Artful dodging: TV accounting methods

Jul 22, 2002  •  Post A Comment

Reese Schonfeld has been in the broadcast and cable news business for more than 30 years. He helped found the Cable News Network in 1979 and served as its first president and chief executive. He also developed and served as vice chairman of the Food Network.
My first lesson in GAAP (generally accepted accounting practices) occurred in 1994, when I was starting the Food Network. I had launched businesses before and I thought I knew what costs to capitalize and what costs to attribute to expenses. Studio construction, broadcast equipment, sets, furnishings, even a logo could be capitalized. I booked everything else as an expense.
The Providence Journal Co., our partner in the Food Network, was an experienced television broadcaster. The company’s chief financial officer instructed me in the art of media accounting, all legitimate, all ethical, but withstanding all that, an “art.” He explained to me that by deferring the cost of programs to future years we would improve our balance sheet in years one and two and our other partners would think better of us. I should have known that myself.
In those days, almost all out-programming was produced in-house, but we had licensed the Julia Child shows for five years. We had paid in advance. The Journal CFO asked me if we planned to run the show for five years. I said probably, depending on the audience. He suggested we spread the license fee over five years. I suggested that the value would decrease as we played it more. He said take that into account. So we amortized “Julia.”
The CFO then asked me about the shows we were producing. “Didn’t we plan to run them for more than one year?” I hoped so, but some programs were timely and others would fail and not merit a rerun. OK, said the CFO, figure out which ones will succeed and amortize them. That’s why I call it an art form.
Food Network had a daily news program, “Food, News and Views,” that had to play same day and couldn’t be amortized. We produced “How to Feed Your Family on $100 a Week.” It had to play same week and it couldn’t be amortized. We did a restaurant review show that was same year only. The restaurant might close, the chef might quit or the food could have gotten awful. It could not be amortized either.
That left us with the cooking shows. Some would work for more than a year; some wouldn’t. So we averaged out. We decided to charge off 50 percent of all the food show costs in the first year, 30 percent in the second year and 20 percent in the third year. If a show is a real winner and becomes a perennial, it covers the costs of the failures. Thus “Emeril,” “Chef du Jour,” “Mario” and “Bobby Flay” would cover a multitude of mistakes. If there had been too many failures, GAAP dictates that the unamortized costs be “written-down.” If the amounts were significant we would have had to restate the previous years’ results and our partners would have been displeased.
Annually at Food, the auditors came in and asked rather perfunctory questions about program amortization. Since the amounts were relatively minor they accepted our assurances, the Food Network annual reports were approved and our partners were satisfied.
I now know that what we did at the Food Network is standard practice throughout the entertainment industry. When a movie studio spends $200 million on a film, studio executives resort to the same art form we did, but on a much larger scale. They’ve got to guess how long the film will last at the box office, in pay-per-view, on cable, on television and so forth. Then they spread their costs over that period of time.
At the Food Network, deferring program costs made it easier for us to live up to our original business plan. But Food Network programs cost an average of $4,000 per half-hour. Even if we guessed wrong about the success of a program, it was immaterial to our bottom line. A $200 million film write-off is a different matter. Studio heads are loath to admit a $200 million mistake. They are tempted to hide their errors. That’s what WorldCom did when it capitalized its overexpansion, and we all know what has happened to WorldCom.
Often, when a new team takes over a major studio you’ll see a billion dollar write-off. The new bosses aren’t going to be burdened by their predecessors’ mistakes. When that happens, studio stocks take the hit. With WorldCom as a guide, I suggest that auditors take a hard look at film company capitalizations and that investors beware.