COLUMN ONE : Finally, Networks Fight Back : The David Letterman bidding could mark the end of the retreat strategy for TV’s big three. Still, they struggle to keep rebellious local stations from dropping their shows.

The $14-million carrot worked. With a promise to pay talk-show host David Letterman at least that much annually, CBS has succeeded in luring him to the network’s troubled late-night schedule.

It’s too early to say if the Letterman gamble will pay off. But CBS’ fight for the late-night audience is the kind of action that could determine whether the major TV networks survive into the next century. The Letterman deal is the strongest indicator yet that the networks are reasserting themselves as they emerge from the worst advertising recession in 50 years.

Letterman-style bidding wars have been rare in recent years as the three major networks have been preoccupied with cost-cutting.

Networks have abandoned some time periods, letting local station affiliates offer whatever programming from whatever non-network source they wish. During the day, for example, networks eliminated over 30% of the programming they used to deliver 20 years ago, surrendering that ground to syndicated talk shows or other programs supplied by independent producers.

As a result, there have been widespread predictions over the past few years that the once all-powerful networks had become a dying breed in the modern era of cable, satellite television and thriving suppliers of game shows, cop adventures and tabloid “news” shows like “Hard Copy” and “Inside Edition.”

Now, however, as the Letterman move indicates, networks are hoping to stage a comeback--or are at least trying not to retreat any further. That won’t be easy. The big three networks are only permitted to own 12 local stations, but they rely on hundreds of other local stations to carry their programming. Without that commitment to carry network programming, CBS, ABC and NBC would disintegrate.

Retaining that loyalty is a challenge because local station affiliates have an incentive to look for programming elsewhere. They get to run more local commercials--and they get to keep a bigger share of the revenue from that advertising. The networks’ big lure is that the programming is free and generally the most popular.

“I think the most important thing now is to try to hold the line and maintain the integrity of the network system,” said CBS Chairman Laurence A. Tisch. “It’s a slippery slope.”

Tisch has reason for optimism. Analysts predict that CBS Inc. will report 1992 profits exceeding $160 million. The broadcast networks continue to reach a larger audience than any competitor, and some executives say that, in the fragmented 500-channel TV universe of the future, the mass-appeal programming could actually be more valuable than ever.

Still, it’s a fragile business, as the late-night programming conflict shows. When a network slips--as CBS has in late-night, or NBC did during the daytime--emboldened affiliated stations simply switch to other shows, further diminishing the networks’ ability to deliver households to national advertisers. With the global village further splintered by cable, adult daytime viewership of network fare dwindled to just 51% last season, down from 60% five years earlier, according to Nielsen Media Research.

The networks’ gravy days were numbered by 1980, when cable began reaching more homes. In the 1979-1980 season, the networks still claimed 90% of the prime-time audience; that share tumbled to 65% by the end of the decade.

Despite the declining viewership, advertisers still spend handsomely on conventional network television: $9.6 billion in 1992, up 7.5% from the prior year.

“It’s a very good business. It’s just been badly managed,” declared Barry Diller, the former Fox chairman who successfully built the fourth network before he quit last year to go out on his own.

Fox continued to add hours to its schedule while the three major networks cut back. Some critics--including Diller--say the traditional networks erred in relinquishing chunks of their daytime schedule.

Fred Silverman, the independent producer who rotated through top jobs at all three networks during the 1970s, said: “It’s like giving away your arm because there’ll be less to feed. They’re sort of dismantling themselves. . . . I don’t think they’re ever going to get that time back.”

Daytime Programming

Just five months ago, NBC debated abandoning daytime programming altogether, according to NBC Entertainment President Warren Littlefield. That’s because a scant 14% of the NBC affiliates were carrying the programming as scheduled, preferring to air popular syndicated shows such as “Live with Regis and Kathie Lee.” Unless the network made changes, NBC’s slim profits in daytime were expected to turn to losses.

NBC decided to stay in the daytime business, but agreed to give up another half-hour of its schedule to affiliates starting Jan. 18, leaving it with just four hours of daytime programming. ABC and CBS have also cut back, although not as much.

Most network executives insist that the givebacks in daytime won’t spread to other time periods. But outside their hierarchy, there are predictions that the three networks might continue to retreat from troubled areas, such as Saturday night prime time, sports or even the network evening newscasts.

Lawrence K. Grossman, a former NBC News president, said: “It wouldn’t surprise me if the third-place news division, NBC, turned back the evening news time period to affiliates for syndicated or local fare, and ran a nightly news segment at 10 p.m., within a 10 p.m. news magazine show, when adults are watching.”

Added Betsy Frank, senior vice president at Saatchi & Saatchi Advertising: “For a network to turn back time suggests to me that the network-affiliate structure is weakening, and the affiliates are getting more independent. I think preemptions for syndicated shows will spread to prime time, on weak spots like Saturday night, which is a weak spot for everybody.”

There are even forecasts that new networks will begin competing in prime time. Tim Duncan, executive director of the Advertiser Syndicated Television Assn., said: “Our view of TV 1995 is that there will be seven or eight networks in terms of prime time; not just ABC, CBS or NBC but maybe the Paramount ‘network’ on Saturday night in a two-hour prime-time block.”

TV Testing Ground

Clearly, relations between networks and their affiliates have never been more vital--or under as much stress--as during the recent recession, when networks continued to reduce the “compensation” they paid to the stations for carrying their ads and programming.

Howard Stringer, president of the CBS Broadcast Group, recalled an incident last spring when “one general manager said to me, ‘I’m not going to clear your show, and there’s nothing you can do to punish me.’ I thought, I know what we could do to ‘punish’ you: We could go under!”

At the moment, the hottest testing ground is late-night television. Even in victory, CBS has a challenge: Only 40% of the nation receives the current CBS late-night fare (promoted as “Crime Time After Prime Time”) at the intended hour. Another 40% gets it on a delayed basis, and 20% not at all, because they prefer syndicated shows such as “Arsenio,” which plays especially well in urban markets.

“In some ways, Letterman is the metaphor this year for the decline of the networks. CBS can’t guarantee the (number of stations) that it could for Pat Sajak (1989-1990) or Merv Griffin (1969-1971),” said Stuart N. Brotman, a Boston-based communications consultant. “I think the balance of power between affiliates and networks continues to shift in favor of affiliates.”

It could take CBS months, if not years, to win back the affiliated stations that have switched to alternative programming at 11:30 p.m. Under their multi-year contracts with syndicators, such stations could face penalties if they cancel or reschedule their shows.

Network sources say CBS is prepared to offer additional compensation fees to affiliates to carry a Letterman show. There is some speculation that CBS might allow affiliates to sell more commercials in the lucrative first half-hour of the new Letterman show than they now get if they’re carrying Arsenio Hall.

“I’m not prepared to take the risk of lower ratings and having to pay for them,” said Hank Yaggi, vice president and general manager of WUSA-TV in Washington, a CBS affiliate that has a contract to carry the Arsenio Hall show through 1994. “Any discussions with CBS would obviously have to have as part of the discussion how they would (compensate) me for damages.”

ABC has similar problems with “Nightline,” the award-winning late-night news show. The program reaches just 63% of the national audience when ABC wants it to air, while other affiliates opt for reruns of “Love Connection,” “Married . . . With Children” or first-run syndicated shows such as “Entertainment Tonight.”

Affiliates defend such preemptions as necessary economic action. A station sells almost half of the commercials of a syndicated show, compared to just 10% from a network program. If the ratings of a syndicated show are strong, there is ample incentive to selectively preempt the network programming.

During the recession, affiliates were under added pressure as advertising revenues in the United States fell in 1991. For buyers who assumed a lot of debt in the 1980s to buy stations, depressed revenues meant that a CBS affiliate like WIVB-TV in Buffalo didn’t collect enough cash to make its 1991 interest payments. Even the healthiest affiliates were hammered by weak local advertising. A.H. Belo Corp.--the Dallas-based media company much admired on Wall Street--saw its operating profits from broadcasting tumble 33% in 1991 to $41.5 million.

Belo allows its ABC affiliate in Dallas to delay “Nightline” in favor of “Entertainment Tonight,” even though Belo--as the publisher of the Dallas Morning News and other newspapers--takes its news seriously.

“ ‘Entertainment Tonight’ makes a significant amount of money,” said Belo Chairman Robert W. Decherd, explaining that his company needs such syndicated profits to finance local production of documentaries, specials and “infotainment” programs.

Few affiliates are as bold as WBZ-TV in Boston, which preempts two prime-time NBC series on a weekly basis. On recent Saturday nights, WBZ ran old episodes of “Golden Girls” instead of NBC’s “Powers That Be”--which the network subsequently canceled.

As each affiliate knows, preemption is a dangerous game that can cost a station some of its compensation money from the network, or even its affiliation if the network can find an alternative station in the same market. Wholesale preemptions could unravel an entire network.

Compensating Affiliates

Traditionally, compensation has acted as the glue keeping affiliates and networks together. Since the earliest days of radio, networks have paid broadcasters for predictable access to the local airways, enabling the sale of commercials on a national basis.

But in the last seven years, as the networks’ revenue growth has stalled, new owners have taken tough action, slashing compensation to an estimated $321 million this year, down 24% from $425 million in 1987. The cuts embittered some affiliates, who worried that some stations would be forced out of business.

“Paying affiliates around $100 million for that kind of clearance is a small amount of money in the context of a network’s $3-billion-a-year operating costs,” said Peter Desnoes, chairman of the ABC affiliate board, adding that, “for smaller stations, compensation can be the difference between survival and bankruptcy.”

Of the three networks, CBS stirred the greatest ire by proposing last spring to charge its affiliates for the most popular CBS shows.

“It was like a match to gasoline,” said Alan Bell, president of the broadcast division of Irvine, Calif.,-based Freedom Newspapers.

Angry CBS affiliates threatened to drop the low-rated “CBS This Morning” and possibly other CBS shows in daytime and late-night. There was talk of buying direct from the Hollywood movie studios.

CBS modified the proposal, adding incentives and additional commercial time in programming so that most CBS stations will end up making money--not forfeiting income--on the plan, according to CBS affiliates. To discourage defections from its morning newscast, CBS tripled the time allowed stations, increasing the local programming to 12 minutes.

The CBS affiliates were unlikely to abandon the No. 1 network in prime time. That’s because no syndicated action or comedic series, other than Paramount Pictures’ “Star Trek: The Next Generation,” delivers ratings comparable to network shows in prime time. “Star Trek” demonstrates the point: 115 affiliates are currently airing the popular show, but only a handful use it to preempt their prime-time schedule.

The Syndicators

Still, Paramount and Warner Bros. are making every effort to come up with hourlong action adventure shows with bigger ratings potential. Four such shows are debuting this month. Paramount has sold “The Untouchables” and “Star Trek: Deep Space Nine” in the syndicated marketplace, while Warner Bros. is delivering “Time Trax” and “Kung Fu: The Legend Continues” to a consortium of TV stations--mostly independents--for their prime-time Wednesday night schedule.

Where the syndicators have excelled is in production of talk shows and game shows, which perform well in the daytime. Belatedly, at least two networks have concluded that if they can’t lick ‘em, they should team up with these suppliers. Both NBC and ABC bid for a new Paramount talk show called “John & Leeza,” featuring the anchors of “Entertainment Tonight.” The show was developed for the syndication market, but NBC came up with a persuasive bid to acquire it for the ailing NBC daytime schedule.

Some affiliates praised the NBC move in trade publication ads, because NBC will be providing a show free of charge that they would have bid for in the syndicated market.

According to Littlefield, the NBC Entertainment president who convened an August “summit” on the daytime schedule, the network stayed in the business partly at the behest of affiliates who dread the prospect of “being totally at the hands of the syndicators.” Littlefield explained that syndicators often price shows “low and easy” at the outset, but hike prices sharply in success, to the stations’ dismay.

Of course, there’s nothing altruistic about NBC’s decision to stay in the daytime business. Littlefield points out that the daytime hours provide the equivalent of $30 million in promotional advertising for other NBC programs.

NBC remains watchful of its goal of wringing profits from each division and time period. “If we can’t provide programming that performs, then we shouldn’t be in the day part,” NBC President Robert C. Wright said.

In the meantime, network executives agree they have every incentive to hold the line.

“You never know when you’re going to catch lightning in a bottle in television,” said CBS Entertainment President Jeff Sagansky. “The hour that you give back this year in two years might be your most profitable time period.”

More details emerge about the CBS deal with David Letterman. Story in Business.