Internet, Television

Content Is King – Part 4

August 18, 2015

“There’s no business like show business like no business I know.”

– Irving Berlin

§ § §

In the 1920s and 30s the Hollywood studios owned most of the movie theatres in the world. They had a virtual ‘cradle-to-grave’ lock on both the creation and the exhibition of films. In other words they owned the industry, coming and going.

Because of this, the movie business was an increasingly competitive marketplace. There were many more studios then than there are now and the small, so-called ‘indies’ of their day had trouble staying alive let alone competing. Not that they couldn’t make their films, they just had nowhere to show them once they were completed.

This competitive oligopoly led to a few well-publicized breakout hits for some, but more often than not these ‘hits’ were scattered throughout more consistent average fare for others less fortunate. To hedge their bets on fickle audience attitudes towards their films, the studios designed huge cinema palaces with velvet brocade on the walls, crystal chandeliers on the ceiling and plush (although tightly-packed) chairs on the floor. If you couldn’t beat the studio competition with the subject matter of the film at least you could give them a run for their money with grand spectacle and attract audiences based on the social interaction aspects.

Legions of psychologists were employed by the movie mavens in Hollywood just to advise the studio on the best colors for walls, how big should the screen be, viewing angles, seat height, how loud should the sound be, etc. One studio, MGM, actually went so far as to offer scholarships to its junior executives for Psych 101 night classes!

There wasn’t much competition for discretionary entertainment dollars in those days – radio was free and theatre was only in the big urban centers and catered solely to the elite. “Going to the movies” was a fairly new experience for people and it was relatively cheap, at least by pre-Depression-era consumers’ standards.

Some studio-owned theatre chains grew to immense proportions – thousands of theatres in some cases. Although the audiences probably didn’t care, those studios continued to reap huge profits from their theatres even though admission itself was inexpensive – such was the popularity of the medium.

Finally, the smaller production companies, in concert with ‘indie’ distributors and small theatre chains prevailed upon the American government to enforce the laws regarding monopolies and end studio ownership of the theatres. They succeeded. An ‘entertaining’ version of the separation of church and state, so to speak.

Why do I mention this…? Because the very same thing happened in television for exactly the same reasons more than thirty years later in 1970. How the instigation of Fin-Syn (I’ll describe what that was later), and its eventual repeal, affected the business of television and especially its content, directly impacts the Internet today.

During the ‘salad days’ of television – the 1960s – the networks had an ownership lock on the programming, the broadcast signals and most of the TV stations nationwide that carried those signals. These TV stations were, for the most part, owned and operated (O&O) by the Big Three networks. This meant that the network brass could dictate to the O&Os what programming they could broadcast and when. Since these O&Os covered the vast majority of the populace through primarily urban centers, the smaller, independent stations could hardly compete.

So, the networks created the content and delivered the content to their own stations. Because they owned the content too they would only distribute (syndicate) it to other stations if and when it suited them and only with inflated syndication fees attached.

This situation was exacerbated by two other problems the smaller stations had to contend with.

One, the programming that was actually deemed ‘distributable’ by the networks was the “B” grade material, not the good stuff, not the programs that got the top ratings. CBS, for instance, refused to let either The Lucy Show or The Dick Van Dyke Show out of their sight. Lucille Ball and Dick Van Dyke were network-owned franchises worth millions in repeat advertising dollars. Why syndicate them, even at inflated rates, only to allow other TV stations, some of them potential rivals, to reap the benefits…? This was not just the thinking at the time; it was the practiced gospel.

Advertisers had a far greater influence over programming then than they do today. When The Dick Van Dyke Show debuted in the Fall of 1961, CBS wasn’t happy with its performance and cancelled it before the end of the season. Proctor and Gamble was the anchor advertiser. They loved the show and were so upset with the decision to remove it that they threatened to do likewise with their advertising… all of it… for the entire network. Since Proctor and Gamble were the underwriters for two of CBS’s highest rated afternoon soap operas – not to mention other programs scattered throughout prime time – CBS wisely relented and the show went on to run for six successful seasons.

[As an interesting ‘historical’ note, Johnny Carson was actually hired for the lead role of ‘Rob Petrie’ but decided instead to replace Jack Paar on The Tonight Show thereby solidifying his place, and that of Dick Van Dyke, in television history.]

The second problem was this: The networks owned the larger stations, true. But they also owned most of the smaller stations as well and controlled the vast majority of prime time space everywhere (7:30pm to 11:00pm). Where would these smaller stations run the syndicated shows even if they could get them…? They didn’t have access to prime time slots. The networks had it all. Period.

Enter, the FCC.

FCC-Logo2In 1970 the FCC enacted the Financial Interest and Syndication Rules. Fin-Syn, as it was called, prohibited the three major networks from owning and controlling the rebroadcast of prime time shows. The rules effectively ended the controversial policies of delaying, or withholding altogether, network ‘hits’ from independent stations that could then program them against network news and even prime time fare; in other words, competition. In the same action, the FCC enacted the Prime Time Access Rule (PTAR) limiting the network’s use of peak viewing time to only three hours per night. This rule effectively shaved off 30 minutes of prime time programming from the networks’ schedule each night and returned it to the local stations.

Although enacted in 1970, Fin-Syn rules actually didn’t go into effect until 1971. President Richard Nixon was more than happy to levy these new rules on the networks since he personally still held them responsible for his loss to John F. Kennedy ten years earlier, because of the now-famous TV debates. During those debates it was clear that Kennedy’s advisors prepped him on how important ‘image’ was on television and provided a hairdresser, make-up artist and wardrobe consultant for the event. Nixon thought it was foolish and took to the stage as he would have taken to the street. In the end, Kennedy looked ‘presidential’ and ‘youthful,’ Nixon looked unkempt, unshaven and unprepared. Kennedy won the 1960 election over Nixon by the smallest margin of victory ever in a presidential campaign.

Later, the FCC went even further, applying a ‘cap’ on network ownership of stations. This allowed smaller ‘groups’ of stations to emerge as ad-hoc networks in and of themselves. It allowed these ‘mini majors’ to acquire content in bulk for their member stations. They created an enormous amount of clout in the marketplace, which begat more competition between the buyers of content, which of course created the potential for profits for those who owned the content: the program producers. The wealth had been redistributed through government edict.

The day Fin-Syn took effect was the same day television network executives began their plotting to wrestle content ownership back from the brink. It would take a long time.

For more than twenty years Fin-Syn ruled. The networks, as they saw it, lost out on large profits garnered from syndication because a certified hit could generate untold millions from advertisers thirsty for consistent eyeballs.

You’d think with so much money to be made the producers and the networks would have been happy with their lot. Well, they weren’t. All they did was argue, and that’s when things were going well. Here’s why:

Producer “A” pitches a half-hour sitcom idea to network “B.” Network “B” likes it. They commission a script, then a pilot episode. They still like it and decide they want to broadcast it in the Fall. They order 22 episodes. The per-episode budget for this sitcom is set at $500,000. However, producer “A” doesn’t get that much from network “B” – they might get half that amount as a licence or pre-licence fee. If the show does well in the ratings (and the network gets lots of money from the associated advertising revenue) the producer might get ‘escalation fees’ later on. But regardless of how successful the show becomes on the network, the producer will not make up the deficit. The key phrase here is: “… on the network.”

This was not – IS not – an unusual practice. It is normal in this situation that the writers and producers of a show defer part or all of their compensation until such time that they can recoup it through ancillary monies, if and when they are made available. Stars and talent aren’t typically as benevolent! That amount by the way – $500,000 – is actually less than half the cost of a regular, run-of-the-mill sitcom these days. But this was an average back in the late 80s and early 90s.

So, let’s say this sitcom does extremely well, perhaps even becoming part of the A.C. Nielsen Top Ten rated programs. The network can demand higher advertising revenues based on the show’s popularity and therefore might not only recoup its initial investment in the show, they’re likely to make a handsome profit from it. The producer (production company or studio) on the other hand, has a hit television show and a huge multi-million dollar deficit to pay for.

Enter, Syndication, or ‘off-network’ distribution.

Although the marketplace into which a program is distributed has changed quite dramatically, the syndication game itself is much the same today as it was throughout the 70s, 80s and early 90s. The only real difference is the players.

There’s a reason why syndication was, and still is, so important: money, plain and simple. But it does go deeper than that.

On an individual, personal level syndication can mean the difference between making wages and becoming very, very rich.

A good friend of mine directs American episodic television and MOWs. He started doing news, began making commercials with his own company and managed to ride the early Stephen J. Cannell wave of programs being produced here in Vancouver signing on as the ‘Canadian’ director. Before the The X-Files made Vancouver ‘Hollywood North’, there were several locally produced U.S. episodic programs such as 21 Jump Street with Johnny Depp, UnSub with M. Emmett Walsh (my personal favourite) and Wiseguy with Ken Wahl.

I once asked my friend what lessons he’d learned from his years of directing prime time content for the American networks. One, he said. He told me a story that had been related to him years before about the guy who had directed the first television episode of M*A*S*H.

Apparently, when negotiating his contract with 20th Century-Fox – the studio that produced the Korean War-based sitcom – this director asked for an escalation clause in his contract because he was directing the pilot episode, even though there was no official pilot. CBS had made a full season order on the strength of the fact the series was based on the very successful Robert Altman feature film.

He asked for $1000 extra every time the show played in syndication should it reach the marketplace.

There was no reason to assume it wouldn’t but television viewing habits being what they were (and continue to be), and since nobody in Hollywood knows anything, why not ask…? Fox balked. After a significant amount of finagling, both sides agreed on $100. A measly hundred bucks.

OK, sharpen your pencils – here’s where it gets interesting!

MASH-LogoThe final episode of M*A*S*H – “Goodbye, Farewell and Amen” – aired on CBS twelve years and 251 episodes after it began on February 28, 1983. It became, and remains to this day, the highest-rated television series episode ever. It had a 60.2 rating and a 77 share. This means that more than three quarters of American TV sets turned on at the time were tuned to CBS and M*A*S*H! The following year it went into syndication.

In 1985, in the Vancouver market alone, M*A*S*H could be seen seven times a day, five days a week. That’s 35 broadcasts a week, 140 broadcasts a month. At $100 a pop this guy, who was negotiated down from $1000, was making $168,000 per year from the Vancouver market alone. One single market! That was in 1985. How many worldwide markets are there where M*A*S*H is still playing…?! It’s still one of the more popular shows in syndication today. I hope he has a good accountant!

As astronomical as this scenario appears on paper, it isn’t unusual. Directors of TV pilots and initial episodes frequently get escalation fees of this sort, because they’re presiding over the crucial creative beginnings of a series. If the series does extremely well it’s assumed that the original director had a lot to do with that success and therefore should be compensated accordingly.

But here’s the bigger picture…

Before the repeal of Fin-Syn independent producers were allowed to re-sell, or syndicate, their programs after they had had their initial run on the networks. Since the licence fee the producer received didn’t cover the entire cost of production as we’ve seen, the producer had to ‘deficit finance’ the series for the entire initial network run. Later, through syndication, he/she/it would make up that deficit, break even and hopefully earn profits.

In those days it wasn’t considered prudent or cost-effective to attempt syndication unless you had the magic number of 65 episodes – half-hours in the case of sitcoms, hours in the case of dramas. Since the networks normally requested 22 to 25 episodes per ‘full season order’, it took three years to reach that magic number. Why 65? Simple. With at least 65 episodes of a series a local station can ‘strip’ that show on a daily basis. In other words, they can air it daily, five days a week, Monday through Friday, which means 20 shows a month, and therefore just over three months to complete the run. The station can then repeat it for another three months, and voila! – half a years’ worth of programming! And that’s only one station.

Recreate that deal at one station in each of a hundred different local markets (there are 210 Designated Market Areas, or DMAs, in the United States) and the independent producer makes a great deal of cash. Put another way, if you recreate that deal in one station in each of the top ten markets which represents over 30% coverage of American households (over 60 million viewers), you not only have a hit (M*A*S*H, The Rockford Files, Roseanne, Cosby), but advertisers will beat a path to those local stations’ doors and pay handsomely for the privilege to sponsor the program. All of a sudden local ain’t so local anymore! And the networks didn’t get a dime of it! The tables had been turned.

From the networks’ perspective, this was intolerable. But this wasn’t the only obstacle they faced in the late 80s and early 90s. The situation was exacerbated by two other mounting concerns: video and cable.

The traditional film studios and broadcast networks were both losing ground to, of all things, home video, an industry they helped to create. It’s difficult to believe it now but the home video industry was not built around the so-called new release strategy we see today. A strategy that allows us to rent or purchase our very own copy of a movie that a short time ago was in theatres.

In the 70s when home video was born, and through the 80s when it came of age, most releases were from back catalogs – old movies and classics that studios thought home video audiences wanted. New theatrical releases were still years away from release on VHS (Betamax and LaserDisc, too). The problem was, people were staying home more and watching pre-recorded tapes, either from the video stores or from the newly acquired ability to ‘time-shift’ their viewing patterns by watching one program and taping another for viewing at a later date.

The second problem was cable.

The tenure of the so-called ‘alphabet’ networks – ABC, CBS and NBC – was quickly being eroded by upstart, satellite, ‘niche’ broadcasters such as HBO, Showtime, Cinemax and Discovery. This was the beginning of what the news media referred to as the 500-channel universe.

The ‘Big Three’ owned over 60% of the television viewing market during this time; the rest belonged to local programming and other services. However, they once owned 80 to 90% and each passing year saw their share, and in most cases their corporate share price, decline.

If you give people a choice, they will choose. For the audience it meant selection, for the TV networks it meant fragmentation that resulted in sagging advertising revenue.

Carsey-Werner-LogoWhen the production company of Carsey-Werner sold their program Roseanne into syndication in 1991, they did so for an unheard-of staggering figure of $579 million! And no, ABC, the network that launched it, didn’t get a dime. In other words, one television series had made one production company more money than all of Steven Spielberg’s pictures combined had made him!

For the networks, this was the last straw.

In order to regain profitability and content ownership, Fin-Syn had to go.

After a lot of lobbying in Washington, and undoubtedly a lot of ‘greased palms,’ in 1992 Fin-Syn was repealed clearing the way for network ownership of content. A return to the good old days, some might say.

If we were to look back at the entertainment business years from now and try to point a finger at the lightning rod that touched off the current spate of content-based consolidation and ‘merger mania,’ we may not need look any further than that Carsey-Werner deal.

The following excerpt from a recent magazine article sums up the dilemma as it continues to exist today:

“… the demise of the network program ownership rules unloosed fear and greed
– and transformed the TV business…”

“That was the overwhelming feeling in Hollywood in late 1992, when a federal court ruled that the Financial Interest and Syndication Rules no longer made sense and put them on the path to gradual repeal over three years. Without the prohibitions, Hollywood producers feared, broadcast networks would eventually take over its business.”

The elimination of the rules has transformed television in profound and lasting ways over the past seven years. And it was that fear that triggered many of the changes, at least initially.

Worried that they would have no outlet for their programming, Warner Bros. and Paramount launched their own broadcast networks in 1995. Warner Bros. gave American viewers The WB, in partnership with Tribune; Paramount, UPN in partnership with the Chris-Craft TV stations; and figuring it was better to eat than be eaten, Disney gobbled up Capital Cities/ABC in 1996 in a $19 billion merger.

“I would never have started The WB if the financial interest rules were not repealed, ” said Robert Daly, former chief executive officer of Warner Bros. “I knew that eventually it would be harder and harder to get shows on the networks that they didn’t own a piece of or control.”

The other catalyst was greed. Freed of the restrictions, ABC, CBS and NBC tried to capitalize on the new opportunities. To varying degrees, they have entered the production and syndication businesses and demanded ownership stakes in shows that would guarantee them a share of syndication revenue.

The post-Fin-Syn restructuring of the TV business took two more major steps last year. First, CBS agreed to acquire King World, a major syndicator, for $2.5 billion, and then it agreed to a $36 billion merger with Paramount. That leaves only NBC without a major Hollywood studio connection.

[Eventually NBC would be bought by French media conglomerate Vivendi who also owned Universal Studios. It was then sold to General Electric, who rebranded it as NBCU – NBC Universal.]

“For the first time in at least 30 years, the major broadcast networks collectively own or have an interest in over half of the prime time schedule. In 1985, the collective figure was only 7%.”

Article by Steve McClellan, Broadcasting & Cable Magazine, January 24, 2000

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So, as we approach the mid point of this story, let’s review and connect the dots, dots that we will need in order to ‘get’ the rest of the story.

A major global push for Interactive Television fails due to many circumstances, not the least of which is underestimating the very public this ‘new media’ is aimed at. Today, the ‘interactive’ aspects of the marriage between the TV set and the computer are foremost among the reasons traditional media is embracing the Internet. Indeed, some of the same people that were involved back then are front and center today. A relatively small ‘amusement’ company leverages its capital and its CEO’s brain trust to acquire and distribute content through various media setting off a firestorm of acquisition and merger mania in entertainment and knowledge-based companies. Today, with television itself going digital, convergence of content is becoming strong. Those with the content make the money, regardless of delivery system. Government’s on-again/off-again regulatory circus ends with the nullification of the one hurdle standing in the way of program ownership by the media conglomerates. As such, today movie studios and television networks – and in a lot of cases an amalgamation of the two – are dominant in the drive to own content, distribute it and make money from it.

These events, combined, are a harbinger of things to come.

The year was 1992, and this was the world into which the Internet entered its adolescence.

# # #

Content: The Once and Future King
Intro  |  Part 1  |  Part 2  |  Part 3  |  Part 4  |  Part 5  |  Part 6  |  Epilogue

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