Networks Get the Picture of Cost-Cutting

Creators of the police drama “Night Heat” decided that they ought to change the look of downtown Toronto just slightly before they began filming the series for broadcast to American and Canadian TV audiences.

“We smeared a little graffiti around, to make the place a little more American,” said Larry Jacobson, president of Grosso-Jacobson Productions.

The producers did a little financial improvisation as well. They signed a deal with CBS and CTV, the Canadian network, that made “Night Heat” the first Canadian show to be broadcast first-run on both American and Canadian networks. They used none of the expensive car-chase scenes that are a staple of such shows, and filmed entirely in Canada, where production costs are lower.

The bill came to about $450,000 for each hour-long episode--about half the average for such shows. Fees paid by the two networks covered the production costs, and now the producers look forward to earning perhaps $650,000 an episode from domestic and foreign reruns in syndication, Jacobson said.

Many in the industry expect to see more such deal-making and cost-cutting as the networks and their suppliers struggle in a brave new world. The changes have been brought on by an unprecedented slowdown in network advertising, increased competition for viewers and a reduction in the inflation that had permitted networks for years to easily pass on their higher costs.

Some now expect the networks to mix more low-cost shows--game shows, news hours, even no-frills soap operas--into their prime-time schedules. They are expected to produce more of their own shows, and may seek out deals such as that for “Night Heat” that allow them to cut costs by sharing expenses with foreign broadcasters.

And they may turn more often to lower-cost suppliers if the studios and major independents won’t accept the prices they offer.

“You’re going to see all kinds of new techniques,” predicts James Rosenfield, former senior executive vice president of the CBS Broadcast Group. “It’s a new era out there, and the networks and the studios are going to have to adjust.”

Anticipation of such moves has grown as the networks continue cutting staff and paring corporate expenses. Like those moves, efforts to limit the growth in programming costs poses tough choices.

The networks can’t risk losing viewer appeal for their shows, lest they drive viewers to watch independent stations, cable TV, or VCRs, and alienate their affiliated stations. And as the production companies are quick to remind them, they don’t directly control their suppliers’ business practices, but simply pay “licensing fees” for the right to air programs twice.

Yet since nearly two-thirds of the networks’ costs are in programming, the networks must find some ways to check the fast growth of such costs if they are to add luster to their balance sheets. CBS and ABC are thought to be most likely to make such moves, because they are second and third, respectively, in the prime-time ratings and are eager to reduce their substantial debt.

“There’s a lot of talk about this right now,” said Robert A. Harris, president of Universal Television, adding that “the subject involves a lot of danger for the networks.”

Harris believes that the new cost-consciousness may bring a “split-level” system of programming, in which the networks pay top dollar for their best shows, but try to cut expenses in time slots where the competition has an overwhelming edge.

ABC stirred speculation that it is moving toward such a programming philosophy when it announced plans to run “Our World,” a low-budget retrospective that relies heavily on old news footage, against NBC’s top-rated “Cosby Show” on Thursday evenings. Similarly, last August, CBS aired “The Price Is Right,” a low-budget item already in a daytime slot, against reruns of Cosby for a few weeks.

While it seems logical to run a lower-priced show up against one with seemingly unassailable ratings, industry wisdom dictates that networks should not allow a competitor’s big winner to run up even higher ratings. An unopposed winner, it is argued, allows the network with the top-rated show a chance to rack up a larger overall ratings score, thus improving its image with advertisers.

Affiliates May Shift

Too, weak programming tempts affiliate stations to preempt the network shows with syndicated programs or other offerings.

Daniel Burke, president and chief operating officer of Capital Cities/ABC, acknowledged in a recent interview that relatively low price was part of the appeal of “Our World,” though he said the network also thought the show offered an attractive alternative for those who don’t watch Cosby.

“We can’t let Cosby run on forever,” he said. “But cost is a factor.”

Talk about moving game shows to prime time has been fueled by the success of “Wheel of Fortune,” a runaway success in “fringe” prime-time hours before the network shows air.

Jules Haimovitz, president of the Viacom Networks Group unit of Viacom International, recalled that the networks regularly scheduled such quiz shows as “What’s My Line?” and “The Price Is Right” in prime time as recently as the 1960s. The 1960s was also the era of “Peyton Place,” a prime-time soap without the expensive sets or action sequences that drive up the price of such current prime-time soaps as “Dallas,” he pointed out.

“There’s risk, but you can lower costs if you’re willing to experiment,” Haimovitz said. “If I were a network, I’d at least take a look at anything. Theoretically, there’s no reason Johnny Carson has to be on in the middle of the night.”

The recent proliferation of Cosby-like sitcoms in prime time is not only because a faddish industry is trying to duplicate that show’s top ratings, observes David Gerber, president of MGM-United Artists Television. Costs for such situation comedies can be kept under $200,000 an episode, making such shows “one of the few places you can make money any more,” Gerber said.

Found Cheaper Supplier

The networks have shown that they can move to a lower-cost supplier to get the deal they want. Last spring, when MCA wouldn’t agree to pay some production costs for a new series, “Crime Story,” NBC took the contract to New World Pictures.

The networks may also begin producing more prime-time shows, both to gain more cost control and to gain an opportunity to make big profit if the shows survive for three years and can be syndicated for reruns.

Robert C. Wright, NBC’s chief executive, said NBC may soon begin producing shows for some of the three hours of prime time each evening that the networks are entitled to fill.

Using parent General Electric’s capital to finance such production, NBC may produce more specials, miniseries, “and you might see some series next year.”

Some have also predicted that the networks will urge their suppliers to rely less on expensive location shooting, limit cast sizes, use old footage rather than shoot costly action sequences and export more production to lower-cost spots such as Canada and Australia.

TV production officials are quick to point out the risks involved in such steps.

“If you want an expensive look, you’ve got to pay for it,” said Michael Dubelko, chief operating officer of Stephen J. Cannell Productions, which makes “The A-Team” and “Hunter.” Nor, he adds, will viewers take it well “if you suddenly say, ‘We can’t pay for Mr. T and George Peppard; we’re going to have Joe Blow and What’s-His-Name.’ ”

Universal Television’s Harris says the networks can cut costs themselves by making decisions on programming in the winter, rather than late spring, to give suppliers more time to negotiate salaries and efficiently produce the shows. Echoing an often-voiced complaint, he said the networks also drive up salary costs by commiting themselves to buying programs with certain actors, directors and producers.

Such commitments give the “talent” the upper hand when they sit down to negotiate salary negotiations with production companies, Harris said.

Promising Market

Former CBS executive Rosenfield said deals to sell programming for first-run broadcast abroad represents “a new, promising market.”

“Night Heat,” which chronicles the adventures of a newspaper reporter and two big-city police detectives, was begun in the 1984-85 season to fill a late-night slot. CBS wanted an action-adventure show, but didn’t want to spend the $1 million-plus per episode usually involved in buying such a product for prime time.

While the networks used to cover 100% of their suppliers’ expenses with licensing fees, such fees now typically cover only about 80% of costs. the production companies’ hopes for a profit thus rest on the prospect that the show will run for three or four years, long enough to accumulate enough episodes to merit reruns in syndication.

This season, Grosso-Jacobson has a second late-night action show, “Hot Shots,” which has also been sold for first-run broadcast in Canada and in the United States.

Meanwhile, the networks are expected to continue making cuts in program costs they control directly--those for sports and news. A number of sports events have already been dropped, or renewed at lower prices.

CBS, for example, complaining that it couldn’t make money on the college football Sun Bowl, renegotiated its contract for less than half the previous price. Last year, the network gave up the Belmont Stakes rather than pay the $3-million fee to broadcast the horse race.

The networks will try next year to cut the fast-rising costs they pay to broadcast professional football. A CBS official estimated that the three networks will lose together $130 million this year on National Football League broadcasts.

Such a loss would absorb about one-fifth of the three networks’ combined 1985 profits of $595 million.

Financial Disaster

Sports “has become a financial disaster in recent years,” said NBC’s Wright.

Television broadcasters on the network and its owned-and-operated stations are also conscious of the new atmosphere, and many on-air personalities have quietly negotiated lower salaries.

One senior network official said that while there have been salary reductions for broadcasters in the past, “across-the-board reductions like this are really unprecedented.”

The networks’ financial straits have made it easier to impose such salary cuts, according to this executive. “In the past, if you gave a guy a big cut, he was going to feel insulted, and maybe leave.”

Cuts in the networks’ news budgets is a subject handled gingerly by network executives, particularly after outrage by CBS News staff members over cost cuts contributed to the downfall of Thomas H. Wyman, the CBS chairman ousted last month.

Yet some senior executives contend that news budgets cannot be sacrosanct amid a general cost reduction. They point out that many of their larger affiliates have greatly expanded their staffs, and are competing with the network in some cases for time to run programming.

“The question is, do we need a worldwide staff that really is called on very little?” said one executive, who asked to remain unidentified.

Analysts say the reductions in payroll and overhead costs at the networks are also far from over.

So far, CBS has cut more than 700 employees from the broadcast group, and is expected to trim at least 500 more this year from the company, which has about 17,000 employees. Capital Cities/ABC has reduced about 600 of its 14,900 positions since Capital Cities acquired American Broadcasting Cos. last year, and analysts say hundreds more dismissals are expected there.

Carrying about $1.9 billion in debt, most of it from the acquisition, the company has predicted that the ABC television network will lose money this year and next.

Prefers Lean Operation

Thomas S. Murphy, chairman and chief executive of Capital Cities/ABC, is fond of pointing out that, like Laurence Tisch, the acting CBS chief executive, he believes in concentrating staff in the operating units. “We ran Capital Cities for years with a corporate staff of 35 people,” he told a gathering of reporters this month. “We believe in delegating.”

Analysts expect NBC, the ratings leader, to enjoy a sharp increase in its television network’s operating profit from the $202.5 million that it earned last year on revenue of about $2.2 billion.

Despite that expected rise, NBC’s Wright said that NBC may also face payroll and expense cuts.

Wright, citing the weak advertising market, asked department heads in an “exercise” last week to draw up hypothetical 1987 budgets that reduced expenses 5%.

While he said no decision on cuts has been made, he asserted that the network business is a “fragile” one, and suggested that NBC may have become swollen with its past several years of financial success.

Although some networks have done better than others recently, Wright said, taken as a group “the networks have been in difficulty for five to seven years.”

Network advertising revenue is expected to rise 2% this year and slightly more in 1987--figures that dramatically contrast with the 15% to 20% revenue growth that was long taken for granted. Though the networks’ costs rose rapidly as well, while inflation was high they could simply pass those costs along in the form of higher ad rates.

“The networks had double-digit growth for the better part of 30 years,” Wright said. “That icing is off the cake.

Other Problems Emerged

As inflation slowed, other problems emerged. Mergers of national consumer-products companies reduced the number of brands that needed television advertising. Computer industry advertising slowed sharply last year, and Anheuser-Busch’s current dominance over Miller Brewing in the beer market was followed by a slowing of advertising for their brands.

This year, daytime ad revenue has been cut, too, by the growing use of the 15-second commercials, which now make up about 20% of total network advertising, said Robert C. Butler, NBC’s executive vice president for finance. “Some advertisers believe they can simply substitute a 15-second spot for a 30-second one.”

About $200 million a year is now lost by the networks to so-called barter syndication. In this practice, a syndicator offers programming to television stations, selling some of the adjacent ad time and leaving the remainder to be sold by the station.

“No matter what we might hope, this won’t go away now,” said Leahy of CBS Broadcast Group.

Competition from proliferating independent stations and cable programming has been largely responsible for reducing the networks’ audience share. It has shrunk to about 76% last season, according to A. C. Nielsen Co., from 87% five years ago.

A smaller share means the networks aren’t as free to raise rates.

There is competition from other media. Newspaper publishers are talking about reducing the spread between their national and local ad rates, to better compete with the networks. Meanwhile, Procter & Gamble, the auto makers and other key TV advertisers have turned increasingly to direct mail, and special promotions to reach their audiences.

“This is a potent problem for us,” Leahy said. After years where there was little need to sell ad time aggressively, “we have to get out there and sell.”

In 1988, the national elections and the Olympics should help the networks, as they did in 1984. But few at the networks expect that windfall to allow them to start rebuilding their staffs or restore such favored perks as lavish parties, free use of limousines and company apartments.