Two of the black business world’s heavyweights have squared off in a bitter bout over the rights to produce and distribute It’s Showtime at the Apollo, the top-rated African American variety show. At stake are millions in television syndication advertising dollars. But a collapse in negotiations over the lucrative contract raises important questions about each of the combatants’ approach to business.
In one corner is 80-year-old Percy E. Sutton, a one-time New York City borough president and former head of Inner City Broadcasting Corp. (No. 58 on the BE INDUSTRIAL/SERVICE 100 list with $59 million in revenues). Known affectionately as “The Chairman,” Sutton has been linked to the revitalization of the world famous Apollo Theater since 1981 when he purchased it with $250,000 of his own money and arranged some $18 million in financing to renovate it. For the last 15 years, he has created and distributed It’s Showtime at the Apollo, a historic television show that helped the Harlem landmark recapture its legacy as an incubator for black musical and cultural talent.
In the other corner is Frank Mercado-Valdes, a 40-year-old former Golden Gloves boxing champion who, 10 years ago, launched The Heritage Networks (No. 90 on the BE INDUSTRIAL/SERVICE 100 list with $30.5 million in revenues). Mercado-Valdes’ television syndication company makes its money by securing the syndication rights to air movies such as Shaft and Cotton Comes to Harlem, and then selling the advertising time to sponsors. The tough, no-nonsense negotiator got his big break when Universal Domestic Television sold him the weekend syndication rights to its hit TV drama series New York Undercover, marking the first time in broadcasting history that a minority-owned company acquired a network syndicated series.
In August, news surfaced that Mercado-Valdes had outbid Sutton for the syndication rights to produce It’s Showtime at the Apollo for the 2002–2003 season. That turned up the heat on a simmering riff between the two entrepreneurs and set the stage for a battle over control of syndication dollars derived from the Apollo brand. Already, things have gotten pretty nasty. Upset by what he calls an unfair bidding process, Sutton is not giving up his 15-year investment developing It’s Showtime at the Apollo without a fight.
To offset losing the show, Sutton is producing a spin-off program called Showtime in Harlem, which offers virtually the same format as the new Showtime at the Apollo (Mercado-Valdes dropped the It’s when he started producing the show). Adding more fuel to the fire, both shows are jockeying for control of the same audience in New York and other markets during the Saturday 1:00 a.m.–2:00 a.m. time slot.
While it may seem counterproductive for two black-owned media companies to broadcast competing shows, with similar names and formats, in the same time slot, there’s much more to this squabble than that. Sutton hopes to regain control of the show to build on the prestige he earned from resurrecting the Apollo franchise as well as reap syndication dollars and additional revenue he says Showtime at the Apollo will command in the future. Mercado-Valdes hopes to combine Showtime at the Apollo with his new Weekend Vibe series to create a two-hour block of urban entertainment television, which will enhance his company’s leverage with advertising firms. The referee in the battle, the nonprofit Apollo Theater Foundation, is using negotiations for the rights to Showtime at the Apollo to establish greater control of the Apollo brand. By doing so, the business-savvy board hopes to implement its new mandate to expand and extend the brand, while making the overall theater operations profitable.
A GOOD DEED TURNED BAD
The seeds for the It’s Showtime vs. Showtime fiasco were sown in 1991 when, after a decade of struggling to run the theater and produce the show, Sutton created the Apollo Theater Foundation with help from the Harlem Urban Development Corp. Soon after, Sutton transferred the theater’s title to the foundation, which relieved him of the financial burden of running it alone, but the theater continued to operate as if he still owned it. A deal was worked out whereby Sutton agreed to pay the foundation 25% of the show’s yearly profits to ensure the theater’s future operations. And because Sutton had a supportive board of directors and a favorable reputation, most community and business leaders didn’t criticize the arrangement.
But by handing over the title, Sutton effectively relinquished private ownership of the Apollo Theater and the Apollo brand. Mercado-Valdes, recognizing the value of the Apollo show, made his first serious bid for the rights to produce it in 1998. When his bid was rejected, a foundation board member filed a lawsuit against Inner City, prompting then-New York Attorney General Dennis Vacco to investigate other foundation board members, including Rep. Charles Rangel (D-N.Y.), for mismanaging the theater and failing to collect $4.4 million in profit from Inner City as stipulated in the contract.
As Sutton’s nephew, Inner City President Chuck Sutton, explains it, the lawsuit became a debate over the interpretation of contract language. The $4.4 million cited in the suit was for back payments Inner City allegedly owed the foundation, but the claim was found to have no merit. According to the terms of the contract, Inner City was obligated to pay the foundation 25% of net profits, which it believed represented the actual advertising dollars made when It’s Showtime at the Apollo aired. During audits, however, the foundation’s accountants read the contract differently, counting the seed money to produce the Apollo program as gross revenues as well as part of the net profit of the show. “Under their interpretation, I was supposed to take 25 cents of every dollar I was given to produce the television show and turn it over to the foundation,” says Chuck Sutton, noting that seed money to produce a television show is rarely considered revenue.
Unfortunately, the lawsuit spotlighted the elder Sutton’s biggest dilemma: keeping the Apollo Theater running when the Apollo show wasn’t yet profitable. In 1989, Sutton teamed up with Western International Syndication, a Los Angeles-based television syndication and production company, to distribute and help finance the show. But because the show hadn’t generated a profit for several years, some complained the foundation often went without adequate funding for maintenance of the theater.
Sutton claims he pumped $80 million into producing and distributing the show with his partners until it finally became profitable two years ago.
While no wrongdoing was found, the damage was done. The lawsuit ended when the $4.4 million judgment was thrown out and Sutton and his partners agreed to pay the foundation $150,000 for future audits. New York Attorney General Eliot Spitzer then ordered an open bidding process to set a fair market price for the trademark and licensing of It’s Showtime at the Apollo. After the lawsuit, the foundation decided to restructure its board by appointing seasoned professionals, including AOL Time Warner CEO Richard Parsons, who could help the theater become profitable.
NEW BOARD, NEW MANDATE, NEW RULES
Sutton was able to keep the licensing contract he won in 1998, which called for a $650,000 annual fee for the show’s syndication rights and $450,000 a year to rent the theater; but when the contract expired in April 2002, the dynamics of the bidding process changed. Derek Johnson, former president and CEO of the theater foundation, says the new board had three priorities when awarding the new contract for It’s Showtime at the Apollo: “to return the greatest economic value for the licensing of the show back to the foundation; to partner with the entity we thought could effectively build, preserve, and grow the Apollo brand; and to retain as much control over the Apollo brand and depiction as possible.” With this new man
date, gamesmanship apparently overtook the bidding process.
Although It’s Showtime at the Apollo had been profitable for the last two years under Inner City/Western International–grossing $11 million in revenues in 2001–the show was in the red for most of its first 13 years. To have any chance of recouping those losses, it was critical for Inner City/Western International to retain the syndication contract. They had the advantage of being the incumbents, which granted them a three-week exclusive period to negotiate a deal, but early on, good-faith communications between Inner City/Western International and the foundation broke down. Both sides give differing accounts of the haggling that began in April and dragged on through the summer until Mercado-Valdes was awarded a one-year, $1.6 million syndication deal in August. But one thing is clear: The new board put more emphasis on adhering to the letter of the law regarding new negotiations rather than cooperating in a spirit of doing good business. In fact, both sides agree that there was little face-to-face negotiating throughout the summer, but neither gave any real reasons as to why. Both sides tell conflicting tales about a series of letters, faxes, “conversations with our lawyers,” and nonresponsive behavior that prevented substantive discussions about the licensing agreement.
According to Inner City attorney Gerry Margolis, Inner City/Western International submitted its first bid April 27, 2002, offering the foundation “25% of the show’s real profits and a cash advance that would be the larger of $650,000, or 7.1% of the gross receipts of each applicable broadcast season” over a five-year period. Afterward, Margolis claims the negotiations were plagued by “a mood of confusion and mistrust.” As the process dragged on into July, a second proposal offering $53 million over seven years, with a multi-tiered compensation structure, was submitted.
Chris Lancey, president and CEO of Western International, says they and Inner City increased their offer because, “We thought it would be very good for the foundation to have a good income stream over a period of years to make improvements to the theater and to pay their staff.”
Nicole A. Bernard, senior vice president of new business development and communications for the foundation, says flatly that the first bid of $650,000 “was not acceptable” because the foundation would not see a profit. Furthermore, she says, the second bid from Inner City/Western International had stipulations that did not guarantee the foundation more than the base of $650,000–a figure board members said the general marketplace could beat. Increasing the funding for the foundation was a priority for the board. As Johnson put it: “If their $53 million bid would have, over that seven-year term, guaranteed us $15 million or $20 million in revenue, we would have taken that. But none of their bids ever offered us any more than a $650,000 base in terms of a guarantee.”
Lancey explained that although the Inner City/Western International $53 million bid offered a base of $650,000 for the licensing fee, he and Sutton were satisfied that “[The foundation] was offered a higher percentage of revenue, an upside, if the show generated more money than in previous years.” Since the show had only recently become profitable, the possibility of higher revenue was not a compelling enough selling point for the new board. The foundation wanted a “legally binding” guarantee, which it didn’t believe the Inner City/Western International contract provided. Margolis, however, insists
that the offer’s entire $53 million was guaranteed, but he also says, referring to the compensation breakdown of the proposal: “Someone might turn around and say that our arithmetic is wrong and the rate card really wouldn’t yield $36 million, but we don’t think so. And somebody might argue with us and say that the format rights wouldn’t be worth $1 million a year over seven years, and we’d quarrel with that as well.”WHO TO BELIEVE?
Bernard says the foundation tried to negotiate a deal with Inner City/Western International while also taking additional bids, but time became a factor. If the foundation didn’t reach an agreement by August, it risked canceling the show for a year. “Advertisers typically make commitments to shows they’re going to support for the upcoming season by June, so as a distributor, if you don’t know you’ve got a show, you can’t buy ad time,” she says.
By mid-July, Bernard says the foundation had received additional offers from Mercado-Valdes and a third company, which she declined to name. There wasn’t enough time to properly investigate both companies, “So we decided to enter into a short-term license, a one-year deal, to get the show up for this year and to give us the proper time to access a longer-term license,” says Bernard. “We did not want to rush into a deal that we would be beholden to over the next five years or more.”
Lancey charges that the negotiations were really about the foundation’s quest to gain control of the show. “Basically, their one-year offer was, ‘We want to take over the show, and we want you to pay us money to do it,'” says Lancey. “Then, when we sent our lawyers to New York, they told us [the foundation was] retracting the offer.” Lancey maintains that he and Sutton never discussed a one-year deal with the foundation.
Once the decision to go with a one-year deal was made, however, Bernard says the foundation gave Inner City/Western International another opportunity to broker a deal. “We went back to all the parties, the first being Inner City/Western International, and offered them the one-year deal. They never responded. Time was of the essence, but they apparently were not interested.”
Margolis says his clients were handicapped by a midstream change in the negotiation process, which included unexplained directives they had to agree to. For example, the foundation asked for a role in the production of the show such as “approving the producer, director, host, or any changes.” It also made vague requests to “hold down production costs.” Margolis also maintains that a letter Sutton sent to the foundation July 1, requesting clarification of the new directives and the one-year deal, was never responded to. Without clarification of what the new directives would cost, Inner City/Western International didn’t feel it was given enough information to accurately price their bid for the license. It wound up resubmitting the seven-year, $53 million bid.
After three weeks, Bernard says the foundation fired off a letter to Inner City/Western International warning that the lack of response to the one-year offer would be viewed as a decline. By that time, Mercado-Valdes had already submitted a one-year bid adhering to the terms the foundation asked for and, with time winding down, the foundation made its decision. The Heritage Networks was awarded a one-year, $1.6 million syndication deal in late August. As part of the deal, the company also pays a $900,000 annual fee to rent the Apollo Theater for tapings.
Once Inner City/Western International became aware that the contract had been awarded, Lancey says he and Sutton protested, saying they should have had the right to match or beat any offers. “We did not receive anything in writing that would have allowed us to review, or ultimately match, any offer,” he says. “We were not given an opportunity to respond to anyone’s bid.” Bernard refutes the claim, saying, “Based on the terms in the expired license agreement, [the foundation] was only obligated to present a competing offer to [Inner City/Western International] if that offer was equal to or less than what they had offered us. That was not the case. We received an offer that was greater than what they had offered us.”
Again, the interpretation of the con
tract language contributed to Sutton’s woes.
WHO GOT WHAT THEY WANTED?
The foundation ultimately did what it says was in its best interest. Not only did Mercado-Valdes’ $1.6 million offer nearly triple the fee from the previous contract but it also gave the foundation 100% ownership of the shows that will be created this year under the Showtime at the Apollo name. “Our being able to control the use of the brand is worth its weight in gold,” says Bernard. “The split was 50–50 with the previous owners of the license, but Heritage was willing to relinquish its equity in the show.”
It was easy for Mercado-Valdes to relinquish ownership rights of the show. He never owned them. But for Lancey and Sutton, who cre
ated, financed, and distributed the show–nurturing it until it became a valuable asset–giving up ownership rights has been a hard pill to swallow. Lancey maintains that ownership of the show was the linchpin of the negotiations, which former foundation President Johnson confirmed. “[The foundation] wanted more control of the product in terms of the brand and the show,” says Johnson. “We wanted greater say on how the brand would be depicted, and greater control over its use.”The foundation gained more control over the Apollo program but at what cost? The foundation’s handling of the matter–negotiating by letters and lawyers, changing the bidding process midstream, and setting a mandate for controlling the show–may have given the appearance of a less than open process. Additionally, the foundation awarded the license to Mercado-Valdes, which opens it up to more second-guessing. Not only was he partially responsible for the 1998 lawsuit, which led to the change in the board, but community members questioned his character because he was sentenced to four months in jail in 1989 on a contempt of court charge for refusing to testify against a friend suspected of drug smuggling.
While Sutton may have legitimate concerns about the negotiations, he is not unscathed. After fighting the 1998 lawsuit against the foundation over contract language, his team underestimated the “strictly business” attitude of the new board and helped foster an atmosphere of distrust by putting forth a proposal with language and compensation clauses that were disputable. Unfortunately, Sutton’s past efforts to renovate the Apollo were not taken into account because the lawsuit made foundation board members cautious about giving the impression they were giving Sutton a favorable deal.
Although Dick Parsons, who is now chairman of the Apollo Theater Foundation, assures, “There is no effort to favor or disfavor anyone,” he explains that, “Given the history of the Apollo and the fact [that] this is a foundation that has obligations to the community …we felt that because the attorney general, the Daily News, and a lot of other people were watching, the right thing to do was to maximize these assets for the benefit of the community.”
Choosing The Heritage Networks worked to the foundation’s benefit since Mercado-Valdes didn’t need ownership of Showtime at the Apollo to make a profit. The largest of the black-owned syndication companies, The Heritage Networks generates $25 million in revenues from The Steve Harvey Show, $11 million from Livin’ Large, $7 million from Weekend Vibe, and $6 million from The Cosby Show. Heritage Networks movies generate about $9 million, and Showtime at the Apollo is expected to add another $11 million to the company’s revenues. Since Mercado-Valdes has access to 212 television markets from New York to Alaska, he views access to the No. 1 syndicated show for black audiences “the crown jewel” in his future plans. “This could give us the ability to control a two-hour weekend block of time in over 100 of the nation’s top urban, African American TV markets,” he says. “That’s tantamount to becoming a weekend broadcast network.”
Mercado-Valdes’ idea of a mini-network for African Americans mirrors the strategy adopted by Fox and UPN networks. Now, The Heritage Networks is offering Showtime at the Apollo and Weekend Vibe in a two-hour package airing after Saturday Night Live in the top 75 television markets in the country. “It’s very valuable to have a two-hour block on urban stations because it has never happened before,” says Mercado-Valdes. “It enables us to leverage advertisers much differently than if each show had a different time slot and was scattered throughout the day.”
Although Mercado-Valdes was in position to win the one-year license agreement from the start, the deal may not have happened had he not lured top-notch producer Suzanne de Passe, chairman and CEO of de Passe Entertainment, as executive producer for the show.
“To his credit, Mercado-Valdes went to the marketplace and found a producer at the highest level,” says Johnson. “He stepped to the table with an economic return more than 100% of what we had been getting. He also came to us with a producer partner who has real credibility, a track record of success, and real roots in the Harlem community.” Johnson says that for the purposes of the one-year deal, Mercado-Valdes had met the foundation’s three priorities.
REMATCH: MORE NEGOTIATIONS
De Passe, an Emmy Award-winning producer, is crucial to Mercado-Valdes’ plan to build his mini-network. “[She] is the day-to-day creative force behind the show,” says Mercado-Valdes. “With de Passe, we’ll have content no other black TV syndicator has ever had before. And with Heritage Networks handling distribution, marketing, and with our strong relationship with advertisers, we will set ourselves apart from competitors.”
Creating a mini-network would be a major accomplishment for Mercado-Valdes, who now estimates that his Heritage Networks programming reaches 95% of all African American homes in the U.S. His goal is to become the largest broadcast distributor of niche-market television programming in the country, a goal that may suffer a major setback if he loses the rights to produce Showtime at the Apollo after the current one-year deal. This season is an audition, of sorts, for The Heritage Networks before negotiations for a possible long-term deal begin in February. At that time, the foundation will have worked with both Inner City/Western International and Heritage Networks/de Passe Entertainment, and will be clear on which team has broader appeal.
While Inner City/Western International didn’t win the one-year contract to produce the show, Lancey is confident he can make a strong case to win a long-term contract when discussions take place next month. “The advertisers liked the show we were doing, and the brand was important, but that’s not the only thing they were buying,” Lancey says, pointing out that Inner City/ Western International’s 15 years of producing a successful show was comforting to advertisers when he and Sutton decided to launch Showtime in Harlem in late September. Lancey says Showtime in Harlem, which will cost about $4.5 million to produce and distribute, airs on 114 stations nationally and has retained a similar
advertising base and station lineup as the previous Apollo show. He also says the new show will generate similar ad revenue and ratings as the show they produced last year. “Sure, the advertisers care about the Apollo Theater, but when they advertise, what they really care about is servicing their consumers. So they’re more concerned about the ratings and demographics,” he says. “Right now advertisers are wondering what the ratings and demographics will be for the new Showtime at the Apollo.”Mercado-Valdes dismisses Lancey’s suggestion that advertisers will be wary of his revamped Showtime at the Apollo. He says the show has kept many big advertisers with family-oriented consumer products, including Sears, McDonald’s, Toyota, and Coca-Cola. He also claims to have picked up new advertisers
for the show, including Fannie Mae, one of the nation’s largest home mortgage lenders, and Wal-Mart. “One of the big values of this deal is that we have many advertisers that have been supportive of the show for so many years. It was an easy sell,” he says.
Mercado-Valdes isn’t even worried about conflicts arising as a result of the similarity of the names and formats of the two shows. “I wouldn’t have done the deal if confusion among advertisers would have been a problem.”
Kim Price, a spokesperson for Coca-Cola, says the beverage maker has maintained advertising with Showtime at the Apollo but has not advertised with Showtime in Harlem. “Showtime in Harlem is so new that it was not in Coke’s 2002 advertising plan,” explains Price, who doesn’t rule out future advertising with Showtime in Harlem. “The timing of when the show airs is not as important as the audience we’re trying to reach,” she says.
The new Showtime at the Apollo appears on 110 stations nationally, says Mercado-Valdes. To upgrade the program, de Passe has expanded the format to include white and Latino performers with urban appeal, such as Justin Timberlake and Christina Aguilera. Other changes from the old show include Mo’ Nique, star of UPN’s The Parkers, serving as hostess; an on-stage applaud meter to determine winners of the amateurs contest; and what was the “Apollo Kids” segment is now “Apollo Stars of Tomorrow.”
Both shows are competing head-to-head in the nation’s three largest markets, New York, Chicago, and Los Angeles, which Stacey Lynn Koerner, a media analyst at Initiative Media, a New York-based independent media planning and buying agency, says is unwise. “It’s stupid because you can’t possibly have the potential audience you could have had if you didn’t split the audience,” she explains. “It doesn’t mean that either show will not do well, or fail, but they won’t be as successful as they could have been if they were shown at different times.”
The early results suggest Showtime at the Apollo is winning the ratings battle. According to Nielsen ratings, in the New York market, Showtime at the Apollo scored a 2.8 rating, or 9 share, last October, while Showtime in Harlem had a .9 rating, or 3 share. That means Showtime at the Apollo had three times the audience as Showtime in Harlem. Liz Fischer, director of media relations for WNBC in New York, says, “In terms of Showtime at the Apollo vs. Showtime in Harlem, we are extremely pleased with the performance of Showtime at the Apollo.”
If the foundation likes the quality of the new Apollo program, they have the option of awarding the long-term deal to Mercado-Valdes without going through the bidding process. Since Mercado-Valdes has given up the rights to the show, the early results look good for The Heritage Networks, but there are no guarantees. “The only risk is that there’s a possibility I could create this value and they could sell it to somebody else for a higher bid,” says Mercado-Valdes. “But, hey, that’s capitalism.”
If Sutton can’t persuade the foundation to award the contract to Inner City/Western International, he will still have Showtime in Harlem. Inner City/Western International also owns the rights to 355 episodes of the first 15 years of It’s Showtime at the Apollo. In a shocker, Lancey revealed that he and Sutton plan to sell 22 episodes into syndication as a new show slated for September 2003. Dubbed The Best Of It’s Showtime at the Apollo, Lancey says the series would have launched even if Inner City/Western International had been awarded the contract. They plan to run the series right after Showtime in Harlem in a two-hour block they hope to create with stations. “The Best of It’s Showtime at the Apollo is something we’ve always planned to do,” says Lancey. “We’ve spent $80 million on [the show] over the years, so this provides us an avenue to get some of that back.”
It also sets the stage for a possible lawsuit over who truly owns the right to use the Showtime at the Apollo trademark. While neither side has tipped its hand, this fight seems destined for a few rounds in court. “You build a show for 15 years, and after 13 years you finally make money, and then it’s taken from you,” says Sutton. “It hurts.”
THE HERITAGE NETWORKS
Location: New York
Year started: 1993
2001 Revenues: $30.5 million
Employees: 45
Type of Business: Broadcast syndication, production, sales, and marketing.
Website: www.africanheritage.com
Tale of the Tape
INNER CITY BROADCASTING CORP.
Location: New York
Year started: 1971
2001 Revenues: $59 million
Employees: 343
Type of Business: Urban music, black talk and community radio programming, radio station ownership
Website: www.wbls.com & www.wlib.com