When NBC Universal's in-house studio produced all eight of its broadcast-network comedy pilots this year, competitors accused the company of “closing and locking its doors” to outsiders.
The strategy misfired for the network: NBC picked up only one of the new shows from recently renamed Universal Media Studios (UMS), The IT Crowd. NBC was forced to order a final season of Scrubs, a show it had threatened to cancel, from rival ABC Studios. Some executives at NBCU carped about funding seven high-priced failures without laying “off some of the risks on others.”
Even with an 80%-plus failure rate for new shows, production and co-ownership deals at network studios are on the rise. And some media conglomerates are threatening to push the in-house totals even higher next year—an untenable prospect for many in the creative community who are not tethered to vertically integrated networks/studios.
In-house and outside productions were equal in May 2006, but the difference between the two widened this year, according to Los Angeles research firm TVtracker.com. During the recent upfront schedule announcements, network orders for shows produced by in-house studios increased by 20%, to 24 from 20 a year earlier. Meanwhile, studios not aligned with the networks saw their tallies remain stagnant at 20.
Showdown over platforms
The threat of more in-house productions comes with a showdown looming between networks and third-party studios, producers and labor unions over the broadcast industry's strong desire to claim all future revenue from advertiser-supported digital and broadband platforms.
Network executives argue that they have always favored the best show for a time period, regardless of where it comes from. But artists contend that the hyper-focus on the bottom line has swung the delicate balance of power from the creative to the business side of the broadcast networks.
“The result of all this is that the independent producer no longer exists in television,” TV and movie producer/writer/director Marshall Herskovitz, president of the Producers Guild of America, testified before the FCC last fall. “Because conglomerates have been permitted to own both networks and production companies, there is no incentive for them to do business with anyone else.”
Conglomerates are frantically searching for new revenue streams, having been hit in recent years by the drastic run-up in production costs for the expensive single-camera comedies and big-ticket dramas that exemplify the new “golden age of television.” The rise in network license fees has also come as at least one desperate network each year bids up costs for everyone.
While NBC had looked internally for comedies, it ordered two scripted hour shows for fall from outside studios: comedy-action series Chuck from Warner Bros. and time-traveling Journeyman from Fox's in-house supplier, 20th Century Fox Television, the latter getting the coveted slot behind Heroes. But, on shows from the outside, the network has to cover as much as 60% of production costs in license fees and can likely air them only once.
“Repeats are not cutting it anymore,” says NBC Entertainment/UMS Co-Chairman Marc Graboff. “When NBCU owns 100% of [a series], the company can double down. We have more flexibility to exploit it by maybe offering it on the broadcast network Monday and [an owned] cable network like Sci Fi Channel on Tuesday. We can't do that with Chuck. It's only licensed for the broadcast run.”
The benefits of integration
Vertical integration has other benefits, too. ABC is expected to revive ABC Studios' cancelled, low-rated According to Jim. Another season of the sitcom would allow Disney to enhance its value in syndication, according to sources close to the negotiations.
The in-house trend is driving many deals. ABC Studios bought out the final year of Scrubs Executive Producer Bill Lawrence's contract with UMS, allowing him to return to his former Disney home with a new four-year, eight-figure overall deal. The cost saving helped ease the financial pain of NBC's having to pay a license fee to an outside studio for a show in which it has no vested financial interest.
To avoid a repeat of its comedy fiasco next year, NBCU had seriously considered integrating the network and studio into one unit. But producer Ben Silverman, recently named co-chairman with Graboff, wanted to keep them separate so that UMS would have a better chance of selling projects to outside networks.
Still, Graboff insists, the newly installed heads of the studio and NBC's development department—Katherine Pope and Teri Weinberg, respectively—are “going to function as one team, so that the folks at the studio know exactly what the network's needs are and everyone will be in lockstep.”
Ironically, UMS continues to benefit from having its biggest hit, House, on a different network. The medical drama was developed by predecessor Universal TV prior to the NBC merger, and, sources say, Fox acquired it in 2004 under a six-year term, rather than the typical seven, for a higher license fee and lower deficit. Last year, UMS negotiated an extra year. Starting in 2008, Fox will cover the entire cast's salary increases (including production and ratings-based premiums), estimated at $5 million, for the life of the series. Fox and UMS declined to comment on the deal. According to sources close to the studio, as long as House remains a hit on Fox, NBCU will benefit from substantial international and off-network revenue, even though it may have left some money on the table at Fox.
With their bottom-line focus, the networks increasingly look toward broadband and digital as a way to bolster revenues in the future. Income from those sectors is still relatively skimpy, but the networks see a potential goldmine.
While the networks try to fully understand the emerging technologies, a battalion of agents and high-priced lawyers representing producing talent are prepared to wage an assault with lawsuits and contract battles over rights to all new digital revenue. Ultimately, executives say, Hollywood's systems of checks and balances will keep all the players honest. At the moment, although no one is sure what these rights are worth, everyone wants control of them.
The ad-based platforms have been far more lucrative than pay models, which are offered as fee-based “sell-through” services on such devices as cellphones and iPods. The networks currently allow third-party studios and producers to keep the revenue from the less-profitable ventures under a temporary business model.
Corporate voices winning
The networks say it is easier to navigate the many contentious digital-rights issues, like creating online elements and using characters, when their shows are produced in-house. “It is difficult to make deals between unaffiliated studios and networks,” says one executive involved in such deals. “There is a whole bunch of 'what-ifs' and questions about what is in the best interest of the company, both domestically and internationally. It is just so much harder when there is an unaffiliated studio involved. It is a source of lots of frustration for a lot of companies.”
Digital compensation will also play a central role when TV- and movie-contract talks start July 16 with the Writers Guild of America's West and East Coast branches. A failure to reach an agreement on key residual issues could lead to the first major industry strike since 1988.
Already the notion of in-house production is a critical issue for both sides. Patric Verrone, president of WGA, West, testified to the FCC last fall, “The palpable result of consolidation on TV writers has been to reduce them to only those ideas acceptable to the corporate voice. The conglomerates,” he added, “reap vast rewards that somehow evade the talent and content providers who make them.”
Warner Bros. TV Group President Bruce Rosenblum, who runs one of the most prolific studios, doesn't appear overly concerned about the networks' dumping a system that has allowed his non-aligned company to prosper over the years. (Warner Bros. has a 50% ownership stake in The CW.) The studio placed 21 total and nine new series on next season's primetime network schedules, including two from Executive Producer Josh Schwartz (The O.C.) on The CW (Gossip Girl) and NBC (Chuck).
“The digital business is not entirely in sync yet in terms of distribution opportunities, but that will certainly happen over time,” Rosenblum says. “Nobody should be in a rush. We have the benefit of learning new things every day. There is clearly an opportunity for us to create equitable business models. Everyone is trying to find solutions, and we must factor in third-party deals as part of the equation.”
Meanwhile, Warner Bros. has been busy developing a two-pronged digital-distribution strategy of its own. The studio will build stand-alone branded sites like TMZ.com, which it has turned into a syndicated TV show launching this fall, while shopping a large volume of library product to a host of broadband destinations. Rosenblum thinks “it is best for us to be in both of those worlds.”
But digital will never replace the revenue earned from network series, and he intends to keep financing network shows—and an increasing number of more economical cable productions—in the hope of finding the next elusive hit.
“Our goal is to be the second-favorite supplier of each of these broadcast networks,” he says. “While each of the in-house studios has the most shows at their respective networks, we were the clear No. 2.”
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