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Programming costs about to be squeezed

Oct 22, 2001  •  Post A Comment

The content-related fallout of the ongoing terrorist crisis has just begun.
What many thought would amount to little more than the cost of displaced TV programs or the delayed release of certain theatrical films is beginning to mushroom into a whole lot more.
There is speculation the major broadcast networks are contemplating up to a 40 percent reduction in routine production costs for the 2002-03 season-a huge number considering that programming makes up more than half of their total expenses.
“The need for the networks to achieve lower programming costs is acute,” Disney Chief Financial Officer Tom Staggs recently told me. “While we are living through a national tragedy right now, the fact is we’ll probably have a healthier business in 2004 because of the hard look and tough changes companies will be forced to make in their programming during this period.”
Although he declined to comment on specific program changes Disney and ABC are considering, Mr. Staggs is adamant that even the most urgent financial circumstances must be balanced by creative considerations. “You have to be careful not to take it too far. Program decisions should not come out of the CFO’s office,” he said.
Low-cost replacements
ABC is considering replacing its poorly rated Saturday night schedule with various forms of low-cost programming. Fox has eliminated its long-form unit for miniseries and TV movies. Fox and CBS have gone back to the National Football League to try to modify their costly long-term licensing pacts.
Perhaps the most jolting evidence yet is the decision last week by Sony Corp., whose profits have dropped nearly 100 percent and whose stock price has fallen by one-third this year, to dramatically reduce its Sony Pictures Entertainment television operation and prime-time program development. With other downsizing moves planned, many are convinced Sony’s U.S.-based operations are being prepared for a quick sale. Sony declined comment.
Ripple effect
Although last week’s move is resulting in the layoff of 70 SPE and Columbia TriStar employees, hundreds more jobs are at risk at production and other companies with whom midsized SPE does business.
That ripple effect in a rapidly consolidating entertainment market is why Sony’s gradual drift from the TV scene is a devastating industry blow.
One offset to consider is that Sony and other Hollywood studios have an unusual glut of theatrical films and TV shows in place, which, while costly to carry on their books, could justify a cutback in production next year.
But there is no getting around the hard reality that when ad dollars are down double digits, and crisis-related losses and spending remain wildly unpredictable, the revenue hit is tremendous-at least $1 billion this year for all broadcast and cable media, by one analyst’s estimate.
If on the other side of the ledger, content-related expenses are not radically curtailed, companies will find themselves strained to remain in business.
So, not surprisingly, there is a widespread industry embrace of some of the survival tactics Sony and others are rushing to employ.
Sony will continue producing the easy wins, such as daytime soap operas and talk shows that command more stable budgets, ad revenues and ratings.
Sony and others may let their big-name talent contracts lapse without renewal. Sony will take the easy way out by converting its popular branded feature films into TV series. It will opt for producing fewer theatrical films, just as broadcast and cable networks will order fewer series episodes. Clearly, new production deals and new show financing will suffer.
Major broadcast and cable networks are expected to opt for even more inexpensive reality and information shows, and to increasingly look to their affiliates to help program some poorly rated prime-time hours.
Many major media players have returned to program producers and talent in recent weeks to seek adjustments in license fees and other costs. “Everyone in the industry is looking at all those possibilities and more. I think you will see a number of those things happen,” said one high-level media executive.
It all points to media companies, whether acting alone or in alliances, settling for minimal content risks and costs as a hedge to bad times.
Part of Sony’s problem was that it didn’t have its own network to which to funnel its content. However, even owning distribution platforms for your own content is no guarantee, as proven by The Walt Disney Co.
Disney dipping
Last week, Disney’s corporate debt rating was lowered by Standard & Poor’s and its earnings estimates were further lowered by Merrill Lynch, primarily in response to the underperformance of its core businesses and the added debt it will incur in its $5.3 billion acquisition of Fox Family Channel.
That didn’t stop Disney Chairman Michael Eisner last week from suggesting that more acquisitions and alliances (mentioning Univision by name) could be in the offing even as the company this year has eliminated 4,000 jobs to realize $400 million in savings.
Despite Disney’s originally stated intentions, the company may have little choice but to initially use its renamed ABC Family cable platform to recycle some of its popular branded film and TV product, and to extend its ABC News product to scheduled program blocks to hold down costs and increase revenues.
“Spending more on content is the programmer’s first response to ratings issues,” said Sanford Bernstein analyst Tom Wolzien. “But in a world where competition could nearly double over five years, only those with the greatest skill and luck will find reasonable returns for their increased spending. The math is stacked against them.”
In some cases, the rebroadcast of proven hit series and movies will play better than poorly received new series and potentially questionable product, media executives say.
A new cost model
“The alternative is creating a new cost model for producing TV shows that works for everyone in this new economy of much lower-than-expected ad revenues and ratings,” said a high-level media executive. “We can’t be paying producers and on-air talent the same as we did in much different times.”
Some of these new pricing models and working arrangements may show themselves first in the news area.
News and information are becoming the dominant staple-at an unprecedented cost to media companies. With incremental news costs averaging $4 million and $6 million a day at CNN and the major broadcast networks, these fierce competitors are likely to continue looking for ways to collaborate in areas such as sharing basic resources and feeds. The situation also could push the likes of CBS or ABC, which lack 24-hour news cable outlets, and CNN into a cooperative alliance.
Mr. Wolzien estimates there could be at least a 35 percent increase in annual news budgets, which average around $500 million.
By comparison, an average night of prime-time programming can cost between $2 million and $3 million, with daytime programs costing about another $2 million, he said.
News saturation represents a double-edged sword to advertisers. Clearly, advertisers know what environment they are buying into in news programs of any kind-they just don’t know how bad or how sensitive the news may get at any one time, as witnessed by the terrorist attacks on Sept. 11.
Too-hot topics
That heightened sensitivity is why CBS was quick to yank an anthrax-related episode of “The Agency,” which cost an estimated $1.6 million to produce. NBC recently rejected a terrorist plot script for its new series “UC: Undercover,” which also costs an average of $1.6 million per episode.
That the ongoing crisis has taken the edge off the television season has especially hurt ABC. It will cost money to yank underperforming new and returning series and shelve untelevised episodes. Consider the price tags of returning shows such as “Dharma and Greg” (which costs an average of $1.9 million per episode) and “Once and Again” ($1.6 million per episode), and of new offerings such as “Bob Patterson” ($850,000)
and “Philly” ($1.1 million).
Although the first clear impact of current events on content production and distribution spending won’t be evident until fourth-quarter earnings results, there is widespread recognition that historic levels of content investment are no longer sustainable or prudent in this new environment.
Broadcast and cable networks are expected to increasingly place their bets on lower-priced, lower-risk programming for a while. Even as they push the limits on viewer saturation levels, it’s tough arguing with paying an estimated $695,000 per episode for CBS’s “Survivor” and $510,000 per episode for Fox’s “America’s Most Wanted.”
Mounting financial and creative losses in these scary times will have a profound impact on the composition, diversity and economics of the content that defines the very essence of most media concerns.