Networks Scramble to Cut Costs

Confronted for the first time with a staggering drop in advertising revenue, all four major broadcast television networks are contemplating sweeping changes to the face of prime-time programming.

Network executives say they are determined to slash production costs by as much as 40% by seeking to phase out many of their multimillion-dollar deals with writers, producers and stars and reducing the number of new series in development.

The economic picture for the networks is continuing to deteriorate in the aftermath of the Sept. 11 terrorist attacks. The networks lost a total of $188 million in revenue during the five days they suspended advertising to provide uninterrupted news coverage.

“We were at the tipping point before Sept. 11,” said Robert Iger, president of Walt Disney Co., which owns the ABC network. Though the networks had trimmed expenses earlier, the attacks “will be a catalyst” for wrenching change at all of the networks, Iger predicted.

The steep cost cutting probably will alter network entertainment: less original programming, more reruns, fewer big names in starring roles and a merging of advertising and programming.

ABC is considering eliminating Saturday night programming entirely, recognizing that it has been decades since Lawrence Welk’s bubble machine drew the American family in front of the living room TV. ABC and NBC already have resorted to running movies on Saturday prime time.

To appease disenchanted advertisers, the networks are embracing their sponsors in ways not common since the birth of commercial television in the 1950s. The new buzzwords among network executives are “integrated advertising.”

Product placement, reintroduced last year in CBS’ unscripted series “Survivor,” will be more common and obvious. Also in vogue is sponsorship--and even ownership--of shows in which advertisers can insist on details as mundane as whether the cast of NBC’s “Friends” wears Prada or Armani.

The major broadcast networks are confronting a grim economic reality for the first time in decades. They had posted an average annual increase in advertising revenue of 6.9% for the last five years, peaking at more than $16 billion with last year’s dot-com spending spree.

In recent interviews, top executives with the four major broadcast networks outlined what they see as their limited options.

“We’ve all paid lip service to the need for these changes for a decade and have made only sporadic progress,” said Sandy Grushow, chairman of Fox TV Entertainment Group. “If not now, then when? None of us has a choice.”

The head of one network, who requested not to be named, said he plans soon to ask producers of shows already on the air to make immediate across-the-board budget cuts, which could trigger layoffs and salary reductions.

The most optimistic of the network executives, CBS Chairman Leslie Moonves, said, “It’s evolution not revolution.”

Before the attacks, media analysts had projected a 2% drop in overall advertising dollars for the year because of the softening economy. They now estimate the networks will incur a 6% decline--or nearly $1 billion--a plunge unprecedented in broadcast television history.

At the same time, the networks face a substantial increase in costs to cover the ongoing international terrorism story after shuttering foreign bureaus during the 1980s and 1990s.

Although the station groups that networks own and operate remain extremely lucrative, their programming has long been considered a break-even business. Now, network programming is looking more like loss leaders for the huge corporations that own them.

“The question is, how valuable are these powerful media engines if they never produce a profit?” asked Leland Westerfield, an analyst with UBS Warburg. The networks are all owned by large conglomerates that do not break out financial results on these divisions.

Network officials have cried poor before as they’ve watched their audience shrivel because of competition from cable and satellite television, as well as the growth of home entertainment, including videos, DVDs, electronic games and computers.

Yet they continued to deliver the largest audience of any media outlet, enabling them to consistently charge higher ad rates.

But with fledgling networks UPN and WB joining the bidding for talent, the cost of making television is outstripping ad revenue. This year’s sluggish ad market has exposed the fundamental weakness of the networks.

“The underlying economics were fragile before,” Iger said. “This is a seminal moment.”

The typically bullish Mel Karmazin, chief operating officer of CBS parent Viacom, was downbeat last week when he warned investors that the attacks had cost the company $500 million in lost revenue.

If the war on terrorism heats up, network advertising revenue could fall a further 9% next year, predicts media analyst Jack Myers.

As ad revenue weakened over the last year, the networks were beginning to redefine their relationship with advertisers.

CBS sold product placement in “Survivor” by weaving the Target store brand into the action. And the network brought in Procter & Gamble as a one-third owner of the sitcom “King of Queens.”

“Each day, advertising agencies are more interested in this way of doing business,” said Seth Bedell, whose marketing firm Bedell/McLean specializes in “integrated” network advertising.

“We were heading toward finding different ways to skin the ad cat,” CBS Chairman Moonves said. “Anything to increase the advertiser’s bang for the buck” is under active consideration, he said.

Last summer, Viacom pioneered the buying of bulk advertising with Procter & Gamble’s commitment to spend $300 million across its media properties.

The deal allows advertisers to design campaigns across CBS, MTV, Nickelodeon, UPN, Black Entertainment Television and other Viacom networks.

Under this arrangement, advertisers “get more flexibility” in designing their campaigns, Moonves said.

But even improving ad sales won’t be enough to correct the network economics. Costs still must be cut.

Hourlong dramas cost an average of $2 million to produce, and half-hour sitcoms cost $1 million--20% more than they cost three years ago. Overall programming costs have climbed 37% during the last five years, according to research firm Kagan World Media.

With the increased emphasis on news programming in the wake of the attacks, the average annual cost of the network news divisions is expected to increase by $100 million a year to a staggering $500 million, said Sanford Bernstein analyst Tom Wolzien.

One way to slash costs, network executives agree, is to cut the number of prime-time hours of programming.

“If Saturday night can’t be put together efficiently, then we won’t program it,” Iger said.

Iger suggested that the network affiliates could be given Saturday night to program, buying syndicated shows and movie packages to fill the time.

Even if the networks keep Saturday night in their lineup, Iger said it is “extremely likely” that the networks will cut programming somewhere else to reduce the Big Three’s traditional 22 hours of weekly prime-time programming.

Another option, called “multiplexing,” spreads the cost of a network show over several of a conglomerate’s media outlets.

“We’re going to be running [ABC] programs more than once a week across multiple platforms,” said Iger, whose company is buying Fox Family Channel as a second-run network for ABC shows.

Already ABC’s “Once and Again” repeats on cable’s Lifetime. NBC repeats “Law & Order: SVU” on USA Network. And Fox’s “24” will repeat on sister cable network FX.

“ABC has to change the way it puts together its slate [of shows], a radical change. I think costs can be reduced 25% to 40% and quickly,” Iger said.

The pork in the budget is talent deals, the tens of millions of dollars paid to writers, producers and stars of scripted series, according to the executives.

Agents said they already have seen a significant drop in the number of overall talent deals with the networks and studios this year.

All of the networks said they plan to slash development costs by curtailing all but the top-tier talent deals with the likes of “West Wing” producer John Wells and “Ally McBeal” creator David E. Kelley.

In anticipation, television agents are projecting that the number of new television shows will fall. The number of scripts ordered by the networks for the 2002 season already is down by 27%, from 373 scripts to 272 scripts.

“Television is going to be a third-world country,” said NBC’s West Coast President Scott Sassa. “Top top talent won’t see cuts, but everyone else will be slashed.”

The bravura banter reflects more than the networks’ collective desperation. In the wake of the Sept. 11 terrorist attacks, they have a renewed sense of their relevance. When disaster hit, viewers went back to the major, old-line broadcast networks for the news.

“There’s been a reaffirmation of the importance and power of the broadcast networks,” Iger said.

The networks draw a huge national audience: 40 million homes tuned into the major networks during prime time Sept. 11, a 75% increase over the previous week.

The resumption of normal programming has meant an immediate return to the mediocre ratings that are now the norm for the networks.

The major broadcast networks’ share of audience has fallen from 74%, the prime-time audience in 1985, to 59% in 2000. With last year’s boost from so-called reality shows, the slide in ratings surprisingly slowed to a decline of one-half of 1%.