Networks Will Emerge on Top in TV Shakeout

What’s gone wrong with the television business? Owning a station used to be a license to print money, but now TV stations are filing for protection from creditors under the bankruptcy law--Grant Broadcasting last month, station WTTV in Indianapolis this week. Where only two years ago there was a bidding war for TV stations, prices lately have been plummeting like those of Midwestern farmland. On Thursday, for example, the $35-million asking price for a Pittsburgh station was knocked down to $21.25 million. Other station owners have withdrawn properties from the market rather than accept today’s prices.

At the convention of independent (i.e., non-network affiliated) TV station owners and managers this week at the Century Plaza, the talk was either about better days gone by--when stations made 35 to 50 cents profit on every dollar--or about the need to hold down prices for rerun rights to popular TV shows. Success was partial on that score. According to convention gossip, rights to rerun “The Cosby Show,” starting in 1988, were being sold for a total of $2 million to $3 million an episode, but “the prices for everything other than Cosby are soft.”

Even the mighty networks appear to be humbled. Where the advertising revenues of CBS, NBC and ABC used to grow 13% a year, last year they declined 2.8%. The ABC television network lost money last year and will lose money again this year, say its bosses, the top managers of Capital Cities/ABC Inc.

Healthy Development

What’s wrong? Nothing’s wrong. Television is going through a healthy shakeout, thanks to federal deregulation and the natural process of competition coming to a business that was too good to last.

Quickly, the facts. Once upon a time, 95% of the television audience watched stations affiliated with the three networks, or they watched one of only 120 independent stations. Advertisers paid handsomely to buy commercial time on that limited number of stations, and the whole business was kept comfortable by Federal Communications Commission rules limiting competition.

Then all changed. The number of independent stations rose in this decade to around 300, and the networks’ share of audience fell. Cable channels came into their own--Cable News Network, the TV equivalent of all-news radio, is reportedly making money now, while major network news shows are not. And the FCC, in an attempt to encourage competition for the networks, three years ago took the wraps off the number of stations one company could own.

The initial result was classic demand and supply. More bidders made for higher TV station prices. And, as stations vied for high-class programming to attract viewers and advertisers, it made for higher program prices, too. Reruns of “Magnum P.I.,” for instance, were sold a couple of years ago for $1.75 million an episode.

Profit Squeeze Resulted

But advertisers tired of the game. They didn’t feel like paying more for commercial time just so stations could recover program costs or buyout prices. The consequence was a profit squeeze and the shakeout the business is going through now.

OK, but what comes next? The strong emerge stronger, just as has occurred already in the deregulated airline business. And the strong in TV, make no mistake, means the networks. Network affiliated stations still reach more than 70% of the national audience, and reach it economically because of the cost-cutting efficiencies their new bosses--Cap Cities at ABC, Laurence Tisch at CBS and General Electric at NBC--have brought to operations.

But the networks won’t merely endure on a penny saved. They will prevail because their money will be needed to finance the expensive, high-quality programming that attracts and holds an audience. You don’t produce winners like “Moonlighting” or “Murder, She Wrote” for peanuts, and if you tried, chances are the audiences would reject them.

The emerging problem, however, is how to finance such programs, and it is the solution to that problem that will give the networks greater dominance of the TV business. The financing of TV shows at present is essentially a two-part process. First the network buys the program from a Hollywood producer--a studio such as MCA-Universal or Paramount, say--and recovers its investment from advertising revenue. The producer may not make any money until the rerun syndication, but then--as the Magnum and Cosby fees indicate--the producers can clean up long-term.

Now that system has to change, because of advertiser resistance to first-run costs and also because the networks want a piece of that long-term syndication revenue.

So what will happen? A combination of advertising and rerun fees will be used to finance programming. The networks will put up money early in the production process in return for a cut of the lucrative back end. The networks, in short, will change the economics of television and become stronger and richer. As a viewer, you will scarcely be affected by this shift in the balance of power.

But if you’re an investor, there’s a useful lesson in what is happening. The smart business people who bought control of the networks in the last year did so just as the business was turning down. They saw the downturn coming; indeed, it suited their purpose by forcing the shakeout and economic change now occurring. But they went ahead because the long-term opportunity in the business that reaches 97 million U.S. homes--and spreads programming throughout the world--is stupendous.

One of those businessmen, Warren Buffet of Omaha, whose equity investment helped Capital Cities to acquire ABC, put it succinctly last year when he wrote: “For Cap Cities, ABC is a major undertaking whose economics are likely to be unexciting over the next few years. This bothers us not an iota; we can be very patient.” Anybody worrying today about the television business should be as patient, and as smart.