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Cable Nets Step Up Their Studio Game

USA Network's upcoming Mr. Robot, TBS’ Angie Tribeca and A&E’s Texas Rising are three of cable TV’s highest-profile new shows, part of an original content wave that shows no sign of crashing. The common trait they and an increasing number of other cable series all share, illustrates a more meaningful trend: They were produced by studios controlled by the same cable networks that air them.

Cable networks have profited from adding original shows to schedules. But now the networks want to cash in on a burgeoning international market for dramas and comedies as well as digital revenue from streaming video-on-demand services such as Netflix.

The studio push comes at a time when media is going through intense changes that make the future of the television business hard to predict. The fundamentals of programming, distribution and advertising are all being altered by digital technology that’s likely to disrupt the predictably high profit margins cable networks currently enjoy.

Owning content has become a popular strategy for programmers as advertising dollars become harder to count on, and as distributors look to create skinnier bundles that pay subscriber fees to fewer networks.

Discovery Communications and Scripps Networks Interactive boast about their ability to exploit digital and international opportunities because they own their content. And increasingly, as more cable networks shift from acquired content to original programming—particularly costlier scripted series—they’ve established studios that can develop, produce and own these valuable assets.

The broadcast networks learned this lesson after the financial interest and syndication rules were repealed. Now it’s cable’s turn.

In the past couple of years, NBCUniversal has established Universal Cable Productions, A+E Networks has set up A+E Studios, AMC Productions owns shows including The Walking Dead, Turn and Halt and Catch Fire; and Crown MediaFamily Networks last month set up Crown Media Productions. Earlier this year, John Malone exchanged shares in Starz for a stake in Lionsgate, a move that will bring those premium networks and a studio closer together.

“The studio is one of the primary ways we are hoping to grow the business going forward. We’re doing what we’ve always done on the reality side, which is to develop, create, own and then monetize. And I think we see an opportunity to do that more on the scripted side of things,” says Bob DeBitetto, president of brand strategy, business development and A+E Studiofor A+E Networks.

Owning content is a gift that keeps giving. CBS CEO Les Moonves loves to crow about how 50 years after it stopped production, I Love Lucy was still generating $20 million in annual profits. And the No. 2 home entertainment performer for Universal Television? Columbo.

Getting into the studio business is a fairly low-cost, high-reward endeavor, executives and analysts say. The main cost is funding the 30% or so of a show’s production cost that wouldn’t have been covered by licensing that show from a studio. Other costs depend on how many non-network employees the studio decides to put in development and production positions.

And if one of the studio’s shows flops, the network still takes most of the financial hit, while revenue from international or digital sales eventually refills the studio’ s coffers.

“It is far more attractive to be in the TV production business than it ever has been,” says RBC Capital analyst David Bank. “It’s hard to have movie-studio-like losses when a show bombs. International will bail you out.”

All in the Family

Even when a network is a corporate sibling of one of the most prolific producers of TV shows, getting into the studio business looks like an idea worth green lighting.

“The strategy is for us to essentially control more of our own destiny and take an ownership and have Turner be its own studio,” says Turner Broadcasting CEO John Martin. “And the reason why that’s important is because more and more we’re looking at these network businesses as a way to create assets and these assets then can be exploited in downstream windows and geographically around the world.”

Martin says that owning content enables Turner to feed its growing general entertainment business outside the United States in addition to monetizing shows in the SVOD and VOD markets.

Turner Original Studios is a “big priority” for Turner’s new chief creative officer Kevin Reilly. The studio reports to Reilly and is being headed up Sandra Dewey, a business affairs exec at Turner for about 15 years. One project at the studio is a comedy pilot from Jason Jones and Samantha Bee.

Even as it’s building its own studio, Turner is deepening its relationship with Warner Bros. “Kevin Tsujihara would say we at Turner are arguably his most important partner,” Martin says. Warner Bros. will control projects for Turner if Warner Bros. brings the project to the network or if it’s got “better capabilities to monetize them downstream in the various windows and various geographies.”

Martin’s own professional path convinced him of the merits of the studio business. When he was chief financial officer Time Warner, the company did an analysis of its businesses to determine which had the highest returns on investment. “The best business to be in is the TV production business because the returns are so high,” he says. “It’s not a tremendous outlay of capital investment and you make your money back with certainty and you make it back quickly. So extending that logic what would then say we ought to be producing as many television shows as possible.”

Owning and operating a studio is not terribly capital-intensive and can reward the patient. In a recent report, analyst Todd Juenger of Sanford C. Bernstein noted that distributors and TV networks appear to be making higher profit margins than studios, which own the valuable content. Networks and MVPDs are registering 40% profit margins, while studio margins are about 15%. Returns on invested capital, he says were about 30% for networks, 20% for MVPDs and high single digits to low double digits for the studios.

But Juenger notes that in the current marketplace, media companies are cutting costs to maintain margins. “But they can’t do that forever. Hence we expect margin contraction,” he says. If you can’t be a star like Beyoncé or the NFL, “then maybe the best place is to be a studio. Yes, you’re starting at lower margins and ROIC. But there is no reason they should compress. Maybe they’ll expand.”

Studio margins will expand because demand for premium video content is growing faster than ever, which means more projects going into production, he says. “Investing more to retain audiences isn’t good for network margins (unless you’re the lucky network who finds the next Walking Dead), but it sure is good for the studios.”

It’s Always Sunny

FX, part of media giant 21st Century Fox, got into the studio business 10 years ago, when it decided it would be better off paying a half-million dollars an episode of its own money to fund a low-cost comedy, rather than bringing in a partner, giving up half of the ownership, and paying 65% as a license fee. The result of that decision: It’s Always Sunny In Philadelphia.

“That proved to be a really lucrative and successful model because that show turned out to be a really big hit,” says Eric Schrier, president of original programming at FX Networks and FX Productions. “Basically we looked at the deficit finance business even on the one-hours and there wasn’t any risk—only potential upside, based on the value of the properties and the ancillary markets. And then if you had a hit, you’d really benefit from it.”

Basically, he says, “you’re owning versus renting. It’s much better to be an owner than a renter, especially if there’s no downside.”

Schrier says FX Productions’ half-hour comedy model has become very profitable. “We’re paying out profits to the profit participants on a number of our shows and that’s great for our business,” he says, pointing to a Wilfred, a sitcom that ran just four years. “We sent out profit checks on it, which is great.”

Eventually FX began owning most of its hour-long dramas, such as Sons of Anarchy, and those have proved profitable as well. “It turned us from a dual revenue stream business into a three revenue stream business,” Schrier says.

The arrangement also makes sense from a creative point of view. “We’ve always been very involved in our process. So there aren’t studio notes and then network notes. It’s all done as one entity,” Schrier says. “We take a 360-degree approach to these shows. So we’re not just thinking about how do we put it on our air, how do we drive ratings, how do we drive ad sales dollars. We’re looking at building brands here.” And that means getting involved in everything from home video sales to merchandising.

As a studio, FX Productions has done overall deals and first-look deals with writers and producers. While that’s been good building deeper relationships with talent, not all of their ideas are right for FX, and the studio must sell those projects to other outlets.

Wayward Pines, set to air on the Fox broadcast network, was the first example of FX taking an idea down the block. “That was more of a corporate synergy thing,” notes Schrier, “but we’re going to be taking out some projects that aren’t part of the FX vernacular and hopefully be selling them.”

For example, FX doesn’t do unscripted shows, so those ideas will be sold elsewhere. And even with scripted, FX has only so much shelf space. “If good IP comes from the talent that we’re working with, we have an obligation to the talent to go out there and sell it. If we can make some money off of it, great.”

Jeff Wachtel, who as chief content officer at NBCUniversal Cable Entertainment oversees Universal Cable Productions and Wilshire Studios, says the entry of networks into the studio business is a strong indicator of how quickly the industry is changing.

“For all of our careers, we’ve lived in a completely network-centric world. Every decision, from ‘Should we do a show about…’ through ‘How do we distribute it? What markets are at play?’ and ‘What’s its long-term viability?’ have been dictated by that sliver of time when it’s exposed on a primary United States network,” Wachtel says.

With linear ratings eroding and shows being available and watched in more places, “things are shifting to a place where the people who create the shows and ultimately control the shows—the long tail—need to have more say about where the show is windowed,” he adds.

Network linchpins

At NBCUniversal, the networks remain the linchpins of the business, but the environment is getting more difficult. “How do you make up the difference in ad revenue that’s under attack because of continually lower ratings? One way you do it is you flip it on its side and you think from the studio perspective. I’m creating this property. How can I maximize it for the long term?” Wachtel says.

As head of the studio, his job is to manage NBCU’s content, looking to answer crucial questions: What’s best for the network? How much ownership is appropriate? Should the company pick up a show that’s getting lower ratings because we’re making a lot of money from it internationally?

“There are two propositions that have to be balanced,” according to Wachtel. “One is how do you make the shows make the most money and what’s the best version of each network in, let’s face it, a really challenged world.”

Wachtel works closely with NBCU’s networks. The studio helped turn a project following comedians into separate companion series on Oxygen and Esquire, Living with Funny and Comedians of L.A.

UCP also does projects for outside networks. Billy Eichner and Amy Poehler brought the studio a script for a comedy called Difficult People. Wachtel recounted the process, “We know what their show is. It’s a downtown Will & Grace. We could do the process and develop this for the next 18 months or we could just give them a couple of hundred thousand dollars and tell them to go and shoot it. We did that. We had a pilot—rough, but a pilot.” It turned out to be a little edgy for USA Network, so “we took it to Hulu and they ordered a series.”

When other studios have projects that would fit on one of NBCU’s networks, Wachtel works to own a piece of the show. When Lionsgate brought The Royals to E!, NBC convinced the studio that the show would get more support if NBCU also had a piece of the upside.

“We were going to make The Royals anyway but we said to the very smart guys at Lionsgate that we have more of a sure thing if you’re on board with us on this one,” he says.

A Promising Start

A+E Networks started its studio in 2013. “I think it’s seeming like a better idea all the time,” says DeBitetto, who’d previously run A&E Network. “It’s been a good first year. An active year. I think I’ll say with some humility, a little more active than some might have expected, which is always a good thing,” he says.

At first A+E Studios picked up projects that A&E, History and Lifetime had already developed, some of which were co-productions. Projects included Houdini, Sons of Liberty and the upcoming Texas Rising, which will air for 10 hours on History starting next month. The studio has produced Carleton Cuse’s The Returned, a remake of a cult-favorite French-language supernatural drama, which is airing on A&E, and Unreal, a scripted look at a Bachelor-esque reality show, which premieres in June on Lifetime.

“We have a lot in development,” DeBitetto says. “Our big three networks are the priority. We wouldn’t exist but for the fact that we have these three networks.”

But A&E’s networks won’t be able to air everything the studio is developing. “They’re going to make choices. We’re going to have a lot of really good material. We’re going to be a place that the community wants to come and work with,” DeBitetto says. “They need to know that if the project for whatever reason doesn’t go forward with one of our inside networks, that we’re going to work with them to see if we can get it set up elsewhere.”

The studio has announced overall talent deals with Cuse, best known for Lost; Michael Hirst, who writes History’s Vikings; and Rachel Winter, who produced the Oscar-winning film Dallas Buyers Club.

So activity, yes. But is A+E Studios making money?

“It’s Year One—talk to me in Year Three,” DeBitetto says. “I would say there are already some very positive indicators. But I think realistically if you look at it over a three-year business plan type of horizon, which is what we do, I suspect that we will be.”

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.