July 2013
Volume 33 No. 5

October 2013
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The Economy of U.S. Studio Biz Model is Financial, Art

By Dom Serafini

Naysayers who under-estimate the business of traditional television had better research the rich potential of the medium. The only drawback could be that those riches are concentrated among some 100 companies worldwide and, in turn, these companies get most of their content from just seven U.S. studios: CBS, Disney-ABC, NBCUniversal, Paramount, Sony Pictures, 20th Century Fox and Warner Bros.

Before reporting on the comments of U.S. studio executives regarding current and future opportunities, let’s analyze the global audiovisual market and what it represents for the U.S. TV industry.

According to a study by France-based IDATE, the 2013 world TV market will generate a total business of $323 billion, with 44 percent coming from advertising, 47 percent subscription fees and nine percent public funding. Considering that programming costs account for about 50 percent of total TV outlet income, we can safely assume that content represents at least a $160 billion portion of that amount. As a point of reference, in the U.S., cable networks alone collectively spend over $20 billion a year on programs.

Granted, the U.S. represents nearly 36 percent of the total global TV market, but Europe is not far behind with 30 percent, followed by Asia-Pacific (21 percent), LATAM (nearly nine percent) and MEA (nearly three percent).

In terms of TV/video rights exports, the U.S. generates an estimated $20 billion a year, which, added to the U.S. domestic TV business, would bring the total TV content sales business to nearly $70 billion a year. If we further consider that up to 70 percent of that business is controlled mostly by U.S. studios, some $50 billion is shared among seven companies, for an average of $7 billion each per year.

Recently, Chase Carey, president of 21st Century Fox, reported that in 2016 the company expects to generate $9 billion, which would include its theatrical business.

That’s a serious and rich TV business indeed, and given the numbers and the growth potential, the future could not be brighter. Only five countries absorb more than 58 percent of U.S. audiovisual exports (the U.K., Canada, Germany, Japan and France). Reportedly, the value of imported drama series for 119 European broadcasters alone across 21 countries reaches $7 billion a year, or 15 percent of total programming investments, of which the U.S. takes at least 80 percent.

There are also emerging countries with large domestic TV markets such as Brazil ($14.1 billion), China ($11.3 billion) and India ($6.9 billion) that are already big consumers of American movies (with India the fourth largest and China the seventh largest) with great growth potential for TV content.

The U.S. studios’ economic power, though, has to match their financial power, considering that each episode of a drama picked up by an American broadcast TV network carries a deficit of at least $2 million, which, for a 13-episode order, adds up to $26 million. Multiply that by the 29 new dramas introduced this fall alone, the additional episodes to complete the season and the newly discovered summer original programming, and it is clear that only a studio system can finance production deficits to the tune of $1.5 billion a year collectively.

Indeed, the U.S. television studios’ business model is so unique that no other country has been able to duplicate or replicate it. Basically, this is because it doesn’t make any business sense. Would any other TV industry in the world be willing or able to spend more than $500 million a year on development to come up with shows that have up to an 80 percent failure rate? (In the view of a former top-level studio executive, the failure rate can indeed reach 80 percent, but the norm is just 20 percent, with large studios averaging close to 50-60 percent). And this is after having invested $240 million to produce pilots (last May out of 98 pilots commissioned to the major six U.S. studios, about 50 were actually picked up), and accumulating the aforementioned estimated $1.5 billion in deficit per year.

Fortunately for the studios, to generate cash they can also collaterize their library for financial loans and monetize them with transactional revenue. Reportedly, a TV library loses an estimated 11.4 percent of its value from year two to 11, and 7.5 percent from year 12 to 21, after which depreciation virtually ceases.

Let’s do the numbers: A studio produces for its own broadcast TV network (or others) a primetime drama carrying a $2 million deficit per episode and takes a tax write-off on it. From that same show, the network grosses an average of $7 million and nets $5 million. The studio then recoups the deficit internationally (including the seven to 10 percent cost of doing business) and generates $1 million per episode in re-runs (off-net) in domestic syndication. In effect, an hour-long drama costs a studio $3 million, while generating revenues for the studio-broadcast group of $9.5 million ($7 million from the network, $1.5 million internationally and $1 million in syndication), bringing profits of $6 million after deducting distribution, development and interest costs (less than that if producers’ participation is involved).

With that rate of return, even at an 80 percent failure rate, the studio level alone will bring in a hefty 10 percent average ROI on an output per studio of 15 TV drama series per year. The sitcoms that succeed don’t do well at the international level, but they’re manna domestically. In effect, for the studios, content is a portfolio business.

And all this is within a four-year period, with a library value that continues to be monetized over the years and without considering digital, international channels, merchandising and other ancillary and transactional revenues.

Indeed, there is a science to this business model called “Ultimate,” a technique unique to the U.S. studios whereby executives can figure out how much revenue will be generated by each movie title or TV series. Ultimates are updated monthly by the studios’ financial people with fresh data from the sales force providing for more incisive forecasts. The Ultimates, together with other moneymaking rituals, like the networks’ Upfronts (pre-sales of primetime broadcast TV commercial air time) and the L.A. Screenings (Hollywood’s showcase for new primetime TV series), make for the studios’ well-oiled money grinding machines.

However, the U.S. studio moneymaking engine is its ubiquitous and omnipresent content distribution apparatus, which encompasses international, domestic distribution (the latter is often referred to as “syndication”) and international cable and satellite TV channels that lately tend to fall under one executive, as is the case with Steve Mosko at Sony Pictures Television; Armando Nuñez at CBS Television Studios; Ben Pyne at Disney-ABC; Jeff Schlesinger at Warner Bros.Television and Dennis Maguire at Paramount Pictures. Only Fox and NBCUniversal remain under the traditionally separate domestic and international structures (see the executive roster sidebar on pg. 59).

Disney was the first to integrate program distribution. In 2007 the studio placed its many content distribution units under one group, “in order to speak with one voice, one vision and have one agenda,” explained Ben Pyne, president of Global Distribution at Disney Media Networks.

At Sony Pictures, TV program distribution and channel divisions have been integrated under Steve Mosko since 2008. CBS integrated content sales in 2012, followed by Warner Bros in 2013.

International distribution and domestic first-run (syndication) businesses provide the studios with their short-term strategy (to enhance cash-flow), while long-term results are generated by off-net syndication. For these reasons studio executives are reluctant to compare revenues, because each division has different financial peaks. For example, international revenues on a network show start to come in immediately, while the domestic division has to wait four years for the off-net income to come in. The business model for first-run is still cash plus barter with some elements of revenue sharing, in the sense that, if the show performs well above what was expected, there will be some extra income for the distributor. First-run genres are game shows, court shows, talk and tabloid news/magazine shows like TMZ and ET.

It has been said that at Fox, Mark Kaner’s International TV division makes close to $2.3 billion in sales per year. Sony Television is responsible for more than 50 percent of Sony Pictures Entertainment’s profit of $450 million. Sony’s 124 channels in 159 countries generate a reported $1.5 billion a year on their own.

Commented Disney’s Ben Pyne: “Disney Channels Worldwide is a global portfolio of over 100 kid-driven, family inclusive entertainment channels and/or channel feeds available in 166 countries/territories, in 34 languages, that generate significant revenues and create brand awareness.”

One might think that the biggest challenge for the U.S. studios would be the domestic TV business, however recent developments proved the opposite on all levels: broadcast, syndication and digital. And, if the studio also owns a network, add retrans fees to those plusses.

For the studios, the network and syndication businesses represent the engine that powers their content factories. They are also conduits for producing the high-quality content that makes lots of money internationally and allows the U.S. networks and their local affiliates to collect retrans fees from U.S. cable, satellite and telco operators and to get an additional percentage from the affiliates’ own retrans fees. The same content also generates cash from digital U.S. outlets like Amazon and Netflix.

Explained Disney’s Pyne,“We have shows, like Grey’s Anatomy, that are available on iTunes as well as our ‘Hot from the US’ service 24 hours after the U.S. broadcast. Some other studios do the same depending on how the show is sold to advertisers. For example, with live plus four, AC Nielsen adds the audience on the broadcast plus video on demand for four days, after which the shows go on transactional digital platforms.”

Contrary to popular belief, U.S. broadcast television not only isn’t dying, but it’s thriving. At the end of the 2012-13 primetime TV season CBS averaged 11.9 million viewers a day, ABC 7.8 million, FOX 7.1 million and NBC seven million.

Moving on to the so-called “uncertain advertising market,” at the conclusion of the Upfront sales that began in mid-May, the aforementioned four U.S. broadcast networks, plus CW, received commitments from advertisers to pre-buy anywhere from around $8.7 billion to $9.15 billion worth of commercial time during the 2013-14 primetime season. The Upfronts showed that U.S. broadcast television is still a good way for advertisers to get reach and frequency and that large brands can’t do without broadcast television. As FOX Broadcasting’s chairman of Entertainment, Kevin Reilly explained, the recent Nielsen cross-platform report stated that television consumption is up by nearly two hours on average, to 157 hours and 32 minutes per individual per month.

On the cable, satellite and telco distribution front, according to some estimates, by 2015 retrans fees to broadcasters will increase to $4.3 billion from $2.4 billion in 2012. Perhaps the business model will change toward streaming if cable and satellite operators drop the networks in favor of original programming a la carte. After all it is expected that viewing via digital sources will increase and potentially surpass traditional distribution. As CBS Corp.’s Les Moonves pointed out, network television is not dying, “it’s just changing…We don’t care where you watch the shows.”

However, even in the realm of streaming, the balls are now moving toward the networks’ court. Recently, the U.S. broadcast TV networks have won the first legal round in court against companies that stream local stations on the Internet without their permission or compensation.
As for the fact that Sony Pictures does not own a U.S. broadcast network, in the view of John Weiser, president of U.S. TV Distribution, “it provides a competitive advantage, since we sell product to all buyers and maximize revenues for our producers.”

Similarly, Steve Mosko, president of Sony Pictures Television, updated an earlier report: “We do programming for 16 networks. Being Switzerland in some ways is a good thing because we can be in business with everybody. What’s attractive to producers, writers and actors is that they can come to us and know we’re going to go out and sell it to the best possible network.”

However, recently Sony Pictures Television (SPT) Networks launched getTV, a new U.S. digital broadcast television network airing movies from Hollywood’s golden era. Programming primarily comes from the Sony Pictures library, featuring more than 3,500 films. It is the third wholly owned Sony-branded channel in the U.S., after Sony Movie Channel and Cine Sony Television.

All three channels are managed by Superna Kalle, SVP, U.S. Networks, SPT. getTV is carried on the digital subchannels of Univision Television Group-owned television stations in 24 markets that account for 44 percent of all U.S. television households, representing more than 50 million homes.

Even in the highly competitive U.S. syndication business, the studios face a bright future. Indeed, for some studios, the biggest challenge is the need for more product, especially theatrical movies and TV shows.

According to SPT’s John Weiser, in terms of avails, he sees a myriad of openings, since five out of six shows currently on air could have better ratings. As for time periods, Weiser sees opportunities in the 9 a.m.-2 p.m. time frame; also little product is working in access time and late night. And, as for Disney, “We have a robust first-run syndication in all day-parts,” said Pyne.

Armando Nuñez, president and CEO of CBS Global Distribution Group, commented, “We are launching The Arsenio Hall Show so we clearly see an opportunity in late-night for original programming. Stations have told us they are looking for alternatives to off-network sitcoms, so that is something we are taking a look at. Daytime also continues to provide opportunities for talk, court and game shows, so we focus development on that daypart as well.”

At the international level, “The power of U.S. TV drama is increasingly becoming dominant worldwide,” explained Keith LeGoy, president of International Distribution at Sony Pictures Television. LeGoy sees growth in all aspects of the business: broadcast, pay-TV, subscription and digital, for several reasons, including the improved advertising market, more competition in the pay-TV and digital areas and the fact that U.S. TV series are now primetime material in major international markets.

Even though around the world there are TV groups equally as powerful as the U.S. studios, none are currently in a position to match the financial and economic strength of the U.S. studios’ production. But, “in the near future,” predicted LeGoy, “major TV players like TF1 and Canal Plus will be able to commission English-language original series from U.S. studios, using the same model as the U.S. TV networks.”

Conversely, Disney’s Pyne doesn’t “envision that in the near future large TV organizations outside the U.S. will commission pilots to pick series. After all, they have all new U.S. product available. However, if that opportunity arises, we’re ready,” he said.

In terms of windowless international release, LeGoy said that the biggest buyers want their American content to debut as close as possible to the U.S. release date. Therefore, he foresees a closer alignment of dates worldwide.

For CBS’s Nuñez, “As a result of global demand for quality content (as evidenced by borderless social media outlets and piracy), we are offering our licensees the opportunity to program our current series on a ‘just after U.S. basis’ more and more. The real issue with ‘just after U.S.’ or ‘day- and-date’ broadcast is balancing the challenges of local market piracy against effective promotion, proper local versioning and delivery.”

Pyne said he doesn’t “foresee a collapsing of windows, even though they’re getting closer. We have series that are simulcast overseas with the U.S. release. For example, Lost was broadcast day and date with the U.S. in 64 countries. With S.H.I.E.L.D., many international premiere dates occurred close to the U.S. release last month. In some cases, our shows are broadcast overseas before they air in the U.S.”

This strategy has benefitted the U.S. studios in other ways as well, since it has been noted that file-sharing piracy is declining where legal alternatives are offered. Consumers tend to seek illegal sources if content is not available legally in all parts of the world as soon as it’s available in the U.S.