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What's up with originals?

For one thing, costs, as networks battle in a more competitive market 5/27/2001 08:00:00 PM Eastern

At its recent upfront presentation, Lifetime announced it would be spending $700 million on programming over the next two years, quadruple what it spent only five years ago.

HBO, notoriously closed-mouthed about programming costs, eagerly proclaims that it will spend $120 million on its 10-part miniseries, Band of Brothers, the most it has spent on original programming "ever."

Meanwhile, midsize nets Sci-Fi and Comedy Central already pay well over $700,000 an episode for their original series Farscape
and That's My Bush.

Indeed, even newly relaunched Country Music Television is doubling its programming budget—from $10 million to $20 million.

What's going on with these ballooning programming costs? Heightened competition, the high cost of off-network products, even the decision by new cable networks to "buy" carriage are all playing a part in the recent programming cost explosion, insiders say. The bottom line is that basic and pay-cable networks are ready, willing and committed to spending what it takes to get and keep cable viewers.

According to Derek Baine, senior analyst, Paul Kagan Associates, a 1999 study Kagan undertook for NCTA to learn why cable rates had increased offered the first clue on the impact of the 1994 rate rollback on escalating programming costs, especially among startup services.

"Networks launched between 1997 and 1999 chose not to move slowly on building up their subscriber base as others had done before," Baine explains. "The 1994 rate cuts caused a delay in new network launches. So those coming on in 1997 and after came on with pockets bulging, paying top dollar not only to acquire the maximum number of subs going in but to provide top-quality programming to keep them."

It became all or nothing, with lots of costs loaded upfront, he explains. New nets were determined to debut with at least 10 million subs, and many were willing to pay anywhere from $7 to $10 a sub, or more, to get carriage.

"Fox put aside $300 million to buy 30 million subs," Baine says. "If you're going to make that huge of an investment, then you'll need to come out with some glitzy, high-profile programming."

The numbers speak for themselves. According to Kagan data, after a 4.7% decline in programming spending in 1994, basic cable networks began to slowly increase their programming budgets, inching up at a single-digit pace until 1997 (when budgets rose by 15%). Then the pace fell to 3.4% in 1998, before escalating to nearly 16% in 1999 and 11.4% in 2000. Estimated growth for 2001 also is a double-digit 10.3%. Over that five-year period, total programming spending for all basic networks grew from $4.2 billion in 1997 to $7.2 billion in 2001.

Paying top dollar for programming, whether acquired or created, is one way for new networks to stand out and another way for established ones to stay on top. But, coincidentally, as the costs for off-network offerings began hitting the stratosphere, it actually began to make economic sense to use those hefty programming-budget increases to create unique programming, which also can be exported overseas for back-end profits, or to forge creative buying partnerships. Thus, you have Lifetime paying in the million-dollar range for its own original movies, HBO paying that amount per episode for The Sopranos, and Court TV and TNT splitting the rights costs for NYPD Blue.

"Obviously, we need to keep our viewers happy," says Dawn Tarnofsky-Ostroff, executive vice president of entertainment for Lifetime. "We have built a relationship with our viewers, and we need to satisfy those expectations."

She says Lifetime prides itself on being a broadcaster to women, but she insists, "What we do doesn't cost as much as broadcast." But the rising competition for quality scripts, stars and productions are closing that gap.

"Clearly, we are paying more money for programming because there is not as much talent to go around," Tarnofsky-Ostroff notes. "There is only X number of great writers, X number of great directors. We really strive for quality programming." The payoff for Lifetime, she adds, is a jump from fifth in the ratings only three years ago to No. 1 in prime time in first quarter 2001.

Chris Albrecht, president, original programming, HBO, agrees: "We are in the business of getting and keeping viewers, and compelling products advance loyalty to our brand." In fact, Albrecht insists that, despite the fact that Band of Brothers is HBO's most expensive show ever, it's a bulge that occurs occasionally, growing out of the need to please viewers with quality stuff, but shouldn't be looked at as some programming-cost race.

"Brothers is a balloon on a one-time-only basis," Albrecht says. The more critical motivating force is grabbing more pay viewers and unique original offerings help do that, especially when Hollywood supernovas like Brothers executive producers Tom Hanks and Steven Spielberg are involved. "What's happening in the last few years is, where once theatricals were the driving force, now we hear as many people say they are taking HBO for the original series," he adds. That said, Albrecht doesn't see HBO changing its current 30%/70% original-vs.-theatrical-programming balance.

For fully distributed, midsize and startup cable nets, though, there's growing reliance on original fare and, with that, rising programming costs, partly because niche nets often can't find programming that fits their niche.

Consider Discovery Networks, which offers 97% originals. "Very little is acquired," says John Ford, president/content group, Discovery Networks. In turn, Discovery's programming costs routinely rise from 8% to 12% each year. What Ford is after is to use Discovery's high penetration and top ratings to "attract" outstanding products.

"Producers want to work with us," he says. Though admitting that talent is motivated by both money and artistic satisfaction, Ford insists, "Discovery won't get into a bidding war, and people still come to us."

Discovery's stand-alone reputation does help drive up programming costs. "Cable needs to be distinctive from broadcast, and it can't do that if it spends most of its budget on off-network sports or reruns," Ford says. Noting that Bravo recently spent over $1 million to land syndication rights to TheWest Wing, Ford says he's concerned about cable's spending "exorbitant amounts" for reruns. "Where is the distinction?" he asks.

Country Music Television, with only 47 million cable and satellite homes, takes a similar view and is doubling its original-programming fare to prove it. "All the cable networks continually fight for audience," says Kaye Zusmann, vice president, program development and production. "They have to be innovative in creating original programming rather than recycling what's out there."

Although CMT was once largely a video service, in order to widen its audience, it is adding long-form series and specials, she says. CMT currently runs only 25% original programming, but Zusmann says that will soon grow to 50%.

Court TV also has dramatically increased its original programming, with annual budgets growing 20% to 40% yearly. Nonetheless, its programming chief suggests there might be a disadvantage to increasing budgets too greatly. "There is a downside to original programming," says Bill Hilary, executive vice president and general manager, Comedy Central. "It's expensive, and we have a burnout factor."

According to Hilary, "the shelf life of a made-for-cable series is two to three years, because you play it so often." Indeed, he fears that That's My Bush might be too edgy for syndication, so back-end savings aren't a consideration.

Instead, Hilary revels in the near-term results of increased spending on original series like South Park, Battlebots and The Daily Show, which, he says, have resulted in double-digit gains in both male and female 18-49 demos.

Programming: Costs on the rise
Network 1997 2001
*Costs for 2000
Source: Paul Kagan Associates, May 2001
Dollar figures in millions
A&E $43.0M $121.5M
Court TV $21.4M $39.8M
Discovery $142.0M $277.2M
Food $17.0M $55.3M
Lifetime $147.4M $260.3M
Travel $12.6M $65.1M
We $9.5M $41.0M
Total: All Basic Nets $4.2B $7.2B
HBO $865M $1.OB*
Showtime $376M $458M*
StarzEncore $231M 367M*
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