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TV IN TRANSITION: Forging a model for profitablity

Jan 28, 2002  •  Post A Comment

How ironic: With production costs still escalating for prime-time series on the major broadcast outlets, it may be their arch-enemy, cable networks, that save the economics of producing TV series.
Increasingly, the vertically integrated studio conglomerates with large cable network portfolios and cornerstone broadcast network properties–such as Disney/ABC, News Corp./Fox, Viacom/CBS/UPN and AOL Time Warner/The WB–have insisted that repurposing, or multiple-window airings of prime-time series for secondary telecasts on cable, is the real win-win solution for both TV producers and the networks.
Repurposing, they say, is the best way to offset increasing production costs and deficits. Disney, Fox and AOL Time Warner have been particularly aggressive in shaping this new economic model–on such shows as “Once and Again,” “The Court,” “24” and “Charmed”–that is intended to “aggregate” ratings from secondary cable telecasts.
Double order for `The Court’
In particular, Disney/ABC’s potentially groundbreaking repurposing deal with Warner Bros. Television on the upcoming midseason series “The Court” last October represented a new era of cooperation between two competing media conglomerates.
Billed by its principal architects–ABC’s Mark Pedowitz and Warner Bros.’ Bruce Rosenblum–as a potential “future template” for series licensing deals, ABC agreed to pay a combined licensing fee for “The Court” to get a “dual play” (as Disney executives are fond of describing it) on its recently acquired ABC Family Channel. In exchange for granting ABC an extended six-year, first-cycle licensing term for the Supreme Court drama, Warner Bros. also got the Disney-owned network to agree on an escalating guarantee of an estimated $400,000 to $500,000 per episode for the back-end run–if WBTV can’t find an outside cable network to buy the repeat episodes.
“The important thing for us in doing this was that ABC was willing to protect the back-end value for us in exchange for [ABC Family] getting the additional runs on cable,” said Mr. Rosenblum, who is executive vice president of television at Warner Bros.
“Bruce has predicated this deal on the number of episodes produced [over the first four to six years], the length of the [first-cycle] term and its ratings [on ABC and ABC Family] in ascertaining a floating scale [to pay on the back end] if the studio does not find another [cable] buyer willing to pay a higher price than what we have set,” added Mr. Pedowitz, who serves as executive vice president of ABC Television Entertainment Group. “That’s why we see this as a precedent-setting template any of the six [broadcast] networks can negotiate on a going-forward basis.”
ABC, according to various sources, was also willing to pay an aggressive front-end license fee of $1.65 million per episode for “The Court,” which also covered the estimated $200,000-per-episode value of staggered runs on ABC Family. The increased front-end license fee, pegged by sources as the high end for an unproven freshman drama, also appears to more than cover any kind of production deficit Warner Bros. and noted show runner John Wells will incur on “The Court.”
The aggressive pricing and unorthodox deal-making for “The Court” also represent the lengths ABC was willing to go to get Mr. Wells (executive producer of NBC’s “ER,” “The West Wing” and “Third Watch”) and his colleague Carol Flint, both of whom are attached to Warner Bros., to take over the Supreme Court drama. “The Court” had originally been in development at Disney-owned Touchstone Television–until former show runner Oliver Goldstick dropped out of the midseason project.
While the principals tout the “Court” deal as a model for the industry, others are skeptical.
“[You’re going to find] very few examples of a network giving an outside studio these kinds of terms, especially in today’s budget-cutting environment,” said Carolyn Finger, president and partner in TVtracker.com, an Internet-based development research service. “But when it comes to an A-tier producer like John Wells, ABC was willing to pull out the stops with Warner Bros. In fact, there are very few A-tier and probably no other B- or C-tier producers that could extract this kind of deal from ABC or another network.”
New economic model, different priorities?
Once considered a verboten subject, the broadcast network chieftains say they’re now willing to offer their cable network counterparts shared exhibition on certain prime-time dramas and sitcoms in order to “aggregate” viewers–to make up for declining ratings and share of ad dollars in an ever-eroding broadcast network TV universe.
Another repurposing deal, with “Charmed,” from Viacom’s Aaron Spelling Television production unit, also has gone a long way in reshaping the new economics in Hollywood. Unlike “The Court,” though, The WB’s multiplexing of “Charmed” with its sister TNT cable network did not affix any protective guarantee on the back-end value of the show and instead focuses on maximizing front-end exposure and cumed ratings.
The fourth-year drama costs The WB about $1.2 million per episode, sources said. Looking to reduce its exposure, The WB came up with a unique solution: have the show run on TNT five days later, but include the same advertisers who are in the show on its WB airing. TNT gets the show for about $150,000 an episode.
To make the economics work, The WB needs advertisers to cough up 80 percent of the money they paid for their WB spots on “Charmed” when it runs on TNT. They’ve only been able to get 50 percent, according to executives on Madison Avenue. And while most of the advertisers on the WB run are included in the TNT airing, a few movie studios have had second thoughts, one source said. “Studios are more interested in reaching folks on Thursday night, when the show is seen on The WB, than Tuesday night, when it’s on TNT,” the source said.
WB officials declined to talk about what percentage advertisers are paying for the TNT run of the show, but WB President and Chief Operating Officer Jed Petrick said the price they are getting “doesn’t work with the current financial model we have with the show.” But he has been encouraged by this initial effort to tie the same advertisers into both a show’s initial prime-time network run and its repurposed cable airing.
“We’re learning a lot,” he said. “We’re working together with Madison Avenue on this. It’s something new for both of us. I think we’ve alleviated a lot of their fears about doing something like this.”
Indeed, the initial knee-jerk reaction of many media buyers was not to do the deal, saying they value viewers of broadcast and cable differently. Indeed, cable costs-per-thousand are considerably less than broadcast network CPMs.
“I’m in on the deal,” said one major buyer, “but I’m still not comfortable with it. Among other issues, it puts an hour of prime time on TNT out-of-sale on my cable buy. If you see enough of these kinds of deals, then all I’m doing is helping them reduce their cable inventory, which will increase my cable CPMs.”
But fragmentation and economic pressures call for new thinking.
“The fact is that [the repurposed `Charmed’ on TNT draws] younger viewers than TNT gets, but not as young as The WB gets, which means it’s a new group of people that watches TNT regularly–that sees the promos and goes to the show,” said Jamie Kellner, chairman of Turner Broadcasting Systems. “But they are not people you’re able to get over at The WB. Duplication [of viewers] is only 2 and 3 percent. Each of these networks have their own core audience of people, and by putting it in different places, you aggregate more total viewers.”
Indeed, showing “Charmed” on TNT helped the cable network garner about a 20 percent increase year to year in adults 18 to 34 and adults 18 to 49 during the fourth quarter of 2001.
While Mr. Kellner was able to extract a shared-window deal with “Charmed,” which is produced by a rival studio eager to keep the show on the air, he has had a much harder time trying to convince
executives at sister studio Warner Bros. Television to go for possible split-cable window deals for such hit dramas as “Gilmore Girls” and “Smallville.” The issue: How will the increased exposure affect the shows’ value in the back end?
Figuring out the best formula
“People who are not supportive of multiplexing, their biggest fear is that the multiplexing could affect the back-end value of the show, and that’s the balance that is being debated right now,” Mr. Kellner acknowledged. “As we start to have more experience with these things, it will become clear what works and what doesn’t work, and then it will be a consensus of how to operate the business.”
But Mr. Kellner is sure of one thing: “The model doesn’t work in the network television business today.” The solution? “You have to sit down and go, `All right, what are you going to do to make it work?’ How can we afford to keep paying for these expensive programs? You can either try to cut everybody’s salaries, which nobody wants, or you can find other ways to exploit the programming [so] that you can generate more revenue [from] the advertisers. This year they proved we’re not going to push the CPM [rates] up again, and maybe not for a while.”
A third repurposing deal is the one Fox has come up with for its highly acclaimed first-year drama “24.” The show, produced by sister News Corp. studio 20th Century Fox Television, airs on Fox and is repurposed on sister cable network FX.
In a highly unusual case for a first-year drama, 20th Century Fox Television is committing up to $2 million per episode on the location-intensive production of “24,” with Fox Broadcasting Co. paying a license fee of $1.65 million for a pair of weekly runs of the series. According to sources close to Fox, sister cable network FX is kicking in another $150,000 per episode for a pair of subsequent weekend runs, thus confining “24’s” front-end production deficit to under $150,000.
But that early deficit is wiped out when counting other revenue streams such as domestic ad sales (both broadcast and cable–though, unlike the “Charmed” example, the broadcast and cable airings are sold separately) and international syndication licensing sales. International sales are estimated to bring in more than $1 million per episode. Add it all up and “24” is a profitable venture for parent News Corp.
Endangering the back end?
Still, with “24” getting up to four exposures per week (and another four airings in repeats), each episode of the series will have up to eight exposures in first-run, which is acknowledged by company officials as decreasing the potential back-end value of the show for future cable or broadcast syndication sales.
“The repurposed windows are not intended to replace the back-end value of `24,’ said a senior Fox executive. “We realize we’re not going to get the kind of money you typically get from a back-end sale because of the show’s serialized format and because of the additional exposures. The intent of the repurposing window is really to give viewers multiple opportunities to see the show and for Fox to aggregate the ratings to give this expensive show some positive traction in year one.”
The bigger concern for Fox with “24” is that because of its serialized nature, viewers who miss a few episodes–despite the numerous opportunities to view the show each week–might just stop watching the series.
“When you have a show like `24′ eating up two time periods on FX, it just takes away from other original programming that could better differentiate the cable network’s brand. In the end, TV becomes less special and the communal moment of seeing something special is gone,” said Gary Lico, president and CEO of CableReady, a Stamford, Conn.-based consulting firm. “I understand the concept, and the broadcast and cable networks have to find the moving target with the viewers surfing all over with their clickers. It really is all in response to the fragmentation of the TV universe.”
The TV world after fin-syn
All of these repurposing schemes aim to solve the solution of escalating programming costs. The cost of producing scripted TV series for prime time is estimated to have increased by about 30 percent since the early 1990s. That dates back to a go-go decade in which the studios engaged in signing highly expensive, long-term talent-holding deals with a litany of marquee producers and writers.
“The balance of power has certainly shifted, especially when you look at how studios like 20th Century Fox spent $60 million on long-term talent deals during the mid-1990s, but now they’re letting those deals lapse for producers like Danny Jacobson and Chris Carter,” noted TVtracker.com’s Ms. Finger. “These days, upper-level producing talent as well as lower-level producers are willing to work on a project-by-project basis and are giving up some gross [profit] points just to get some work. There is definitely more [producing] talent floating out there in the market.”
Perhaps the major factor affecting the economic model for producing prime-time shows during the last six years has been the “sunset” of the once federally enforced financial interest and syndication (fin-syn) rules limiting a network’s financial involvement in a TV show. The ending of the rules ushered in an unprecedented wave of network-studio mergers, the result being that the broadcast networks have used their steadily growing leverage to almost freely dictate the economic models being shaped for TV series today.
During the days of fin-syn, the networks were prohibited for almost 20 years from taking a financial stake in any scripted series sold in back-end syndication–instead selling their rights to in-house produced shows to third-party distributors.
Depending on the level of that ownership (derived from sole in-house production or co-production), the six major broadcast networks typically increase license fees for scripted dramas and sitcoms when the terms work in their favor, according to license fee data maintained by TVtracker.com as well as other Hollywood sources.
Of the 43 dramas currently airing on the broadcast networks, the average hour-long drama costs between $1.1 million and $1.6 million in per-episode license fees–sometimes as low as $900,000 per episode for dramas airing on The WB and UPN. (See chart, Page 13.) More than 60 percent of series licensing deals are sealed with either sister studios or in-house studio arms at the networks. Only 18 of the prime-time dramas carry significant production deficits (in the roughly $500,000 range)–and those are largely attributable to deals with outside major studios or independent production companies.
On the comedy side, there are 35 sitcoms garnering a range of $700,000 to $1.1 million in license fees, but only 16 of the half-hour shows are carrying deficits of $200,000 or more per episode.
“I don’t think there is anything particularly earth-shattering in knowing that the broadcast networks are more amenable on paying a bit more for scripted shows coming from their sister studios or in-house production units,” said Chuck Larsen, president and CEO of October Moon Television, a syndication consulting and producers’ rep firm in series negotiations. “When there is an internal series deal, the department heads within a conglomerate all have to individually maintain their bottom lines and ultimately have to work together by sharing in the profits through mutual ownership of a show. That’s the way of the vertically integrated world.”
But it is the burden of carrying those deficits and relinquishing significant ownership stakes that has forced independents, including Columbia TriStar Television and Michael Ovitz’s Artists Television Group, to exit new network TV series production during the past nine months. In Columbia TriStar’s case, the Sony-owned studio spent more than $75 million on long-term talent-holding deals within the past two years, which left it typically holding the bag on significant deficits while its network co-production partners were largely off the hook.
Instead, Columbia TriStar i
s forgoing “talent roster” deals, choosing to selectively embark on cable network series deals–such as a recent deal to produce the sci-fi drama “Odyssey 5” for the Sci-Fi Channel.
Fin-syn smarts
“Like Las Vegas, the leverage has always been with the house,” said former Warner Bros. Television President Tony Jonas, who now heads up his own production company under the studio’s auspices. “The networks have been very smart after fin-syn, because as they have now demanded bigger ownership stakes, they have still left the studios to carry a lot of the heavy tonnage on overall talent deals. To all of us in the business, it was truly sad to see the demise of Columbia TriStar from the [broadcast] network business, but a lot of us were wondering when the bubble would burst for them.”
Most illustrative of the uphill challenge that Columbia TriStar faced was its three-way ownership on the CBS sitcom “King of Queens” with CBS Productions and packaged goods giant Procter & Gamble. The fourth-year sitcom generated a slightly below average $650,000-per-episode license fee, leaving Columbia TriStar to share in an estimated $250,000 to $300,000 per-episode production deficit.
`Starved out of the business’
“By the time they gave up the gross points to get about 30 percent of the show’s profits [with the rest shared between CBS and P&G], then to carry those deficits, I can see why Columbia TriStar was starved out of the business,” said a leading Hollywood network packager.
The retreat of Sony-owned Columbia TriStar from the development of new broadcast network series is particularly ironic in light of generating a record $1.5 billion-plus in revenue from “Seinfeld” during its two cycles (four years each) in domestic syndication on TV stations and cable’s TBS Superstation.
“Seinfeld” set that record by garnering more than $4 million per episode, or about $800 million for 188 episodes, in total from domestic license fees. Added on to that record tally is income from barter advertising sales, TBS’s cable license fee, international sales, merchandising revenue and NBC’s front-end license fees (topping out at more than $5 million per episode in “Seinfeld’s” last three seasons).
All told, Columbia TriStar is estimated to have generated a record $5.7 million-per-episode gross profit–or $1.1 billion in total–that the studio split with series producer/owner Castle Rock Entertainment, star Jerry Seinfeld and the show’s co-creator and executive producer, Larry David, among other gross profit participants.
With “Seinfeld” having been created during the fin-syn era, NBC, which took the initial risk on the show and nursed it to No. 1, was precluded from taking a profit participation in the hit series, though it did garner then-record ad rates for a sitcom.
Mr. Larsen also noted that in the days when fin-syn was being enforced, Carsey-Werner Co.’s “The Cosby Show” also approached the $1 billion threshold during four cycles in syndication, with NBC similarly having no back-end participation.
“Those were the salad days, when the independent studios were essentially protected by the umbrella of fin-syn,” said Mr. Larsen. “The after-market for sitcoms over the last five years is somewhat lower, but more than the dollars changing, it’s who owns the major pieces and more than half now going back to the network in most cases.”
Still a pretty good business
In particular, Mr. Larsen and Mr. Lico say the greatly increased demand for scripted dramas by the broadcast networks and cable networks is allowing the vertically integrated conglomerates to secure profitable after-markets early into a drama’s first broadcast run.
Giving a vertically integrated network/studio conglomerate a significant ownership stake has presented an advantage in pre-selling cable back ends on high-profile dramas like CBS’s “CSI: Crime Scene Investigation” to TNN: The National Network, a Viacom-owned sister cable network.
And despite the conventional wisdom that vertically integrated network/studio conglomerates have sounded the death knell for independents, Canadian-based indie Alliance Atlantis Communications, which co-produces “CSI” with CBS Productions, is guaranteed to share in the record $1.6 million-per-episode back-end sale to TNN. Alliance Atlantis also shares with CBS the international sales of the hit second-year Thursday night drama.
“For Alliance Atlantis, it’s a great business when Viacom-TNN can guarantee back end for `CSI’ after just one year on network [CBS],” Mr. Lico said in an interview at the time of the deal. “When you are on the inside with a vertical combine, a company like Alliance Atlantis can make the economics work when their partner owns the other distribution platforms.”
Outside or inside of the vertical world, though, the general rule is one must reach the all-important threshold of 80 to 88 episodes to get a shot at achieving profitability from off-network back-end sales.
The “road is littered with canceled shows” that racked up three seasons or less on the air, Mr. Larsen said, adding that such a predicament causes the networks and studios to write down tens of millions of dollars annually.

“The conventional wisdom is that one out of every 10 pilots gets on the air, and only about one out of 10 series makes it to four years–that’s the accepted price of doing business and getting hits,” Mr. Larsen said. “If you multiply the odds, one out of 100 shows” reach the nirvana of syndication. But he added, with the networks filling their schedules with shows in which they have a profit participation, it’s likely more shows will run at least four seasons.
As an example, Mr. Lico notes that Imagine Television/Touchstone’s “Felicity” was sold for $600,000 per episode to WE: Women’s Entertainment a few weeks ago, but the producers did not get $750,000 per episode because the series probably won’t get a fourth-year [renewal] from The WB for next season.
Studios USA Television has been the most adept independent studio in extracting certain favorable rights from the broadcast networks. Studios USA was the first independent to set the template for split-cable windows on NBC’s “Law & Order: Special Victims Unit” and “Law & Order: Criminal Intent” for staggered plays on its sister USA Network.
In securing 22-episode orders and renewals through the 2002-03 season from NBC, Studios USA offers up slightly discounted per-episode license fees to the Peacock Network ($1.2 million per episode for “Criminal Intent” and $1.45 million for “SVU”). It covers the estimated $300,000-plus per-episode production deficit through license fees and ad sales generated by USA Network’s cable plays. It is important to note, though, that the Studios USA situation is a special one due to the leverage it has with NBC by producing one of the network’s most reliable hits.
The lessons learned from Studios USA’s precedent-setting multiplexing of the Dick Wolf-created “Law & Order” spinoffs served as apparent inspiration for ABC’s Touchstone Television unit to later sell a dual-play window on “Once and Again” to the Lifetime cable network. In addition to ABC paying a healthy $1.6 million-per-episode license fee to Touchstone, the studio is estimated to be earning another $250,000 per episode in license fees from Lifetime.
By garnering up to $1.9 million in front-end license fees domestically, “Once and Again” is also estimated to earn more than $500,000 per episode in international broadcast sales–meaning the show could still be netting a profit of more than $1 million per episode–after deducting its production costs and profit participations for talent and executive producers Marshall Hershkovitz and Ed Zwick.
Third-season blues
Still, ABC is currently weighing the potential cancellation of highly touted but ratings-challenged drama “Once and Again,” which is currently in its third season. If ABC should decide to balk on renewing the show for next season, it could impede or significantly devalue “Once and Again’s” chance at a rich back-end sale.
“You can bet ABC an
d Touchstone are carefully weighing their options, because it could spell profit or loss on whether the show can achieve a back-end run,” said a competing studio executive, who requested anonymity. “Maybe they’re close to black ink with the shared window [on Lifetime], or maybe they’ll find a way to sell Lifetime on continuing the original run for only that network next season. It’s not like they are boxed into a corner on that one.”
The advantage ABC has in considering options with “Once and Again” stems from the fact that all the players involved in the show–Touchstone Television, ABC and Lifetime–are units of parent Walt Disney Co.
So one of the biggest lingering questions is whether multiple revenue streams will outpace multiple-platform overhead. Is repurposing the answer, with some sort of protection for the back end?
Many hope it is.
Bottom line, “If we don’t change the economic models of all these things [broadcast and cable licensing], we are going to collapse under the weight of [the overhead],” said NBC Entertainment President Jeff Zucker. “Obviously, the economic models are going to have to keep on evolving and changing, but what ABC did with `The Court’ is something for all of us to look into.”