Despite declining share of profits and threats from cable, TV networks bet more on programs

Network spending shows why free TV isn’t dead yet

LOS ANGELES — If you looked at the finances of the broadcast TV networks, you might not be optimistic about the future of free TV.

Each year, ABC, NBC and Fox contribute a smaller share of the profits reaped by their parent companies. Meanwhile cable channels boost viewership and get growing chunks of the advertising pie. No wonder a cable company is about to scoop up NBC — largely because it owns cable channels, which also deliver a stream of revenue from subscription fees.

So why are the TV networks spending tens of millions of dollars more on prime-time dramas and comedies for next season than they did in the last season? What’s in it for the companies, when even Fox, No. 1 among viewers in the key demographic of 18- to 49-year-olds, eked out just 3 percent of the total operating profit reported by Rupert Murdoch’s News Corp. in the last quarter?

An analysis of the broadcast business suggests a few answers:

— Even though the profits may be slim on the broadcast segment alone, other areas of media companies enjoy the benefits.

Spending money on new programs helps sister divisions such as TV production studios, which will own the rights to shows in perpetuity and can sell them in other countries, to other channels and on home video.

That’s partly why NBC is investing 40 percent more on new shows this year than in the 2009-10 season and backtracked from its move last year to replace new shows with a daily dose of Jay Leno at 10 p.m. Its 13 new shows are more than double what it made last year. Six will be produced by sibling Universal Media Studios, such as the Indian call center comedy “Outsourced” and the apocalyptic thriller “The Event.”

The mantra of new spending at NBC has been backed by Brian Roberts, the CEO of Comcast Corp., which is set to take control of the media company from General Electric Co. in a $13.75 billion deal expected to close late this year.

“If you have a few years where you don’t invest in your programming, three or four years down the line that stream of revenue is going to take a huge dip,” said Jeff Gaspin, chairman of NBC Universal Television Entertainment. “We need to start to seed those new hits.”

— The most expensive shows that generate the largest audiences are usually developed on broadcast TV before migrating to cable channels.

It’s partly history and partly economics, but cable networks anchor their programming with reruns of shows that were once broadcast. That helps fill their 24-hours-a-day, seven-days-a-week schedule.

“If you look at USA Network, it’s driven by ‘House,’ if you look at Turner (TNT), it’s driven by ‘Law & Order,’” said Bruce Rosenblum, president of the Warner Bros. Television Group, which makes shows for all the networks.

Audiences tend to decrease for reruns, so it’s better to start big on broadcast. To be sure, some original cable shows are popular and cable channel owners continue to spend on new programs. But even the season premiere of AMC’s highly regarded “Mad Men” was watched by fewer people last fall than a recent rerun of CBS’s “NCIS” on USA.

— The benefit of hitting a home run outweighs the cost of a few strikeouts.

Mega-hits like “CSI” or “Lost” can be sold around the world and generate hundreds of millions of dollars in licensing fees for reruns. A failed show might have cost $1 million-plus per episode to produce, but much of that cost is covered by advertising revenue.

“If a show doesn’t work after a couple of airings, you’ve limited your costs to maybe two or three or at most nine episodes and you go on to the next one,” said Fred Reynolds, former chief financial officer for CBS Corp., which still gets most of its profit from broadcast. “You’re always trying to come up with the show that’s going to beat the incumbent. That’s good.”

NBC’s failed gamble of putting Leno at 10 p.m. last year shows why this kind of spending is a must for the networks.

— Broadcast television is developing sources of revenue that were once exclusively the domain of cable networks. That also helps justify new spending.

TV stations used to give their signals away for free to cable, satellite and telecommunications companies in exchange for their agreeing to carry new cable channels under the same corporate umbrella. For example, News Corp. let cable companies show Fox network broadcasts if the cable providers also took the FX channel. NBC Universal did the same thing to get Oxygen, MSNBC and CNBC on the tube.

Now, broadcast TV stations are demanding to be paid licensing fees to “retransmit” their signals. The negotiations are getting more intense, such as when Walt Disney Co.’s ABC briefly blacked out the Academy Awards to Cablevision Systems Corp. subscribers in March.

Broadcast operators are now getting an estimated 50 cents or so per month for every pay TV subscriber — money that once went only to cable channels such as Discovery, History or Lifetime.

Research firm SNL Kagan expects such fees for broadcasters will surpass $1 billion this year as more deals are cut, and will make up about 8 percent of TV station revenue in 2011. It’s expected to hit $2 billion by 2014. A lot of that money flows to the networks’ parent companies through TV stations they own and from affiliate stations that are part of their networks.

The money is nowhere near the $37.3 billion in fees that basic cable channels are expected to get in 2014, but it’s a start.

“In order to keep growing those fees, (networks) have to deliver some blockbuster programming,” said SNL Kagan analyst Robin Flynn.

— Broadcast TV, not cable, remains the easiest way for advertisers to get their message out quickly. And now advertisers have more money to spend.

Partly helped by its free-to-air accessibility and easy-to-find lower numbers in channel lineups, nothing yet beats the big audiences that broadcast TV can deliver at once. The fragmentation of media provoked by the rise of cable actually makes hit broadcast shows more valuable.

“Shows that have bigger audiences have more effect at the water cooler, and these days those are the things we are beginning to value more,” said Antony Young, CEO of advertising agency Optimedia US.

Companies in some of the sectors hurt worst in the recession, notably the auto industry, are back in the market buying TV ad time. Automakers’ spending on national TV ads in the first quarter rose 13 percent from a year ago, while auto dealers spent 41 percent more, according to Kantar Media. While that doesn’t mark a recovery to pre-recession levels, broadcasters such as CBS and ABC typically own the biggest stations in the biggest markets, and will benefit from the gains.

Revenue at CBS’s local stations jumped 29 percent in the first three months of the year from the first quarter of 2009, and revenue at the national network grew 25 percent. After cutbacks at stations during the recession, even more of their revenue now turns to profit.

“(In) the local television business, there was a broad, deep recession. That’s what happened. (Advertisers) cut back. They didn’t cut back 10 percent; they cut back 40 percent,” CBS Chief Financial Officer Joe Ianniello told an investor conference in May. “But guess what, they’re coming back into the marketplace and there’s still a ways to go.”