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Originals Lift Cable’s Profits, Reputation

Sep 16, 2007  •  Post A Comment

Cable networks’ record investment in original scripted programming this summer are likely to translate into big benefits — in both profits and cachet.

Spending for original programming on cable last year hit $5 billion, up 66 percent over five years, according to research from SNL Kagan. That figure is expected to rise another 43 percent between 2006 and 2009. The broadcast networks, by comparison, spent about $7.6 billion on original programming last year.

The return on investment? Higher ratings for some networks and potentially a stronger hand at the bargaining table with advertisers in the upfront and scatter advertising markets. Networks that burnish their reputation with winning originals also can pull in sponsors that otherwise would pass on a network.

“I would say it does pay off,” said Jeff Gaspin, NBC Universal Television Group president-chief operating officer, whose cable channels Sci Fi, USA and Bravo have established brands built on first-run shows. “The combination of being up in the ratings and strong scatter pricing is what you need.”

New original series’ prospects for profitability, of course, are only as promising as their ratings.

Network executives and analysts said a successful show can break even in its first year, then make money if ratings stay high and advertiser demand increases. Networks also are beginning to see digital dollars as original shows drive viewers to their Web sites and viewers buy shows on iTunes or watch them on-demand.

Shows like Lifetime’s “Army Wives” and AMC’s “Mad Men” can help change the perception of networks with viewers, advertisers and even cable operators, who can be persuaded to pay higher license fees for networks with original programming.

“It can be very profitable for the hit shows,” said Deana Myers, SNL Kagan senior analyst. “But you have to have a hit show.”

Networks like USA and FX have been the prime beneficiaries of the ad dollars that flow to original scripted programming on cable, Ms. Myers said. This summer, “Some of the other networks are hoping for the same,” she added.

By and large, Ms. Myers said, cable networks have succeeded with their original programming efforts and are rushing to do more.

Spike TV, which had a flop last year in “Blade,” came back this summer with “Kill Point,” which drew 46 percent more viewers than “Blade” and improved its time-period audience rating by 52 percent among men 18-49. Despite one of its two main lead characters dying in the season finale, the network is discussing bringing the show back with Donnie Wahlberg continuing in his role as a hostage negotiator, Spike executives said.

Scripted programming is a less expensive venture for cable networks than the broadcasters, potentially making it a more efficient way to attract additional viewers.

Ms. Myers said production costs for cable shows are about 75 percent of those on broadcast, which range from $1.5 million to $2.5 million per hour, depending on music fees, the talent involved and other factors. The networks pay the studios about 70 percent of that as a license fee, she said.

Unlike the broadcasters, which order about 22 episodes of a series, cable networks tend to order fewer episodes per season, usually 13. That means an investment of about $13 million to get into the originals game.

There are more ways to recoup money spent on originals than for acquired programming, Ms. Myers said. For one thing, the shows can be run over and over. Then there are digital revenues from program sales and from advertising on network Web sites.

Money to ‘Burn’

NBC Universal’s cable networks—USA, Sci Fi and Bravo—are laden with original programs. Mr. Gaspin said a hit show such as USA’s “Burn Notice” occasionally makes money in its first year. As long as ratings hold up, program profitability grows in subsequent years because demand by advertisers for hits is greater than for original shows that lack proven track records.

Demand for Bravo shows like “Top Chef” and “Project Runway” has increased season after season, and their ad rates have risen accordingly, Mr. Gaspin said. The profit threshold is lower for nonscripted shows because their costs are lower, he said.

“The other factor that drives profitability is the repeatability of the show,” Mr. Gaspin said. USA’s “Monk” and “Top Chef” repeat quite well, and that adds to the profit potential, he said..

NBC also is experimenting with different business models to make original programming more efficient. Sci Fi this year used a syndication model that let it dramatically lower its license fees for “Painkiller Jane” and “Flash Gordon”—it allowed the studios to put the programs on TV stations six months after they appear on cable.

Even though “Painkiller Jane” was canceled and “Flash Gordon” dropped from its high opening ratings, Mr. Gaspin said the model “clearly lowers the cost and drives the profitability in year one.”

Of course, in success, the cost of a show tends to rise, because the studio and talent seek raises.

“The goal is always to have revenue rise faster than your costs,” Mr. Gaspin said. “In those cases, your profitability increases.”

One network that took its first try with original scripted programming this summer was AMC, whose “Mad Men” won accolades from the critics.

“It’s amazing what one show can do for you,” said AMC executive VP and general manager Charlie Collier.

While the show itself probably broke even at best on its own, Mr. Collier said the entire network benefited from adding an original to its lineup.

“We saw it in the upfront. It’s been a really solid performer,” he said. The series also drew traffic to the AMC Web site, episodes were a top seller on iTunes and it helped the network achieve full distribution of its video-on-demand service, he said.

Discussions about renewing the show are being held.

“Mad Men’s” ratings outperformed most of the network’s movies and it drew a more upscale audience, making the show and the network attractive to advertisers in categories trying to reach that hard-to-reach demographic.

“Original programming allows you to look at your air in a different way. You can showcase your programming and you can showcase the advertising,” he said. Several clients have been integrated into “Mad Men” episodes and the network has been running “Madvertising” title cards between spots to keep viewers’ attention.

As “Mad Men” reaches its conclusion, the network also will be able to use the show to promote its next original series, “Breaking Bad,” Mr. Collier said.

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