NBC sets sights on new profit model

Apr 7, 2003  •  Post A Comment

NBC is poised to do much more than develop replacement hits for its aging and costly prime-time series to maintain a hold on upscale viewers.
It faces the challenge, and some say an industry imperative, to use this pivotal juncture to invent a more cost-effective model for securing network ratings and profits.
The 2003-04 TV season will likely be the last one this potent not only for NBC but for all broadcast networks. It will be the last season for a while that NBC has as many popular veteran series, providing the only platform fertile enough to ensure a level of viewer and advertiser sampling that transforms new shows into long-term hits.
At this point, NBC represents the best-case scenario for a broadcast network still operating under old program system standards: buy programming in bulk and hope to claim some of the fewer than 10 percent of all prime-time series that last long enough to become syndication successes. Hardly terrific odds.
That isn’t a very sound business proposition for an industry in which only two major broadcast networks (NBC and CBS) are profitable; live news and sports are mostly big loss leaders; and the economic viability of the broadcast networks to their corporate parents is rightfully being questioned.
Executives of NBC and its owner, General Electric, know the network’s anticipated $775 million in operating profits in 2003, and its estimated $350 million in news profits (the lion’s share coming from the Today show), are clearly the exception rather than the rule in broadcasting.
Those same executives at NBC, led by Chairman and chief executive Bob Wright, and at GE, headed by Chairman and CEO Jeffrey Immelt, also have been bold enough to set some economically astute precedents, from eliminating affiliate compensation to resisting exorbitant, money-losing professional sports license fees. So devising a smarter program business model for a new TV world is within their means and, sources say, already high on their list of priorities.
Here is some of what NBC is up against and could do to cast all broadcast network economics in a whole new light:
NBC could schedule a second same-week broadcast of popular or worthy series in its own prime-time schedule or on one of its owned cable networks. Because it produces so many of its own series and will be starting fresh with outside producers of new series, it can negotiate these kinds of terms-which have been impossible to achieve with returning hit shows. This is not multiplexing as it was initially and brazenly discussed among industry mavens. There is unexplored value in selectively repackaging and showcasing series that NBC is in a strategic position to test. It also can use a platform such as Bravo (which it has vowed not to make a recycling dumping ground) to develop cutting-edge series along the lines of HBO’s The Sopranos, which could be filtered in some form to the NBC TV Network.
NBC could dare to take popular programming into new dayparts.
Television has become all about nurturing lucrative brands, across broadcast and cable network platforms, on nights of the week, and into other media such as recorded music, films, books and home video.
For instance, NBC’s successful Law & Order franchise contributed 27 percent of the total gross profits of all NBC regular series in 2001-02, according to Morgan Stanley analyst Richard Bilotti.
NBC’s long-dominating “Must-See” Thursday night schedule commands an additional $145,000 of revenue per spot, or an estimated 17 percent premium to the rest of its prime-time schedule, Mr. Bilotti said.
With such hefty economics at risk, NBC should try an evening version of what is arguably its most popular and profitable program, Today, that viewers can drift in and out of, because appointment television is becoming a thing of the past.
NBC could create an elite breeding ground for independent, even new, producers to bring fresh ideas to prime time at a more reasonable cost.
Not enough of it is done. Someone has to take the lead. It could change the entire industry. Enough said.
NBC could recast the network’s prime-time schedule in the context of a bigger, more diversified media concern. While prime time generates about half of a broadcast network’s revenues, its related programming expenses make up about three-quarters of its costs. NBC and its network brethren have a long way to go in fully amortizing their news-gathering, sports and other programming expenses across all of their commonly owned broadcast and cable networks. NBC still can afford to be bolder in that regard. But even with such synergies at full throttle, a broadcast network’s relative economic contribution to a media conglomerate such as GE, Walt Disney, Viacom or News Corp. can often be no better or no worse than another of its core assets. These companies need to stop lavishing money on their broadcast networks as though they are the center of the universe, because they no longer are, from a nickels-and-dimes perspective. A growing number of broadcast and cable networks and studios are realizing the joy of investing less money, in a smarter, different way than in the past, and achieving better returns. NBC is in a position to push that envelope.
Indeed, NBC is aiming to make much less of its future fortunes dependent upon the fickle ebb and flow of prime-time program ratings. It will be able to recover at least half of the profits lost from the attrition of hit series by growing profits in other related core businesses.
In 2003, their first full year in the NBC family, Telemundo will generate more than $100 million in pretax profits for NBC and Bravo will generate an estimated $80 million in pretax profits, according to internal NBC estimates.
NBC’s cable portfolio should generate $450 million in pretax profits this year, bolstered by war-related news coverage and Bravo, growing at 15 percent annually. MSNBC’s war-related ratings and revenue growth will make it profitable to the tune of $50 million.
Explosive Hispanic demographics will drive Telemundo’s annual growth to 20 percent, boosting its 2003 upfront take by $50 million to $260 million.
NBC also is starting to see notable returns from its syndication operations, which should generate $500 million in operating profits this year from such internally produced series as Access Hollywood and Will & Grace.
As a result of these nonprime-time network contributions, NBC overall will likely make nearly $2 billion in profits on $6.7 billion in revenues this year.
Less of its fortunes come from top-rated but expensive veteran series than you might expect. The only monetary payback from Friends, costing NBC $11 million per episode, will be a two-hour finale that generates $1 milion-plus per 30-second spot.

Instead, more of NBC’s profits collectively are tied to its dominant 18 to 49 upscale demographic, which generates $200 million in additional annnual prime-time revenues, sources said. Developing new series to support that demo has proved challenging.
As a result, NBC is expected to command an upfront price premium in the mid-teens barring a worsening of the war or the economy.
Last week, advertising guru Jack Myers took the first official stab at estimating that broadcast network prime-time ad spending could swell to as much as $8.65 billion this year over last year’s $8 billion. He estimates the cable upfront could rise to as much as $5.3 billion from last year’s $4.6 billion, and that syndication would be essentially flat at $2.2 billion.
That may be wishful thinking if war and a weakening economy prevail.
NBC executives tell me they are painfully aware that the last time NBC went through such an extensive series development process, the industry’s economics and competitive landscape were decidedly different.
Today the broadcast networks spend more than $1 billion annually on programming (not including sports) and $50 million to $100 million on season-long series development-and can spend close to $1 million on half-hour comedy series episodes, and $1.5 million to $2 million on hour-long drama series episodes-for far
more diminishing returns.
No matter how you cut it, NBC faces the monumental task of replacing as many as half a dozen anchoring series over the next several years.
The absence of hits such as Friends and Frasier by the 2004-05 season, coupled with NBC’s poor track record of new show successes, will make it vulnerable to losing audience and advertising market share for the first time in a decade. Law & Order, West Wing and Will & Grace should still be on the air to assist in the transition in another year. But the most important unknown, NBC executives say, will be the health of the overall advertising upfront marketplace at that time, when the network is selling new series and new nightly schedules.
Whether any of NBC’s new series entries work will be, as usual, the luck of the draw. Even with the significant strength of its popular series to bookend new shows this season, NBC has been unable to develop shows that promise to be future hits. Next season could hold more of the same. “This is not something that is going to implode here, by any means,” defended one high-level NBC executive. Maybe not. But there’s no doubt that there’s a whole lot more than prime-time ratings at risk in the season ahead.