA NI MED NI TOP NI FEA NI MAG NI TOP NI GEN #<853975.219053># -0- (BN ) Nov/02/2004 5:13 GMT -----------------------------====================------------------------------ Copyright (c) 2006, Bloomberg, L. P. ############################ END OF STORY 1 ##############################