End of a TV Drama Nears : Entertainment: Networks and producers have been given until June to resolve their dispute over who will profit from reruns of hit programs.

Marcy Carsey, one of the producers of the television hits “The Cosby Show” and “Roseanne,” went to Washington last week to lobby on behalf of independent producers who want to keep their sole rights to reruns of television shows.

When one of the congressmen she was visiting remarked that he thought the dispute between the networks and the producers over these rights was just a skunk fight between “the wealthy and the very rich,” Carsey protested. If it were not for the current government regulations, she said, people like her would be out of business.

“I was the daughter of a shipyard worker,” Carsey reportedly told the congressman. “We were poor as church mice. I went to public school. I worked hard for 15 years, mortgaged my house and rented an office above a store. Then I hit it big three years ago. This is the American dream come true.”

Indeed, the current “financial interest and syndication” rules have allowed producers like Carsey to become fabulously wealthy because they control a valuable commodity: the rights to television programs. But the networks, which still collectively earn hundreds of millions annually, say they had a major role in creating this wealth and deserve to share in the rewards, especially if they are willing to pay more of the costs.

Negotiations and lobbying have reached a fever pitch over the last several weeks because the Federal Communications Commission, prodded by Congress, has set a June 14 deadline for the networks and studios to negotiate their own deal or have the matter decided by the FCC itself.

To the viewer sitting at home watching television, the “fin/syn” rules seem like one of those esoteric Washington economic issues like the trade deficit or Third World debt. Both the networks and the studios want to avoid the perception that they are engaged in an unseemly grab for more money, but at stake are billions of dollars in the rerun program market.

The financial interest rule prohibits the networks from owning equity in shows that they air, while the syndication rule bars them from selling shows to U.S. stations.

The dispute is “not about money,” insists Jack Valenti, president of the Motion Picture Assn. of America and Hollywood’s tireless lobbyist in Washington. “Somebody is always going to make money. This is about power, and whether it’s in the long-term interest of the country to have three corporations control entertainment programming.”

Not so, said Stephen A. Weiswasser, chief counsel for Capital Cities/ABC Inc. and the spokesman for the network side of the negotiating table. This fight is about being able to control the networks’ No. 1 expense: programming. “It is much more effective if we can engage in risk sharing. That means we ought to be able to invest in producers and talent and creative ideas the same way anybody else does in this business.”

The network television business, as executives are fond of explaining, is a business of failures. Salvation is the occasional hit, which the network can leverage into more hits by placing other shows behind it and thus build the strength of its overall schedule. This was the rationale behind Carsey-Werner Co. asking NBC for a $100-million bonus to renew “Cosby” for a seventh season: The producers argue that the show was singularly responsible for NBC’s turnaround.

Undoubtedly, “Cosby” has been a big contributor to NBC’s colossal profits of more than $500 million annually, which are significantly more than either ABC’s or CBS’. But facing a shrinking audience because of expanding choices for viewers, the networks argue that they should have a right to rerun profits.

In 1970, the government adopted the fin/syn rules as a remedy to alleged “abuses” by the three television networks. The studios and producers complained then, as they still do today, that the networks would not put a show on the air unless the producer gave up a stake in the program.

Until the fin/syn rules were adopted, the networks could, and did, “negotiate” for a stake in the back-end profits of shows that aired on ABC, CBS or NBC. At that time, the networks could also sell the reruns of those programs to local television stations, a highly profitable business that is the show business equivalent of a Texas gusher.

Profits from the reruns of old network television shows are among the best-kept secrets in Hollywood. The studios rarely break out rerun profits in financial statements, even though they can be a significant contributor to the bottom line.

Because of the bizarre economics that have evolved in the making and distribution of television programs, the studios customarily do not earn a profit for shows they produce for the networks; the license fees are less than the production costs. This system of so-called deficit financing means that a producer loses $200,000 to $400,000 an episode, depending on whether it is a half-hour comedy or a one-hour drama.

The payoff comes when the show stays on the network at least four years and enough episodes have been produced so the reruns can be sold to local television stations. Out of the dozens of new shows that premiere each season, less than one-third are renewed for a second year and fewer still stay on the network long enough to build up the minimum 100 episodes needed for syndication.

The odds are long, but the eventual jackpot can be staggering.

Carsey-Werner’s “Cosby Show” has generated $575 million in reruns sales, about one-third of which was kept by the distributor and the remainder divided among star Bill Cosby and producers Carsey and Tom Werner. The ultimate total will actually be much higher because the rerun contracts call for the stations to make additional payments each year “Cosby” stays on the network after its seventh year.

“The most successful entertainment property of all time, in terms of profit, was ‘Cosby.’ The profits there rival, if not exceed, movies like ‘Star Wars’ and ‘E.T.,’ ” said Larry Gerbrandt, a vice president with Paul Kagan Associates, a Carmel media research and investment firm.

“Cosby,” Gerbrandt estimates, grossed about $5 million for each half-hour episode, $2 million more than “Who’s The Boss?,” the second-highest-grossing show in syndication. Assures Gerbrandt: “We will not see another ‘Cosby’ for a long time.”

Although few shows make it beyond the first “cycle” of syndication--that is, a four-year contract for reruns--those that do become a handsome annuity for their producers.

“Three’s Company” grossed $125 million when it was first sold in syndication in 1982, and the old episodes did so well that the distributor was able to raise the license fees and gross $200 million more on its second cycle. “MASH,” which was first sold in reruns in 1979 and is now nearing the end of its third cycle, has grossed well over $500 million for 20th Century-Fox.

“A change in the rules would have a devastating blow to my business,” said Len Hill, an independent producer of television movies. Hill has just banded together with a group of other independent producers to sell rerun rights of their movies, thereby cutting out the customary 30% distribution fee that an outside syndicator would take. “The networks, by virtue of their national exposure, compete with independent stations and other outlets, who are the customers of our distribution company.”

Twenty years ago, the television business was considerably less competitive than it is today. Although there was a smattering of alternative viewing choices, most viewers tuned to one of the three networks, which collectively captured more than 90% of the audience. There was no MTV, no around-the-clock sports and news channels, no rented movies that could be popped into a VCR.

Over the past 10 years, competition has eroded the three networks’ share to 65% of the audience from 90%. Because of the growth of cable and independent stations, the typical home today receives 27 channels, compared to five in 1980.

“Cable and VCRs have fundamentally altered the way business is done,” said Richard Cotton, NBC’s chief negotiator on the fin/syn issue. “All we want is to compete fairly in this new marketplace.”

Both sides are waging an intense propaganda war. NBC on the network side has been the most aggressive--some would say shrill--in sounding the alarm about the invasion of Hollywood by foreign-controlled corporations that are exempt from the regulatory restrictions that apply to the networks.

Spurred by a petition from Fox Broadcasting Co., the subsidiary of Rupert Murdoch’s News Corp. that has launched a fourth network, for the FCC to re-examine the fin/syn rules, momentum has been building on Capitol Hill and the FCC to settle the issue once and for all. A major reason this has happened is the improving relationship between Congress and the FCC. That relationship had been in disrepair during much of the 1980s because Capitol Hill felt the FCC chairman’s office had been occupied by two “ideologues,” first Mark Fowler and then Dennis Patrick, ardent supporters of deregulation.

“The feeling now is we would like to get back to regular order,” said one Capitol Hill staffer involved in the fin/syn issue, alluding to Congress’ tense relationship with the FCC during the Reagan Administration. Adds a longtime lobbyist for the networks: “The relationship between the Hill and the FCC was strained under Patrick. The Hill feels more comfortable with (current Chairman Alfred C.) Sikes to let this thing proceed.”

Over the past six years, private negotiations between the networks and studios have advanced at a snail’s pace. There are at least four proposals on the table. One proposal advanced by the studios would allow the networks to negotiate up to a 50% equity stake in programs they air if they, in turn, hand over the revenues from 50% of the advertising time in those programs. This is not likely to get very far, observers say, because it involves giving the studios a significant portion of the networks’ lifeblood.

The studios have also suggested that, if the networks agree to pay 100% of the deficit incurred in the making of a show, they would be entitled to 50% of the show’s profits when sold in reruns, and if they covered 50% of the deficit, 25% of the profits and so forth.

A proposal by NBC would evenly split the 22-hour weekly prime-time schedule and have the current fin/syn rules apply to 11 hours of the network’s schedule while freeing up to negotiate any kind of deal it could for the other 11 hours.

Fox also proposed last week to allow the network the right to syndicate all the shows it makes in-house but would put a limit of 11 hours on the amount of shows a network could produce itself. Right now, the networks are allowed to make five hours of prime-time programming per week, but that cap is set to expire this November and the networks would be allowed to produce their entire prime-time schedule if they wished, something the networks have neither the inclination nor capability to do.

Both sides of this marathon dispute are now under intense pressure to come up with a deal to present to the FCC, which can adopt it, change it or throw it out altogether. Both the studios and networks have an interest in controlling the cost of program making, which has always exceeded the inflation rate. Although the networks are opposed to the “formula-based” solution proposed to date by the studios, it seems likely they will have to find a way to allocate a portion of their advertising revenues to the program suppliers.

WHAT’S AT STAKE

Gross per episode Number Total gross Show (millions) of episodes (millions) Cosby $5.0 144+ $720* Who’s the Boss? 3.0 144+ 432 Cheers 1.4 192+ 269 Facts of Life 1.1 209 230 Webster 1.5 144 216 Family Ties 1.3 144 188 Golden Girls 1.5 120+ 180 Night Court 1.1 156 172 Growing Pains 1.1 120 132 Alf 1.0 120+ 120

Total $2.659 billion

*Includes payments for projected additional episodes.

Source: Paul Kagan Associates, Petry TV, Variety. The above figures represent estimated gross syndication proceeds compiled by outside firms. Figures are subject to eventual number of episodes.