TV’s Evolution Brings New Profit Squabbles

Times Staff Writer

Beginning this month, many Comcast Corp. cable subscribers who miss an episode of the CBS hit “CSI: Crime Scene Investigation” can pay to see it later. Next month, they will be able to use the same video-on-demand service to watch previous installments of the network’s reality game show “The Amazing Race.”

But when consumers fork over their 99 cents to see forensic investigators or globe-trotting contestants, who gets the money? And who controls the so-called VOD window?

That’s what CBS and Walt Disney Co.’s Touchstone Television have been squabbling over lately. Ever since November, when CBS and Comcast announced their video-on-demand partnership, Touchstone has been crying foul, say several executives on both sides of the deal. The reason: Touchstone, which co-owns “The Amazing Race” with CBS, wasn’t consulted before the deal was struck.


“These are areas that have to be ironed out,” said Bertram van Munster, the creator and executive producer of the Emmy-winning show.

The Touchstone-CBS spat is hardly unique. As television executives scramble to exploit new technologies and make their shows available in as many formats as possible, they are facing scrutiny from many quarters -- retailers, advertisers, TV producers, actors and writers -- that fear their interests are being ignored.

Because existing licensing agreements signed as little as two years ago do not address how to split revenues from video-on-demand or video iPod downloads, every new deal -- however small -- is being closely watched.

“Right now, it’s a low-money but a high-stakes game,” said Rick Rosen, a partner at Hollywood talent agency Endeavor. “There’s not much money involved at this point, but in the future it will be a tremendous amount. So any deal could be precedent-setting.”

Hollywood’s guilds are particularly concerned. Labor leaders fear a repeat of the early 1980s, when movie executives convinced them that revenue from videocassette tapes would never amount to much. The guilds accepted a much smaller cut of the profits from home entertainment, then watched as VHS and, later, DVDs mushroomed into a multibillion-dollar-a-year business and the studios’ biggest moneymaker.

Now that technology has created yet more formats, said Patric Verrone, president of the Writers Guild of America, West, “this is really a galvanizing issue that some of our TV writers didn’t see coming quite as rapidly as it has.”


The dust-up between CBS and Disney’s Touchstone centers on whether the network has the unilateral right to offer video on demand as part of its licensing agreement, which gives the network the first “window” of exhibition, typically defined as one season.

CBS’ position is that because the video-on-demand release piggybacks on the marketing push it put behind its shows, the network should reap the rewards. Not only that, but most consumers identify a show with the network that the show airs on, not the TV studio that produces it.

Touchstone, however, has accused CBS of overstepping when it made a deal involving “The Amazing Race.”

Executives at CBS and Touchstone declined to comment.

Some worry that the CBS-Comcast deal and others like it are nothing more than “land grabs,” in the words of one top executive. But network executives describe them as experiments. Just as ratings on TV pilots reveal what viewers want to see, these deals may shed light on what delivery options consumers will embrace.

After all, networks are under pressure too. Their advertising revenues are shrinking at the same time that production costs, for items such as big-name stars’ salaries and high-quality visual effects, are soaring. These days, TV production studios are commanding $750,000 to $900,000 to license a new half-hour comedy. The licensing fees for hourlong dramas are about $1.2 million to $1.6 million for each episode. And that buys a network only the ability to run an episode two or three times during the season.

TV production chiefs say they too are getting squeezed. In the past, the huge profits they reaped from a mega-hit such as Warner Bros. Television’s “Friends” or 20th Century Fox Television’s “The Simpsons” more than covered their inevitable flops, which cost hundreds of millions of dollars each year. And a show like “Friends,” which made more than $1 billion in syndication, was a gift that kept on giving.

But now, the success of television show DVDs and next-day downloads of episodes are threatening the business model that has been in place for nearly half a century. So-called repeat values -- the amount that can be charged to run a show in syndication -- are expected to drop if everyone has already seen the show on a DVD or video on demand.

Still, many media executives hope the new technologies will make even more money not just for their companies but also for everyone involved.

“Change can be unsettling,” said Peter Levinsohn, president of digital media for Fox Entertainment Group. “But you have to look at these things as opportunities, and that’s what we are doing here at Fox.”

This month Fox announced a deal that will eventually give subscribers to satellite giant DirecTV the ability to download episodes of “The Shield,” the corrupt-cop drama, and “Rescue Me,” about New York firefighters struggling after 9/11. Episodes of those shows will be available for $2.99 two days before their initial run on Fox’s FX cable channel.

When the service is up and running in March, Fox may make available deleted scenes with every episode, perhaps including racier material deemed inappropriate for the cable channel.

For now, most of the video-on-demand deals are narrowly focused and short-term. For example, CBS’ Comcast venture is available only in certain markets -- Los Angeles, New York and Chicago, among others -- where CBS owns the local CBS television station. Comcast digital cable subscribers in Sacramento can spend 99 cents to see an episode of CBS’ Navy military drama “NCIS,” but those who live near one of the U.S. Navy’s major ports, San Diego, cannot. In San Diego, the CBS affiliate station is owned by Midwest Television.

To avoid a skirmish with CBS affiliates, who fear they might lose local ad dollars if viewers can find the network’s most popular shows on other media platforms, CBS and Comcast kept the video-on-demand service out of markets where the affiliate station was owned by another company.

Disney has riled plenty of people with its deal in October with Apple Computer Inc. Under that agreement, Disney’s ABC television network is allowing episodes of its biggest prime-time hits -- “Lost” and “Desperate Housewives” -- to be downloaded from the iTunes store for viewing on video iPods.

Three sources close to the matter said Wal-Mart Stores Inc., the world’s largest DVD retailer, had expressed concern to Disney that iTunes downloads might take a bite out of its sales.

ABC’s affiliates weren’t wild about the idea, which has been expanded to include the female-president drama “Commander in Chief.” But because Disney was careful to follow to the letter a provision that allowed the network to “reuse” only three prime-time programs, there wasn’t much that affiliates could do.

Not surprisingly, Disney’s Touchstone Television studio is the sole owner, or producer, of the three shows it has made available on iTunes. Notably, Disney did not include ABC’s quirky drama from David E. Kelley about ethically challenged lawyers, “Boston Legal,” in the Apple deal. That show is owned by 20th Century Fox Television.

Television executives say it’s going to take them several months to hammer out an industry standard for video-on-demand compensation. By mid-May, when the networks begin picking up a new season of pilots, the contracts to license the shows are likely to include such provisions, executives said.

For now, television studios are treating these video-on-demand downloads as “home entertainment,” which allows the companies to pay much smaller residuals. The Screen Actors Guild and the WGA contend that Internet downloads are more like pay TV, whose profits studios share more generously.

“There’s no rationale to any of this stuff,” producer Gavin Polone said. “It simply becomes part of the negotiation. The owners of the content will go back and forth with those who create the content. That’s what always happens.”

Another important sector that has been left on the sidelines is advertisers, which have underwritten the cost of television programming for half a century. TV executives haven’t figured out how to, or even whether to, include advertisers.

“All of the major deals that are being announced have no advertising,” said Tracey L. Scheppach, video innovation director for Starcom USA, a major ad buying firm. “I haven’t gotten any calls from CBS, NBC or ABC to talk about their iTunes deal or their Google video deal.”

Scheppach suggests that the networks offer consumers the ability to download shows with or without commercials and set the pricing accordingly. Advertisers would be game, she said, because they could better target the consumers who might be interested in buying the products they were pitching.

“Why don’t we give consumers that choice?” Scheppach asked.

But Van Munster, executive producer of “The Amazing Race,” said those who resisted the new technologies were going to lose out.

“This is ultimately where the business is going,” Van Munster said, adding that he wouldn’t be surprised if eventually “you will be watching ‘The Amazing Race’ on your watch.”

The show, he said, “is an expensive production. We all have a huge investment at stake, and everyone deserves to make some money.”