Tuesday, October 16, 2012

A New Business Model for TV programs?

  In a piece originally published in The Hollywood Reporter magazine, Lacey Rose suggests that a new program production business model is emerging in cable.  My response - sort of, but not really that new.
  Historically there have been two basic business models for television programs.  In one, the broadcaster/network finances and owns the program - and bears both the risk of failure and the benefits of success.  In the other, program production and ownership is separate, and the broadcaster/network licenses the right to air the program.  In that case, the program owner bears the risk of failure, and reaps the rewards that come from success.  While the real world allows some intermixing of the models, and certainly the production of very expensive programs may require commitments from networks or sponsors, at heart there are the two fundamental models.
  In the U.S., a series of policy moves pushed the U.S. production model to the second stream - for decades broadcast networks were prohibited from any ownership of either the programs it aired, or their distribution rights beyond the initial network license agreements.  As demand for programming grew, these rules were loosened, and networks roared back into program ownership.  There's some economic downside to the network/studio ownership model, however.  First, these large firms tend to have higher production costs (union contracts and rules, and internecine competition for top talent, push costs up).  Second, as generalists, they tend to be followers of trends rather than being able to accurately predict shifts in audience preferences.  Third, with network ownership in particular, there is a tendency to emphasize short-term success in terms of revenue potential (that is, they focus on first-run licensing revenues).  Combine these, and firms become risk-adverse.
  So if you look at the big network program production model, you'll see a mix of high-cost entertainment programs (with a sizable number owned by the network), high cost sports programs obtained through licensing arrangements; low-cost news programs owned by the network, and low-cost "reality" programs (again, mostly licensed),  The networks don't fret too much about ownership of the latter three program categories, figuring that there is no significant secondary market for news, sports, and reality programs.  The production costs for entertainment programs are highly inflated (for a number of reasons), so require substantial secondary market revenues to even have a chance at recouping production costs.  Networks need these programs to remain viable and competitive, so there is a strong incentive to obtain ownership rights - first to guarantee supply, but also in the hope that secondary market revenues can offset the initial high costs of production to some degree.
  What Rose noticed, and writes about, is the growth of made-for-cable entertainment programs.  Cable audiences and revenues aren't large enough to support entertainment programming - not using the basic business model above, anyway.  So is there a new, different business model for Cable?  Not totally new in the traditional sense; what Rose notes is that the potential to reduce costs that digital brings, and the development of new marketing channels for video programs have combined to make both the producer/owner and network ownership models financially viable for the smaller scale cable markets.
  Rose looks at the success of program production house FXP (affiliated with the FX network).  The company started with a belief that producing sitcoms for cable networks could be viable if you could produce them cheaply, and keep ownership rights (so that you could benefits from licensing the program to the growing range of distribution outlets, merchandizing, and in some cases, games and movies).
"Back then, the big traditional studios didn't think there was any money to be made from cable comedy, so they ignored the space," says one executive. What (FXP figured out was that) Half-hours could make sense if you made them cheaply and -- importantly -- if you owned them. (Comedy tends to generate lower ratings during the first run but holds up better in repeats; so if you're simply licensing a series, you're paying more to get less and aren't able to take advantage of that ancillary revenue.)
New technologies meant programs could be made cheaply, if you can get talent inexpensively (and frankly, if you can produce in a non-union environment) - and talent could be enticed to take lower initial direct compensation; particularly if you could give them creative freedom and a piece of the downstream licensing rights.
  The growth in the number and value of secondary licensing markets, though, has meant that the networks are increasingly interested in program rights ownership.
"We've just figured out a way to make comedies less expensively than almost anybody can do it," notes Schrier (VP of FXP) (discussing) a template that has them producing half-hours for $400,000 to $700,000 an episode (a network sitcom can cost four times that).
It also helps that in addition to the traditional rerun and international licensing markets, substantial new markets have emerged in licensing content for home video (DVD), on-demand, streaming video, merchandizing, videogame, and even movie rights.
For instance, if FXP wholly owned the Sony TV-produced Damages -- and thus benefited more from such ancillary revenue as the nearly $2 million an episode in international license fees -- (FX Networks President) Landgraf says he would have kept the drama on the network for more than three seasons.
  What Rose looks at isn't really a new business model in the traditional, pure sense.  What's new, and impacting programming markets, is the realization that shifting cost structures and emerging secondary licensing markets let the traditional models be viable on a much smaller scale.  It's a new cable model in the sense that now those models can work in the smaller audience/revenues scale of cable markets.  And in the sense of presenting new opportunities and impacting program production markets, that's what is important.

Source -  The New Cable Model: Why It's Better to Own Than to Rent (Analysis), The Hollywood Reporter

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