Fin-syn repeal has yet to pay off

Jun 3, 2002  •  Post A Comment

The 1995 repeal of the financial interest and syndication rules has turned out to be a financial bust for broadcast networks, whose profits are dwindling despite their increased program investments in search of rare perennial hits.
Although they are no better off financially for having done it, the Big 4 have taken full advantage of owning an economic interest in their schedules at levels that, in some cases, appear alarmingly high.
CBS will have a 91 percent stake in its total network schedule next season, representing 23 shows and 20 hours of programming; Fox will have a 72 percent stake in its total network schedule, or 18 shows representing 13 hours; ABC will have a 62 percent stake in its total network schedule, or 21 shows representing 19 hours; and NBC will have a 52 percent stake in its schedule, or 23 shows representing 19 hours next season, according to a new report by Merrill Lynch analyst Jessica Reif Cohen. She also noted that CBS’s UPN has a 67 percent economic stake in its fall schedule, and AOL Time Warner’s WB Network has a 47 percent stake in its schedule.
Little to show
However, none of the broadcast networks have significant financial upside to show for their efforts. The broadcast networks’ increased program investments have only heightened the volatility and financial risk they and their corporate parents face at a time when their very existence is being challenged by intensified competition and increased fragmentation of viewers and advertising dollars. NBC and CBS are the only broadcast networks that will be profitable this year.
No network has produced a hit show with boundless syndication potential for its own schedule. The odds of that occurring haven’t changed, even though the broadcast networks’ gamble has grown. When a network hits the jackpot-and eventually one will-the returns will be big enough to offset any losses rung up along the way. But for now, the broadcast networks are sustaining greater risks and losses than before the fin-syn repeal.
“It is the ultimate double-downing in blackjack. They’re splitting their hands and doubling their bets,” Tom Wolzien, analyst at Sanford Bernstein, said last week.
While owning shows may help to hold down overall production costs, the big broadcast networks each still spend upward of $2 billion annually (before sports rights) on programming and are still struggling to make money. The prosperity promised by fin-syn deregulation has encouraged broadcast network owners and their in-house production companies to shoulder all of the cost and share none of the financial risk-or potential financial rewards-with partners.
The Walt Disney Co. will be taking the biggest gamble of all next season by having its Touchstone subsidiary produce six of the seven new shows on its schedule. Even if they have the makings of a hit, these new series will have an uphill battle for viewers on an ABC schedule that is weak across the board. Touchstone, and therefore Disney, assumes all the production costs and back-end risks of each show it produces alone.
Touchstone also carried the cost of producing a record 23 series pilots for ABC, most of which were not picked up. It’s not clear whether Touchstone spent more or less doing the ABC series pilots in-house. As a general rule of thumb, broadcast networks can spend an average of $75 million in development, industry sources said.
Overall, Touchstone will produce 12 series, one more than last season, for all of network TV.
Even as the broadcast networks and their internal production companies produce shows for other broadcast and cable networks, there are no guarantees-only the hope that their strongest products will find the strongest time slots in prime time. But even then, they are assuming much more risk than they are reaping rewards. Wherever shows fail, and a majority of them do, the broadcast networks and their production companies are left holding the bag.
But several success stories are emerging from the fray.
Ms. Reif Cohen points out that being a copyright owner of its own and other networks’ schedules is about to render a bonanza for Fox.
Fox’s in-house television production studio, 20th Century Fox Television, is the leading supplier of prime-time programming for the upcoming 2002-03 season with 19 scheduled series. More important, the studio has nurtured 12 returning prime-time series during its four consecutive seasons on top that contribute to a $2.5 billion backlog of off-network television syndication revenue.
Ms. Reif Cohen estimates that at least 60 percent of that revenue is operating profit that gradually will fall to the bottom line of Fox and News Corp., its corporate parent.
Although that syndication pipeline only contributed about $100 million in cash flow in fiscal 2002, next year Fox will begin to enjoy an “annuitylike” cash flow stream for filmed entertainment of between $250 million and $300 million a year, offsetting the $175 million that the Fox Television Network is expected to lose.
“Fox has aggressively invested in talented television writers and producers over the last five years, which is finally beginning to pay off,” said Ms. Reif Cohen, who adds that her estimates do not reflect potential syndication hits such as “Malcolm in the Middle” or “Judging Amy.”
It is not unlike the choice position Warner Bros. enjoyed through the mid-1990s when the significant high-margin cash flow generated from its TV syndication business propelled Time Warner’s overall cash flow growth, Ms. Reif Cohen said. However, despite The WB’s steady and solid empire building, Warner Bros. still does not have the benefit of a full-fledged broadcast network off of which to leverage its best efforts.
Analysts agree that if AOL Time Warner ever gets its balance sheet and debt in order and makes a bold move to acquire a full-blown broadcast network such as NBC or ABC or a major station group such as Tribune Broadcasting, it would blow away the competition.
As for its next season, AOL Time Warner will draw on its Warner Bros., New Line TV, Turner Television, HBO Independent, and Telepictures Productions to produce 23 shows or 18.5 hours of programming, 29 percent more than last season.
For now, Fox offers the only truly lucrative vertical integration model, with its own broadcast and cable networks to launch and nurture its own off-network syndication hits-an important point, since 20th’s overall prime-time television production will decline by 21 percent next season.
Viacom leads the pack
Fox’s 20th, Regency, STF Productions and Fox TV Station Productions will produce a total of 25 shows, or 18 hours of prime-time programming, for all outlets next season, Ms. Reif Cohen said. However, Viacom will be the leading overall supplier of programming to all TV dayparts, with a total 35 shows and 28 hours of programming produced by its various production arms, including Paramount Network TV Productions, CBS Productions, Viacom Productions, Spelling, Big Ticket and CBS News, she said.
But the ultimate post-fin-syn test and financial bonanza will be when a single media company produces sustainable hit shows for its own broadcast network schedule and its owned television stations. For maximum impact, a media company’s broadcast network schedule and owned TV stations must be a fertile enough launching pad to make the most of an internally produced potential hit show. Such a feat would be like getting the planets to align.
“When everything goes right, it’s winner takes all,” Mr. Wolzien said.
The `Millionaire’ model
There already have been glimpses of what that kind of success will look like. “Who Wants to Be a Millionaire” single-handedly restored ABC to profitability, generating an estimated $350 million in cash flow at its height before fizzling in two years. That is about the same amount that ABC will sustain in advertiser make-good losses from falling short of ratings guarantees last season.
In search of the same success, Viacom next season will have a stake in all but two of CBS’s scheduled fall series. Clearly, CBS is building the “CSI” franc
hise in hopes of creating a “Law & Order”-like profit center.
In fairness, Mr. Wolzien and Ms. Reif Cohen said seven years might be too soon to expect the best of post-fin-syn economics to have surfaced in a fluctuating television marketplace. But they also concede that while it takes time and the right resources to nurture hit series, it is also to a large degree a matter of dumb luck.