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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
. 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

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
. (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
, 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.