B'casters harvest money from cablers
It’s Economics 101: When the buyer gets his hands on more profits, the seller starts pounding on the table for bigger fees.
The major broadcast networks are the buyers, and the fresh money they’re beginning to harvest is rolling in from cable systems that are paying cash to TV stations owned by ABC, CBS, Fox and NBC in exchange for the right to carry broadcast signals. The sellers are the TV divisions of the major studios, who are preparing an assault on the networks’ new-found revenues by demanding ramped-up license fees for their series.
The most aggressive of the sellers, CBS chairman Les Moonves, said his O&Os clinched carriage deals with a batch of small cable operators last month, declining to name them because of confidentiality agreements, but insisting that, for the first time, CBS will pocket about $6 million a year in fresh money.
One of Moonves’ adversaries, Chuck Larsen, whose TV consultancy October Moon helps some of the top TV producers in Hollywood negotiate network deals, wants to put in a claim on some of that cash.
“My clients regard this money as the beginning of a new income stream flowing to the networks,” says Larsen. Since CBS is “bragging about getting all of this extra money,” Larsen adds, “why shouldn’t the creative people start going after it?”
As Larsen sees it, the TV-production community is spoiling for a fight because it’s not thrilled that the networks are plastering series episodes all over the new-media landscape, from Web sites, where people with broadband connections can download them, to video iPods, where the pay-per-view fee averages about $1.99 an episode.
The networks say the dollar flows are minimal from these new uses. But, however small, the revenues are not shared with the producers, despite the fact that they end up shouldering an average deficit of $700,000 an episode for a 60-minute series. (For a rookie hourlong drama, the average production cost is $2.5 million and the network’s average license fee is $1.8 million.)
Larsen says the people who produce these shows are particularly incensed because the extra runs on the Internet and iPod “could negatively affect the back end in syndication,” where a hit series can reap hundreds of millions of dollars.
The profit participants represented by experts like Larsen may have to take the lead in some instances, because four of the majors’ TV divisions — ABC TV Studio, CBS Paramount Network TV, Fox TV Studios and NBC Universal TV Studios — are sister companies of the Big Four nets.
But all four also supply programs to nonsiblings: NBC U produces drama “House” for Fox, for example, and Fox TV Studios produces NBC comedy “My Name Is Earl.”
So the studios and their equity partners will soon start getting answers to the one big question: Do they have the leverage to extract fatter license fees from the broadcasters?
Kathy Styponias, media analyst with Prudential Securities, says the networks will not give in without a fight. They’ll argue that even if cable becomes a significant generator of income, “the networks’ main revenue stream, advertising, is being put at risk by digital video recorders,” Styponias says.
The networks will insist that the millions coming in the front door from cable will just about offset the millions that are tumbling out the back door from advertisers’ cutting their network budgets because more than 10 million DVR subscribers speed their way through the commercials.
And that’s not the only argument the networks will make, says Bill Carroll, VP and director of programming for Katz TV, which represents more than a hundred network affiliates. As Carroll puts it: “I can see the networks saying that it’s not only producers’ primetime entertainment shows that cable systems are paying the stations for. At CBS, for example, you’ve got the NFL Sunday games, March Madness, Masters golf, ’60 Minutes’ and other CBS News shows,” plus local news on the O&Os and syndicated programming like “Entertainment Tonight” and “Dr. Phil.”
And just because the broadcasters pocketed some cash from a few of the smaller cabler ops doesn’t mean the big cable operators are going to be willing to pony up cash for carriage.
David Joyce, media analyst for Miller, Tabak & Co., says operators like Comcast, with more than 24 million subscribers, might end up offering the stations a deal that would involve not hard cash but goodies like extra bandwidth for the station’s high-def programming or a video-on-demand platform for the replay of shows on the station’s schedule.
The problem for the producers is how to put a dollar value on these noncash considerations, which the networks could say are helping the cable systems as much as the TV stations.
Bruce Leichtman, head of his own media-research operation, says a giant cable operator such as Comcast is so dominant in cities like Philadelphia and Boston, controlling more than 70% of TV households, the network-owned stations would probably cave in — and forgo a cash license fee — before removing their signals from the Comcast system and facing a potentially devastating loss of audience and, by extension, advertising revenue.
The biggest operators like Comcast and Time Warner Cable may have the clout to avoid paying cash to carry local TV stations. It’s the smaller systems that could end up shelling out carriage dollars to TV stations, terrified that large blocks of customers would switch to a satellite dish if they suddenly lost “American Idol,” “Survivor,” “Grey’s Anatomy” or “Heroes” on cable.
But even the cable pipsqueaks have a potential weapon, Leichtman says. Cable Labs, the think tank funded by the cable industry, he says, “is working on integrating a TV antenna into the cable set-top box.”
So if the TV station pulls its signal from cable, all the subscriber would have to do is switch to the antenna, which would immediately pull the station out of the air and, voila, there’s Howie Mandel and a stageful of showgirls searching one briefcase after another for those beautiful piles of cash.