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Not your mother’s business model

May 20, 2002  •  Post A Comment

Since Sony Corp. of America Chairman Howard Stringer challenged the television industry to devise a profitable programming paradigm last year, content and distribution players have wrestled with new economic models, some of which are boldly evident in the new prime-time program schedules.
Although no panaceas have emerged just yet, a number of formulas for sourcing revenues and profits are in the making and worth closer examination. Perhaps the most intriguing is the not-so-radical concept of program reruns. But the idea of replaying stored content-at the discretion of a viewer with full interactive control-is bound to give added value and new revenue-generating potential to popular movies, genre series and specials. The media world is just beginning to better understand that value.
For instance, if Comcast Cable subscribers become accustomed to watching NBC’s “Nightly News With Tom Brokaw” on demand-pausing, rewinding or fast-forwarding as they go-a year from now, subscribers and cable operators will be asked to pay for that service, which they can access for free for a limited time as part of a video-on-demand trial run. The same may be true for Fox’s “24” series, which for now is a free VOD offering through Cablevision Systems.
There will likely be myriad other broadcast network fare that will be time-shifted for free during the next year. What the fees and splits are among broadcast content providers and cable operators a year from now will depend on how quickly the industry approaches the 38 million subscriber penetration that Kagan World Media predicts will occur within five years.
“I think they are trying to see what will work, and there’s nothing on the table that cries out, `This is it’ now,” said Deana Myers, a Kagan World Media analyst specializing in programming economics and new business models. The latest edition of Economics of TV Programming and Syndication and a new book on modeling TV series profits will be published by the Primedia company next month. Ms. Myers is the leading contributor to both publications.
“The broadcast model is not working, and the nets need to find a way to add revenues,” she said.
Meanwhile, some prices already have begun to form a framework for what will be the more prominent practice of program repurposing and program time shifting that will be evident across many broadcast network schedules and cable platforms this fall. As program syndication continues to be a business held together by infrequent, explosive hits commanding extraordinary pricing, the repurposing option was important enough for ABC to agree to compensate for, even though it is essentially a big unknown, Ms. Myers said.
“This is the type of stuff that you don’t find out about until it’s there. We didn’t hear about repurposing until it was a done deal with shows like `Law & Order,’ `Once and Again’ and `24,”’ she said.
The first repurposing models to emerge this season hold promise for short-term profits.
Although “24” is costing about $2 million per episode to produce, compared with an average $1.8 million for a one-hour action adventure, the payback has been almost immediate. Produced by 20th Century Fox and playing both on Fox and FX this season, “24” will come close to profitability its first year on the air, Ms. Myers said. With a Fox license fee of $1.1 million, an FX license fee of about $150,000 per episode and an estimated $1 million foreign license fee, “24” will sustain less than a $6 million deficit after the first 24 episodes, she said.
Broadcast and cable networks are seeking more series that can last longer and go further in a multichannel media world where syndication already is being radically transformed.
Some industry experts have begun to ponder whether new program trends such as VOD eventually may supplant conventional syndication, which could be rendered obsolete by a customer-driven on-demand video market. The syndication sector also will eventually become squeezed by a reduction in the number of hit series on broadcast television as cable continues to take viewing share and as cable networks shift more of their spending to original programming.
For now, however, cable networks are bidding up off-network series in ways that also are setting new precedents as they pay along programming from one end of a media concern to another. This year, cable will comprise the largest portion of syndicator revenues, or $3.4 billion of an $8.9 billion total, up a whopping 12 percent from last year-and twice the amount independents or affiliates can fork over.
Drilling down into syndication, the economics are more vulnerable and changing. The cash market is hanging on by a thread, posting a slight 1.4 percent increase in 2001 revenues to $2.8 billion, in a drop that corresponds to plummeting ratings. With only top-tier product getting solid cash deals, barter has dropped 6.5 percent to $2.2 billion against difficult ratings and advertising.
Kagan predicts barter syndication will grow annually at about 5.3 percent to reach $3.5 billion in revenues by 2011-still the lowest rung in the program exhibition/distribution food chain. Middle-rung off-network syndication and barter-supported series may not be as stable in the future.
“With a tough ad market its harder to get strong advertising revenues. Also, as there are a lot fewer independent stations today than 10 years ago, with the rise of UPN, WB and Pax, there is also less room for off-network shows, so that leaves less room for the middle shows,” Ms. Myers said.
Some experts believe the most lucrative new economic models may have yet to surface. ABN AMRO analyst Stuart Wang created a hypothetical six-year model for a digital cable network that would become profitable in its fourth year.
The maximum approach for distributing cable operators may be to align with content providers while contributing their appointed assets and sharing in the upside. Digital cable networks initially will heavily rely on existing program fare to keep costs low and cultivate their fragmented audiences-making their initial formation much like that of existing cable networks. For instance, Carsey-Warner may want to look for VOD rights sales of archived programs on a VOD server to squeeze new revenues out of old shows.
Mr. Yang’s digital cable network model assumes operators seeking an initial carriage fee and an advertiser cost-per-thousand of $2.50 each. Although program expenses could start at $7.5 million annually, they would diminish to only 40 percent of revenues by the first year.
On the way to those first digital networks materializing in the next several years, longer, more conditional production contracts, co-production agreements, moving shows to distant locations and even resorting to more reality fare amount mostly to “Band-Aid” economics, Ms. Myers said.
ABC’s fleeting though lucrative multiyear brush with “Who Wants to Be a Millionaire” is a good example. “Millionaire” generated an estimated $390 million in cash flow for the 2000-01 season, based on a modest $866,000 per episode license fee. By comparison, a normal hour-long prime-time reality series generally renders $36 million in annual revenues and $10 million in annual profits, or $32 million in cumulative profits over time.
With the broadcast networks spending a record $11.5 billion on television programming in 2001, which represents about 40 percent of spending worldwide, it is surprising that less than 3 percent of all television industry budgets are spent developing new business models, industry experts said.
The networks’ share of spending will decline to about 31 percent by 2011, or $15.4 billion, growing at an annual rate of 2.8 percent. At the same time, basic cable networks are expected to increase their collective spending by 8 percent to $7 billion by 2011.
But with the six broadcast networks delivering only an average 34 prime-time rating and regularly reaching less than half their household footprint, the nets are moving quickly to extend their distribution platforms to something other than syndi to better amortize their p
rogram costs, which still comprise more than 70 percent of their overall budgets.
“With more than 80 percent of all series failing the first season, in theory it is better to control your own production costs-except when the show becomes a hit series with name stars,” Ms. Myers said. That explains why NBC and CBS each own about 45 percent of their schedules, compared with 53 percent for Fox and UPN and 34 percent for ABC.
Of course, ABC, with all 29 of its fall series pilots produced by its own Touchstone unit, is praying for those kinds of problems. If the network’s new series win, ABC wins big. But if they go the way of most new series, ABC could need to sustain another season of devastating losses following this past year’s $300 million advertising make-goods shortfall.
But just getting to the head of the class is tough, since the competition faced by broadcast network prime-time series has never been more fierce on conventional and digital cable, satellite and even the Internet.
“The reality is the broadcast and cable networks will have to do better than that if they want to survive,” Ms. Myers said.#