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Can Cable Keep Making Big Off-Net Bets?

Tucked away in Time Warner's fourth-quarter 2009 financial report was the tidbit that TNT took a $104 million writedown on its acquisition of the Warner Bros.-produced drama Without a Trace. And while deals between TNT and WB essentially move cash from one Time Warner pocket to another, it serves as a cautionary tale as cable networks lay out increasingly major dollars for off-net programming.

Trace aired on CBS from September 2002 through May 2009, and on TNT from 2004 until last December. TNT paid approximately $1.4 million an episode for the program—for a total of about $225 million—but the show never performed at expected ratings levels. When CBS decided to cancel Trace last spring, it was already playing in lesser-watched late-night slots on TNT. Writing down the show lets TNT take it off its air, and allows Warner Bros., which made money on the show, to sell it somewhere else.

While $100 million is nothing to sneeze at, Trace is an example of the big bets that cable networks must make when acquiring off-net shows. That has become more evident than ever as competition has skyrocketed for anything with a broadcast pulse, the latest example being USA paying well over $2 million per episode for NCIS: Los Angeles in a deal announced after the show had aired just seven times on CBS.

Two rules govern those bets by the cable networks: carefully calculated projections of a show's ratings potential, and the law of supply and demand. And those bets can make or break a cable outlet. “The network that's done the best at 8 p.m. on a weekly strip basis has won the year,” says one top cable executive.

Since 2006, that network has been USA, which now airs CBS' top-rated NCIS at 8 p.m. From 2002 to 2006, that network was TNT, which built its ratings on NBC Universal's Law & Order. This allowed the network to develop and launch shows such as The Closer, basic cable's most-watched original. Today, TNT airs Twentieth's Bones at 8 p.m.

At one time, TNT hoped that Trace would be such a program. It was sold to TNT in 2004, a time when broadcast dramas were particularly hot. TNN, now Spike, purchased CBS' CSI in 2002 for a record $1.9 million an episode, and in 2004 Bravo and USA together paid $1.9 million an episode for Law & Order: Criminal Intent.

“People were saying, 'This is the new level' for off-network dramas, so the marketplace accepted these prices,” says one source.

While the market has a strong hand in determining the price for off-net shows, the current market isn't a good predictor of future audience acceptance. When A&E bought HBO's The Sopranos in early 2005 for a record $2.5 million an episode, it was the hottest, most critically acclaimed show on television. The Sopranos promptly failed and became an incredibly expensive mistake for A&E.

“A&E thought it would put them on the map, but ultimately they had to take some kind of writedown on it,” says one source.

On the other hand, when USA bought CBS' NCIS for just $750,000 an episode in 2006, it seemed like a throwaway show. It skewed old, and the cable networks were saturated with off-net dramas. But USA started running it in 2008, and a new audience was drawn to the quirky procedural.

Suddenly, the show started performing both for USA and for CBS, with original episodes attracting some 20 million viewers. Today, NCIS (along with NBCU's House) is largely credited with putting USA in first place among basic cable nets, allowing it to build its brand with originals such as Burn Notice, Psych, White Collar and In Plain Sight. (Monk premiered in 2002, prior to the acquisition of NCIS.)

The possibility that off-nets will perform like NCIS is why last fall TNT and USA paid well over $2 million per episode for Warner Bros.' off-CBS The Mentalist and the NCIS spinoff, respectively.

That said, those prices should still be considered the exception, not the norm. “Nobody is going to pay those kinds of prices if you don't think it's going to work in prime,” says another cable executive.

The industry expects the next big off-net cable deal to be the sale of Warner Bros.' The Big Bang Theory, which is likely to win top prices from cable networks. These nets also are beginning to eye CBS' The Good Wife, with TNT, USA and Lifetime expected to show interest. Cable chiefs say it's a little early to acquire that show, however, which is still in its first season.

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