Discovery Inc. is facing a backlash from the unscripted production community following a shift in the cable giant’s protocol for paying for programming.
During the past year, Discovery has implemented a new system that calls for the company to pay producers for shows after all episodes and related material for a given season have been delivered to the network. Previously, the payment schedule for episodes was subject to negotiation and typically spread out across the timetable of production after key milestones were met.
The change requires producers to have enough funds on hand to cover the production costs for a show until the payment comes in at the end. Discovery recognized that this could be a hardship for some companies, particularly the smaller independent shops that are key players in the unscripted TV community. To address that problem, Discovery initiated a program with Citibank to arrange for a type of low-interest loan — considered a “sale of a receivable” in banking terminology — to allow producers to receive financing that Discovery would pay back later, including the interest and other fees.
Discovery maintains that the shift is revenue-neutral to producers and is largely an administrative issue. But numerous producers contacted by Variety say they are wary of the Citibank option because of Discovery’s reputation for pushing producers hard on controlling, and often cutting, production costs on shows. There are deep concerns that if a Citibank receivable deal is factored into a show’s production budget, there will be pressure to reduce overall production costs on a show to make up for the fees and interest costs.
According to multiple sources, at least one prominent production entity has balked at the new payment plan terms and has walked away from a development project at a Discovery outlet. Sources contacted for this story would not speak on the record given the enormous clout that Discovery wields in the marketplace, as most of its 19 domestic channels are huge buyers of unscripted programming.
Discovery began implementing the change about a year ago. The company said it made the shift in order to better manage its cash flow by instituting more uniform payment schedules for programming.
“We have engaged in constructive discussions with our producing partners to better manage our cash flow as we invest more in content than ever before,” a Discovery spokesman said. “We have gotten a positive response so far from both big and small production companies.”
One critic of the Discovery plans likens the situation to a homeowner asking a construction company to cover all of the costs of renovating a home until the owner decides it is complete. John Ford, general manager of the unscripted producers trade organization NPact, noted that few independent production companies can afford to finance $5 million-$10 million or more upfront to produce a season’s worth of episodes over the course of many months, or more than a year in some cases. NPact has fielded numerous inquiries from members and non-member companies about the Discovery changes.
Ford, who is a former Discovery executive himself, said the concerns about the new payment plan and strains over series production costs and demands on producers are making Discovery a less attractive option for producers to bring projects and new talent.
“In a hit-driven business, that could be trouble for Discovery,” Ford told Variety. “Discovery has to balance the potential loss of shows against the benefits of extending this financing proposal.”
The angst over Discovery’s move comes at a time of major transition for the traditional cable TV business, which for years has had a voracious demand for unscripted programming. The vast majority of production companies deliver programs on what is known as a “work for hire” basis, meaning they have no ownership of the finished product. Typically, budgets are structured to provide a 10% profit margin for the production company.
But producers say that traditional 10% margin has been severely squeezed in recent years by heightened requests for reshoots, new episode cuts and other tweaks that all add to the cost of a show. The issue is industry-wide, producers say, but Discovery managers are known to be tough and demanding.
“The finance department will tell you that they will cover your costs but then production management team comes in and says ‘now you have to cut (costs) across the board,'” said one seasoned producer who has long done business with Discovery. Discovery has had staff reductions in recent years that have led to programming executives managing significantly more programs than in the past, which has made it harder at times for producers to get clear directions and timely responses on programming questions.
Producers say they recognize the challenges that Discovery faces in a fast-changing TV marketplace. But there is great frustration at requests for budget cuts or the lack of increases for subsequent seasons. Producers also feel that they provide a level of R&D on series ideas and scouting for new talent for the company that is rarely covered by series deals. The lack of ownership in the finished product makes producers vulnerable to being removed from shows entirely if there is conflict – even in cases where a producer brought the series concept and talent to Discovery.
Industry sources say that talent representatives are advising unscripted TV clients to reject any deal that requires them to provide upfront financing or enter into a receivables deal with Citibank. There is concern that other large cable groups will take Discovery’s cue on financing at a time when every major media company is under pressure to make its quarterly earnings as rosy as possible.
“This will kill the (independent) producers off if this becomes mainstream,” said a veteran talent agent.
Discovery executives are understood to have had numerous meetings with production companies in an effort to explain the rationale behind the financing plan. Multiple sources said that Discovery more than a year ago floated a version of the program that would have made producers responsible for paying the interest from the receivable sale, but that could not be confirmed. Discovery sources emphasize that the only impetus for the program was to make optimum use of its organic cash flow at a time when the company is investing big in original content around the world, notably on sports rights for its Eurosport linear and digital platforms.
The Discovery issue became a spirited subject of conversation among producers in recent months as more have been exposed to the Citibank financing offer. Although Discovery has tried to assure producers that the company, not producers, would be on the hook for the loan, there are concerns about how a receivables deal could impact a producer’s effort to arrange bank loans and lines of credit.
“It’s absurd. No business would ever do this,” said a producer with multiple series on Discovery-owned channels. “The fact that they’re asking us to do this is so outrageous.”
More than one producer reached for this story pointed to the contrast between tightening production expenditures and Discovery CEO David Zaslav’s blockbuster $129.4 million compensation package for 2018 (the vast majority of which is tied up in stock options that will only pay out if Discovery’s shares hit ambitious performance targets).
NPact’s Ford said the strain that producers working for Discovery outlets feel will ultimately be reflected on screen — to the detriment of the shows.
“Producers have to be concerned with their profit margins. They’re also concerned with their reputations. They want to make the best shows they can make,” Ford said. “Our members are getting increasingly uncomfortable with what (Discovery) is asking them to do. It’s going too far. They’re cutting in to bone and muscle here.”