Vertical integration and syndication

Jan 6, 2003  •  Post A Comment

With three weeks to go before the annual convention of the National Association of Television Program Executives, it’s clear that the syndication business is in the midst of many changes. Yes, “Dr. Phil” has been a success, but it’s a success that has been hard to imitate.

Electronic Media asked five heavyweights to join us in this year’s roundtable discussion to talk about the current crossroads in syndication. They were: Roger King, CEO, CBS Enterprises and King World Productions; Greg Meidel, president of programming, Paramount Domestic Television; Sean Perry, head of alternative programming, Endeavor Talent Agency; Dick Robertson, president of Warner Bros. Domestic Television Distribution; and John Weiser, executive VP, Sony Pictures Television.

Doing the questioning were EM Senior Editor Chris Pursell and EM Publisher and Editorial Director Chuck Ross.

We led the discussion with one of the hottest topics in producing for first-run syndication: How important is it to be a studio that also owns a TV station group?

Electronic Media: We have at the table two gentlemen, Dick and John, representing companies, Warner Bros. and Sony, that do not own TV stations. And on the other side of the table, we have Roger and Greg, who are connected with stations through CBS and Viacom. So let’s have Sean, who represents talent, answer this: On what side of the table do you want to be? How big a factor is it today that a studio be connected to a station group?

Sean Perry: There is no one right answer. It’s going come down to the product, the distributor at the time and where that product is best suited to go. If you tell me that I’ve got a big talent that is clearly an affiliate talent, that clearly should be playing at 3:00, 4:00-I’m going to be knocking on Roger’s door and Greg’s door to say, ‘I want those “Martha Stewart” time periods.’ If you tell me that I’ve got the next ‘Elimidate,’ the next ‘Blind Date,’ where I think I need multiple station bids to kind of make myself whole, I need affiliates, I need independents, I need to be able to build something up. So then I’m going to go to Sony, I’m going to go to Telepictures, just because I’ve seen what they’ve done with those shows. And they don’t have a definitive spot. The question always is, in success where will you get the most money?

I was at King World working for Roger when we didn’t have stations. And my argument was without us having stations we’ll get you more money because we will go market by market and bid out the show. And we will get a higher price. In these modern times, the other argument can be made that with lawyers behind everything, that fair market value will always be there even if you own those stations. I see Dick nodding his head. I want Dick’s opinion on this.

Dick Robertson: Well, it’s common sense that if you are buying from yourself, you’re not going to pay the highest price.

Roger King: Well I have a real [disagreement with you].

Mr. Robertson: I understand you do and-

Mr. King: Maybe there are companies, maybe NBC is doing it, but I’ll tell you, CBS is not doing it. And Greg is here on the phone so he’ll testify to this-

Greg Meidel: Absolutely.

Mr. King: When I sell a show to CBS, it has nothing to do with who owns [it]. I swear to God to that. And if you look at the better broadcasters-ABC is doing the same thing. I mean they have ‘Wheel,’ ‘Jeopardy,’ ‘Oprah,’ and then they incubate at 10 a.m. in the morning with their own product. And I don’t blame them. But it’s certainly leads into nowhere. But when I sold ‘Dr. Phil’ to CBS, I sold it to them. And look at what I did in Los Angeles and Chicago. You know, CBS bid on it. They didn’t give up. So that’s the way this company works.

I know it appears that way when you read an article in Electronic Media or somewhere, and you see ‘King World sells “Live it Up” to WCBS New York.’ You think that that’s a partnership. I’m telling you, it’s not. I mean the nice thing about it is I own Viacom stock.

Mr. Perry: You are Viacom stock, Roger.

Mr. King: I know that Dick Robinson’s looking at this or Sony is looking at this and it could not be further from the truth.

Mr. Robertson: For every one of the examples that you put out like that-and I think that’s probably very much the case with ‘Dr. Phil’-there are numerous other examples where that is just so not the case. I’m not talking about your company. I’m talking about the industry. And that’s just not true industrywide, and my comments were more as an industrywide observation. So forgive me if I tried to paint you with the same brush on that particular transaction, but I didn’t mean to.

All I’m saying is that when we go talk to the Sean Perrys of the world and they have a talent, we say, ‘Look, we have more first run shows-strips on the air than any other company, and we have no stations. And when it comes down to bidding a show we have, we don’t go anywhere first. If you want to get the highest price, we have no allegiance to anybody.’ And that’s the argument on the other side of vertical integration. If you go and say, ‘Well, I want to get my show on the air and get it launched,’ fine. You can do that with a vertically integrated company. A production distribution company with stations. But if the show works, are you really going to get the highest price? You can threaten to move it to another station, but is the other station really going to believe that? And the truth of the matter is that historically that has not been the case. And all I’m saying is that those are the arguments. And I’m not saying that either one is the right one. I’m just saying that when you go make a deal as an agent or as a representative of a talent, with a vertically integrated company, you may be giving up a big upside. I’m not saying you are giving up a big upside, but you may be giving up a big upside because common sense makes you ask the question: ‘When you’re buying from yourself are you going to truly get the highest price?” And if you do have the right talent, and more than one station in a market wants it, wouldn’t you rather have an unaffiliated third party conducting that transaction rather than somebody who has got skin in the game with their own stations.

Mr. King: This is not a small little issue you’re kicking around here. It’s a big one

Mr Meidel: Yes, there are lawsuits about profit participation. It’s self-dealing, that’s what the lawsuits are about. Which gets back to Roger’s point. Our company, both King World and Paramount, through Viacom, we go and get the best deal in the marketplace. I mean it is absolutely crystal clear what the mandate is within the Viacom organization. We go to the marketplace and we get the most money for our product.

John Weiser: With vertical integration, looking at it from the outside looking in, because we don’t have the station groups, certainly makes it tougher. A lot of the vertically integrated companies will turn to their production houses first and prioritize. And if there’s nothing there then they’ll go to the outside. So it makes it tougher for companies like ours. We have to be much more selective and targeted in the programming we bring out to really meet specific needs. No one comes to us and says, ‘We have three time periods to fill, give me your best shot on all of them.’ We really have to come in with ideas targeted to meet the station needs and to reach the audiences. The real big question is, can the vertically aligned companies meet all the needs of their station groups?

Mr. Meidel: No. I can tell you both [that] after working at Fox and now working at Paramount, now being owned by Viacom, our stations have a tremendous appetite for content.

Mr. Weiser: Right. So our goal is really to be the first choice …

Mr. Meidel: It goes back to Roger’s point of why ‘Dr. Phil’ is in some of the CBS owned markets, and NBC’s got it in the other major markets. They all want the best lead-in to that news at five o’clock.”

EM: What about a studio that has stations keeping a show on the air on its stations when ordinarily the show would be canceled because of low ratings?

Mr. Robertson: Right. Well
look, I am walking a very slippery slope in this roundtable. John and I both are, because of the [disappearance of the fin-syn] rule. Now our biggest customers are our biggest competitors. So for me to come into a public forum like this and tell you what’s really going on out there is really in many ways antithetical to trying to get done what we need to get done. That being said, shows are being renewed in syndication that never in a million years would ever have a scintilla of a chance of a renewal were it not for their vertically integrated station groups. And I don’t have to go into the details of this. We all know what they’ve been over the last three or four years.

EM: Roger would you concede that? We’re not talking about any specific King World property, but just the general point that Dick’s just made?

Mr. King: I’ve never sold a show to a station because I was partners with them.

EM: We understand that. But what Dick is saying is that there are shows that have been renewed …

Mr. King: Oh, I know who he’s talking about, and everyone knows who he’s talking about. I don’t disagree with that at all. I agree 100 percent.

Mr. Robertson: Yeah, and it’s not just one company. It’s a lot of companies out there that are doing it. There are a number of them that are buying from themselves. They are renewing shows from themselves that would never be renewed. And they are costing their companies tens of millions of dollars.

Mr. King: That’s what I was going to say. Let me tell you what they get for that. They get nothing. When someone mentions synergy, you [should] run out of the room.

Mr. Robertson: It is a nightmare. We have a situation, I will not name the group, where in a very recent season-let me see how obtuse I can make this, OK?

A very large station group asked us to move a very successful show in two very big cities. They asked for permission because, contractually, they were not allowed to do so. They wanted to replace our show with their own program. We looked at the request and agreed to do it with certain modifications to make us whole. There was about 36 weeks left in the season in just two cities. That 36-week change in just those two cities cost those two television stations $2.8 million dollars in spot advertising revenues.

And I was going to do one of those syndietoon ads about it and do a whole thing, and then I thought, you know, what’s the point? All we’re going to do is antagonize our potential client for the next show. This is the slippery slope that we’re on.

EM But here’s the question: These vertically integrated companies with station groups are managed by bottom line financial guys, whether it’s Viacom managed by Mel Karmazin or whoever, and certainly they aren’t going to allow their stations to keep shows on the air that’s costing them money just because they own them.

Mr. Robertson: They don’t get it. They don’t get it. When a CEO vertically integrates, he or she is so sold on this self-containment that it has led to some of the worst business decisions that I’ve seen in the 38 years that I’ve been in this business-the worst. It’s the single-biggest ugly dirty little secret in the syndication business in my opinion. The tens of millions of dollars that are going down the tubes-and not just in money that a lot of these companies are losing on their programming ventures. But the loss in spot television revenue on the station side of the ledger. It’s a double whammy. And common sense tells me that when you just fish in one part of the pond, you’re a lot less likely to catch a fish. You might catch ‘Dr. Phil’ in that little corner of the pond. But you’re a lot more likely to catch ‘Dr. Phil’ when you fish in the entire pond. And even when you say ‘OK, I’m just going to give my vertically integrated sister production company one time period a year’-well how many time periods do you have that are in play to begin with? You only probably have one or two. So you’re giving up half of your new chance for success. And some of these companies particularly have had pretty sketchy track records. And I’m trying to be polite-

Mr. Meidel: You are. You’re very polite about it.

Mr. Robertson: To these people. But the facts are the facts. And if anybody disagrees with me-

Mr. Weiser: No, it happens in syndication, and it also happens on the network side. Where networks have the investment and programming that they’d rather try to [monitize] by building up enough episodes. And it’s probably not the right programming decision, as it relates to something that we all lose sight of every now and then, which is the audience. You know, forget the business. We’re all trying to reach the audience out there.

Mr. Robertson: Like what happened to ABC when their entire development came out of Touchstone.

Mr. Weiser: What happens is not only do some of those shows get renewed, but the deficits built up on those shows are tremendous. So it’s great to have outside partners to share the risk-some of the upside too-but share that risk and make it a financially more secure platform to afford.

Mr. Robertson: But the thing in syndication is we have a lot less turns at the plate. In syndication strips, you know, it’s somewhere between eight and 10 shots a year. And in prime-time network television it’s like 75 shots a year at the plate. So we have a lot less. So when a … when one of these companies says, ‘You know, we’re going to do our own show,’ it’s just a lot more risky. They certainly have the right to do it. But if I were sitting back, overseeing the balance sheet of these businesses, I’d have to be asking some very tough questions as to the profitability of my television stations.

EM: Given that this situation is mainly caused by fin-syn going away-do we need it to come back?

Mr. Robertson: Well, I asked our research department to put something together for me. I just thought this up out of my head. I said what were the 10 biggest television groups in 1993? How many stations did they have and what percent of the DMA market coverage did all their stations represent? If you go back 10 years ago it was Cap Cities, CBS, NBC, Tribune, Fox, Chris-Craft, Gannett, Group W, SCI-that was what [Storer] and Scripps. They had 76 stations representing 174 DMA coverage points. This year, in 2002, 10 years later, the top 10 television groups-they’ve changed obviously-have 274 stations representing 266 total DMA coverage points. That’s true DMA coverage points, not counting UHF as a half. So the consolidation with the cap, taking the cap from 25 percent to 35 percent, and then [by the government’s reckoning] only counting the UHF stations as a half, has concentrated the decision-making process on what the American public sees.

Because, ultimately, we as businessmen can sit around the table and talk about the business of Hollywood all we want. But the public interest is what wins in Washington. That decision-making is now in the hands of roughly half the people. Half the people. Now, on the other hand, because of that fact that I just quoted, when you look at the number of distributors that were around in 1993, there were 32. There were a lot more if you just look in the NATPE book. But if you take out all the ones that weren’t real-and only count companies where I knew people who worked there-the All American Televisions, the Stephen Cannells, the Carsey-Werners, the Klasters, then there were 32 real syndicators in 1993. And this year there are 17. Half. So you got half as many people supplying twice as big a buying group. Because the top 10 buying groups today are twice as big as they were 10 years ago. And then you got the buying groups now, because of fin-syn, being able to buy from themselves.

It’s a terrible temptation to want to own both sides of the equation. But if I was the CEO of these vertically integrated companies and I looked at the amount of money I can make from the program vs. the amount of money I can make from the :30s that I can sell on my television station-and have almost all of the benefits without the risks … you know, they can take guys like John’s company and my company and beat us up so
bad because they’ve got the [pipe]. We have to give profit participations, guaranteed license fees, caps on renewals and all that kind of stuff. So if you’re able to buy from the whole world, why would you want to go produce it yourself and take 100 percent of the downside, when only one in about seven of these things works, anyway. And particularly if your company didn’t have a very good track record.

Mr. Perry: And Dick, is the average success in that scenario, if the show’s doing a 2 or 3 [rating], is the value of that success even close to what you make on the station side? Reverse it-if it’s a negative how much more does the negative hurt the station? Because I had a conversation last year …

Mr. Meidel: It ain’t gonna change, guys.

Mr. Perry: I had a conversation with a distributor, and I said, ‘Why is your station group buying from everybody else and not you?’ And he said it was really simple. ‘The head of that group said, ‘I don’t want to take the double loss.’ And in success, if a show goes on that I bought from the outside and it works, I always figure I can go back to a Dick Robertson or a Steve Mosko and pay them enough money to keep it on my air. But I don’t have that downside.

Mr. Weiser: I can sympathize with all this. But if we’re here to talk about the past-

Mr. Robertson: No we’re talking about the future. We’re talking about today.

Mr. Meidel: It took forever to change the rules the last time. It’ll take another 10 to 15 years to change again.

Mr. Robertson: No, I’m not suggesting the rules get changed. I’m just pointing out the economic realities of what’s happened to a lot of vertically integrated companies who got greedy in my opinion. Who tried to own it all and have wound up costing themselves a ton of money in my opinion.

EM: Well, given your belief, then, that that has happened a lot of times and that they should be shopping from the bigger pond, is it your belief that further regulation isn’t really necessary and this is going to be self-correcting?

Mr. Robertson: Yes. I believe it will. The pendulum always swings [back the other way].#

Part 2 of the Syndication Roundtable will appear in next week’s issue of EM.