October 2013 56 Economy of U.S. Studios (Continued on Page 58) Fortunately for the studios, to generate cash they can also collaterize their library for financial loans and monetize them with transactional revenue. Reportedly, a TV library loses an estimated 11.4 percent of its value from year two to 11, and 7.5 percent from year 12 to 21, after which depreciation virtually ceases. Let’s do the numbers: A studio produces for its own broadcast TV network (or others) a primetime drama carrying a $2 million deficit per episode and takes a tax write-off on it. From that same show, the network grosses an average of $7million and nets $5 million. The studio then recoups the deficit internationally (including the seven to 10 percent cost of doing business) and generates $1 million per episode in re-runs (off-net) in domestic syndication. In effect, an hour-long drama costs a studio$3million,whilegeneratingrevenues for the studio-broadcast group of $9.5 million ($7 million from the network, $1.5 million internationally and $1 million in syndication), bringing profits of $6 million after deducting distribution, development and interest costs (less than that if producers’ participation is involved). With that rate of return, even at an 80 percent failure rate, the studio level alone will bring in a hefty 10 percent average ROI on an output per studio of 15 TV drama series per year. The sitcoms that succeed don’t do well at the international level, but they’re manna domestically. In effect, for the studios, content is a portfolio business. And all this is within a four-year period, with a library value that continues to be monetized over the years and without considering digital, international channels, merchandising and other ancillary and transactional revenues. Indeed, there is a science to this business model called “Ultimate,” a technique unique to the U.S. studios whereby executives can figure out how much revenue will be generated by each movie title or TV series. Ultimates are updated monthly by the studios’ financial people with fresh data from the sales force providing for more incisive forecasts. The Ultimates, together with other moneymaking rituals, like the networks’ Upfronts (pre-sales of primetime broadcast TV channel divisions have been integrated under Steve Mosko since 2008. CBS integrated content sales in 2012, followed by Warner Bros in 2013. International distribution and domestic firstrun (syndication) businesses provide the studios with their short-term strategy (to enhance cashflow), while long-term results are generated by off-net syndication. For these reasons studio executives are reluctant to compare revenues, because each division has different financial peaks. For example, international revenues on a network show start to come in immediately, while the domestic division has to wait four years for the off-net income to come in. The business model for first-run is still cash plus barter with some elements of revenue sharing, in the sense that, if the show performs well above what was expected, there will be some extra income for the distributor. First-run genres are game shows, court shows, talk and tabloid news/magazine shows likeTMZandET. It has been said that at Fox, Mark Kaner’s International TV division makes close to $2.3 billion in sales per year. Sony Television is responsible for more than 50 percent of Sony Pictures Entertainment’s profit of $450 million. Sony’s 124 channels in 159 countries generate a reported $1.5 billion a year on their own. Commented Disney’s Ben Pyne: “Disney Channels Worldwide is a global portfolio of over 100 kid-driven, family inclusive entertainment channels and/or channel feeds available in 166 countries/territories, in 34 languages, that generate significant revenues and create brand awareness.” One might think that the biggest challenge for the U.S. studios would be the domestic TV business, however recent developments proved the opposite on all levels: broadcast, syndication and digital. And, if the studio also owns a network, add retrans fees to those plusses. For the studios, the network and syndication businesses represent the engine that powers their content factories. They are also conduits for producing the high-quality content that makes lots of money internationally and allows the commercial air time) and the L.A. Screenings (Hollywood’s showcase for new primetime TV series), make for the studios’ well-oiled money grinding machines. However, the U.S. studio moneymaking engine is its ubiquitous and omnipresent content distribution apparatus, which encompasses international, domestic distribution (the latter is often referred to as “syndication”) and international cable and satellite TV channels that lately tend to fall under one executive, as is the case with Steve Mosko at Sony Pictures Television; Armando Nuñez at CBS Television Studios; BenPyne at Disney-ABC; Jeff Schlesinger at Warner Bros.Television and Dennis Maguire at Paramount Pictures. Only Fox and NBCUniversal remain under the traditionally separate domestic and international structures (see the executive roster sidebar on pg. 59). Disney was the first to integrate program distribution. In 2007 the studio placed its many content distribution units under one group, “in order to speak with one voice, one vision and have one agenda,” explained Ben Pyne, president of Global Distribution at Disney Media Networks. At Sony Pictures, TV program distribution and Dennis Maguire, president Home Media Distribution, Paramount Pictures NBCUniversal: Ron Meyer, Belinda Menendez, Jeff Shell, Kevin MacLellan and Steve Burke Janice Marinelli, president of Disney-ABC Domestic Television for U.S. and Canada Steve Mosko, president of SPT, with the stars of Breaking Bad, Bryan Cranston and Aaron Paul (Continued from Page 54)
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