Nickelodeon Knows How to Tickle a Child

The kids' cable network keeps the hits -- and the revenue -- coming

Don't get Matthew Friedman started on Nickelodeon. "I want to be SpongeBob SquarePants!" the 8-year-old yelps while standing with his mom in the giant Toys 'R' Us (TOY ) in New York's Times Square. But it's not just the undersea-dwelling sponge. He loves it all: Rugrats, The Wild Thornberrys, even U-Pick Live, where kids get to choose what cartoons are aired. It's the station he turns to when there's nothing else on. Scratch that: For Matthew, there basically is nothing else on. "As long as there's Nickelodeon, I wouldn't care if the rest of my tv broke down," he confides.

On an average day, about half the kids in America who are watching tv are viewing right along with Matthew. The 24-year-old cable network, a unit of Viacom (VIA ) Inc., has become a $1.1 billion blockbuster machine with global hits ranging from Blue's Clues and Dora the Explorer for preschoolers to The Adventures of Jimmy Neutron, Boy Genius, and The Fairly OddParents for an older crowd. It has been the highest-rated basic cable network in the U.S. since 1995 and was 43% ahead of No. 2 Fox News Channel (FOX ) through June 15 of this year, according to Nielsen Media Research Inc.

The brand is so potent, critics say, that even run-of-the-mill shows get good ratings simply because they appear on the network. And while they may grumble that execs can be dictatorial about what appears, advertisers admit there's often no better place to reach kids. Says Nickelodeon chief Herb Scannell, who was recently promoted to group president of mtv Networks, which houses Nick, Comedy Central, vh1, and mtv: "You must buy Nick if you're building a marketing plan." Even rival John F. Wilson, senior vice-president of programming at Public Broadcasting Service, calls Nick terrific at "burning that brand into kids' psyches."

Nick continues to thrive at a time when overall children's viewing is down and competitors are clawing for market share, but the kids' powerhouse can't afford to become complacent. There was a time, after all, when nobody could rival Walt Disney (DIS ) Co. for kids' hearts. Disney has long since stumbled, but its Disney Channel is popular with the 9-to-12 group known as 'tweens, and other rivals are roping in boys with more-violent action shows.

For now, though, nobody has a lock on the 2-to-11 market like Nickelodeon. That may be partly due to its obsession with research, which includes about 300 focus groups a year to test shows and ferret out trends. Others credit its ability to control content through its own animation studios and production facilities. In any case, Nick has become remarkably adept at answering a question that nags marketers and manufacturers worldwide: What do kids want?

In the world of tv, at least, they seem to want slightly edgy, funny stories and characters that look at the world from a kid's point of view. They crave cheekiness, adventure, and independence without straying too far from home. They want to gross out their parents with burps, farts, and celebrities like Jim Carrey covered in thick green slime. (Yet Nick quietly wins adult approval with a ban on violence and sexual themes.) They want a place that's cool enough to draw stars like Will Smith for its annual Kids Choice Awards or celebs like Britney Spears on the sketch comedy All That. Nick also proved that boys would watch shows starring girls, that Latino characters like Dora could appeal to a general audience, and that homely characters like The Wild Thornberrys' Eliza could be heroes.

But if Nick's goal isn't to cater to parents, it does have to please its own parent. While Viacom doesn't disclose the unit's financials, analysts at research firm Kagan World Media (PRM ) estimate that Nick generated cash flow of $615 million last year, with margins of almost 57%, vs. a 33% average for the industry. Its ad rates are more than double those of peers like The Cartoon Network (AOL ). "Nickelodeon is a very hot property -- bigger than mtv," notes Tom Freston, chairman and ceo of Viacom's mtv Networks. Moreover, Nick has leveraged its cable success into everything from magazines to live shows to toys.

That gives Nick an added edge over cable networks that rely primarily on advertising and affiliates' fees. Another advantage: owning production facilities in Orlando and Hollywood, as well as animation studios in Burbank, Calif., and New York City. Not only does that keep programming expenses to less than two-thirds the industry average, it allows the network to take chances with less risk.

Take SpongeBob, a phenomenon that took even Nick execs by surprise. "I thought it was cute," says Freston. "But no one was banging on the table, saying, 'This will be a runaway hit."' Instead, the wacky series created by Steve Hillenberg started out four years ago in a weekend slot, soon becoming a Saturday morning and weekday prime-time hit. Ditto for The Fairly OddParents, which creator Butch Hartman tested as a series of short cartoons two years ago. He calls Nick's Burbank animation studio "a big day care for adults," with Scannell acting as proud parent.

Despite his low-key style and penchant for self-deprecating jokes, Scannell is a key force behind the Nickelodeon brand. Dora the Explorer was initially a bunny until Scannell, himself part Puerto Rican, pushed for more Hispanic characters. It was he who, early in his tenure, went to Viacom's tightfisted Chief Executive Sumner M. Redstone with a request for $350 million to build his own animation studio. "I thought that's what you did when you're president -- ask for a lot of money," shrugs Scannell, 46. Insiders say the Nickelodeon veteran and father of two girls is a driven leader who's constantly pushing staffers to take more risks, be more relevant, inject more fun.

That doesn't mean Nick always gets it right. Animorphs, which sprang from a Scholastic (SCHL ) Corp. book series, and Noah Knows Best both fell flat. General Manager Cyma Zarghami admits they were "too talky and a little too old." Then there are the oddball bets like CatDog, a show about -- you got it -- a dog and a cat trapped in the same body. While it posted decent numbers on tv, it was a bomb on the merchandising front. Nick execs sheepishly suggest the concept didn't translate well to products.

Despite all the talk about not developing shows with merchandise in mind, in fact, no other tv-based business has been as aggressive in spinning off its brands into merchandise, movies, and live events. Nickelodeon Enterprises is the fastest-growing part of the business and could give Nick close to $200 million this year. Jeffrey D. Dunn, who heads up the operation, proudly points out that hits like Blue's Clues, Dora, and SpongeBob are home-run licensed properties that helped generate $2.6 billion in retail sales last year. Now he's evaluating proposals for everything from preloaded debit cards to a Nickelodeon hotel chain targeted at families with young kids.

Still, Nickelodeon faces plenty of risks, from a notoriously fickle audience to overextending its brand. Advertisers argue that Nick has made more than a few enemies with its high-handed style. They complain that execs don't let advertisers buy spots on hit programs like SpongeBob, for example, instead forcing them to buy a rotating time slot where their ads can be moved around at will. (Nick responds that it always guarantees certain ratings delivery.) Nick also tends to veto more ads than rivals and is less willing to work with advertisers to play up their brands. "They treat us like we're evil instead of their partner," mutters one consumer-products executive. Freston counters that it would be worse to tarnish a precious asset: "Once you're seen as selling your soul, it's very hard to recover from that."

Nobody needs to tell that to Nick's most important constituency. Just ask 9-year-old Taylor Guthrie of Lonsdale, Ark. At the end of a long day of school, he clicks on to Nick. "I love all of the shows," beams Taylor, noting that his 6-year-old sister and 11-year-old brother watch it, too. "It makes me happy." While advertisers and rivals may grumble, that kind of loyalty is hard to ignore.

By Diane Brady and Gerry Khermouch in New York, with bureau reports

    Before it's here, it's on the Bloomberg Terminal.