The TV market is both a primary and secondary platform for content. Although TV is traditionally thought about in terms of TV series and other made-for-television productions, TV programming is a quilt that also relies heavily on other product. Accordingly, beyond analyzing firstrun programming, to understand the entire economic picture it is also important to review how television garners revenues for films and other intellectual properties that can be aired on television but were not originally produced for television broadcast.
This chapter focuses on traditional television, namely free television (commonly referred to as free over-the-air broadcast television) and cable/pay television. New technologies, such as cable video-on-demand (VOD) and Internet/OTT streaming, are blurring the lines of what has historically been categorized as “television” (see Figure 6.1), and this blurring and the emerging new media platforms for TV programming are only touched upon here and then discussed in greater detail in Chapter 7. It is worth noting up front, however, that the very nature of what we perceive as “TV” is changing so rapidly that at the end of this century’s first decade, the landscape has completely transformed from what existed just a few years ago. Simply look at the new points of access that already exist (see Figure 6.2).
Against this backdrop, there are evident challenges, including windowing, as well as forecasting whether and how fast new media revenue streams will mature. I asked Gary Marenzi, former president of MGM Worldwide Television, as well as Paramount International Television, how he viewed this new landscape and how television distributors were adapting and tempering enthusiasm for new revenue streams versus the proven sources:
Figure 6.1 Types of Television
Digital/online-enabled platforms are becoming a major source of revenue for content providers, as more and more consumers (especially those under the age of 30) are utilizing their laptops, tablets, and smartphones as their primary sources of video content. This growth is obviously welcome and has helped to compensate for the decline in physical disc/DVD sales, but it requires the licensor to be extra vigilant in determining what rights are granted and for which exploitation windows. Obviously, licensors want to maximize their revenues from traditional sources like free television, so they’ll protect these traditional windows against overexposure by other media. But as media licensing opportunities continue to grow, the major content providers will stir up competition for pricier, exclusive windows regardless of the delivery configuration. The key for content providers is to maintain the value of their programming for every potential audience, so that priority will not change no matter how many new distribution options emerge.
Figure 6.2 The Shifting TV Landscape
Table 6.1 Table of Broadcast Television Networks
Data from Wikipedia (http://en.wikipedia.org/wiki/List_of_United_States_over_the_air_television_networks). Excludes My Network TV.
Free Television (United States)
Free Television Market Segmentation
Free National Networks
The market is divided into terrestrial over-the-air national networks (NBC, CBS, ABC, Fox, and The CW) and cable or satellite-delivered television stations. Networks are somewhat complicated entities, however, in that a network is really a grouping of local television stations that are either owned by or affiliated with the parent network company. The FCC regulates station ownership to protect against the concentration of media ownership within markets, a construct that may become moot as market shares continue to erode and access to media from online and other sources becomes ubiquitous. There are several regulations, but the critical ones governing television station ownership are:
■ National TV Ownership Rule: Prohibits an entity from owning television stations that would reach more than 39 percent of U.S. television households.
■ Local TV Multiple Ownership Rule: Allows an entity to own two television stations in the same designated market area (DMA, as defined by Nielsen Media Research) provided threshold minimum of other stations in the market remain and at least one of the stations is not ranked among the four highest-ranked stations in the DMA.
■ Dual TV Ownership Rule: Prohibits a merger between or among these four television networks: ABC, CBS, Fox, and NBC.1
Accordingly, the “big” networks are an aggregation of owned local TV broadcasters and affiliated stations, which cover all the major DMAs and reach nearly all the potential households in the United States (see Table 6.1). (Note: While reach has been relatively constant, it is interesting to note that services such as Nielsen have reduced their counts of TV households, a fact attributable to a census shift to the Web and evidence of cord-cutting (see Chapter 7); the reduction by Nielsen of households in 2011 was the first downsizing of total households by the ratings agency since 1990.2)
The “network” only programs a certain amount of airtime for simulcast on a national basis, which generally includes the national news and a primetime schedule of three hours in the evening. In terms of original programming, this translates into around 22 hours per week (three hours Monday–Saturday, four hours Sunday, excepting Fox, which broadcasts an hour less in primetime). This is among the reasons why NBC’s announcement at the end of 2008, amid the steep economic downturn, to eliminate original scripted programming in its 10:00 p.m. hour (EST/PST) was so dramatic (shifting a new Jay Leno talk show to its third primetime hour); this represented a shift of five hours out of 22, nearly a quarter reduction in original programming. (Note: The move, leading to a ratings decline, was generally considered disastrous and was quickly abandoned.)
The affiliates are generally obligated to run the network programming during these hours, but for the balance of the schedule they have a measure of flexibility whether or not to take the network-offered programming. The network actually markets and sells to its affiliates, trying to convince them to come on board for its slate. Economically, there are strong incentives to stay consistent with programming: the local affiliates gain the benefit of the brand (e.g., ABC or NBC), and the more shows it programs from the parent, the stronger and more consistent the brand. From the network’s standpoint, it wants national coverage for its programming and will therefore incentivize the local stations to stay loyal to its slate.
Local Independent Stations
Alongside affiliate stations that make up a national network, there remain many local independent television stations. The recent disbanding of the WB and UPN (2006) for the new CW network freed up several local affiliates, creating a boon for the independent market, which for years had been in decline. In the 1980s and the early 1990s, there was a plethora of strong independents, fueling off-network syndication opportunities, but the growth of networks such as UPN, WB, and Fox gobbled up the prime independents and relegated much syndication to an afterthought following cable options.
Cable Networks
There are currently over 200 cable stations in the United States, with toptiered channels bundled in “basic” carriage packages such that popular networks (e.g., Discovery Channel, ESPN, TNT, and USA) are provided in the overall fee charged to the consumer. This is distinguished from “premium cable,” for which the consumer pays a direct incremental fee for access to specific premium channels such as HBO (“premium pay cable”).
With the increased penetration of cable and satellite, many larger media companies have diversified programming by creating niche or specialized channels, and, as in the broadcast space, the independents have largely been consolidated. Examples of cable networks with national reach that are part of larger media groups include USA, Syfy, and Bravo (under the former NBC-affiliated family, and now all part of Comcast); Comedy Central, Nickelodeon, Spike, MTV (under the MTV Networks/Viacom family); CNN, TBS, TNT, TMC (under the Warners family); Fox Sports, FX (under the Fox/NewsCorp family); and ESPN, the Disney Channel, and the ABC Family (under the Disney umbrella). A good resource for television programming issues and for identifying a complete list of networks is the publication Broadcasting & Cable (see www.broadcastandcable.com, which lists upwards of 250 channels/networks). Beyond the pattern of large media producers developing or acquiring cable outlets for their content, it may be a new trend to see pure-play cable operators owning the cable networks carried over their pipe, in essence incubating their own viewers. Comcast, for example, before broadening its holdings with the acquisition of NBC Universal and its affiliated networks, was the parent to a variety of smaller services, including the Golf Channel, E! Entertainment, G4 (merged with the acquired Tech TV), and OLN (Outdoor Living Network, rebranded Fine Living).
Free Video-on-Demand and Internet Access—What Does Free TV Mean?
It used to be that “TV was only TV,” but with the advent of advertising-supported Internet access, such as offered by Hulu, and cable-free VOD (FVOD), the lines are blurring. In contracts, attorneys have to grapple with whether TV should be delineated by delivery mechanisms (e.g., analog, digital, free-over-the-air, terrestrial, satellite), and now dealmakers and attorneys alike need to categorize Internet streaming and other on-demand access. If a network such as NBC makes a show available for free Internet access on a non-NBC-branded site such as Hulu, or ABC makes a primetime show available via abc.com, or CBS makes its primetime series available for free viewing on cable free-on-demand, how should these be characterized?
As a consumer, you can access Glee, or CSI for no additional charge and watch the same programming with the same, or in most cases fewer, commercials. Because the start time for access is in the viewer’s control (and the site even perhaps embedded into a personalized page on a social networking website), it is a form of VOD; moreover, because this VOD is not transaction-based (i.e., no direct fee to the viewer), but is advertising-supported, it is coming to be known as advertising-supported VOD (AVOD), a subset of FVOD. (Note: See Chapter 8 for more discussion on transactional VOD.) Whatever the label, free viewing at one’s election is competitive with free viewing in accordance with a broadcaster’s schedule.
Free TV is therefore becoming categorized not so much by where or how one watches, but whether the content is TV-branded and -produced (“premium content”). In the future, free TV will ultimately only mean programming broadcast on TV (or perhaps debuted or simultaneously launched on TV) in addition to being made available via other outlets, thus turning everything on its head. Today, we think of the other markets as emerging and competitive to TV, but if and when content is everywhere (and, by and large, the market is already close to this point), then free TV will become the limiting, not the defining factor, because unlike other platforms, broadcasters have retail-like limited shelf space: just compare 22 hours of primetime versus an infinite range of choice on-demand or via the Internet. The fact that a program at least was aired or launched on TV, or was produced for TV, may become the defining element of whether it falls within the notion of TV at all.
Metrics and Monetization Challenges
It is worth circling back to the discussion in Chapter 3 regarding the challenge of pricing advertising, and the difficulty of reconciling online versus offline pricing—in some ways, it is almost as mystifying as international currency conversions and trying to find equivalents, given many moving parts. The issue is important in the FVOD context because major cable operators are straddling the fence, pricing in one way now while looking to major growth and an upside if they can coax the ecosystem into capturing value via increased VOD viewing accompanied by dynamic ad insertion. U.S. cable giant Comcast is a good example. Speaking at a Broadcast & Cable summit, and noting that Comcast anticipates VOD advertising impressions on FVOD content to increase tenfold between summers 2012 and 2013, one of Comcast’s executives noted: “We have 400 million monthly VOD views on Comcast. I’d love to have a dollar for every view.”3 FVOD revenue growth is enabled by dynamically inserting advertising into content called up by users, which makes the viewing experience feel more like live TV (as ads are not embedded in the content, creating the same repetitive loop each time a program is called). The catch is that the value of viewing those ads is still generally monetized via ratings, and captured within Nielsen Live+3 ratings windows; however, with dynamic advertising insertion and the ability to monitor by user, people are now starting to track data in different ways and looking at online impression metrics. The industry simply needs to rationalize and harmonize the systems, and once everyone can obtain consistent and reliable data from VOD sources (i.e., set-top boxes in terms of cable), then arguably different metrics than estimated (and aggregated) ratings ought to be used for valuing those VOD views.
This challenge was further highlighted in Chapter 3 when discussing the underpinnings of ratings, and the challenge of capturing downstream viewing from sources outside traditional TV, given the fast growth of watching via a myriad of devices, including game systems, tablets, and phones. Nielsen talks of the shift in “appointment viewing” whereby, historically, viewing and therefore ratings were grounded in capturing views at a particular place and time (with live sports being the prime example). However, they have asked the obvious question as to what happens when viewers can freely time-shift to when they want—how much viewing is taking place outside both the traditional metrics (“live”) and then outside the “catch-up” window captured generally as Live+3 and at the outside as Live +7? Citing a new National People Meter Panel that is being trialed, Nielsen has reported findings that “just over five percent of viewing is happening in this beyond-7-day environment, with less than one percent for syndication. In fact, some of the top shows are adding up to an entire rating point in this expanded period.”4 My guess is that this 5 percent is well underreported because metrics have not been reliably developed to capture the plethora of devices where people are actually watching, and that the sampling is too dependent on traditional streams from DVRs, where catch-up started and is still most prevalent. The challenges are daunting in terms of harmonizing ratings and metrics, but no doubt more and more content is being consumed both off-TV and later (whether via one-off catch-up or emerging trends of binge viewing, whereby viewers will watch a series in marathon fashion). (See Chapter 7 for further discussion.)
Historical Window Patterns and New Technology Influence on Runs
The market for feature films on TV has historically been very strong, and for years a key sales benchmark was a license to one of the major national networks. In the best of scenarios, the market even provides four successive TV windows, allowing for millions of dollars continually flowing in for well over a decade:
■ 12–18-month window on pay television (e.g., HBO, Showtime, Starz)
■ 3–4-year window on network TV (e.g., NBC, ABC, CBS, Fox)
■ multi-year window on cable TV
■ multi-year window in syndication.
(Note: As discussed later, four windows today is extremely rare.)
Assuming this historical pattern, a theatrical feature film will typically be licensed to a broadcast network for debut approximately three years after its theatrical release. This allows an exclusive period for the theatrical run, followed by the primary video/cable VOD window and a pay TV license (see Figures 1.8 and 1.9 in Chapter 1). Up until the TV landscape shifted dramatically (see Figure 6.2), the “network window” was generally the most lucrative, as the networks simply had a larger reach and audience share, and could therefore pay more with the larger advertising revenues earned. To the extent value is allocated over runs, the initial airing would command the greatest value because audience ratings usually show a decline with each successive airing. Accordingly, network licenses are customarily for relatively short periods and limited numbers of runs, such as for three or four runs over three or four years. Depending on the film, the first run, if not all of the runs, will usually be in primetime.
The Internet and digital technology are complicating even this relatively simple construct, as the definition of a “run” (i.e., telecast) is transforming. If a broadcaster has a multiplex channel, such as NBC and NBC HD, are simulcasts on each only one run? What if there are time-delayed digital channels where the entire channel is shifted an hour or two (e.g., ITV + 1), thus expanding the hours programming is broadcast (Program X is on at 9:00 p.m. on Channel Y, and again at 10:00 p.m. on Channel Y + 1, with Y + 1 the exact feed/programming as Y, just shifted back an hour). Is the + 1 run considered part of the other run, or separate? And, finally, what about free streaming VOD repeats on cable or the Internet, where a show may be available for a limited time (sometimes referred to as a “catch-up”) after the TV broadcast, allowing viewers to see the show if they missed it live or did not record it? Are catch-up runs separate runs, or is a run the live broadcast plus a week’s catch-up access?
Setting the evolving and boggling matrix of the definition of a run aside, in certain instances, with exceptional films, the license may specify exact airing windows such as around a holiday period or in a cross-promotional window if the movie is tied to a larger franchise. This was the case with Steven Spielberg’s classic E.T., where Sears sponsored the broadcasts and the film was licensed to play as a perennial on Thanks-giving. In the instance of a film series, such as James Bond, Star Wars, Batman, or Spider-Man, the license may be structured (or broadcasters may simply structure their schedules) so that airings take place around the promotional window for an upcoming new film in the franchise. Some believe that such an airing could detract from the theatrical release, but others ascribe to the theory that the TV broadcast helps cross-promote the film, and the film’s marketing platform, in turn, helps cross-promote the TV broadcast.
Decline in Ratings for Films on TV
It is an acknowledged fact that ratings for films on TV have declined over time, and there are several factors frequently pointed to explaining the slide. Among these are the growth of DVD, the growth of other media options such as the Internet, fragmentation of the TV market with the growth of cable, waning tolerance for viewing films with commercial breaks, the ability to consume the film earlier via ancillary platforms such as VOD and PPV, the changing profile of network scheduling and programming (e.g., reality craze), and, of course, piracy.
It is no doubt also true that before the growth of the home video market, TV had a more dominating impact: there was a large audience that had never seen the movie, and no matter how big a film was at the theater, the reach of tens of millions of eyeballs on TV inevitably dwarfed the numbers that had physically seen the movie in cinemas. With movies selling in the millions across downloads, digital lockers, and DVDs, and the expansion of ancillary windows/access, including VOD, allowing earlier consumption, clearly prior exposure has contributed to the decline in ratings of films on TV. In the 1980s when a film played on television, this was its first and primary exposure after the movie theater; now, however, by the time a film is on free television years downstream from its theatrical release, there have been innumerable opportunities to “consume” the movie on a variety of platforms (and, regrettably, both illegally as well as legally).
Shared Windows, Shorter Network Licenses, and Clout of Cable
With the decline in network clout and the growth of cable channels, the traditional sequential TV windows are becoming more of an historical artifact. There are instances where films go to network, and then cable, and then syndication; however, it is now common for cable stations to buy out network windows or to partner with networks on shared long-term windows with oscillating periods of exclusivity. The playing field is relatively level, and cable stations such as FX, USA/Syfy, TBS/TNT, Spike, Bravo, and the ABC family can compete with, and in cases are, the frontrunners to the networks, even in cases where the networks may be an affiliated sister company. Because the licensors are trying to garner the best deal for their specific film or package, the best option may cut across different studio lines and strange bedfellows can emerge.
Ranges of fees are tightly guarded, but Table 6.2 outlines several high-profile deals typical of the market’s high end, and also illustrates how some films will share windows between cable and networks.
It is also worth highlighting that with the growing clout of cable, and especially in hybrid licenses where cable stations and networks may share runs, the licensed runs and period for networks are shrinking. Whereas it may have been typical to take three to four runs, scenarios now arise where a network may only take one or two runs.
Star Wars Example
I was personally involved in overseeing the licensing of the six Star Wars movies to TV. As of 2005, none of the films had aired on cable or syndication for several years, and Episode III, which was just launching in theaters, had obviously never been licensed to television. Given the unique nature of the saga, and knowing that there were no more sequel motion pictures planned for the future (at least that was the case at the time, before George Lucas turned the keys to the franchise over to Disney in his 2012 sale of Lucasfilm), it made sense to explore licensing all six films together. The highlight would be the television premiere of Episode III, supported with the first TV window for all of the films together. The final deal was made with Spike, at the time a relatively new cable network under the ownership of MTV Networks/Viacom, which catered to a male-skewing audience. Spike had rebranded itself as “the network for men,” in contrast to women’s branded networks such as Oxygen or Lifetime. The network had a variety of programming, but had been successful with franchise exploitation having been the home to the James Bond films. I cannot comment on the specifics of the deal, but it was significant, and Variety (without confirmation from either Lucasfilm or Spike) reported the package as being sold for $70 million.5
I relate this story not as a travelogue of deals past, but as an example of how interesting the TV market can be. At the outset of this deal, it probably would have been fair for analysts to speculate that the films would go to Fox, as historically movies of this stature would only debut on network; in fact, Episode I and Episode II had debuted on Fox. Cable had grown to a point, however, and the market had changed substantially enough that Episode III, the film with by far the biggest box office of 2005 ($380 million in the U.S. and $848 million globally) and among the top box office films of all time (as of 2005, number seven of all time), was licensed to premiere on Spike.
Table 6.2 Movie Licensing Fees
There is no doubt this formerly network-dominated business had experienced a seismic shift when The Lord of the Rings premiered on TNT, Star Wars on Spike, and Avatar on FX. This is also a sign of healthy competition as the big four networks and cable channels jockey for positioning and programming.
Economics and Pattern of Licensing Feature Films for TV Broadcast
Films were historically licensed in large packages. The size of packages could vary dramatically, from a few films to hundreds—a traditional studio package of films would often include 25 or more films. A buyer would acquire all the titles for a “package price,” with the titles having (usually) common numbers of runs and a common license period. There were always a couple of key lead titles, and buyers would be faced with the dilemma of potentially having to acquire a bunch of secondary titles simply to acquire the few titles they really wanted to program. With deals often going out several years, and with lots of airtime to fill up, this scheme satisfied buyers and sellers for years. The top pictures would be programmed in premiere slots, where premiums could be charged for commercial spots, and the other pictures could be used at off-peak times or even as filler. The art of valuing pictures within a multiple-picture package lies somewhere between absolute logic and litigation.
Packages are still common, but as buyers have become more selective, the number of pictures in those packages has shrunk, and the economics are more closely tied to true per-picture valuations.
So, how do you value a license?
Runs and Term
The most critical elements are the number of runs and term. There are certain industry-accepted benchmarks, and the jousting is then within these parameters. As noted previously, network television licenses are usually for a small number of runs such as three or four. This is largely due to the fact that, as earlier discussed, the definition of “network” accounts for those hours that are programmed by the network as opposed to given back to the affiliates; this inherent limitation puts a cap on inventory and programming space. A second limitation is that films are long—with commercial breaks, they take up a minimum of two hours of programming time, and can take up to three-hour blocks. Completing the matrix is the fact of diminishing returns: ratings typically decline with subsequent broadcasts, echoing the general TV pattern of higher ratings for new episodes/programs than for repeats.
Add up the factors of: (1) diminishing ratings with repeats; (2) limited inventory; and (3) requirement of large chunks of prime programming inventory space, and what you get is the need to space out broadcasts and cap runs. It does not really help to have the right to broadcast a film on network 10 times in three years because the network would never allocate that much space; the opportunity cost of foregoing a show that would likely draw higher ratings would force the network to omit runs. Moreover, for the licensor, if a film was played too frequently and the overexposure caused a severe dip in ratings, then the future value would be diminished. Everyone would lose.
The result is a mutual desire to manage runs in a way that maximizes ratings and returns. As a rule of thumb, playing a film on network, on average, more than once a year starts the downward spiral; accordingly, most network deals call for a couple of runs, and sometimes up to four, over a period of time that allows breathing room of, on average, at least a year between runs. A traditional network deal may therefore be structured as three or four runs over three or four years.
Cable licenses are more complicated, for there is more inventory space and the smaller audience share lends itself to more repeat viewings; cable, after all, grew up as a bastion for reruns, and only in recent years have cable networks invested substantially in original programming to differentiate themselves. The pattern in cable is more dependent on the niche and individual station philosophy, and some stations will literally play programming to death. What is typical across all groups is that the average number of runs is substantially higher—it is not unusual to see film deals with 10 or more runs of a title per year. This allows the cable network great flexibility in programming, and enables customized blocks, such as marathons, weeks focusing on subject matters, retrospectives, etc. The cable station is often branded as the “home of X,” and for that to ring true it needs to appear enough to validate the identity. Airings once a year or so do not make sense, nor would there be (potentially) enough programming to fill up the schedule. As networks mature, they often realize that they have the same vested interest in not overexposing a property, and balance is ultimately struck.
It is important to note in this context that a run may not be what one expects of a single run; namely, before the layer of complexity created by Internet VOD or multiplexed channels, cable and pay TV required nuances on the notion of runs. A network run will be just as it sounds: a simultaneous broadcast aired by its network affiliates, run one time during the day. For cable, however, given the lower penetration and repeat programming as part of the landscape, runs may be defined similar to a pay television context with the use of exhibition days. An exhibition day is a 24-hour period (very specifically defined in a contract; for example, 12:00 a.m. until 11:59 p.m., and then within the box defined as an exhibition day there may be multiple runs granted). Accordingly, the cable broadcaster may have the right to broadcast a title two or perhaps even three times within that single day. Often, these runs are placed at unrelated times to fill up programming space, but in other instances there will be back-to-back runs (often marketed as an “encore” performance). The theory is that no viewer would watch the program twice in a day, and that the multiple start-time schedule will not undermine the value: after all, there are only so many exhibition days allowed. So long as the number of exhibition days is within customary bounds, and likewise the number of runs permitted within each such exhibition day is standard, then this practice is generally accepted.
Setting License Fees
It is only after sorting out the runs and years that it can then make relative sense to value the corresponding license fee. That is why it is so difficult to make direct comparisons on TV deals: the playing field is not level. It is not like dealing with DVD units, where there are bragging rights to absolute numbers (although this has its quirks, as discussed in Chapter 5, with performance influenced by pricing, returns, and inventory management) or the egalitarian barometer of box office. When you hear about a license value for a TV deal, it has to be put in context of how many runs, how many years, and if it was a stand-alone or an allocation of some sort was involved (now only imagine the complications wrought by trying to factor in online catch-up). Moreover, in a world of relationships and horse-trading, there may be political or timing elements that could further influence values.
Stripping out these other considerations, and looking purely at the underlying economics, the principles of valuing the license fee then becomes straightforward. The licensor will look to competitive product or historical licenses to set a range, and the licensee broadcaster will be running numbers on potential advertising revenues. The deal can thus be looked at on a macro level in terms of the gross fee, and then also be validated bottom-up by analyzing on a per-run basis (either straightlining license fees per run or imputing a certain discount after a certain number of runs). At some level, this can be overanalyzed, because a buyer and seller will be negotiating here in a classic fashion trying to find common ground. Are you going to agree to $50,000 per run or not?
To gauge whether $50,000 per run is fair value, if one side perceives there is too much of a gulf and they cannot agree on terms, then the negotiation may take on factors that apportion risk. This often takes two forms. First, a licensor may agree to a percentage of barter, such as a deal that is part cash and part barter. In this scenario, a certain minimum guaranty is locked in for security, and the balance is tied to the ad sales. This is a cumbersome direction, for it requires being in the loop on the ad sales front, as well as the determination and cost of potentially auditing the revenues. Another, frankly easier path may be tying overages or underages to ratings performance. If the fees are ultimately tied to a certain expectation level, then tying a bonus to over-performing should protect both sides; the licensor will win by protecting an upside, and the broadcaster can easily afford the upside if they have earned a premium on the ad sales. Both of these scenarios significantly complicate a deal from a reporting, managing, and trust perspective.
Another method of valuation is simply to quote an industry-accepted range. On hit films, it was sometimes quoted as a “rule of thumb” that the license fee should be in the range of 10–15 percent of domestic box office; however, this percentage cannot be relied upon as an accurate benchmark, and to the extent there is a benchmark range, it tends to move over time. In the case of Superman Returns, for example, Variety said of FX: “The network has agreed to pay Warner Bros. Domestic Cable about 12 percent of the eventual domestic gross, with a cap at between $17 million and $25 million, depending on the contract’s length of term and on whether Warners finds another buyer to share the window with FX.” Although an older example, in reporting a license for War of the Worlds, Variety referenced this barometer in the context of a reputed $25 million fee:
That’s a much lower stipend than the 15 percent of domestic box office, which used to be the benchmark for a successful theatrical-movie deal in the network window. But times have changed. Since War of the Worlds has grossed more than $230 million domestically, 15 percent would come to $34.5 million—an impossible figure for distributor DreamWorks to draw in a sluggish broadcast and cable marketplace for theatricals…. Bowing to the new reality, distributors have put a cap on the total license fee, which can start as low as $22 million and rise to as high as $27 million a title, unless the buyer gets more runs and a longer exclusive license term.6
Further indicating that there is likely an artificial ceiling in the market, Broadcasting & Cable magazine, in describing how FX was recently dominating the market, acquiring 28 of the top 50 box office titles in 2011 (including Mission: Impossible – Ghost Protocol and The Girl with the Dragon Tattoo as part of a $100 million 19-film deal), noted in the context of a further acquisition of 21 Jump Street and The Lorax that: “Basic cable networks tend to pay 8 percent to 12 percent of domestic box office for premiere rights to theatricals.”7
A final twist is licensing titles across channels within a larger group. If a particular film has crossover demographic appeal, together with a strong enough brand identity, then there may be a desire to play the title across multiple group-affiliated networks. This obviously adds another wrinkle to the analysis and value for runs. Moreover, this is an area where analysis paralysis can loom, and from a macro point of view many will simply split this into network versus cable; namely, how many aggregated cable runs are required across various cable outlets. It may be that certain discounts are taken, or that certain outlets are either ignored (given limited reach) or excluded on grounds of fit (“I do not want X on Y!”). The primary impact of aggregating potential licensees is that the fee will usually increase, given the greater exposure, and the time of the license will also be lengthened to allow for the title to be cycled through the different outlets without over-saturating exposure both on a single outlet and across the group. While it was only the syndication market that traditionally had very long licenses, one may now see 10-year licenses in this context.
First-run TV series tend to follow a regular cycle of development and launch tied to network seasons. Although the growth of cable, including powerful pay networks such as HBO, have altered this, and some networks have gone to a year-round launch calendar, most network shows debut in the fall and are committed to following screenings of pilots in the spring.
Pitch Season and Timing
Pitch season is traditionally in the fall. The new network season has launched and, within a short span (in many cases, within the first two to three episodes), the broadcasters are already starting to evaluate which new shows will survive and whether to consider mid-season replacements.
After scheduling pitches (“pitch season”), the networks will then decide which ideas to green-light for a script, with the network’s approval of the writer. The script will then be written later in the fourth quarter so the script would be ready to take to pilot in the new year. There is a brutal winnowing down of material, and only a small percentage of pitches are commissioned for scripts, and an even smaller percentage of scripts are then produced as pilots. The ratio can vary dramatically from company to company, with the economic incentive to maximize the percentage of pilots made from scripts commissioned. The Museum of Broadcasting once pegged the ratios as follows: “few scripts are commissioned, and fewer still lead to the production of a pilot—estimates suggest that out of 300 pitches, approximately 50 scripts are commissioned, and of those, only 6 to 10 lead to the production of a pilot.”8
Pilots
Although expensive to produce, as discussed in Chapter 3, pilots are an efficient means to test a concept and evaluate a show before committing to a full series. To a degree, this solves the problem faced by theatrical films, and inherent in experience goods, of having to complete the movie before it can be screened and tested; theoretically, a pilot dramatically decreases the risk on a per-property basis because there is enough information to make an informed decision, yet the show is not so far along that it is too late to make changes.
Because pilots are the guinea pigs of a series, experimenting with location, premise, cast, timing, etc., they tend to be significantly more expensive than later episodes. Once a show finds its rhythm, it should become more efficient to produce (but for escalating talent costs), as episodes are produced in volume, and upfront costs of sets, costumes, and infrastructure can be amortized over the run of series. Although the amounts are now dated, the Museum of Broadcasting noted the following regarding costs and the risks at stake: “In the early 1990s the average cost for a half-hour pilot ranged from $500,000 to $700,000, and hour-long pilot programs cost as much as $2 million if a show had extensive effects.”9 Today, the cost of pilots is a multiple of those figures. In looking at the 2009–2010 pilot season, the Hollywood Reporter noted that with the downturn in the economy, the average cost of drama pilots had dropped to $5–5.5 million from a high of $6–6.5 million in 2008.10
Pickups and Screening for International Networks
The “network cycle” continues in the second quarter of the new year as network executives tinker with and test pilots with focus groups. By spring, decisions need to be made, and the networks elect which shows they will commission for their fall lineup. The timing is dictated by the “upfronts” (see more detailed discussion later, as well as discussion of emerging digital upfronts in Chapter 7), where the networks put on a dog and pony show for advertisers, unveiling their primetime lineups and securing large upfront buys for the bulk of the season’s airtime. Virtually as soon as the lineups are locked, the networks host screenings for international buyers; the “LA Screenings” occur toward the end of May following the network upfronts and comprise a week when international networks cycle through all the new offerings. The LA Screenings have evolved into a significant market, given the growing importance of global license fees and the need for key broadcasters to launch series on a nearly simultaneous basis to avoid devaluation from piracy and potential early online glimpses.
(Note: There are other forms of first-run programming, such as TV movies and miniseries, both of which have generally fallen out of favor given costs and general programming economics (TV movies, for example, are now more common on cable networks, such as Lifetime, that can both match programming to specific demographics and heavily promote and rebroadcast the programs given their 24/7 control of airtime and limited original offerings). Given that these formats have become relatively niche programming, I will not address here, but simply point them out as another factor in market segmentation, as described in Chapter 1.)
Syndication versus Network Coverage and Timing
Syndication used to be the Holy Grail for TV: once a program reached a certain number of episodes, it could be sold into syndication for fees that can dwarf initial licensing revenues, turning a deficit into profits. The traditional magic number for syndication is 65 episodes. This allows a station to run a program five days per week (“stripping”) for 13 weeks, corresponding to half of a network season (e.g., September–December); with repeats, this quantity provides adequate episodes to run a series daily throughout the entire broadcast year. Although this can still be true, the market has shifted dramatically from the 1980s and 1990s, when syndication was king. This is due to a number of factors: the elimination of the fin/syn rules (see the section “Impact of Elimination of Fin/Syn Rules and Growth of Cable” later in this chapter for discussion), the growth of cable stations acquiring programming that used to be the staple of syndication, and the shrinking number of potential syndication buyers overall (by network groups such as Fox and the WB, now part of CW, aggregating stations and taking key independents off the market).
Table 6.3 Ratings and Coverage of Syndicated Shows (2006)
Program |
Stations/% Coverage |
Ratings—AA % |
Wheel of Fortune |
488/98 |
9.2 |
Oprah Winfrey |
S21/99 |
7.6 |
Jeopardy |
464/98 |
7.2 |
Dr. Phil |
S23/99 |
5.6 |
Entertainment Tonight |
484/99 |
5.6 |
Judge Judy |
473/97 |
4.8 |
Seinfeld |
408/99 |
4.7 |
Friends |
404/99 |
3.9 |
Variety, December 18–24, 2006; AA average refers to non-duplicated viewing for multiple airings of the same show.
Before discussing these forces and the evolution of the market further, however, it is useful to clearly define syndication. Simply, syndication means licensing a program into the individual markets on a one-by-one basis. There are over 400 markets in the United States, and syndicators maintain dedicated sales forces to sell programming into individual stations. Table 6.3 illustrates a matrix of top-ranked syndicated shows, coverage achieved, and their ratings.
As discussed earlier, stations are either owned, affiliated, or independent; even affiliated stations have programming flexibility and only take a certain percentage of programs from their affiliated parent groups, thus having residual program slots to acquire other programming offered by the network (such as branded late-night shows or morning talk shows) or unaffiliated third parties. When all the network affiliates broadcast a program together, it reaches 95 percent or more of the potential TV households, thus creating the unique convergence of saturation market coverage and simultaneous broadcast. This is a cumbersome way, in essence, to stay live.
In contrast, syndication is the broadcast of the same program over non-affiliated stations at times programmed by the individual stations. Accordingly, it is possible in syndication to achieve the same market coverage and the same amount of time on the air. The profound difference is in missing that intersection of simultaneous broadcasts with full market coverage. This pseudo-live nature of a network broadcast is what makes it so powerful: the network can reach an enormous number of people with the same programming at the same time. This cross section allows for targeted marketing and scheduling, which in turn allows for targeted advertising. Despite the explosion of new media options, there is still no better way to reach a population of over 250 million people. Broadcasters know that a certain percentage of X demographic will watch the nightly news at 6:00 p.m. versus Y demographic for a sitcom in primetime. And the game is all about that sole fact: how many eyeballs of which type (here, young versus old, male versus female, kid versus adult) will see the program.
Syndication, in contrast, is still about drawing eyeballs, but the task can be more challenging when the promotion is solely at a local level.
There is no absolute magic threshold for coverage, but there is a certain quantum of coverage that rises to the level of “significant.” That benchmark is usually in the 70 percent or more range. The composition of the coverage is often a hodgepodge of stations. It could mean an ABC affiliate in Denver and Dallas, a Fox affiliate in Los Angeles, and independent stations in Kansas City and Seattle. There are sometimes certain station groupings, such as the former “WB 100,” that may license together, which can achieve a chunk of coverage in one deal.
Achieving a certain quantity threshold of coverage is critical for attracting advertisers, as many will not consider a program that does not hit an internal mandated coverage threshold (e.g., 80 percent of nation-wide coverage). Beyond the absolute percentage, however, advertisers will look at both the quality of stations and the programming time. For a national buy, there will usually need to be a significant number of top stations in key markets. If, for example, there are no network-affiliated stations carrying the program in the top 10 markets (e.g., no network affiliates in Los Angeles, New York, Chicago), then it is obviously a hard sell. Sometimes this can be overcome with a strong enough station grouping, such as a percentage of Fox- or ABC-affiliated stations.
Because the syndication quilt will not achieve simultaneous broadcasts, advertisers will also be keenly interested in the time slots. It may be great to have a Chicago station, but if it is a CW station broadcasting a kids’ show at 5:00 a.m., then the value is clearly very different than had it been an ABC affiliate at 8:00 a.m. It is because of this particular challenge of trying to aggregate and secure advertising commitments across unaffiliated stations in less than full market coverage with non-synchronized broadcast times that anyone in this business needs a good advertising–sales team. The nature of the beast is such that it may be difficult or impossible to secure a national spot/advertiser, and that advertising needs to be sold on a market-by-market, broadcast-slot-by-broadcast-slot basis. Because syndicators may air a program more than once a week, the matrix of total telecasts becomes quite complicated to manage. (Note: See also Chapters 3 and 7 regarding the challenge of pricing fragmented online/Internet viewing, as akin to a form of national or global syndication, whereas traditional TV syndication sells advertising locally.)
Barter as a Solution to Fragmented Sales and Airings
Making this task of selling ads even harder is the speculative nature of viewership. Because of the fragmented placement, marketing can only be committed at the local level, and ratings are only meaningful within the discreet local market. Accordingly, what has emerged is a barter market.
The term barter syndication is often used in this context, and means a sharing of the advertising time. If a 22-minute program is shown in a 30-minute block, that may leave approximately seven minutes of advertising space to sell (excluding time reserved for station promos). The licensor of the program may “own” all or part of this time, and is betting on the fact that he or she can sell the space for better terms than he or she would otherwise receive for licensing the program outright. This is also a mechanism for the station to hedge its bets and lower program acquisition cost. It may be better for a station to pay $1,000 rather than $3,000 for a program and cede some advertising time to lower its costs.
In this instance, the station is obviously betting on a couple of factors. First, it is assuming that the value the licensor will achieve from selling the advertising inventory is less than the discount the station has granted. Second, the station is assuming that there is residual value/benefit to having the programming; it draws viewers to the station generally in the time period, viewers are not going to a competitor, and viewers may stay tuned in for other programming because of coming in the first place.
There are even instances of full barter, where the station pays nothing and the licensor achieves any and all financial benefit from selling the space it retains. In this situation, the station may reserve some spots and have a pure upside from selling inventory against no-cost basis. Of course, there are always opportunity costs, and the buyer needs to value whether another program would create greater ultimate value.
As a result of the complexity and difficulty of clearing markets, and then selling advertising across a scattered broadcast pattern, specialist distributors have evolved. Two of the powerhouses in this space, for example, have been King World (now merged with CBS) and Tribune; additionally, given the scale, companies will sometimes further partner with other specialists, as was the case of syndicating South Park, where one company was responsible for market clearances and another for the ad sales.
Barter to the Extreme—Paying for Blocks of Airspace
The ultimate barter arrangement is the full auctioning off of airspace. This tends to occur in a couple of niche areas, such as certain children’s programming.
A prime example of this practice was 4Kids Entertainment’s arrangement with Fox. When Fox Family was sold to Disney, Fox opted to shutter its Saturday-morning Fox Kids animation block and instead lease the space. It struck a deal with 4Kids, the company that represented the merchandise licensing rights to Pokémon (and certain non-Asian TV rights to both Pokémon and Yu-Gi-Oh!), where 4Kids paid Fox $25 million per year for the airtime; 4Kids then sold the commercial space within its half-hour block and was betting that either its annual advertising revenue would exceed the $25 million, or if it ran a deficit its merchandising sales would take it into profits. In essence, the company rented the commercial space, viewing the broadcasts as a giant commercial for the brand that would then drive non-TV revenue. Perhaps only in children’s programming, where robust merchandising programs may be a primary goal, can a producer set a strategy to use the show itself as a loss-leader to drive ancillary revenues. (See Chapter 8 for additional discussion of this 4Kids–Fox deal.)
Infomercials are another area where one sees negative license fees and full purchase of airspace. Here, a company is renting the airtime for a giant commercial. This presents even tougher economics than the 4Kids example, because an infomercial is not selling advertising against the airtime, and therefore needs to recoup 100 percent of the lease costs against product sales. At least in the 4Kids instance, there is the goal for advertising to recoup the rental costs, with the deficit in the worst case merely a fraction of the overall lease costs. For this reason, infomercials tend to air during inexpensive slots, because costs would become prohibitive during prime airtime.
First-Run Syndication and Off-Network Syndication
First-run syndication means programming produced for initial broadcast in the syndication market. These programs are often daily, unscripted shows such as talk or game shows (e.g., the original Oprah Winfrey show, Wheel of Fortune, Entertainment Tonight). In the 1980s, there was an upswing in the number of dramas that succeeded in syndication, with spin-off Star Trek series (Star Trek: The Next Generation and Star Trek: Deep Space Nine) and Baywatch pacing the market. (Note: Baywatch was an interesting case because it aired initially on NBC and was cancelled, but then continued with new episodes in syndication.) The nature of firstrun syndication shows also leads to longevity not seen in other programming—two of the most successful syndicated shows have been Wheel of Fortune and Jeopardy; both premiered in the early 1980s and have been running for roughly 25 years.
In contrast to first-run syndication, off-network syndication refers to the playing of reruns of hit shows after they have finished their network runs (or in the case of multiple completed seasons for long running series). This captures the category of when shows such as Seinfeld, The Simpsons, and The Cosby Show are syndicated to independent stations. As earlier noted, it is only the most successful of shows, those that reach more than 65 episodes, and more frequently crest 100 episodes, that have the awareness and stature to succeed in this market. Achieving this status, however, is the ultimate mark of success, and is where TV shows have their true upsides.
One of the most famous examples was The Cosby Show, which led the networks ratings race in the 1980s, and in the 1986 network season had a record 34.9 rating on NBC (representing 63 million viewers at the time) Time magazine noted: “The show’s success has created its own bonanza on the syndication market: The Cosby Show reruns, currently being sold to local stations, have earned a record-smashing $600 million, and the total could eventually top $1 billion …”11 This is the Holy Grail of television, and the success of The Cosby Show paved the way for its producer, the Carsey-Werner Company, to become one of the most successful independents in TV history: “Another hit show of the 1980s for Carsey-Werner was The Cosby Show spin-off A Different World, which aired on NBC beginning in 1987. The following season, 1988–1989, the company would accomplish the unprecedented feat of producing the year’s three highest rated shows: The Cosby Show at number one, followed by Roseanne and A Different World.”12
(Note: As an interesting footnote, the wealth created here allowed Marcy Carsey to partner with Oprah Winfrey and Geraldine Leybourne (former Disney and Nickelodeon executive) to found the Oxygen network, and Tom Werner was part of the group that purchased controlling interest in the Boston Red Sox baseball team.)
Aftermarket sales continue to be the lifeblood of television success today. The key market change is that whereas cable networks were originally simply competing with syndication for top programming, they are now the leading buyers. The Sopranos set a record, with an estimated $2.5 million per-episode license fee from A&E for an exclusive run off of pay TV (HBO). A few other examples, some also with fees greater than $2 million per episode, include: (1) Sex and the City to TBS for an estimated $700,000 per episode;13 (2) The Office to TBS and Fox-owned and -operated affiliates for $950,000 per episode ($650,000 per episode for TBS);14 (3) Law & Order: Criminal Intent to USA/Bravo for just under $2 million per episode; (4) The Mentalist for approximately $2.2 million per episode to TNT; (5) NCIS: Los Angeles for approximately $2.2 million per episode to USA;15 (6) Hawaii Five-O for approximately $2.1–2.5 million to TNT;16 and (7) The Big Bang Theory for $1.5 million per episode to TBS.17 What is interesting in the foregoing NCIS: Los Angeles example is that this sale was achieved during the first year of the series, long before there were enough episodes to be “stripped” into typical syndication. This type of move, while unusual, is not unprecedented, as strong brands with spin-off series have similarly managed sales during their first seasons (e.g., CSI: Miami and CSI: New York, respectively to A&E for $1 million per episode and to Spike TV for $1.9 million per episode).18
Online Services Now Changing the Dynamics
It was inevitable, with the growth of streaming services such as Hulu and Netflix becoming leading gateways for both on-demand and secondary viewings (and thus akin to new types of networks), that Internet-delivered services would start to compete with cable for programming in the off-network/syndication window. In 2013, CBS hit series The Good Wife was sold in a complex window for what was estimated to be $2 million per episode in what I can best describe as a “syndication-plus” license window. The show was sold to Amazon, Hulu, the Hallmark Channel, and basic syndication, in a divvying up that allows certain seasons to be accessed via Amazon Prime (commencing March 2013) Hulu Plus to offer seasons on its subscription service (commencing September 2013), the Hallmark Channel to air episodes on basic cable (starting in January 2014), and weekend broadcast syndication airings being sold in (for fall 2014 debut).19 The deal also has marketing implications, with availability on online services viewed as a potential catalyst for bringing in new viewers to current episodes. Deadline noted: “The rationale is that binge-viewing customers are so accustomed to such platforms, as evidenced by Breaking Bad on Netflix, it would send new viewers to The Good Wife’s original telecasts on CBS the way it happened with Breaking Bad on AMC, which has been sizzling since the series’ previous seasons became available for streaming.”20
(See Chapter 7 for further discussion of online streaming services such as Netflix and Hulu impacting television programming.)
Online’s “Short Tail” versus “Long Tail” and Impact on Syndication
The ability via the Internet to monetize the long-tail value of content sometimes leads people to assume that the long tail creates incremental revenue; however, that may only be true if there is no additional upfront exposure or what I will refer to as the “wide tail” (or the platypus effect discussed in Chapter 1). The increased access points for TV programming and the ability to easily see a show you missed via free Internet, cable VOD, and expanded video and over-the-top VOD offerings (e.g., Netflix, Amazon) leads to such front-loaded exposure that downstream values are inevitably poised to drop. This is due to multiple factors, including fewer viewers who are watching a show for the first time in a long-tail window and less repeat consumption with greater access to more new programming in the wide tail. In my first edition, I noted we were already seeing the impact on pricing and revenues, and further predicted that the overall pie would shrink if the nonexclusive value of the wide tail did not equal the prior exclusive value of the long tail. I asked long-term industry veteran and president of Fox TV International, Marion Edwards, about the new TV landscape and whether she sees the pie expanding from Hulu-type services or whether easy access is serving to undermine pricing for reruns. She noted:
There is no doubt that the world of “free on-demand” (FOD), now primarily referred to as AVOD (advertiser-supported video-on-demand), as well as SVOD (subscription video-on-demand) viewing, whether accessed on a network-branded website, or on OTT services such as Hulu, Netflix, Amazon, or any number of smaller local services, all delivered via various platforms to the ever-growing number of devices, is having a major impact on the traditional revenue streams associated with the distribution business. The obvious upside is that, in the AVOD model, these services give the advertisers “unskippable” ads (which makes those ads more valuable), the networks have found a new way to allow viewers to “catch up” with shows they may have missed, and the viewers can watch programs when and where they choose. The SVOD model allows for consumer consumption of entire series (binge viewing) quickly after the first network run had ended and has pumped important revenue into the distribution stream. The distributor, however, has the challenge of trying to make the program seem fresh and unique in a world where it has become ubiquitous, and to be mindful of the home entertainment value when consumers are very aware that programming is available for free quickly after telecast, and soon after first run on SVOD services. In addition, the new ask from broadcasters is to allow downloading for some period of time, instead of the streaming rights currently granted. We are already seeing the impact on the long-term value of TV programs in terms of relicense in the traditional aftermarkets. The emergence of digital terrestrial television channels as consumers of “library” series has helped retain value, but has not replaced the value of network relicense. How the overall economic model continues to evolve remains to be seen.
Impact of Elimination of Fin/Syn Rules and Growth of Cable
The huge off-network syndication revenues earned by producers such as Carsey-Warner were among the reasons that broadcast networks started to lobby against the elimination of the financial interest and syndication rules (fin/syn rules). Summarizing the history, the Museum of Broadcast Communications notes:
The Federal Communications Commission (FCC) implemented the rules in 1970, attempting to increase programming diversity and limit the market control of the three broadcast television networks. The rules prohibited network participation in two related arenas: the financial interest of the television programs they aired beyond first-run exhibition, and the creation of in-house syndication arms, especially in the domestic market. Consent decrees executed by the Justice Department in 1977 solidified the rules, and limited the amount of primetime programming the networks could produce themselves.21
These rules were contested for years, with producers favoring fin/syn fighting the networks, and were eventually relaxed and then fully eliminated in 1995. One of the reasons for the elimination was a belief that media competition, including from the growth of the cable market, had weakened the networks’ prior dominance and that therefore the protections were no longer needed. This was true, to a degree. The combined TV market share for ABC/CBS/NBC in the time of the rules’ promulgation in the 1970s bordered 90 percent, but 20 years later in the mid 1990s the share had dropped into the middle 60 percent. Nevertheless, the fear of vertical integration by major media groups, and the difficulty for smaller producers to deficit finance series in the hope of hits that would pay for misses, remains a challenging reality for independent producers who want to keep the back-end/upside in their productions. How easy do you think it is today for an independent producer to land a show on NBC and maintain ownership in the backend syndication revenues that could lead to the type of upside reaped by Carsey-Werner on The Cosby Show?
Virtually any producer will lament that the result of changes in the fin/syn rules has been to shift leverage to buyers/networks. I asked Ned Nalle, former president of Universal Worldwide Television and executive producer of various series (e.g., Legend of the Seeker for ABC Studios, along with Sam Raimi, director of the Spider-Man films), if he agreed with this trend. He noted:
Mergers and relaxation of financial interest regulations have led to market concentration. Putting aside whether the quality of the content has improved, deteriorated, or stayed the same since the market contracted, it nevertheless means less competition among buyers for content. That means the leverage pendulum has moved decidedly over to the buyer, and away from the seller. It also seems to excuse that, absent more competitors breathing down his or her neck, a buyer can and will take more time to make a decision. The buyer will also exact more rights away from suppliers. It doesn’t mean that worthy shows won’t get ordered, and eventually be on the air. But shows may be commissioned for financial-interest reasons as much as creative or ratings merits. As the gatekeeper, a network can demand anything from an anxious producer, including distribution rights, financial interest, negative covenants, sequels, spin-offs, and certain protection before a producer might migrate a hit series to a network rival.
The TV business has always been one of deficits; namely, the license fees for a show rarely cover the cost of production, and the resulting deficit is hopefully made up in off-network syndication sales or other revenue streams such as DVD. This holds as true today as when the fin/syn rules were in force and Carsey-Warner was in its heyday. (Note: At that time, it cost approximately $500,000 per episode to make a standard half-hour comedy, which would typically run at a deficit of $100,000–200,000.)22 The only difference today is that the gulf has grown, with the cost of production generally rising more than corresponding license fees. This is not surprising, given the erosion of network market shares and in the increased competitive environment.
The macro picture is therefore similar to the motion picture business, where hits pay for misses, and success is based on a portfolio strategy. The buffer that has sustained the TV business recently is the expansion of additional revenue streams. In the children’s area, as described before in the 4Kids example, merchandising opportunities are sought after to recoup a deficit. With respect to live action, the growth of the DVD market for television series, now augmented by online and portable revenues, such as downloads to tablets, VOD access via cable, and OTT services, has created an additional buffer to projected deficits following initial broadcast license fees. The New York Times, in part quoting 20th Century Fox Television co-president Dana Walden, analyzed how hit show 24 would likely not have been made absent DVD revenues:
… the costs of producing a drama like 24 had become so prohibitive that it probably could not be made today without the DVD sales. Though the studio would not release exact figures, each of the series’ 120 episodes has cost just under $2.5 million to make, for a total of about $300 million. Licensing fees from the Fox Network are not believed to have exceeded $1.3 million an episode, for a total of no more than about $156 million. The rights to broadcast the series internationally have probably been sold for $1 million or more an episode, for a total of at least $120 million. All told, that revenue—about $276 million—has not been sufficient to eliminate the deficit and provide a profit. DVD sales, however, have.
“The DVD opportunity on this series has enabled us to produce the show that is on the air,” Ms. Walden said.23
This interdependency is the reason that the decline in certain sectors, such as the DVD market, has such a ripple effect. If DVD revenues materially decline (as they have), and revenues from new access points (e.g., downloads, VOD, and subscription rentals) are less than substitutional for the drops in the markets previously essential for overall financing, then how is expensive-to-produce premium product to be funded? This is the question of the day, and why the economic interplay of Ulin’s Rule can paint a frightening picture. This continuum also lies at the heart of the fight against piracy; while some fight against strengthening rules and enforcement, conjuring up the spectre of a regulated Web undermining free speech and access, the flip side is that if piracy goes unchecked and consumers can gain access to shows for free that are, in fact, supposed to be paid for, then the financing walls buttressing production come down and the quality of content tumbles with them. I know almost no TV or film executive that would disagree with this analysis, which is why it becomes all the more frustrating for studios and networks when laws designed, at their root, to address this problem are thwarted because of political movements grounded in free expression. The sad fact is that the same media executives believe fiercely in the same free expression, but somehow the message has become distorted and those that are actually allies have failed at cogently expressing common ground and outlining appropriate boundaries (see also discussion in Chapter 2).
Cable’s Advantage and Move into Original Programming
The risk profile of a series is directly proportional to the number of likely revenue sources for recoupment. As discussed in Chapter 3, cable networks can theoretically take greater risks than the broadcast networks because they have a dual-revenue stream from cable subscriber fees and advertising. The cable fees are guaranteed, and create a production funding pool insulating a particular series from the direct impact of advertising revenue; the subscriber fees are tied to the overall network and brand, such that a hit series can help drive brand value, but a one-off failure will not change the underlying economics (other than, of course, the impact on advertising for that show). This is one reason that cable networks are starting to offer more and more original programming: a hit or group of hits can help increase the brand value of the network and differentiate it to a greater extent than reruns. Accordingly, a series on a cable network can now draw from: (1) advertising dollars; (2) an allocation from cable subscriber fees paid to the network overall; (3) DVD revenues from box sets of seasons; and (4) emerging revenue streams, such as OTT rentals, subscription VOD, and EST downloads, to a growing array of tablets and other portable devices. A network series benefits from all of these sources except for the cable subscriber fees; however, that element alone can be so significant that the cable network can afford to take different risks and accept a lower audience rating.
The success of original cable series, as opposed to original series in syndication (e.g., Star Trek) has recently created an almost renaissance of original programming. The ability for non-networks to produce hit original series was proven by HBO, with hits such as Sex and the City and The Sopranos. Soon, non-pay channels realized they could enter the market as well, and the following is a snapshot of a few of the shows evidencing the trend of cable networks to develop their own franchises (of course, this had long been the trend with kids’ channels such as Nickelodeon with Jimmy Neutron, etc.):
■ USA: Psych, Burn Notice, Suits, White Collar
■ TNT: The Closer, Leverage, Franklin & Bash
■ F/X: Sons Of Anarchy, It’s Always Sunny in Philadelphia, Rescue Me
■ AMC: Mad Men, Breaking Bad, The Walking Dead
■ Syfy: Ghost Hunters, Eureka
■ Lifetime: Army Wives, The Client List
■ A&E: Dog the Bounty Hunter, Storage Wars
■ Disney Channel: Hannah Montana, Good Luck Charlie
In some cases, the show’s ratings have been extremely competitive, with TNT’s The Closer scoring network primetime-like numbers in a few instances (especially with season premieres). From dabbling, cable networks started to gain confidence in their ability to launch original series and began to leverage two inherent competitive advantages. First, cable stations could counter-program and start seasons in periods when the networks showed reruns. USA and TNT, for example, routinely air new episodes of series in the summer, enticing viewers who preferred new episodes to network reruns or replacements. Second, because cable stations program a full day, as opposed to a network that has limited primetime hours and must share promotional time with affiliates, the cable networks can cross-promote new shows literally nonstop; further, because they may only have a couple of original series, the promotion can reach channel saturation, optimizing marketing support to help shows break through the clutter. Accordingly, the cable networks tend to program their originals in sequence, rather than as a lineup, thereby maximizing promotion and always having something new (e.g., F/X will plug its fall original during its summer original series).
The issue now may become whether the market can absorb all these shows. As the market has matured, it may be, as Variety noted, that everyone needs to run faster just to stay in place:
The one-time vast wasteland of cable networks filled with repeats and wrestling has been replaced by a world in which even networks as small as Sundance Channel are producing quality first-run fare. No longer a band of misfits, basic cable’s top nets are spending more money on original fare and making more noise with marketing—yet they aren’t seeing their numbers grow. They’re having to do more just to maintain the status quo.24
A Golden Age for TV?
The strength of quality content, however, has somewhat disproven this flattening hypothesis, as there are significant examples of cable shows lifting the entire network. Mad Men on AMC, basic cable’s only winner of the Emmy for Outstanding Drama Series (not once, but four consecutive years starting in 2008) is a good example. Prior to launching hit originals, including Breaking Bad, The Walking Dead, and Mad Men, AMC was primarily known for older films and reruns, product that dovetailed with its original name (American Movie Classics). Leveraging cult followings, the network has been able to increase its cable licensing fees significantly (see Chapter 3 discussion of cable financing), with the New York Times estimating that AMC charges MSOs, like Comcast and DirectTV, upwards of $0.40 per month per subscriber—with national carriage and 80 million subscribers, that translates into $30 million per month for license fees, a sum that could not be commanded without viewers clamouring to see these select hits.25
The net result of more money to produce quality shows begetting more quality shows, while feeling a bit like a bubble, has in fact proven to be a virtuous cycle, lifting the quality bar to a point where many feel there is an unexpected renaissance in TV. Despite the competition from new digital and online sources (see also Chapter 7), the New York Times article “The Mad Men Economic Miracle” described this as television’s “golden age” and waxed on that: “Networks have effectively entered into a quality war. Basic-cable channels have to broadcast shows that are so good that audiences will go nuts when denied them. Pay TV channels, which kick-started this economic model, are compelled to make shows that are even better. And somehow, they all seem to be making insane amounts of money.”26
While all this is true, the digital competitive forces are lurking, and cable companies are well aware that cable bills have become extremely pricey and that they cannot simply keep raising rates (which is the only way to fund demands for increased subscriber fees, which are in turn commanded by cable channels succeeding with evermore original fare). Not only does cable have to fight cord-cutting by a new generation used to online access without forking out for cable bills, and expanding digital piracy of in-demand shows, but now the online companies are themselves getting in on the original content bandwagon. The production of original content by the online leaders that are aggregating content in the over-the-top space is a direct threat to cable, and exacerbates traditional media players’ fears of their digital competitors. Chapter 7 discusses how services ranging from YouTube to Amazon, Hulu, and Netflix are moving into online originals; among a variety of impacts, this new range of programming, including from some of the services themselves that are starting to look like an aggregator of cable channels, will be competing both for viewers and advertisers, putting pressure on cable that the industry has never before faced. The foregoing quoted New York Times article, in talking about AMC and how cable channels spin cliffhangers from their original series into gold, mused that while Charles Dickens had to sell the next chapter in books (that were published in a serialized form), no one has managed to monetize cliffhangers like TV (and cable TV); the article could, though, have as aptly quoted from Dickens that for TV, today it is truly the best of times and worst of times.
Upfront Markets, Mechanics of Advertising Sales, and Ratings
Advertising is the lifeblood of free television, and networks essentially lease portions of their airtime to advertisers, charging rent based on ratings. Much like any other rental market, rates can be based on long-or short-term rates, with discounts applied to prepayment or longer-term security scenarios. To grasp the mechanics of the television advertising landscape, imagine you owned an apartment building where certain views commanded premium pricing (exchanging the notion of view for viewership), discounts were applied to someone leasing bulk space, such as an entire floor, and each individual unit in the building was a unique property that commanded its own rental rate (yet still had some rational relationship to all the other units rented). In this analogy, the TV upfront markets would be akin to long-term rentals, the scatter market would equate to monthly or weekly rentals, and ratings would be the cost-per-square-foot barometer for setting the rental rates.
Upfront Markets
There are a couple of times a year when networks pitch their new season lineups to advertisers, trying to secure commitments for shows before broadcasts. This obviously secures capital/commitments to underwrite production costs, the annual ritual of which has come to be known as the upfront markets.
The mechanism of the upfront markets is relatively straightforward. Broadcasters auction off their commercial space, referred to as “inventory,” and receive guaranteed payments for the commercial space/spots. The buyers of spots obviously secure key placement for their products, as the upfront markets cover large commitments over long periods of time. Companies with a steady stream of advertising needs, such as auto companies or large packaged goods companies, will secure a range of spots that will then be allocated to specific products at a later date. Those companies buying large inventory and later allocating to clients tend to have products that need continuous marketing, and therefore do not need to have the first spot on NCIS on the week of November X. For this flexibility, they buy in volume and gain both the benefit of guaranteed delivery as well as a certain discount.
It is in part this guaranteed, and to an extent more flexible, income stream that was put in jeopardy with the U.S. auto company and broader 2008 economic crisis; without this revenue, the networks cannot afford a basket of staple programming and risks, with the collateral impact hitting everything from the concept of primetime (NBC’s decision to substitute Jay Leno for scripted fare in its third hour) to sports. And there is a lot at stake with the US broadcast networks securing an estimated $9.2 billion during the 2012–2013 upfront market; CBS alone in the 2013–2014 market reportedly sold about 80% of its commercial inventory for $2.5–2.6 billion.27 Evidencing the strength of cable, Turner in 2012 took in about $4 billion across its networks, with TBS and TNT accounting for an estimated $1.95 billion28 (see footnotes for relative size of 2007 market). (Note: The 2007 upfront markets, by comparison, secured over $15 billion for the broadcast and cable networks (respectively, $9 billion and $6.5 billion).29
The spots will be sold on a cost-per-thousand-eyeballs basis (CPM). Spots can either be based on general ratings/viewership, or spots will be sold with a guarantee within a certain targeted demographic (e.g., certain rating in the 18- to 30-year-old demo). As noted previously, the seller has the benefit of secured sales and financing, and the buyer secures a certain number of guaranteed spots and eyeballs for their client base. The game is then in the pricing, with buyers trying to make efficient use of marketing dollars and the sellers/broadcasters trying to maximize the value of each second of commercial time.
Economically, what then happens is that the seller/broadcaster will guarantee a number of eyeballs, with the guarantee used to drive the price as high as possible. The rub then comes when a show either under-or over-delivers. If it over-delivers, then the buyer had a very efficient buy; it paid for X eyeballs and actually received a higher viewership than it bargained for. On the flip side, if a show under-delivers, then the seller has to make good on its guarantee and compensate the buyer for the show underperforming. This practice is literally known as “make goods.” The seller will allocate additional spots or other value to make up the difference. A good example of this market is likely the first season of Survivor. The show was a much bigger hit than anticipated, and those buyers who had space on the show benefited from the over-delivery and had an efficient buy. The market then corrects in the next season/upfronts, where expectations are adjusted and the broadcaster will increase the charge for the show, raising the CPM for the targeted rating.
One interesting economic factor in setting rates is that while the market corrects, it does not correct radically such that year to year the CPM value proportionately adjusts to the prior year’s ratings. A network that has had a strong run over several years will command a premium in its CPM base value, whereas a network that has been struggling historically but has just come off a strong year may not be able to increase its rate to “current market” overnight.
Why the CPM pricing of advertising inventory does not correct to market and more quickly discount or grant goodwill based on recent performance is a lesson of relative leverage and limited players. The same scenario would not play out in the brutal maelstrom of the stock market. A key differentiator here is that a network is not going to discount its pricing more quickly than it has to, and will fight every step to avoid erosion, arguing that any recent correction is a temporary dip and its new lineup will place the channel back on top. The buyer is more likely to accept this because the pricing is in relative rather than absolute terms, and they will ultimately only pay the “true” value of delivery once make goods are applied (if applicable).
As discussed in more detail in Chapter 7, in 2012 online aggregators started to host events in advance of the traditional network upfronts, trying to tap into advertising dollars for original content. With the expansion of programming, the question will now become whether advertisers simply adjust their allocation of media spending, or the expansion of content leads to an overall expansion of advertising. The former is the likely initial result, with advertising becoming more targeted. This is, in part, because, at least in theory, the number of advertisers does not expand with the quantity of content. Over time, however, there could be an expansion if niche channels/programming opens up less expensive advertising opportunities to companies that could not efficiently participate before—akin to what has happened on the Web, with Google AdSense pioneering the way. Finally, the last step in the cycle is a levelling off, with the long tail of content yielding less revenue, given the amount of content that continues to expand is still chasing limited buyers. This is depicted in Figure 6.3, and is the same effect sometimes referred to in terms of Web pages, which tend toward infinity (and also why, per Ulin’s Rule, more content with easier access, as discussed in Chapter 1, does not necessarily lead to greater value).
Figure 6.3 Diminishing Value in Long Tail
Scatter Market
The opposite side of the upfront market is the scatter market. The scatter market is just as it sounds: in this market, companies can make specific buys for limited spots and placements. This market is needed when a buyer/advertiser has specific timing demands, such as the release of a product (e.g, the release of a film). If you want to advertise your product on a specific show on a specific night to either tie into a promotion or product launch, then you will likely be buying in the scatter market. The advantage the buyer gains is the specific timing and placement, but what they sacrifice is guaranteed delivery. The buy is at risk, and there will likely be no guaranteed make goods.
The process, art, and business of buying media is a complicated discipline, with millions of dollars at stake in increments of 15- and 30-second inventories. Perhaps the most cited example of advertising expenditure is the Super Bowl. Despite the claims of the demise of TV and new media impacting viewership, advertising on the Super Bowl continues to be vibrant, with fees charged per spot at the upfronts and total advertising spending continuing to climb—a 30 second spot in 2013 hitting a record $4 million.30
Understanding Traditional Ratings
Almost everyone uses Nielsen ratings as a barometer of the audience and demographics captured, and it is best to go to Nielsen Media for the relevant definitions. The website has an excellent glossary, and defines ratings, share, designated market areas, metered markets, etc. Nielsen explains the difference between a rating and share as follows:
■ The terms rating and share are basic to the television industry. Both are expressed as percentages.
■ Simply put, a rating tells how many people watched a particular TV program; it is the percent of households or persons within a universe (all TV households, or adults 18–49, for example) who are tuned to a particular program or daypart.
■ A share expresses this same number of viewers as a percent of only the households or persons actually watching television during the program or daypart. Thus, a share is a percent of a constantly changing number—the number of homes or number of persons in a given demographic using television at that time. Shares can be useful as a gauge of competitive standing.31
Accordingly, if one looks at the entire U.S. market (defined as the universe of TV households, which approximates 110 million homes), a ratings point would be 1 percent of this total, which means, as a rule of thumb, that a 1 percent rating translates into just over 1 million people/homes.32
In Nielsen’s glossary of media terms and acronyms, it further defines the metrics with specific formulas. Focusing again on the key measurements of ratings and share, Nielsen’s formulas are as follows:
In practice, ratings are dissected and used not only for an overall measurement, but also targeted advertising buys. Clients will want a specific delivery with a defined demographic, such as adults 18–49 or males 25–49. The pricing of the buys is then formulated by indexing the value of a ratings point to the population reached on a per-1,000 impression basis. Nielsen defines these CPP and CPM measurements as follows:
DVRs, Ad-Skipping, and the Threat to Traditional Advertising
DVRs posed an immediate and profound threat to the traditional television broadcast model because consumers could fast-forward through commercials. If viewers became accustomed to recording shows and zapping commercials, the value of advertising would be reduced, and ultimately the entire ad-supported model of free TV could be undermined. The statistics are shaky, but Variety noted: “it’s generally accepted that 35–40 percent of people who watch programs played back on DVRs still sit through the ads.”35
As DVR penetration approaches mass-market levels, it is creating new pressures, and as discussed previously, it is altering the way ratings are reported and advertising purchased.
Ad-Skipping
Ironically, as TV programming was first finding outlets on the Internet, one of the sales items for streaming content is that advertising could be embedded and not skipped; the market, though, has now moved on, with the ability to give viewers choices of ads (see Hulu discussion), and services differentiated by the flexibility (or not) and placement of advertisements. Thinking had thus come full circle, or perhaps even further: first, there was the fear of the Internet siphoning away consumers from TV, then the fear of ad-skipping undermining the entire broadcast infrastructure, then the Internet perceived as a savior to broadcast because commercials could not be skipped if watching a show via your computer as opposed to your TV, to ancillary revenues dependent on the mechanism for advertising being a differentiator. The one sure outcome is that the traditional television-advertising model is changing, and networks will need to find substitutional revenues as audience share declines from competing media options and advertising becomes more tenuous as more people can zap commercials.
I had an interesting conversation a few years ago with the founder of a technology company whose software enabled a TV-like interface via the Web. He mentioned that ad-skipping was overrated: ask people if they ad-skipped and then ask if they had ever, while fast-forwarding, stopped and rewound to watch something that caught their eye, and the percentage response was nearly identical. Why had the people stopped, rewound, and watched? Because the item was relevant. This simply created a need for better target marketing—something the Internet promised by feeding advertisements via customer-profiled databases (intelligent advertising serving), and a goal that TV advertising kept iteratively refining by slicing ratings into narrow demographic baskets.
I received a similar response recently from Alex Carlos, head of entertainment at YouTube, who believes online can improve the environment for advertisers and that ad-skipping is not the end of the story. When I asked about how he thought monetization of original content would evolve and how advertisers viewed the divide between ratings and CPM metrics, he advised:
Our ads are evolving all the time, but one thing remains the same: advertisers pay attention to the content that reaches their audiences. That applies to all channels, not just the funded channels.
We think online can change advertising for the better. Advertisers must create great ads that people want to watch. Over 60 percent of our instream ads are already TrueView skippable ads. That means that if a user doesn’t want to watch the ads, he or she can skip it and the advertiser doesn’t pay. The better ads and the more targeted we make them, the fewer people will skip. That’s a good thing for the user and a good thing for the advertisers.
Not everyone is as forgiving, and the flexibility expressed by those hailing from the streaming/online side of the equation tends not to be found from those monetizing the network/traditional TV side of media. In 2012, Dish Network surprised many in the industry by enabling Auto Hop, a feature that allows viewers to automatically skip over advertisements. In May 2012, CBS, Fox, and NBC collectively sued Dish, and in a counterpunch Dish sued back, arguing that Auto Hop did not infringe any network copyrights.36 The oddity of the case is that the adversaries have a symbiotic and mutually advantageous relationship: Dish is one of the networks’ largest distributors, and the networks are similarly a key supplier of content to Dish. Nevertheless, the networks felt they had little option, with the issue similar to DVR manufacturer ReplayTV’s ad-skipping feature that had been tried 10 years earlier; at that time, the networks similarly sued, and the collective pressure and difference in size essentially drove ReplayTV out of business.37 Commenting about the lawsuit, NBC alleged: “Dish simply does not have the authority to tamper with the ads from broadcast replays on a wholesale basis for its own economic and commercial advantage,” and Fox argued that wholesale ad-skipping could destroy the whole free TV landscape: “We were given no choice but to file suit against one of our largest distributors, Dish Network, because of their surprising move to market a product with the clear goal of violating copyrights and destroying the fundamental underpinnings of the broadcast television ecosystem. Their wrongheaded decision requires us to take swift action in order to aggressively defend the future of free, over-the-air television.”38 Regardless of the outcome, it is interesting to see the different philosophical underpinnings when viewing ad-skipping from the perspective of traditional broadcasters versus online pioneers—and it is accordingly not surprising, considering the advertisers themselves are somewhat caught in the middle, just wanting to efficiently promote products and capture associated metrics about effectiveness, that a gulf remains in harmonizing metrics and systems.
A New Ratings Landscape: Live + Ratings and Ratings on Commercials
A few years ago, the ratings landscape began shifting as a result of factors including DVR viewing, and networks were insisting on moving beyond the historical measurements. The argument was simple: “live” ratings no longer accurately reflected how many people “watched” TV. (Note: I put “watched” in quotation marks because this was the argument just a couple of years ago, but going forward I believe the system will have to evolve even further to capture “consumed” via all outlets.)
After a tug of war in 2006, when advertisers succeeded in maintaining ratings based on traditional metrics of measuring the viewers who watched a program live (wanting to preserve this lower base as long as possible, arguably knowing they were only paying for live but recognizing a larger audience ultimately was captured), the advertisers and networks agreed to a new system that was introduced in the summer of 2007. Calling the pact on commercial ratings and DVR viewing “the biggest sea change” in the TV ad business in two decades, Variety summarized:
Virtually all ad sales will be based on Nielsen Media Research’s newly introduced commercial ratings—which measure the number of viewers who are watching ads, and not just the programs in which the ads air…. As a quid pro quo, the advertising business had to acknowledge the existence of digital video recorders (DVRs). Most major advertisers will allow networks to measure their commercial ratings by adding in viewing via DVR that occurs up to three days after the initial telecast. (The new ad standard was quickly jargon-ized as “C3,” or commercial ratings plus three.)39
The introduction of the new ratings system, providing the average ratings of a commercial within a program (and, by corollary, an indication of how many ads were skipped), was introduced just around the time of the 2007 upfronts, delaying deals and creating unprecedented levels of uncertainty as parties were reluctant to commit big sums against a new and untested ratings system.
Despite the anxiety, most parties ultimately agreed to the new C3 system, as Variety highlighted: “NBC Universal last month cut a $1 billion deal with Group M, the media-buying arm of ad giant WPP, which included sales based on the C3 standard for the Peacock and for its cable sibs … That deal more than any other set the precedent for the industry’s broad acceptance of the C3 standard.”40 (Almost as a truism, Advertising Age, in a 2007 upfront study, posed the question “What is the most significant new trend that has emerged during the 2007–2008 upfront season?” to the following groups: cable, broadcast, buyers, planners, and clients. Every single category replied that it was the new ratings construct, and specifically the Live + 3 measurement.)41 The jury was out whether this new scheme would truly capture time-shifted viewing in order to more fairly represent consumption of a broadcast program—with DVRs now commonplace, and consumers’ options ever-expanding in terms of access to programming, why not Live + 10 rather than Live + 3? Surprisingly, the numbers actually stack up. Nielsen, in its 2012 report on the state of the media, notes that: “42.9 percent of time-shifted primetime broadcast programming is played back the same day it was recorded,” and that a staggering “87.6 percent is played back within three days.”42 The fact that the ratings agency have found a compelling way to measure the impact of time-shifting and give metrics to advertisers that validate the broader bear hug of reaching consumers within the “zone of initial broadcast” does not, however, solve some of the other challenges posed by new access points and multi-screens.
Live + Still a Limited Solution
While the new “Live +” system is an improvement because it more accurately gauges the total consumption of a program, advertisers that are focused on time-specific flights will want to discount or dismiss the added time, and accordingly will not want to pay the same rates. If I have a movie opening on Friday, and advertise on Wednesday, the value of a consumer seeing my advertisement the next week following the opening weekend (imagine Live + 7) is greatly, if not fully, diminished (especially if my ad was targeted to drive opening weekend box office).
The open issue is now reliability: “It’s generally thought that 5 percent of auds leave during commercials, and that is built into the system of buying and selling.” But what if the commercial ratings say differently? “Even a tenth of a ratings point equates to millions of dollars,” noted NBC Universal’s research president to Variety.43
Once the slippery slope is opened, broadcasters may find that they need to refine metrics even further. One direction would be to slice commercials more finely, measuring each commercial rather than tracking average commercial ratings. Many advertisers, however, are likely to go beyond ratings, realizing their statistics need to compete with the direct consumer information readily available online; conceptually, the advertiser wants the same type of tracking to measure the effectiveness of buys on and offline. One trend addressing this convergence is to track engagement; namely, tracking not simply whether a show is watched, but how much time is spent watching down to a per-viewer level. While conceptually this may be a more valuable indicator, given the recent seismic shift, and the fact even online metrics are not yet valued-based on duration, it is not likely this next iteration of valuation will be adopted in the near term.
Internet Intersection—Live + What?
As noted above, economic pressures are pushing for ratings and metrics to be more precisely calculated. This trend is no doubt accentuated by the gulf in online metrics versus TV ratings, where Nielsen ratings are based on statistical samples and averages, while the online advertising market has now become accustomed to exact, by-individual costs per click and by-user impressions. There are, though, two different issues at play here.
First, there is the “what” should be captured, as in the argument that TV ratings should account not just for live watching, but also capture a viewer watching the program time-shifted via his or her DVR (hence, the Live + 3 rating). But what about all the other points of consumption evolving: Should this rating not also capture watching the show via Internet free VOD or on a mobile or other portable device (whether simulcast or accessible on a VOD basis)? The expansion of access points for consumption will inevitably cause a further shift in this metric to capture a total consumption number within a fixed period. This is a point I have been arguing for years, and finally in early 2013 Nielsen announced both that it would expand households to include TVs hooked up to the Internet (capturing cord-cutters plugging in TV monitors, and accessing content via such services as Aereo) and that, downstream, it would also measure viewership on iPads and other portable/mobile devices (though offered no details as to how they would capture, measure, and aggregate data from such portable devices).44 To date, this has not been forced because-cord cutting is still new and has only impacted TV households at the margin (though this is changing and starting to evidence a material impact; see Chapter 7). Additionally, while the market was in a “laboratory phase” and companies began experimenting with different ad constructs such as trying fewer advertising minutes (Wired noted: “While broadcasters cram eight minutes of advertising into a half-hour show, Hulu sells only two”45), increasing the CPM rates (value per ad) by not enabling ad-skipping (e.g., Hulu has been able to charge a premium, selling spots, according to Wired, for “two to three times the ad rate that the broadcast network commands”46), and even eliminating ads in the context of subscription services (e.g., Netflix), it was bewildering how to harmonize values—there is still no consensus on how best to capture “Internet views,” but at least Neilsen is acknowledging the problem and pledging to tackle it.
This leads into a second factor, namely dovetailing value and ratings systems: Is CPM for the Internet the same as CPM for a network-advertising buy? (See also discussion on page 93, “Principal Methods of Financing Online Production.”) Both are trying to track costs based on reach (CPM viewers). However, the TV ratings are based on statistical values, while the online ratings are theoretically based on direct, by-user clicks or impressions. It will be interesting as these two systems, both based on different assumptions and data, yet trying ultimately to track the same information, continue to converge.
Finally, it is worth in this context noting some macro-statistics as to just how big the online video market is becoming—growth that means differences in how the systems capture value are amplified as more video is consumed online. At the beginning of 2013, comScore, via its Video Metrix service, reported the following online statistics for the month of January (all sums on per-month basis):
■ 180 million unique monthly video viewers
■ viewers watched/streamed 36.2 billion online views
■ each viewer watched 19 hours of video
■ there were 9.1 billion video advertisements.47
It is no wonder that online video advertising is now big business, that online networks are pushing for digital upfronts tied to new premium programming, and that key ratings services (Nielsen) are seeking ways to capture dispersed ratings.
Social Media Driving New Changes
While, for years, I have been predicting a need for a major ratings changes given these dynamics, it appears that new systems may finally be coming—but driven from social media, rather than focusing on Internet broadcasters or FVOD services, as one may have expected. Neilsen and Twitter have teamed up to introduce what they are calling the “Nielsen Twitter TV Rating.” This metric will track not the actual number of people watching, but rather try to rationalize some of the otherwise cacophonous noise in cyberspace by “calculating the total number of people who tweet about a programme, as well as the number of people who see those messages.” As the Financial Times noted in describing how the hit show Glee jumped from a Nielsen ranking of 74th place to second place when measured by Publicis’s Optimedia metric “that analyses information from Facebook, Twitter and a range of other sources,” this is part of a continuing attempt to objectively quantify “buzz.”48
Because these metrics, though, are still based on an extrapolation, and are trying to draw an assumed correlation between conversations and actual watching, it may be that they only serve to create value in advertising extensions—such as sponsored tweets or placing Facebook ads and tracking impressions. The more fundamental challenge of actually capturing ratings across diverse viewing platforms remains.
While there are some similarities to the free television market in pay television licenses, the underlying economics are significantly different. The market is dominated by a very small group of broadcasters, the inventory space has an elasticity component given multiplexing, and values are not fully dependent upon ratings.
The U.S. market is dominated by three key players: HBO/Cinemax, Showtime/The Movie Channel, and Starz/Encore. HBO is by far the largest, with more than 20 million subscribers (excluding Cinemax). Because the economics of series was discussed previously, my focus below will be on film licenses and the macroeconomics of pay channel deals/programming.
As discussed in Chapter 1, the film pay TV window is typically a year or so from theatrical release, and six to nine months following video release. This is heavily dependent on changing market conditions, and as pay services have grown and expanded channel offerings through multiplexing services, the windows have now become more complicated. Pay TV services are often granted second and even third windows, so that a couple of years or more of exclusivity are secured, punctuated over several years, where the first and most important window is 12–18 months long.
Pay TV license fees can run into the millions of dollars, and services recoup the costs by amortizing fees over high numbers of runs and directly charging consumers a monthly access fee. Because pay services are not ratings-dependent, they are focused on two primary items for value: satisfying the current subscriber base and attracting new subscribers.
Subscriber satisfaction is an interesting issue. A service may feel it can pick and choose content, but there may be a built-in expectation from subscribers that they will have access to certain films or types of product. If a service markets itself as the top pay channel, where “you’ll get all the hits,” it would not be delivering on its promise if it did not have the top three or four films of the summer—an issue that will become more prevalent as online subscription aggregators, such as Netflix, come to resemble traditional pay TV services and compete for content (see also Chapter 7). The value proposition is a bit different if focused on attracting new subscribers, and the challenge is whether the service is able to accurately correlate subscriber changes with the playing of specific programs.
Basis for License Fees: Calculation of Runs
License fees paid by pay TV services have almost always been based on a fee-per-subscriber basis. Accordingly, if the fee was $1 per subscriber and there were 10 million subscribers, the license fee would be $10 million. Carefully crafted legal language dictates how the subscribers are counted, with choices ranging from at the time of contract, at the commencement of the license period, or as of the end of the period. It is also quite typical to calculate the average number of subscribers over a monthly period and then take the average of those averages over a specified period or aggregate the fees based on a per-month calculation.
Because most pay services have grown over time (given the name of the game is acquisition and maintenance of paying subscribers), licenses often take this into account. One method is to take averages calculated over specified periods, and another is to simply impute a number. In a typical deal, the license fee may be specified as a certain minimum guarantee, with overages due if subscribers increase past an agreed threshold. In the prior example, the licensee broadcaster may guarantee the licensee $10 million, but also agree to pay $1 per subscriber for every subscriber over 10 million. Because subscriber counts can go down, this can cut both ways; however, as licensors covet minimum guarantees, it is less common to have reduction provisions. Similarly, pay TV licensees often refuse to grant a minimum guarantee tied to a current subscriber level, since this gives them no flexibility for a downturn. If instead the minimum guarantee is lower but overages apply, then everyone has hedged their bets and the fee should come out fairly.
Despite this logical pattern, as services grow there is a tendency to start moving away from the per-subscriber formula to more fixed fees; namely, once maturity is reached, the risk of leaving money on the table is reduced and simplicity wins out.
Calculating Number of Runs—Complex Matrix from Multiplex Channels and Exhibition Days
The final important element of a pay TV license deal is understanding the implications of increasing runs by the notion of exhibition days and multiplex offerings. In pay TV agreements, an exhibition day usually is defined in a manner that allows multiple airings of the film within a 24-hour period (similar to the discussion on cable runs, but it was in fact pay TV that established the pattern now being copied). Similar to the cable example previously described, it would be typical to allow a couple of airings within a day. (Note: As discussed below, subscription VOD applications, known as SVOD, are now granting subscribers on-demand access to programs within the pay channel, a trend that obviates the need for exhibition days.) The theory behind exhibition days is that the structure affords the broadcaster greater programming flexibility, offering its customers more choice. For the licensor, because the viewings are confined to within the same day, it is more akin to time-shifting, and as per custom has not raised issues of overexposing the product.
In terms of exposure, an area that needs to be managed is runs on multiplexed channels. Multiplexing is simply the practice of successful services offering expanded channels. Sky in the UK, for example, offers a menu of channels such as Sky Movies 1, Sky Movies 2, and Sky Cinema. Each of these channels will have a slightly different flavor and programming skew, and each of these channels may have other affiliated channels. Language defining an exhibition day will therefore need to take account of the runs within a day and which channels those runs can be taken on. This sum can ultimately lead to a dizzying number of runs.
If we were to assume, for example, that 20 runs are allowed on a primary movie channel, as well as each multiplexed channel, and were further to assume that the total number of multiplexed channels allowed were capped at five, then the total number of runs would be 240. This is calculated as 20 runs per channel × 6 potential channels × 2 runs per exhibition days.
Beyond Multiplexing—Apps and Pay TV On the Go
A major new trend that has emerged since the publishing of my first edition is the explosion of the app market, and with it the ability to extend access through apps. HBO Go now enables SVOD access outside of the hard-wired cable ecosystem, allowing TV Everywhere applications (see Chapter 7), whereby a subscriber can access HBO in a VOD format via tablets (e.g., iPad, Kindle Fire) and smartphones. Recognizing that an app can provide additional functionality and is inextricably tied to interactive access points, in conjunction with the second season debut of Game of Thrones, HBO updated its app to enable second-screen functionality. Viewers can now pause the main video and access a range of supplementary content, such as viewing maps, watching behind-the-scenes interviews with cast and crew, and accessing information alerts providing additional information on scenes or character relationships.49
A hit such as Game of Thrones exposes the economic conundrum that providers face in the app versus TV world: there are countless people that want to watch just that program and would pay for access via an app, and the producer/network (HBO) has to balance that foregone revenue versus its dependency on cable and satellite partners and the upside provided by using the hit series to drive subscriptions (where subscriptions require the consumer to pay for the broader suite of offerings). To date, Time Warner has been very clear that the economics do not justify enabling people to obtain HBO Go on an à la carte basis. This has two short-term consequences, both of which involve a kind of theft. (Note: Piracy is nothing new to pay TV operators, who have long implemented sophisticated conditional access encryption systems to thwart those who want their content without paying, or worse, those who want to hijack and redistribute the content, profiting from charging discounted rates and deceptively operating like an alternate pay provider. See also Chapter 2’s discussion of piracy.)
The first theft is password-sharing, leveraging the fact that HBO Go allows subscirbers to have three separate accounts, enabling family members to watch different shows at different times at home. A much more serious problem is outright piracy–an issue that used to be more of a problem in the theatrical and DVD markets, but now is an enormous concern for TV. According to a Forbes article entitled “HBO Only Has Itself to Blame for Game of Thrones Piracy,” the second season of Game of Thrones (2012) had been “downloaded more than 25 million times from public torrent trackers since it began in early April, and its piracy hit a new peak following April 30th’s episode, with more than 2.5 million downloads in a day.” The article attributed the piracy problem to the fact of huge demand, and that it was not available online on services such as Netflix or Hulu or, for that matter, to anyone without a cable subscription.50
Although there may be a case for offering the series as a stand-alone offering to increase its base, the issue smacks of entitlement and fails to accept the implicit underpinnings of Ulin’s Rule. OTT access or standalone access is not a fundamental right, and HBO can choose how, when, where, and for how much to exploit its programming. The critical driver of exclusivity creates enormous premium value for its content with cable systems, and the security of carriage and subscription, both tethered to exclusivity, enables the financing of expensive unique content (Game of Thrones is more akin to a miniseries in production value). To argue that HBO is its own worst enemy and that piracy is your just reward for not making content more freely available via online access is what I would have to call window blackmail.
And yet, as unfair as all this sounds, it is a real problem and something that neither HBO nor other content providers can ignore in the long term. Currently, while painful, the losses can be tolerated because there has not been a tipping point toward app viewing. A New York Times article that focused on the danger of password-sharing also quoted HBO’s co-president Eric Kessler as saying: “The vast majority of our viewing continues to be on the linear service and the on-demand service” (on-demand referring to cable VOD systems), before noting the following telling statistics 2012: taking HBO viewing as a whole, 93 percent of viewing is via TV, 6 percent through on-demand, and 1 percent through HBO Go.51 The demand to see hit content that is not freely available is nothing new to HBO—plenty of consumers wanted to see The Sopranos without having to fork out for a subscription. What is new today is that apps provide a mechanism to monetize that content via a paid-for independent stream, and there will be a tipping point (akin to the desire to offer premium VOD on theatricals jumping the video window). HBO is a child of cable, but as OTT services such as Netflix and Hulu continue to grow, and if HBO can materially expand its base by offering direct subscriptions or even à la carte VOD access to series via other access points, there will be increased pressure to monetize that demand. In theory, there is no reason that the new aggregators could not compete with cable for access to content—in fact, it is already happening (see further discussion in Chapter 7). Conceptually, you could subscribe to HBO via Amazon as easily as through cable.
In this context, as traditional pay operators expand their access points, new security concerns are apt to arise; as providers diversify where and how users can watch content, there are more links in the distribution chain to protect against piracy. Given the relatively low percentage of users currently watching via new on-the-go junctions versus traditional viewing, one wonders whether providers are prepared to tackle the complications of having to protect multiple sources embedded in an ever-growing array of consumer devices (e.g., phones, tablets). I asked Graham Kill, CEO of Irdeto, one of the preeminent global companies providing security solutions to protect the content distribution ecosystem, whether in the new on-the-go construct companies are more or less focused on the issues of protecting underlying content and where he sees the market heading:
Pay media platform operators (like U.S. cable operators) ultimately want to keep their hard-won and very valuable (subscriber acquisition costs amortized and now high ARPU annuity revenues with relatively low churn) subscribers entertained via their brand’s platform. They want to maximize the time and money spent on their platform for a consumer’s entertainment needs. As those consumers want premium content on devices and settings of their choosing, beyond the living room and their TVs, these platform operators have mobilized to extend their linear and VOD offerings to multi-screens OTT.
The challenge to the business model, to date, has been adding value to the premium packages to avoid churn, so they have deployed security merely to “tick the box” on their studio content licenses to get access to that content. The security requirements for such content deployment are far from standard, and vary per device targeted for consumption. This makes for a confusing world for operators.
Many of us believe, and there are some early indicators to bear this out, that ultimately premium content provided OTT will be paid for, and more robust security regimes deployed to protect it and the platform operator (or studios direct to consumers) business models associated with it. However, that security will have to be less invasive and more flexible than traditional STB conditional access security in order to match consumer expectations using always-connected devices of various flavors.
The phenomenon of apps enabling additional video streams is, importantly, not limited to pay TV or even pure VOD access. The London Summer Olympics (2012) exhibited the potential of the new app-enabled world, with NBC complementing traditional broadcast TV with a myriad of apps to watch virtually any event. Its NBC Olympics Live Extra app allowed cable and satellite subscribers to access and stream live more than 35,000 hours of content, including 32 sports and all medal events.52 The president of NBC Olympics boasted: “NBC Olympics Live puts the London Olympic Games into the hands of America’s tablet and smartphone user, enabling us to once again use advances in technology to provide the broadest possible access to the thousands of hours of Olympic competition.”53 Following the games, NBC, in a press release touting a variety of records, noted:
■ NBC Olympics Digital set multiple records with video streams, engagement time, and page views—nearly 2 billion page views and 159 million video streams.
■ Cable, satellite, and telco customers have verified 9.9 million devices either on nbcolympics.com or on the NBC Olympics Live Extra app.
■ This is believed to be the most device verifications ever for a single event in TV Everywhere history.
■ The NBC Olympics Live Extra and NBC Olympics Apps were downloaded more than 8 million times.
■ The NBC Olympics Live Extra is believed to be the most downloaded “event-specific” app in Apple’s store history.54
Interestingly, NBC was less forthcoming with respect to monetization from apps and digital revenues, noting only: “During the 17 days of the London Olympics, nbcolympics.com, the mobile site, and the apps delivered unprecedented traffic, consumption, and engagement.” This would tend to support the thesis that while app access is revolutionizing viewing, programmers are struggling to harmonize metrics and capture value tethered to consuming via devices other than traditional televisions. Today it is unclear how to assess simultaneous value across different mediums, how to derive a common aggregate “ratings” number from near-simultaneous viewing, and whether there may be more value in an aggregate measurement or via the sum of the parts of viewing via different screens. Because of these challenges, broadcasters are tending to report about the successes in niches benchmarked against past performance in those silos, while touting the knock-on halo effect that is deemed to improve related channels measured by traditional metrics.
It will be fascinating to see whether certain value drivers underpinning windows can be parsed out and differentiate value within the construct of a live broadcast—the concept of apps linked to live events, in theory, can enable repeat consumption (live and VOD watching again, in essence controlling your own replay) and differential pricing (basic free, with value-added functionality coming with a price, such as an in-screen second window offering content such as commentary or information about an athlete). It does not automatically follow, though, that while drivers can create different experiences, they will then lead to enhanced monetization. Live events, by their nature, being the epitome of the time driver, represent a different type of intellectual property and experience, with value being driven by how and whether it is possible to differentiate experiences tied to simultaneous consumption. This happens in the physical world via different pricing tied to access (a front-row seat at a sporting event priced at a premium to the bleachers), and programmers are just beginning to experience how to slice and price digital seats.
One thing from all these questions and changes is clear: apps are starting to influence the ecosystem in a measurable way, and will continue to have a profound impact on the consumption of certain types of programming. Whether they become the focus of monetization, or simply a linking or value-added/enhanced feature set mechanism via which other methods of monetization extract value (FVOD, SVOD)—which I believe is the likely outcome—is still evolving.
Most of the above applies to the structure of a deal on a by-picture basis. However, most studio films are licensed via output deals. An output deal is exactly what it sounds like: a studio will license its entire output of product to a program service, thereby securing long-term and broad product distribution and revenues. The benefit for the supplier is a guaranteed exclusive supply of key product, thereby giving it a competitive advantage over a rival service.
Because these deals are difficult to negotiate and rely on averages (certain number of titles performing in different ranges over time), they tend to be for long periods. Fox, which has had a 25-year continuous relationship with HBO, re-upped its deal in 2007 for 10 years, with guarantees of over $1 billion, as reported in Variety:
The money HBO pays Fox for a movie comes out of a formula heavily dependent on the domestic box office gross of the movie. But over the long term, HBO will pay an average of $6–7 million each for the titles in the output deal … HBO regards theatricals as the lifeblood of its multiplex channels and its on-demand service … Fully 70 percent of the schedule of HBO and its multiplexes consists of theatrical movies.55
Output deals are similar to free TV packages, only larger and with less choice. They work because pay services need to fill up a 24/7 schedule, catering to an audience that is constantly expecting something new, and to an extent different than they may have selected on their own. The great benefit of a dominant pay service is that it shows everything. Of course, subscribers expect and demand the key major releases; beyond the lead titles, however, the pay services offer exquisite variety. There are so many movies released every week that truly only a professional movie-watcher could catch the complete variety of offerings. With the pay service, that movie that you did not want to pay for in the theater, or found not quite compelling enough to rent, or were embarrassed to admit that you really wanted to see, is offered up from your bed. I would argue that a pay service is close to the movie equivalent of your favorite radio station: you trust them to program the things you know you want to hear (see), but you are actually looking for the disc jockey (programmer) to introduce you to that new band (film) that you vaguely knew something about or may not have even heard of at all. Output deals put the catalog at the hands of the programmer. But, unlike the music analogy, you cannot flip to another channel if you do not like the schedule, because with content exclusivity it is the only channel. (Note: The level of discovery that pay services offer has been superseded by online options, providing another challenge to the business, given that viewers today are more apt to craft personalized playlists than accept the passive discovery that has so well served pay TV since its inception; see also discussion of viewers customizing their viewing experience in Chapter 7.)
As touched on in other chapters, the structure of how pay TV channels acquire content is starting to have a profound impact for online aggregation leaders. In Chapters 5 and 7, I argue that Netflix today, although putatively a video rental service, is in fact closer to a pay service—namely, it is a subscriber-based content aggregator. As these markets converge, companies have to do more to differentiate themselves (leading to online aggregators starting to produce original content, following the pay TV trend, as discussed in Chapter 7); moreover, it is the $1 billion checks for content that the Netflix’s of the world will have to keep paying in order to continue offering content on a scale comparable with the leading pay TV services. That competitive future, though, is already here. In Chapters 5 and 7, I reference forecasts that Netflix will already spend greater than $1 billion for streaming rights in 2012 (and that its streaming liabilities approached $5 billion).56 Additionally, in a telling sign of market shifts, in the UK Competition Commission announced an about-face in its declaration of pay giant Sky’s dominance—dropping its case and noting that the growth of Amazon’s Lovefilm and Netflix were materially altering the competitive landscape for acquiring premium content (see also Chapter 7). In the U.S., Netflix outbid pay service Starz for its next movie package (starting 2017), with the Hollywood Reporter noting: “Financial terms of the deal were not disclosed, but those close to the situation said Netflix will be paying $100 million-plus more to Disney than Starz was paying each year, putting the price tag near $350 million annually.”57
For the moment, the lines are still blurring, and some pay services are still willing to license to their would-be competitors (who are eager for content) to the extent deals bring in revenues, help extend brands, and reach different audiences (e.g., viewers watching via mobile devices). In 2012, Epix, a small pay TV movie channel (partnership among Paramount Pictures, MGM, and Lionsgate) struggling to gain carriage via a number of the major MSOs, switched allegiances, licensing 3,000 movies to Amazon, who were keen to add additional content to their Amazon Prime members via the Kindle Fire. Reuters reported: “Netflix had been paying $200 million a year since 2010 for exclusive rights to Epix movies. The exclusivity expires this month [September 2012], but Netflix will keep Epix movies on its service through September 2012. Netflix has the option to extend its nonexclusive use of Epix through September 2014.”58
Economics of Output Deals
In terms of economics, the key items in an output deal are length of term and fee. Because of the unique nature of the pay TV market, and the mutual advantages previously discussed, these deals are invariably for multiple years, and in some cases upwards of 10 years. The service is incentivized by locking up a key supplier—again, giving it access to an enormous range of quality product while shutting out a competitor from product that may feature the hottest star of the moment or an award-winning film. In addition to the aforementioned Fox deal, HBO has had several long-term deals, including with Universal, Warner Bros., New Line, and DreamWorks.59 Each studio therefore has the security of knowing it has a constant income stream regardless of the performance fluctuation of its slate. When financing a picture, it is not an insignificant element that the studio can count on a secure sale. The same logic suggests that similar titanic struggles over long-term deals could emerge in the online/digital space between key aggregators and content suppliers; as discussed in Chapter 7, there is a current land-grab playing out, with sellers benefitting from a wave of competition, and an equilibrium has yet to be reached, including in terms of deal lengths.
Coming back to pay TV, this would still not work if the economics did not balance similarly. In a typical structure, the pay service would have a baseline guarantee for films. The films may be designated within a band, such as an A, B, or C picture. Although these may be defined on strictly financial terms, such as by U.S. box office gross, conceptually, definitions can also include hybrid elements such as if a star or particular director is attached. In addition to a minimum, the studio will have an upside because fees will further be tied to financial performance. Different gradings will usually correspond to box office thresholds. If a picture achieves $50 million box office, that may trigger one fee, and if it is greater than $100 million, it will trigger a different, higher fee. (Note: As discussed in Chapter 4, this can provide a distributor an incentive to keep a film playing longer in theaters than the week-to-week numbers may justify, if a bit more box office will trigger a material threshold, such as can be the case with pay TV.) The pay services are generally fine with this structure; they are simply indexing their exposure/cost to the value of the particular film. What they want to ensure is that there is some rational cap, and that on an amortized basis they are acquiring a certain overall volume for a certain bulk price. This tends to work out, because the vicissitudes of the business ensure a range of hits and misses—to the extent that if someone has a string of hits, it may be more costly in the short term, but should help both parties in the long term. In terms of caps, the deals may set an artificial limit, such that a film can only earn so much. If the cap is $X for a film achieving $150 million or more of domestic box office, for example, this will be fine for a film around that number, but will actually disadvantage a film that may achieve $250 million. In theory, this is a risk the licensor takes (assuming a cap), and is one of the benefits that the pay service reaps: they get somewhat of a bargain (akin to an efficient upfront buy in TV) and are assured they are not gouged at the high end, and in return are pledging the security of taking volume regardless of overall performance.
Most output deals historically have incorporated escalating fees over time. This can be tied either explicitly to subscriber growth, ensuring that the per-subscriber fee is maintained as the key element setting price, or in an imputed fashion over time. In theory, this is no different than a landlord having a rent inflation clause in a long-term lease, ensuring that the payments keep pace with market pricing. Accordingly, a 10-year contract is likely to include material escalators. This is one area where the pay services have been squeezed at times. If the assumptions are wrong, then pricing can rise significantly above what market pricing would have been absent the output deal. The service may have been forced to take the risk to secure the product, because the studio would not entertain such a long-term contract without the security of increasing fees. Given these dynamics, pay TV is one of the few areas where it is not uncommon to hear about deals being renegotiated (though still vehemently resisted). Deals between online aggregators and content providers, to date, have not been for as long a period because the market is immature and no one is certain about the relative risks—accordingly, with the stakes high and uncertainty remaining as to where/how equilibrium will be reached, there is less standardization.
To add further wrinkles (to the pay TV context), if you can think of a variable, it has probably come up. Some contracts will have “gorilla clauses,” allowing for special treatment of select films. Many deals will have carve-outs, acknowledging that rights may be split in a way where the studio may reserve the right to exclude a picture. In virtually all deals, there are notice periods; the studio has some measure of flexibility including a picture and must provide notice of inclusion by a specified date. To the extent there is some flexibility for inclusion, it may be tempered by volume commitments (so many A-titles per period), such that the true flexibility is at the margins.
Value of Individual Titles
The ultimate value paid is obviously a closely held secret. Because there is strong competition among three U.S. services, however, it is fair to hypothesize that the value bears some relationship to the free TV window, which is longer but also comes later. Variety, in an article describing Starz’s acquisition of 500 movies from Sony’s library, including Spider-Man and Men in Black, noted that for TV, “four-year-exclusive blockbuster titles in the first window can cost a network upwards of $20 million apiece.” It then continues on the relative value of library titles to fill in pay TV slates, highlighting that “it’s far cheaper. The typical nonexclusive library title will fetch in the neighborhood of $150,000.”60 Another variable, in theory, should be some discount applied to the pay fee in an output deal, because unlike free TV it is a guaranteed sale. This is, again, an important element in financing. Accordingly, if one believes the free TV value should be $20 million, do the factors of: (1) discounting for a guaranteed sale; (2) prior viewing in an earlier window; (3) smaller audience reach; and (4) a shorter overall window cumulatively increase or decrease the value relative to free TV? Many of the factors should net others out, creating a vibrant marketplace with license fees that can be in the high millions of dollars per title.
Revenue Model and Original Programming
As discussed in Chapter 3, pay television networks derive revenues from the intersection of carriage fees and subscriber fees. Carriage fees are fees paid by cable or satellite operators for the right to carry the channel, and subscriber fees are the approximately $30 per month that a subscriber pays to receive the channel; in macro terms, these numbers are aggregated by the cable provider, passing along a much larger fee to the channel (dollars per subscriber rather than cents per subscriber), given the direct consumer-funded per-subscriber fees. Without delving into the P&L of a pay TV network, the economics are somewhat straightforward: simply multiply the number of subscribers by the average monthly fee for the gross revenue budget. At subscriber levels in the millions, this quickly becomes a big number, and to the extent the service is able to maintain and grow its base, there is a very secure continuous income stream. (Note: Let us assume $20 per month × 10 million subs; with these numbers, the gross revenue approaches $2.5 billion over a year.)
Pay TV is therefore similar to cable in terms of the TV distribution chain, where consumer dollars flow to the cable operator, which in turn passes along the revenues to the pay TV network. This is somewhat akin to cable (where a percentage is passed through, but the network then directly receives advertising revenues), and is fundamentally different than free TV, where no consumer dollars are passed directly to the network. Figure 6.4 helps frame the value chain.
What has been interesting in the evolution of pay TV is that the operators have come to realize that its suite of programming optimizes subscriber satisfaction when combining access to films (traditional route) and supplementing movie fare with unique original programming. Because U.S. pay networks operate outside primetime network FCC standards and practices regulations, they seized the opportunity to create adult-oriented programming: the programs you always wanted to see but the subject matter was either too crude or risqué for network or cable boundaries. In fact, HBO’s advertising slogan was “It’s not television, it’s HBO.” And they are right: you cannot see sex, which underlies Sex and the City (in its original/uncensored form), or graphic violence, as seen in Boardwalk Empire, or explicit gay lovers, as seen in Six Feet Under, on free or cable television. Consumers are drawn to these shows, first and foremost, because they are great entertainment. What consumers may not pause to think about is that they are also watching racy dramas or soaps on HBO because regulations or customs prohibit elements that are central to these shows on non-pay TV.
Figure 6.4 The Television Distribution Chain
HBO and other pay outlets have been very clever in taking strategic advantage of their positioning, insulated from competition (except by other pay networks) by law, to create original programming that you truly cannot see anywhere else. The other major pay services have, not surprisingly, jumped into the game following HBO’s success: Showtime successfully launched Weeds, The Tudors, and Californication, while Starz, a bit later to the game, has joined the space with originals such as Spartacus and Boss (as well as, in 2010, backing the award-winning miniseries The Pillars of the Earth, adapted from the best-selling Ken Follett novel).
This strategy then has the knock-on benefit of being highly profitable in the DVD/video market. The very nature of the gloves-off shows makes programming more akin to mini-movies. Positioned as a hybrid between TV series and the freedom of expression found in movies, these shows have been highly successful in the DVD market. Although now counted for and built into financial plans, these revenues are, to some extent, found money, as releasing TV series on DVD and now also into download, online subscription, and VOD rental markets was not a cornerstone of the decision to diversify into original programming in the first place. When a series happens to also translate to syndication, as has been the case with Sex and the City in a cleaned-up, edited version for TBS, it is, in theory, all profit to the bottom line. As earlier noted, in 2006, The Sopranos hit a record $2.5 million per episode in licensing second runs off HBO of the series on A&E. This is truly hitting the jackpot, and is revenue that cannot be expected from many other shows, because only shows achieving a certain level of success will be in demand for syndication/cable window, and also because not all pay TV original shows can be cleaned up (or otherwise translate well) for licensing into traditional free television.
The other key element of this programming is that it is somewhat ratings-proof, because original series on pay TV are not dependent on the advertising market, and accordingly are not slaves to traditional ratings (or at least not to the same extent). It is often said that the best job in town is the head of production or programmer for a channel such as HBO: high profile, good budgets, and minimal ratings pressure. Although this is obviously an exaggeration, it is truly within the network’s prerogative how long to keep a show, because as long as subscribers are holding steady or growing, there is no similar direct pressure on an individual show.
Original Programming Now the Cornerstone of Pay TV
The role of original programming on pay TV, as further discussed in Chapter 7, is instructive in terms of the maturation of the online aggregation space. For the pay TV services, they are in the third stage of maturity: (1) first, they built brands by aggregating content in the pay TV window, exploiting the repeat-consumption driver in Ulin’s Rule and affording consumers a new form of content access; (2) then services, pioneered by HBO, added original programming (e.g., The Sopranos, Sex and the City, Entourage, to leverage not being constrained by FCC broadcasting standards and practices) to complement aggregated movies, utilizing original programming to drive subscriber growth while reaping dividends in ancillary markets (e.g., DVD sales); and (3) today, as pay channels leverage original programming not merely to drive subscribers, but defensively to stop subscriber erosion in the face of increased media options, expanded on-demand access, and the loss of status as the only aggregator in town. I would argue that today the reason viewers go to HBO is for original titles such as Game of Thrones, which have become the pay TV equivalent of primetime, and aggregated movies then fill out the schedule. Online aggregators such as Netflix are just emerging from a comparable first phase of maturity, and now have the challenge of succeeding in the second phase with original programs; however, these services will not benefit from the novelty of offering original fare, and face competition from deep-pocketed and experienced media companies who will not idly cede the online space (e.g., HBO, Showtime, Starz).
Moreover, it is not easy to succeed with original programming. HBO is the industry’s bellwether, and its leading streak of success, and high-risk, high-reward strategy of financing its own shows and retaining the upside, has led to results such as $4 billion in 2010 and in various years reputedly accounting for 25 percent or more of Time Warner’s total operating profit.61 In tracking HBO’s creative success with originals, talking about its latest challenges from companies such as Netflix, and chronicling its key series since launching originals, The Economist noted: “For more than a decade it has lavished good, smart product on its viewers, and in the process raised the entire industry’s creative game.”62
Nevertheless, a new battleground was borne in 2013 with Netflix’s debut of original series and its garnering of fourteen Emmy award nominations. Netflix’s and other online services’ commitment to original fare (see Chapter 7), coupled with the fact that Netflix’s subscriber count passed HBO for the first time (Netflix edging up to almost 30 million in the US by mid-2013) means that competition will remain vibrant with respect to the production of original context as well as acquiring third party content to aggregate.63
Aggregators Positioned for the Future
While pay TV services have an advantage in terms of brand value, customer base, experience creating hit original properties, and generally deep pockets to weather the disruptive forces from OTT services such as Netflix and Amazon, there are two new challenges that they face. First, the pressure to attract eyeballs is now more intense and challenging. Pay TV has long benefitted from limited or minimal competition among providers (see below regarding international and consolidation to monopoly providers) because subscribers wanted the full palate of content that could only be offered by aggregation. Today, with OTT services offering movies on demand, be it in subscription or à la carte fashion, the competitive landscape has fundamentally altered. As discussed in Chapter 7, no longer are pay services the only aggregators; rather, companies such as Netflix, which masqueraded as video services, are fundamentally subscription aggregators of premium content (sound a lot like pay TV?). In addition to heightened competition for viewers/subscribers, pay TV services now, as a corollary, also have increased competition for acquiring content. These new types of aggregators, themselves with deep pockets and large rivalling subscription bases, are also keen competitors fighting for content and their own output deals. Despite the importance of original content, pay TV services are, at their heart, aggregators of content, needing to fill up a 24/7 schedule while only producing a handful of hours. Additionally, the more a service looks like a video store (a concept that may feel quaint in a few years) and offers the full catalog of new content, while complementing that offering with key originals, the more compelling the value proposition to its subscribers. Accordingly, pay TV services, for the first time, are being challenged simultaneously on three fronts: original content, aggregated content, and competition for subscribers.
The good news for the services is that they are still well positioned in the ecosystem. They have the benefit of 1:1 subscribers, mimicking the advantage of online with direct knowledge of their customer base (though clearly not as strong, given the cable or satellite provider middleman interfacing with the consumer, though apps such as HBO Go promise transitioning this relationship in favor of the pay provider); they are aggregators at heart, which is in the strategic bullseye of a landscape where values for individual pieces of content are in flux; they are paid directly for their content, which, so long as they can maintain the demand, sets them apart from the pressure toward free and trying to monetize the ever-marginalized long and wide tails via advertising; and their positioning as an aggregator is again strategically well situated, given the movement overall toward VOD access (see also Chapter 7 discussing these factors). In many regards, of all media, pay TV is uniquely in the competitive crosshairs, with some of the most favorable positioning, as well as the most daunting challenges. My prediction is that leading services will emerge strongly from the current disruptive battles, blending their traditional offerings with new upsides by exploiting the crown jewels of original programming to a wider (and paid) audience while building direct-to-consumer engagements via apps (leveraging SVOD applications; see below) and select à la carte premium VOD offerings.
Flexible Pay TV: Subscription Video-on-Demand
Subscription video-on-demand (SVOD) is a relatively new application that can be applied in a few flavors. One variation is simply a functionality improvement on an existing service. This may be the case with a pay TV service that allows its cable/satellite subscribers to access programming at any time as opposed to the scheduled broadcast times. Accordingly, if HBO were to start a show at 9:00 p.m. on Monday, an SVOD application of its service would allow customers to access and watch the program at a time of their choosing (usually any time after the initial scheduled showing). Basically, it is converting a limited selection of programming, such as HBO’s content for a month, to VOD access functionality.
Another variation of SVOD is via a computer. In this application, a service will allow a subscriber to download a show to his or her computer (with the transfer enabled by a security link or closed-loop Internet system). To the extent the residency of the program on the computer is time-limited (e.g., a rental), then it is a type of VOD, as opposed to a permanent download (i.e., ownership), which is then a form of electronic sell-through. (Note: The discussion here involves SVOD from pay cable services, and Netflix SVOD via OTT aggregation is discussed in Chapters 5 and 7.)
A further SVOD application is when program access is via a pay channel provider’s set-top box (e.g., as occurs in various European markets). Certain highlighted content may be automatically downloaded/resident on the box (“pushed”), while other content needs to be accessed and then downloaded to the consumer (“pulled”). In the end, whether pushed, pulled, or otherwise, the goal of SVOD is improving the consumer’s pay TV experience by making paid-for premium content accessible at any time. One can therefore envision SVOD supplanting traditional pay TV (in terms of films, this is merely an aggregation of content that could be available sooner except for the window). The next logical iteration is whether the customer will pay to have a subset of content available via his or her TV at an earlier date (put another way: Where is the line between transactional VOD and subscription VOD, and should premium aggregators that pay hefty guarantees be disadvantaged by having to wait for content?).
To the extent this is all about the window timing, then the relevancy of pay TV channels comes into question. The pay TV services that have focused on original programming may end up protecting their brand based on differentiating content, for the repurposing of theatrical content that helped build their channels is unlikely to survive in an à la carte, on-demand world providing access on, or close to, the video window. Pioneering new applications by Amazon and Netflix (see Chapters 5, 6, and 7) are already enabling this vision, which in theory has to pose a serious threat to pay services (what’s the real differences between HBO SVOD and Netflix SVOD other than the specific content available?). For the content supplier, this presents a Hobson’s choice: failure to favor online/OTT VOD services may not give the consumers what they want, but failure to favor pay TV would give up guaranteed, very large revenue streams (see also Chapter 7). For the moment, given the sums involved and the need to maintain large advances as financing security in the face of declining video revenues, online aggregators (e.g., Netflix) are being treated akin to pay services, and as discussed earlier, competing head-on with historical pay channels.
The window and economics for SVOD simply track the underlying basic rights; namely, the window for an SVOD application of pay TV rights would mirror the consumer’s pay TV subscription (although generally with no access to a show until it has been premiered on the service in its scheduled slot). The one exception to this would be to the extent parties want to limit viewing (protecting the value of pay exhibitions), where SVOD availability could be windowed only to provide “catch-up” access. In this instance, the SVOD availability for a particular piece of content may be limited to a set period post the initial broadcast of the content.
Deal Term Overview (Pay and Free TV)
Although license agreements will obviously be quite detailed, when stripping away many of the legal protections and basic information governing the parties, the fundamental economic structure boils down to a relatively short list of items. While many of these categories have been discussed before, it is useful to view them in a checklist form.
Licensed Channels
In a pay TV deal, defining the range of primary and multiplex channels is critical. While focus may be on runs on a primary channel, there could be several additional multiplex channels (e.g., movie channel versus action channel, or other specialty theme). The multiplex options allow the broadcaster to amortize costs and increase the fees to the licensor; ratings are lower given limited coverage, but exposure may increase significantly. In some cases, there will be formal trade-offs agreed, such that one broadcast on Channel X may be substituted for one or more on Channel Y.
A free TV deal will generally be to a specific identified channel, such as CBS; however, as technology allows multiplexed options such as high-definition channels and even Internet carriage, the notion of a single channel actually existing as a branded channel that may appear in a basket of delivery and sub-branded channels will make this area ever more complex going forward.
Runs
As discussed earlier, pay TV has evolved in a more complex fashion, but with technical innovations allowing new possibilities with free TV, the concept of “runs” is fast becoming a more complicated issue. In pay TV deals, definitions can become almost ridiculously complex: defining numbers of runs per primary channel, runs per multiplex channel, conversion ratios to exchange runs between channels, aggregate runs on each type of channel (e.g., no more than X on primary and Y on each multiplex), and aggregate runs across the range of channels (e.g., no more than X cumulative runs across all of the licensed channels, including primary Channel X and multiplex Channel Y–Z). When layering on top of this matrix the fact that runs will be linked to exhibition days, which will typically allow two runs per exhibition day, and that exhibition days are defined by time limitations (e.g., a 24-hour period commencing …), calculating permitted runs and monitoring runs can become an exhausting and often unclear process. I have been involved in more than one situation where there were valid interpretation debates on permissible runs based on long-standing and seemingly clear definitions—and this all before the notion of viewing via an app.
Term
The structure of a license period can be straightforward, such as a fixed number of years, or complicated if there are multiple windows; a layer of complexity can be added to either scenario when the periods are tied to pending triggers, such as a specified number of months following yet-to-be-announced theatrical or video release dates. Additionally, beyond the actual window, there will often be blackout periods and defined pre-promotional windows.
The above scenarios, even in the case of multiple windows, assume fixed terms with the variable being the start date; however, because rights are bounded by both time and runs, a license period can, in theory, expire on a fixed or variable date (the variable is the last permitted broadcast). Agreements may therefore often be structured to trigger the end of the term on the earlier of the expiry of the fixed term or the last permitted broadcast/run.
Calendaring software will keep track of this matrix, logging in the fixed date and accelerating availabilities to the extent runs are taken early, which is frequently the case, as licensees will not wait until the last day or even month of a term to exercise broadcast rights. All of this can become more difficult to track if there are multiple windows, which can be similarly triggered by fixed periods or variable dates if tied to the expiry of another right (e.g., following expiry of free broadcast window X). This, in turn, may be likewise triggered by fixed and variable dates.
Taken together, calendaring and monitoring rights availabilities is a complex task subject to errors. The simple question of “availability” can cause lawsuits and relationship issues, as licensees are paying premiums and basing deals on rights that will be compromised if windows are misstated; there is nothing worse than finding that two clients, competitive with each other, both have rights to the same product at the same time. This is a never-ending headache for studios and is an area that is taken for granted, but is fraught with danger if not micromanaged to perfection.
This is again straightforward if the fee is flat. However, to the extent there are potential overages involved, or if this otherwise has a contingent element, this can be quite complex. An overage definition needs to account for the difference between the minimum guarantee, which may either be flat or based on cents/dollars multiplied by a minimum stipulated subscriber basis, and the ultimate fee due, based on the actual number of subscribers multiplied by the agreed cents per subscriber base. The actual definition can become almost unwieldy in that the “actual” number is often pegged to the average number of subscribers in a month. The result can be akin to a complex bank interest calculation statement, with permutations of averages to refine the calculation.
Rights
The issues here can include:
■ What is the territory? Is it physical- or language-bounded, or both?
■ What languages are included? This may impact the definition of territory, such that rights may be both territorially and language-bound (e.g., such as a grant of rights for “French-speaking Belgium”). Further, language can have three tiers: the original version of the film (e.g., English language), as well as dubbed versions or subtitled versions.
■ What formats/cuts are allowed? For example, will there be one or multiple versions of the product, such as an original version versus an extended director’s cut, or is the release in standard definition or high definition?
■ Are the rights just free TV or pay TV, or are there variations such as subscription video-on-demand (SVOD)?
■ Do the rights licensed extend to channels being rebroadcast or accessed in VOD fashion via online sites, apps, or wireless systems?
■ Are there technical limitations, such as curtailing digital transmissions?
■ Are there carriage/delivery restrictions, such as via cable and satellite?
■ Are single or multiple feeds permitted? This issue can arise in a multiplex situation or in territories with remote locations where a relay may be required for coverage in secondary areas.
The international markets have historically lagged behind the U.S. market in terms of maturation of both free and pay TV options, but that pattern is now changing.
Unlike the United States, many, if not most, international markets grew up with “state broadcasters.” These were public as opposed to private channels that were either fully owned or controlled by the state, and accordingly funded by taxpayer money. Examples of such channels are the BBC in the UK, ARD/ZDF in Germany, and RAI in Italy. In some of these cases, funding is achieved through television license fees, where all citizens owning a television have to pay an annual TV license fee—a sort of tax. Even though I had been “in the business” for several years, I readily admit to the reality check of receiving my bill when I hooked up my television in London, and realized I was directly taxed to underwrite BBC programming. It is a common notion worldwide, but something of an anathema to Americans who have never experienced this system.
Not only did most countries have public broadcasters, but until the 1990s in many countries these were virtually the only broadcasters. As Americans were getting used to cable and an increasing number of channels, Europeans were just starting to auction off and authorize the first commercial licenses in the territories. In Spain, for example, the state network RTVE had dominated until the government allowed some of the first commercial licenses. The winners and resulting networks were free-to-air channels Antenne 3, which 10 years later became a leader in exhibiting movies on free TV (such as The Lord of the Rings and Harry Potter films), and Telecinco (Channel 5); additionally, Canal+ Espagne was initially granted a monopoly in the pay television space. There were, and still are, regional broadcasters, but the virtual simultaneous launch of three new national commercial networks had an obviously profound impact on the marketplace.
In the early 1990s, it was a renaissance for Hollywood studios and networks, for rather than having a handful of buyers limited by public-sector budgets, they all of a sudden had fierce competition from commercially sponsored national networks vying for viewership and profits. The pattern started in Western Europe, and then as the former Soviet bloc led to emerging democracies in Eastern Europe, competition and new stations started to flourish there as well. Hungry for programming, stations signed up massive output deals with studios and networks. Suddenly, the international TV divisions were no longer stepchildren, with hundreds of millions of dollars of revenues (at minimum) per year at stake.
The pattern continues as democracy spreads, broadcast outlets are freed from state control, and economies grow and build larger middle classes (e.g., Eastern Europe, India, Southeast Asia). However, the growth seen a few years ago in certain emerging markets, such as Russia, has slowed and TV distributors can no longer count on greenfield opportunities to substitute for declines in traditional secondary sales. I again turned to Marion Edwards, president of international TV at Fox, who confirmed:
No market is emerging to equal licensing revenues of the core markets of Europe, and many of the markets considered ‘emerging’ in recent years have peaked and have turned to local programming to fill their schedules. Because we produce and distribute such a broad range of premium content, we’re able to remain successful and relevant by supplying a variety of films, series, and formats for local production depending upon the mix that a particular territory seeks.
The economics of international free television, on territory-level basis, are not materially different than that of the domestic market.
License Deals
On the feature side, licenses tend to be for a fixed number of runs over a specified number of years. Also similar to the domestic model, license fees are fixed; on occasion, deals can be indexed to performance, if licensed in an output-deal-type structure. Barter, however, is rarely applied for U.S. product.
Finally, the pattern of packages that often typifies the U.S. syndication market has been frequently applied in the international context. Whether a package is set as part of an output arrangement, or simply as a standalone package, the economic underpinnings are the same. The buyer/station obtains throughput from a key supplier, and the seller has a guaranteed income stream indexed to theatrical performance; as important, the seller has secure placement of its titles, ensuring that underperforming films still find a home. This is a critical fact when circling back to the key value of studios: they are financing and distribution machines, and if they cannot ensure a producer or director that they will maximize revenues and license their films into all markets, then their role is severely compromised. (Note: Output deals apply more often to films than TV shows.)
The following 2007 deal between one of the two major German commercial networks, ProSiebenSat1, and Warner Bros., as described in the Hollywood Reporter, typifies this symbiotic relationship:
ProSiebenSat1 Group … has inked a long-term output deal with Warner Bros. International Television Distribution for the free-TV rights to at least 30 films per year, the company announced Thursday. A ProSiebenSat1 spokeswoman said the deal had a total worth “in the low hundreds of millions” of euros and a term of “several years.”64
High Margin
International television licensing is extremely high margin, as the two principal categories of costs are relatively small. The first, and largest, is the cost of a sales force to license product globally. This will often involve layers as follows:
■ Head office: management, marketing, and fulfillment.
■ Regional office: regional heads/coordinators, often for UK, Western Europe, Eastern Europe, Japan, Australasia, and Latin America.
■ Local offices: virtually all studios have multiple local offices in Europe, an office in Australia, and an office in Latin America.
The personnel are fixed costs, and accordingly the business can be managed simply by overhead cost. This infrastructure is a defining element of studios, as discussed in Chapter 1.
The other material cost is for delivery. International territories require different formats, such as PAL for Europe, as well as dubbed and subtitled tracks. While the licensee will often absorb some of these costs, it is not uncommon for the distributor to have to supply a foreign-language master. On top of the physical master, the licensee will need press kits, marketing materials, and occasional special-value features (e.g., customized intros or promotional pieces such as behind-the-scenes documentaries; such “VAM” is increasingly important as stations enable their own apps and websites offering supplementary material.). The matrix of elements can become quite complicated, and additional personnel need to coordinate the “trafficking” of elements (elements that need to be delivered in a time-sensitive manner, given local broadcast dates).
Further, any dubbing or subtitling will be specifically defined and subject to quality-control guidelines. Additionally, this becomes a significant economic issue, as dubbing can be expensive and who owns the dubbed masters is a negotiated point. It is not uncommon for a local broadcaster to invest in dubs for a TV show and to hold the right to those dubs. Accordingly, a producer who later wants to release in video via another distributor may not own or even have access to dubs of its own shows and may have to negotiate license fees for dubs to its own programs (for which costs, in turn, can influence whether the release is feasible).
In terms of the macro picture, though, the key element of the foregoing costs is that they are one-offs: a licensee will ultimately only require a single master. When comparing this to the video/DVD market or theatrical market, where variable costs for manufacturing units or creating prints run in the millions of dollars, the cost of delivery for TV is modest.
Crowdsourcing as Mechanism to Reduce Costs
Today, some of these costs are coming down by employing techniques such as crowdsourcing, tapping into local fans to create dubs—rather than view frustrated fans who want to see their favorite content in local language and “do it themselves” by posting self-created dubs almost overnight on the Web, companies are embracing this method rather than viewing the dub or subtitle creators as a type of pirate. Harnessing the community, and securing a level of quality control by having socially networked fans comment and self-police (akin to the Wikipedia model), content providers are finding ways to build communities and lower costs.
In 2012, Mozilla and the Knight Foundation invested $1 million in Amara (formerly known as Universal Subtitles), a pioneer in crowd-sourced translation services, to help the company broaden into dubbing videos. While the company provides tools for amateur videos, and is heavily used to translate YouTube videos, it is being increasingly leveraged for commercial contexts as well. Outlets such as PBS NewsHour and Al Jazeera utilize Amara, and given the ability to scale translations with essentially zero costs, it is likely that the use of crowdsourcing will become a staple for many broadcasters. (Note: There will inevitably remain some resistance at the premium content level where producers and distributors will be willing to underwrite costs to control the ownership and quality of the resulting materials.)
Repeatable
Unlike the theatrical market, where films are rarely rereleased, television is a somewhat evergreen market. New titles are obviously licensed, but library sales can also be very significant to the extent that markets continue to mature and add new outlets, such as secondary or tertiary channels that may be either cable- or satellite-delivered. The opportunities for continuing library sales lead to material revenues. Moreover, in cases of repeat licenses, element costs for delivery are either reduced or eliminated, leading to an almost 100 percent margin sale if overhead staff costs are not allocated out to the variable license.
It is a Big World
Probably the most significant factor in the international marketplace is the sheer size. As global markets have matured, it is possible to license product into more than 50 credible territories. Moreover, some of these have grown to the size that revenues, as a percentage of the United States, are high. Germany, France, Spain, the UK, Italy, Russia, Japan, Australia, and select other territories can all yield licenses in the millions of dollars. Accordingly, it is not a stretch to target achieving cumulative international sales that total or exceed U.S. sales. Of course, every market has its nuances. Add this truism to the fact that it is a relationship business and the value of maintaining a global sales force becomes evident.
Markets and Festivals
Most people think about Cannes when talking about film markets, but just as important, and perhaps more so in terms of money generated, Cannes hosts the two biggest worldwide television markets. Run by the Reed Midem organization, MIPCOM takes place in October and MIP in April. Although each market has certain ancillary events that distinguish it from the other, such as MIPCOM Jr. focusing on kids’ programming just before MIPCOM in the fall, the markets are mirror images of each other, affording a biannual marketplace for worldwide TV executives to gather.
These are remarkably efficient markets attended by virtually every major program supplier and broadcaster in the world. Most of the studios and networks have major booths, and newcomers and wannabes can make an instant global impression. Gone are the peaks of lavish parties and spending, but for those in the business the markets have become a must-attend rite of season. I was honored to deliver a talk at MIPCOM tied into the release of the first edition of my book, focusing on the impact online was having on the traditional TV marketplace—as this edition evidences, the pace of change is such that I could speak each year and never run out of new topics to highlight.
For a period, there was a significant market in Monte Carlo in February, but with the U.S. domestic market NATPE falling in the same time frame and becoming better attended by international buyers, there were just too many festivals. Certain executives felt obligated to go to from NATPE, to Monte Carlo, to MIP, to the LA Screenings, and everyone admitted there was no compelling reason for this quantity.
Lack of Station Groups
One inefficiency in the international market is that there is a dearth of station groups that buy together across markets; in general, sales are made on a territory-by-territory basis. It would be attractive for a number of sellers to have “one-stop shopping” and license all of Europe or Western Europe in a single deal. A few companies have tried to aggregate station groups, such as CME, RTL, and SBS (since sold to a private equity consortium), but even in these instances many of the affiliated stations will acquire product independently. The reason is simple: countries have local sensibilities, and it is even more difficult to buy a program on the assumption it will work from Paris, to Frankfurt, to Barcelona than harmonizing a demographic audience from Sacramento to New Orleans. Even if demographics were aligned (e.g., targeting Generation X across affiliated stations), cultural nuances and differences make programming across borders extremely challenging. In a sense, it is a variation on the theme of the challenges of the euro.
Nevertheless, people will still try to aggregate station groups and more efficiently purchase content, and the purchase of ProSiebenSat1 in Germany by the same groups (KKR and Permira) that bought SBS (originally a Scandinavian broadcaster that branched out in countries such as Belgium, Hungary, the Netherlands, and Greece) was aimed at competing with RTL as the only other potential pan-European broadcaster. The International Herald Tribune commented on this scale:
The purchase of ProSiebenSat1, which operates five channels that draw 42 percent of all German TV advertising revenue, will bolster plans by KKR and Permira to create a competitor to RTL … Analysts said KKR and Permira were likely to combine the German broadcaster … with the Permira-owned SBS Broadcasting, a Luxembourg-based group of 16 radio stations, 19 free channels, and 20 pay-TV channels.65
International Pay Television and Need for Scale
The economics of international pay television networks and the structure of license deals largely mimic much of the discussion above regarding the United States. It is high margin based on few costs beyond acquisition expenses, of which most other costs are fixed rather than variable. License fees are tied to fixed sums per subscriber, with overages applied against minimum guarantees. Windows tend to mimic those of the United States, with pay television’s window accelerating to several months post video from an historical one-year-from-video holdback (still mandated in France), and runs defined in terms of exhibition days. Buyers and sellers attend the same markets as free TV, with MIP and MIPCOM as the primary international festivals.
The major difference is that while the United States is cable-dominated, many international services, such as Sky in the UK, are predominately satellite-delivered. Moreover, many of these services have been local pioneers, and the set-top box is actually tied to the pay TV service rather than the local cable carrier. The incremental hardware cost was initially a barrier to subscriber growth, but with the maturation of the market or discounted giveaways (and, in cases, even free) with signing up this is becoming less of a factor. What it does enable, however, is the networks to efficiently capture new VOD revenue streams because they already have the technical infrastructure in place to offer the services without a third party controlling the intermediate pipe/delivery mechanism. Additionally, although international services have quickly moved to digital delivery, enabled by the satellite-to-home delivery, there are limitations for interactivity; cable more easily enables two-way communication, whereas satellite is dependent on pulling down and manipulating a signal, but does not by its customary functioning enable a user to message back.
Finally, when talking about boxes, delivery, and positioning, a key challenge facing pay services—which have been inherently dependent on encrypted delivery and access via set-top boxes—is the competition from over-the-top services and boxes/technology enabling cord-cutting (see also discussion regarding cord cutting in Chapter 7).
Monopolies and Need for Scale: Product Monopoly versus Broadcast Monopoly
The other limitation of international services is simply the size of local domestic markets. There is limited elasticity in revenues derived from subscriber bases—it is great and steady when reaching a certain threshold, but if the base remains too low there is no way to increase revenues. A hit does not bring higher advertising dollars, and if the program has been acquired from a third party it may only become more costly downstream without the benefit of upside from corresponding increased revenues. This inherent cap on revenue against this lack of a cap on expenses leads to the result that international pay services need scale to survive.
In nearly every major international market, competition has not allowed networks to flourish, and in fact has almost crippled the stations. Cutthroat competition for Hollywood product and slowing subscriber growth, coupled with what I would argue is an inherent problem with scale when revenues cannot be increased in a linear way with programming success, has led to mergers in virtually every major market.
The push toward mergers has been fueled by infrastructure and programming costs, plus the desire to aggregate content so that the service can offer the same range of titles that the consumer has become accustomed to at the video store, and now on multiple devices (in an environment when many consumers are device-agnostic and simply expect ubiquitous access to programming anywhere, anytime). It is not uncommon to find monopolies in large territories, and for all practical purposes the key pay services in the UK, Germany, Spain, Italy, and South Africa have no material local competition. As of 2006, France joined this club with the merger of long-standing rivals TPS and Canal+ (though competition resurfaced in 2008 with the debut of FT-Orange’s satellite pay services).66 The result is an interesting dynamic: a monopoly negotiating with a monopoly—the only licensor with the rights to Film X licensing with the only pay TV broadcaster. So, who has the leverage?
Interestingly, neither and both. The services assume that each studio must agree to certain parameters—if pricing is cut for one, it will be for all. Similarly, the studios all attempt to take a most-favored-nations approach, for heads will roll if one studio accepts a cut only to find out that its rival did not. The only out is dissimilar product and length of term. These negotiations can therefore resemble a sumo-wrestling match and can be drawn out over long stretches. Agreements are eventually reached, though, because both sides ultimately need each other. (Channels, even if a monopoly, still need content quantity and quality to attract and retain subscribers.) Fee escalators and pricing tied to bands of performance build in rational expectations and thresholds, and long-term output deals serve to provide mutual security both in terms of product flow and, to an extent, resource allocation, avoiding frequent protracted negotiations.
Table 6.4 shows countries that started with multiple pay TV networks that have consolidated into virtual local monopolies. This truly may be an example where a monopoly situation may benefit the consumer but not the supplier. Monopolies are never good for the program supplier, and usually lead to an increase in consumer pricing; however, as pay services are forced to compete against free services for viewers’ time, as well as new media options, pricing has not increased dramatically. In fact, pricing has only so much elasticity against a universe with ever-expanding media options, and has a direct relationship with subscriber stability and growth. Accordingly, pay TV monopolies have evolved as a result of requiring scale for local survival, while being capped on abusing monopoly status vis-à-vis consumers by having to compete against other television options.
Interestingly, and in a very different structure from free television, in several territories the Hollywood studios have banded together to co-own the local pay TV networks: creating scale from the supply side. This is true, for example, in Latin America where LAP TV is a partnership among Fox, Universal, Paramount, and MGM, and Australia where Showtime, the channel of the Premium Movie Partnership (PMP), was a joint venture among Sony, Fox, Universal, and Paramount (pre-Foxtel interest). A partnership ensures a certain cap on programming costs, but similarly also caps the extreme upside. This is probably good over time for the studio owners, but potentially limiting to producers who are selling into an artificial market. Why would Universal approve a certain fee to a Paramount film whose producer is demanding higher fees when Paramount is unlikely to approve a higher fee to a Universal film? What likely results is a sort of most-favored-nations output deal structure, aiding network profitability at the likely expense of an occasional individual film. (Note: I cannot prove this, but it is a logical assumption based on the structure.)
Again, it is a Big World
The flip side to the growth of pay services worldwide and the potential of millions of dollars for a single film is the infrastructure needed to sell into these multiple markets. As outlined in Chapter 1, pay television launched similarly to joint ventures in theatrical and video markets. UIP pay television was a joint venture among MGM, Paramount, and Universal, literally mimicking the theatrical structure of UIP theatrical (and the video structure of CIC, although it was limited to Paramount and Universal). This venture enabled the studios to enter global markets with reduced overhead, and to offer a breadth of product that could literally launch a local network.
Table 6.4 International Pay TV Monopolies
As the markets matured and revenues grew, the service was ultimately disbanded (after about 10 years). Today, every studio has pay television divisions and sales forces that can be staffed relatively thinly with the merging of worldwide services; PPV and VOD are often tied to these groups, as so many of the services are spin-offs from and owned by their larger pay TV parents.
Trendsetters and Market Leaders
Much like HBO in the United States, select pay TV networks have become a fixture on the local landscape, having a material impact on production and culture, and even growing into mini-studios. Two of the best examples are BSkyB in the UK and Canal+ in France. Among the oldest global pay networks, these channels attained early scale with millions of subscribers, enabling them sufficient cash flow to diversify into other production; in fact, both grew successful enough that they are perceived as true competitors to the free networks.
Canal+ grew so successful that it was the engine for Vivendi’s acquisition of Universal Pictures (a combination that ultimately proved unsuccessful for a variety of reasons, including exuberance of Internet expectations, with Vivendi selling off Universal to GE/NBC). At its peak, Canal+ had acquired multiple networks across the globe, including:
■ Canal+ Spain
■ Canal+ France
■ Canal+ Poland
■ Canal+ Netherlands
■ Canal+ Scandinavia (Sweden, Norway, Denmark)
■ Canal+ Belgium (covering Benelux)
■ Canal Horizons (French-speaking Africa)
For a period, this created the potential of one-stop shopping for many suppliers, although it is likely many executives would have yielded that facility to lessen the leverage of Canal+ in continental Europe.
On a much smaller scale, I will never forget the discussion I once had with a fledgling pay service in Eastern Europe in the early 1990s. Because consumers in the former communist country had been cloistered from Western entertainment, there was a voracious demand to watch new offerings. Pay services customarily cycle through movies on a multiple time/month basis (see discussion regarding runs), assuming that its audience will want to watch the new offering, and that with a repeating schedule, they will ultimately find a convenient time to watch. In the case of this territory, everyone watched the show the first time it was on, and the only way to satisfy the customers would have been to build a huge inventory and only show new programs (defeating the economic model).
The international market, unlike the United States, has a culture of coproductions. This stems, in large part, from the size of domestic markets and the need to aggregate markets to raise sufficient capital for projects. It is very common for multiple distributors or networks to fund percentages of a budget in return for local exclusivity plus a share of the overall profits.
As discussed in more detail in Chapter 3, a coproduction is a much-bandied term that can mean many things, including: (1) creative collaboration or a sharing of production versus distribution obligations; (2) co-financing, where more than one party invests in a production to share both risk and upside; (3) the sharing of distribution rights (e.g., a United States–European coproduction may mean that the U.S. investor acquires North American rights while the international party acquires European or all international rights, i.e. rights excluding North America); or (4) certain pre-sales scenarios (e.g., if one party acquires rights to a product in advance of completion or production, thereby creating financing security enabling production, it may consider the risk it has taken as justifying its position as a coproducer rather than a buyer).
While coproductions can be compelling, they are complicated, often cumbersome to construct and administer, and involve compromise. Inherent in the structure is a sharing of responsibility, something that often undermines the creative process. Just like the concept of “final cut,” every production needs a creative master; when production is run by committee, or when groups are trying to compromise to accommodate local cultural differences (let alone whims or power plays), the end result often suffers. The more parties, the more these problems are exacerbated. If three or four parties are all funding a production as coproducers, and each has an expectation of creative input and authority, it can be a recipe for disaster. For those needing the money, this is a necessary evil. Many in Hollywood would never cede this level of control, and in fact the studio mantra tends to be to keep all control and all rights. Hence, coproductions are generally an international financing mechanism, and a staple of international TV production.
Most Americans have not heard of Leo Kirch, even though he was a media mogul on the scale of a Ted Turner or Rupert Murdoch (well, maybe a mini-Murdoch). Similarly, most Americans have not heard of KirchMedia or Betafilm, but the Kirch Group’s production reach spanned the globe and was behind the scenes of some of the more well-known shows—everything from the Gone with the Wind sequel Scarlet, to Baywatch, to Star Trek spin-off series (e.g., Star Trek: The Next Generation), to JAG, to coproducing/financing in Europe The Young Indiana Jones Chronicles.
What Leo Kirch achieved was total vertical integration in the German marketplace across TV stations, supply of TV product, and local production. At its height, the Kirch Empire, worth billions of dollars, was akin to wrapping NBC, HBO, Disney merchandising, and the largest local production company under one umbrella.
On the network side, Kirch built and controlled two of the three largest national free television commercial broadcasters: Sat 1 and ProSieben. On the pay television side, the group built the dominant pay television network, which, after a few iterations, is now known as Premiere. What was remarkable about the Kirch Empire is that Germany is highly decentralized and to gain national licenses it was necessary to gain buy-in from each of the autonomous regional areas. This was not wholly dissimilar to Fox aggregating enough local independent stations to form a national network. The difference in Germany is that when Kirch first built these networks, there were no other comparable national commercial networks: they were, in essence, creating the first commercial competition to the public broadcasters.
To feed the programming needs of the stations, and grow them, Kirch virtually monopolized the supply of programming from the United States. Early on, Kirch lobbied the U.S. studios, even bringing the regional stations they were trying to aggregate to meet people such as Frank Wells at Disney (at the time, co-head of Disney with Michael Eisner). Ultimately, they succeeded, and secured long-term output deals with all the major American studios. In a bold stroke, they created a duopoly. The only viable place for U.S. studios to license their product for top value became Kirch. In turn, Kirch had a monopoly on the programming put on its controlled networks. The result was a vertically integrated media empire that, for a period, controlled the television landscape in the country.
Over time, the Kirch Group built up one of the world’s greatest libraries and largest integrated media companies in the world. An online encyclopedia summarized that:
By 1993, Kirch Gruppe had become the largest entertainment program provider for German-speaking countries, including Switzerland and Austria. The group was involved in all areas of the movie and TV entertainment business, such as production, synchronization, distribution, rights and licensing trade, movie and video rental, and merchandising. Besides owning about 15,000 movies and 50,000 hours of TV shows, Kirch’s many production firms put out about 400 hours of new movies and TV programs per year.68
In addition to building a library of owned and licensed titles, the Kirch group built state-of-the-art technical facilities to store and archive the vast product accumulated. The technical group and storage vault at BetaTechnik became world-renowned, and many international producers used the facility to store negatives, prints, and masters, as well as to create foreign-language versions. The BetaTechnik storage vault looks like a scene from a sci-fi movie, with tall rows of film prints in a secure, clean, climate-controlled room reaching stories high, and mechanical computerized robots able to pull and access individual elements. When U.S. studios and leading producers wanted to archive treasured masters and prints, despite local options and promises of salt mines able to withstand nuclear strikes, many ultimately turned to Leo Kirch. If you want to find the old reels of a classic film, your best bet is not Hollywood, but Munich.
Like so many entertainment company stories, however, the reign of Betafilm and Kirch ultimately came to an end. KirchMedia’s bankruptcy was nothing short of spectacular, with far-reaching consequences across borders. The Hollywood Reporter chronicled: “KirchMedia’s bankruptcy in April 2002 was the largest in German post World War II history. Before it fell, the company built by Bavarian mogul Leo Kirch had the largest library of films and TV rights outside the U.S. studios … Observers estimate that when Kirch went belly up, the company’s bad debts totaled €10 billion ($13 billion).”69 The impact of the bankruptcy sent ripple effects through an incredible array of high-profile businesses and even governments:
■ The banking world: HypoVereinsbank, Germany’s second-largest publicly traded bank, and Bayerishe Landesbank (owned 50 percent by the Bavarian government) combined had loaned Kirch well over $1 billion.
■ Kirch had employed over 10,000 people.
■ Kirch held the rights to Formula One racing, and some worried it could destabilize the entire sport.
■ Kirch held the broadcast rights to the German soccer league (and the worldwide broadcast rights to the World Cup), and missed payments could have thrown the sport into turmoil.
■ It became a political issue, in that the Bavarian premiere Edmund Stoiber was the opponent in 2002 to Chancellor Gerhard Shroeder’s re-election; speaking of the Bayerishe Landesbank’s $1.7 billion in outstanding loans, Time magazine quoted Shroeder as saying: “This is not an indication of economic competence, but the opposite …”70
■ Kirch owned more than a one-third share in Germany’s largest publisher, Axel Springer Verlag.
There are many reputed causes, but two facts were, at minimum, catalytic forces. First, in an effort to build a digital pay service, Kirch tried to reproduce the strategy that had been so successful in free television: lock up rights. The difference was that by the late 1990s, the international markets had matured, studios had grown shrewder (and perhaps greedy), and the costs had ballooned. In 1996, for example, a 10-year deal with Paramount was announced for $1 billion.71 Unfortunately, the field-of-dreams thinking did not lead to subscribers rushing to the service. Pay TV subscriptions did not come close to estimates, and the service, as described by Time, was losing money fast: “Kirch managed to sign up 2.4 million subscribers; the break-even point was 4 million. The company was losing more than $2 million a day and he borrowed heavily to keep it running.”72 Second, Kirch acquired the distribution rights to Formula One, another investment reportedly in the billions. This acquisition was targeted, in part, to gain monopoly-broadcasting control of the sport to drive viewers to its channels. A second and more controversial theory was that the group was also working to rescue EM.TV, a company that had a somewhat symbiotic relationship with the Kirch family of companies. Animation producer and distributor EM.TV was founded by a former Kirch executive, Thomas Haffa, and had a meteoric rise in value. Germany had never had a small market cap exchange such as the NASDAQ in the United States, and in the heyday of the Internet had launched a new exchange, appropriately called the Neur Markt. EM.TV was the star of the Neur Markt, going public, as described by Business Week, on revenues of only about $15 million and soon seeing its stock rise to into the multibillions:
EM.TV & Merchandising, a Munich outfit that may well be Europe’s hottest company. EM.TV had a tiny $15 million in annual sales when it went public in October 1997. But over the past 10 months it has grown at an explosive rate as Haffa has spun deal after deal with the biggest players in the world of entertainment, from Walt Disney Co. to German media titan Leo Kirch. Its stock is up around 10,000 percent, to nearly $1,000 on Germany’s growth stock exchange, the Neuer Markt. The stock carries a price-earnings ratio of roughly 90; Merrill Lynch & Co. estimates the company will earn $38.3 million this year on sales of $117 million.73
Part of its success was directly tied to Kirch, as EM.TV formed a venture and programming block called “Junior,” which gave EM.TV the exclusive rights to Kirch’s entire 20,000-title library of animated titles; for its part, Kirch helped land programming on its stations, guaranteeing distribution for the titles. EM.TV then leveraged this base with the fortunate circumstance that few, if any, major German media companies had ever been available to the public for investment; the two local giants, Bertlesman and Kirch, were both closely held private family companies.
EM.TV used its stock market value to go on an acquisition binge, first buying or acquiring investments in smaller animation studios, and then nabbing a big fish with the purchase of the Jim Henson Company. In a story on the cover of Business Week titled “The Cartoon King,” Thomas Haffa boasted that they would rival Disney, and securing the prized Henson company was almost a metaphorical move to prove its ambition.74 Several years before, after the death of Jim Henson, a pending acquisition of Henson by Disney fell apart in a public spat and now, nearly a decade later, the Germans had won the day. Of course, there was an enormous price: the reported sales price was $680 million, a figure that many insiders considered a significant premium over other market offers.75 (Note: In an odd twist of fate, EM.TV ultimately sold Henson back to the Henson family (for a fraction of what it paid), who then turned around and sold the company to Disney, completing an odyssey that had the Muppets initially and then again in the Disney family of brands.)
The next deal was the straw that broke the camel’s back. EM.TV, which up to that point had been a company focused on children’s programming and drew strength from its merchandising abilities, diversified to acquire controlling interest in the sport of Formula One racing. In October 2000, EM.TV came under fire for irregularities in the reporting of earnings tied to the Henson acquisition, and the stock price crashed 32 percent in two days, and then shortly fell to less than one-third of its 52-week high.76 Caught in a downward spiral, with insufficient cash flow to sustain operations, the company started selling assets. The big prize was Formula One, which Haffa sold to Kirch. (Note: As another aside to the story, the German Neuer Markt, which had been based on the NASDAQ, eventually went out of business; although I have not seen it written about, EM.TV had been a significant percentage of the market’s overall capitalization (e.g., several percent), and the failure of EM.TV started the spiral that led to the downfall of the whole market! Imagine a U.S. bankruptcy that actually helped take down the whole stock market and you can glean the enormity of the Kirch and EM.TV saga.)
The Formula One acquisition did not stem the tide of the digital pay services losses, however, and the collective weight of debt eventually put the once-dominant company into bankruptcy. Perhaps in a move to gain scale as global media partners were growing and perhaps to raise capital, given the slow subscriber growth (partially attributed to an expensive set-top box digital decoder), Kirch started offering small stakes in his empire for the first time; Silvio Berlusconi’s Mediaset in Italy, Rupert Murdoch’s NewsCorp, and German publisher Axel Springer all took small shares or had put options. When Axel Springer exercised its put option worth $670 million, and then Murdoch followed, the company, as described by Business Week, collapsed:
What went wrong? Everything, say industry execs and ex-Kirch employees. The set-top decoder cost $500, and Kirch stubbornly tried to pass the cost onto subscribers … Underlying pay TV’s woes were the huge sums Kirch paid for rights to films and sporting events. His deals with foreign media companies obligated him to pay some $2.6 billion for films through 2006, West LB estimates. Vivendi is just one of the companies embroiled in litigation as it seeks to collect some $200 million from Kirch. Industry insiders believe he owes Paramount $100 million … Most important, Kirch had a 45-year history of borrowing big, betting big, and winning big. It was hard to imagine he would fail.77
(Note: At the time, Vivendi was the parent to Universal and Canal+.)
Within a few short years, both Kirch and EM.TV were reduced to shells of their former selves and the heyday of Germany as the key territory financing Hollywood television came to an abrupt end. The country, though, still remains one of the strongest TV markets. ProSiebenSat1, previously consolidated by Kirch (ProSieben had been founded by his son Thomas), was acquired by Israeli Power Rangers mogul and Fox Kids founder/co-owner Haim Saban. Saban, cash rich from the sale of Fox Family to Disney (since rebranded as ABC Family), cleverly bought during the tough days following the dual crashes of the Internet and Kirch, and in just a few years turned the network around and sold the group at the end of 2006 for more than $7.5 billion, a multiple of the purchase price.78
I have included this detailed background to illustrate a few salient points about the international television market. First, it is large. Once a stepchild of Hollywood, individual countries now have the scale to compete on a level playing field with the United States. Betafilm and Kirch produced and acquired quality programming in a quantity that rivaled any U.S. group. (Note: Betafilm today is once again a major producer/distributor.) Second, the market dynamics are no different than those found in the United States. Fierce competition for programming and eyeballs on networks leads to enormous risk-taking. Third, all Hollywood studios had deals with Kirch, gaining significant cash flow they could count on against production budgets. Fourth, the international TV market is a perfect example of the world economy. In the case of Kirch, a German company became a global media player that fueled and supported the cash flow of multiple Hollywood studios and producers. It acquired the TV rights to the second-most-watched sport in the world, and ultimately sold its leading network in bankruptcy to an Israeli-born entrepreneur (Haim Saban) who made his fortune on kids’ and animated programming in the United States (having leveraged the fortune from Mighty Morphin Power Rangers into the building and sale of Fox Family). For Saban, his timing and navigation of the kids’ programming space outwitted EM.TV. In the end, somehow, most of the key children’s assets (the Muppets and Fox Family), ended up with Disney.
A New Landscape—Impact of DVRs, VOD, and Hardware
In 2005, a sea change began to take shape in the television landscape. From the inception of television through the first few years of the new millennium, the concept of television was relatively static. Viewers watched a monitor, and over time the quality of the monitor had improved, as had the channel offerings. From black and white to color, then from standard definition to high definition, from analog to digital, from square 4:3 to theatrical 16:9 aspect ratios, from stereo to home theater (and now from 2D to 3D), the viewing experience kept improving. Similarly, the quantity, and arguably the quality, of programming increased and improved from the big three networks, to tens of channels on cable, to hundreds of options via satellite. The range of programs available diversified exponentially. What fundamentally started to change in the beginning of the twenty-first century, however, was that the viewer could become the programmer. The world had evolved to a media mandate of “whatever you want, when you want it, and how you want it.”
This change started with the Internet, and then the file-sharing capabilities enabled by Napster in the music/audio world. It was only a matter of time before digital compression improved enough and bandwidth became cheap enough that the same trends and demands emerged in video media. While DVRs had already started to become popular and improved user-friendly VOD options were integrated into the TV remote via the customer’s cable or satellite box, the mid 2000s were a watershed period that ushered in an era of mass experimentation. Not only was VOD and DVR penetration growing quickly, but in a span of a year or so, virtually all networks and broadcasters were seeking ways to make their television programming available via Internet access, downloadable portable devices, and mobile phones—and this all before the further extension into apps and tablets. When the right models hit (e.g., iTunes, Hulu, Netflix), consumers adopted the new services/products with unprecedented speed.
Chapter 7 discusses the economics and emergence of these new distribution platforms in more detail, while the next section simply highlights a few of the new options that were poised to change the television landscape—overnight and forever.
First, there was TiVo, a revolutionary technology that allowed the pausing of live television. The essence of TiVo was that the technology converted a television into an easy, better, and virtually idiot-proof VCR—but not just a VCR that recorded shows, a type of digital recorder that allowed viewers to manipulate television shows as if they were being played via a VCR. Soon, the technology became more common, with cable companies such as Comcast offering bundled recorders with its service. The functionality initially enabled by the TiVo brand gave way in an OEM world to generic versions labeled digital video recorders (DVRs).
TiVo had the first-mover advantage in terms of digital recording technology, and in addition to being able to pause live TV and record programs for playback with VCR functionality, the storage capacity enabled viewers to record a season of programs with the press of one button (record all episodes in the season of X). People that used TiVo became quickly addicted, but by 2005 the upstart Silicon Valley-based company was facing fierce competition from cable providers offering copycat DVR services. In particular, large cable providers such as Comcast aggressively marketed like-services at competitive prices with the marketing advantage of upgrading a captive installed base of customers. (Note: Comcast and TiVo then struck a deal to offer customers TiVo, meaning specific TiVo interface features.) As earlier discussed, the adoption of DVRs and resulting change in viewing patterns had such a profound impact that it led to a fundamental change in measuring ratings (Live +).
What is a bit hard to fathom is how quickly today new technologies lose their competitive advantage and simply become a commoditized feature set in digital devices. Today, the pausing feature of Tivo is a consumer expectation in any hardware (or even software) capable of exploiting the function. Of course, this is an area rife for patent claims, as evidenced by Apple’s ire over features in Android smartphones.
Beyond the expanded access to programming enabled by free VOD (as discussed previously when asking the question “What is free TV?”), we are still in the infancy in terms of VOD applications. There is no reason conceptually that once viewers become more accustomed to VOD applications, they will not demand more personalized scheduling options: we should expect the TV paradigm to shift again to one where the viewer can be the programmer.
If I were to download 30 programs and pay for them (or select a cue of programs from free VOD options), some from TBS, some from CBS, some movies that were only available currently on DVD/video, some content from the Web, and store them for viewing on my hard drive (or set-top box, or iPod, or the cloud, or whatever), what would I call this compilation? Would it be my favorites? Would it be akin to a Netflix subscription where I paid to have 20 titles out at once for a fixed monthly subscription fee? Would it be akin to my having programmed my own mini-TV channel where I paid for the programming access? As technology puts more control in the consumer’s hands, the boundaries defining TV become more blurred (again, see Chapter 7 for a discussion of the new paradigm).
■ What is “free TV” is a rapidly moving target, with the development of advertising-supported AVOD services such as Hulu; additionally, key online providers such as YouTube, able to more finely target niches, are launching bouquets of original channels and even challenging conventional advertising practices with digital upfront markets.
■ Where you can watch TV is evolving quickly, with networks offering “catch-up” VOD access on their own branded websites and via apps.
■ Technology is shifting advertising metrics—DVRs have changed ratings tracking to “Live + 3,” but how soon will we see “Live + Hulu”? Additionally, the standardization and flexibility of targeted/personalized streaming video advertisements is creating opportunities and challenges, with a mismatch in metrics between ratings and CPMs/engagement statistics.
■ Piracy and global access to debuts via English-language websites is creating pressure to launch shows “day-and-date” internationally with the United States.
■ Second-run repeat values, which historically drive long-term library values, are threatened because of wider, earlier repeat access from VOD applications (the pie may actually shrink and reduce ultimates if new revenues do not exceed resulting declines in syndication values).
■ Multiplexing of channels is creating block-based time-shifting to add flexibility for viewer access (and quality flexibility with HD channels), enabling linear channels to compete more effectively in a more a la carte VOD world.
■ Pay television is facing unprecedented challenges from OTT online services, such as Netflix, which may have roots in other markets (e.g., video) but at their core as subscription aggregators look much like a new breed of pay TV service.
■ Apps are enabling direct-to-consumer distribution of TV content via a variety of business models (e.g., HBO Go via SVOD), expanding reach, enabling new levels of engagement/interactivity, and making second-screen viewing mass market.
■ As more players enter the competitive landscape for providing and aggregating content, services are turning toward producing more original content as one of the few differentiators.
■ In the new TV paradigm, we can imagine the viewer becoming the programmer, aggregating a type of “favorites” list from a variety of channels and sources, and creating a personalized schedule.