For syndicators, 2009 has been the year of barter, but it's a business model that can't hold up, according to many industry executives. “Barter is a necessary evil at this point,” says Ira Bernstein, co-president of Debmar-Mercury. “But you can't support first-run shows with barter-only deals, and it floods the market with advertising inventory.”
“Barter revenue doesn't cover our production costs,” says another syndicator. “We cannot produce a quality television show off the revenue that barter generates.”
Nearly every show that syndicators have sold to TV stations in 2009—NBC Universal's 30 Rock, Warner Bros.' New Adventures of Old Christine, and HBO's Entourage and Curb Your Enthusiasm, to name a few—has been sold on a virtually all-barter basis, with stations agreeing to give syndicators advertising time in the show in exchange for airing it.
Typically, stations pay syndicators a cash license fee in addition to that advertising time, but this year very little cash changed hands, although Christine did pick up a bit of cash in some markets. Deals for shows that involved solid cash license fees—Sony's Dr. Oz, Debmar-Mercury's The Wendy Williams Show and Twentieth Television's How I Met Your Mother—were completed before last fall's economic crash.
So with stations strapped for cash, the old model for the development of big first-run programming for syndication is broken. But if the marketplace rallies and a couple of major names don't return, there could be a myriad of opportunity for program providers in coming years.
OUT WITH THE OLD MODEL
In this new, virtually all-barter environment, negotiations revolve around formerly minor deal points, with dealmakers getting guarantees for specific time periods, station placements and number of runs, and stations giving up more barter time to distributors than ever before. That's not so painful with the ad market in the dumps, but it could become excruciating for stations when the ad market returns.
For example, NBCU's 30 Rock was sold to stations with a 4/3 barter split: Stations get four minutes of advertising time in each episode, while NBCU gets three minutes. In the past, the typical barter split for off-net sitcoms has been 5½ minutes local/1½ national or 5/2. In the 30 Rock deal, stations agreed to give up another minute of ad inventory in exchange for not paying any cash.
That's fine for now, but if and when advertisers clamor to buy time again, stations will be stuck airing shows in important time slots in which they've given up much of the ad inventory. Just one minute of advertising time in an access show in New York City can be worth $50,000-$100,000 per week to a station, according to industry estimates. Over 52 weeks a year, that adds up quickly.
With no cash in the market, syndicators have been biding their time by selling off-network shows to TV stations, and putting off investments in new first-run shows until the market improves. In fact, three talk shows that were supposed to launch this fall—CBS' T.D. Jakes, Program Partners' Marie Osmond and Hearst's Carlos Watson—were cancelled because syndicators couldn't get stations to pay enough cash to support the shows.
“With viewing in daytime declining, you don't have a lot of stations who are going to pony up cash license fees for product,” says Bill Carroll, VP of programming at Katz Television Group Programming. “If you aren't going to do that, you have to be willing to accept what else is available. You have to look at something else that's being offered that already has a brand and is being offered on an all-barter basis.”
That's why the NBC and Hearst stations picked up NBCU's Real Housewives off-Bravo franchise; for stations, it's fresh, branded programming that plays in many dayparts. And at a 7½-7½ local-national barter split, the price is right—at least for now.
“With a show like Real Housewives, you know what you are getting,” says one buyer. “You can estimate the show's performance and prepare for it, and then you can live to fight another day.”
Stations and syndicators expect that day to come in 2011. “2010 is a skip year” in which there will be little or no new first-run programming, says another buyer. “But 2011's going to be the Wild West.”
WHAT WILL OPRAH DO?
Talk-show queen Oprah Winfrey is 2011's big question mark. Winfrey's deal runs through the 2010-2011 season. If she finally wraps her show and decides to devote her time to her new cable network, OWN, there will be a huge hole on TV stations for syndicators to fill.
Like Oprah, CBS' Dr. Phil also is renewed through the 2010-2011 season and syndication executives and stations alike are closely watching the economics of that show. Many other expensive syndicated shows are renewed on stations for years. That was incredibly profitable in the halcyon years, but now that stations are having trouble paying the license fees, those long renewals have become an issue.
“If syndicators don't substantially reduce the license fees for all of these established shows with enormous fees, they won't be on the air,” says a syndication executive. “If those shows go away, there's an opportunity in the marketplace because then there will be a lot of cash available.”
That said, syndicators don't expect stations to ever again have the kind of cash that they did when local TV was the only game in town, and stations would fight over shows and bid up their license fees. With cable and the Internet taking over a serious chunk of daytime, access and late-night viewers, syndicators have to revamp their business models.
“We're sitting on a two-legged stool right now and propping ourselves up with a foot,” says another syndication executive. “We need to find one or two more legs.”
One of the solutions is to reduce risk, but that means reducing potential upside and many studios aren't willing to go there. Debmar-Mercury lowers its risk by working with a cable network to first test a show at very little cost to that network. If the test proves that the ratings will be there, as they did with Tyler Perry's House of Payne and Meet the Browns on TBS, the cable network agrees to buy 100 episodes up front at a pre-determined price. If the show's a huge hit, the network has a bargain.
Debmar-Mercury has had great success with what it now refers to as the “Tyler Perry model.” The company is hoping to expand that model with two more original sitcoms in the works, one from the producing team of Will Ferrell, Adam McKay and Chris Henchy, and another from producing partners Ice Cube and Revolution Studios' Joe Roth.
“Going in, we're giving away a certain amount of upside,” says Debmar-Mercury's Bernstein. “But if it's a smash hit, we'll all ride that ad revenue train.”
Another way to reduce risk is to distribute shows across platforms. For example, Twentieth Television is producing Are You Smarter Than a Fifth Grader? for daily syndication on cable network CMT, with primetime runs on News Corp.-owned MyNetwork TV. NBCU is doing something similar with original episodes of Deal or No Deal, which this fall will run both in broadcast syndication and on MyNetwork TV. (Repeat episodes from Deal's primetime run on NBC air on cable network GSN.)
“It's the sum of all parts that allows us to produce Fifth Grader,” says Greg Meidel, president of Twentieth and MyNetwork TV. “We just have to make sure that we are very strategic in how we work out these multi-platform deals. I think there will be real opportunities for quality programs.”
And syndicators know they need to produce shows based on a realistic expectation of their potential ratings. Some syndicators, such as NBCU and Debmar-Mercury, are literally going farther to cut costs, moving shows to Connecticut to take advantage of new tax breaks. Four NBCU shows—Jerry Springer, Maury, Steve Wilkos and Deal or No Deal—have moved to the Nutmeg State, while Debmar-Mercury plans to produce both of its new sitcoms there.
Syndicators are also working hard on creating brand integrations with advertisers that run seamlessly in many of their shows. These include Warner Bros.' partnership with Walgreens in Ellen and Bonnie Hunt, CBS'integration with department store Kohl's in Entertainment Tonight, and Disney-ABC's work with Quaker Oats in Live With Regis and Kelly. “We're doing a lot of integrated marketing,” says one syndication executive. “It definitely helps us subsidize our production costs.”
Striking a note of optimism, syndicators don't expect this marketplace to be a permanent state of affairs.
THE KEY TO THE CITY
“We believe that the decline in newspaper readership and the decline of cable penetration due to the increase in subscribers to other services are creating something that local TV stations have never had before—they are the only place where you can buy an ad and reach the entire city,” says Mort Marcus, Bernstein's partner at Debmar-Mercury. “If you want to cover the DMA, you go to your TV station. That's why TV stations will survive.”
To attract and keep that business, TV stations will need fresh programs as much as ever, but the cost of that programming will have to stay in line with new TV station budgets. The day of break-the-bank license fees is likely over, but stations still need quality programs to lure viewers.
“If stations stop investing in first-run programming, they stop investing in their unique selling proposition,” says Ken Werner, president of Warner Bros. Domestic Television Distribution. “With some 118 choices on the program guide, if you look like everyone else, you're dead.”