THE SKED: Ad Age Shows Us the Network Money – Part I

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Advertising Age has issued its yearly survey of the actual prices (more or less) being charged by networks for 30-second national ads in their primetime programming, which allows us to do some back-of-the-envelope calculations about just how profitable each individual show and network may be.  We’ll get to the network-by-network calculus tomorrow, but today, let’s go over some basics about how these figures translate into actual revenue, what they illuminate and what they may obscure.

A Typical Hour of Network Television Includes 20 National :30 Commercials.  There are plenty of exceptions to this rule of thumb, both up and down (for example, the networks try to squeeze more ads into hit shows), but generally speaking, a 60-minute TV show includes about 10 minutes of national commercials (sold by the networks), 3 minutes of local commercials (sold by individual stations), and 3 minutes of promos for other network programming.  Similarly, a half-hour episode has about 5 minutes of national commercials, and 1 1/2 minutes each of local ads and promos.

What’s Missing:  Ratings Guarantees.  Ad Age has (approximate) rates in its chart, but virtually every sale of advertising time involves another critical number as well:  a minimum ratings guarantee for that show.  (These can be based on the well-known Adults 18-49 measurement, or any demographic subniche, e.g., 12-17 year old girls.)  If a show is a surprise success and overdelivers on its guarantees, the networks get no additional compensation from Upfront sales (see the “scatter market” below), but they do bear the risk of any underdelivery.  As you can imagine, there is heavy negotiation on how these numbers are set, especially for new series that don’t yet have track records, where rating estimates are mostly educated guesswork.  If the worst happens and a show can’t meet its minimum, the networks try not to refund cash if at all possible, but instead give the advertisers additional free ads to make up the difference–those are called “make-goods,” and they can radically affect profit and loss for a network having a bad season.  So, for example, this fall there’s a good chance that Revolution is outperforming its guarantee, but NBC has to live with the Upfront deals it made for that show.  However, when American Idol plunged in the ratings last season, FOX was hit with a tremendous shortfall on its guarantees, forcing make-goods to be issued and possibly even money refunds.

Upfront Prices Are Only Part of the Story.  Networks sell their advertising time in two very different ways.  The part that’s become part of pop culture is the “Upfront” selling season, in which, as the name implies, the networks sell the majority of their ad time before the new season even begins and any viewer has decided whether or not to watch a particular series–these are the prices covered by Ad Age’s survey.  Typically, a network sells around 80% of its total ad inventory in the Upfront, while strategically reserving the rest of its inventory for what’s called the “scatter” market.  This refers to sales that are made while the season is already in progress, on a show-by-show, night-by-night basis (get it?  “scattered”).  The scatter market has both risks and potential upside.  Sometimes an advertiser decides it needs more commercial time than it originally bought (e.g., a movie studio that realizes its big-budget release needs some extra marketing zing if it’s to open big) and will pay a premium for those extra spots, making them super-profitable for the networks.  Of course, if that doesn’t happen, for example if a bad economy makes advertisers cut their marketing budgets, a network can be left with unsold inventory on its hands.  On the network’s end, if a show overperforms beyond the ratings estimates set at the time of the Upfront, its network can raise the rates for that show in the scatter market (as is probably happening right now with Revolution)–however, scatter spots in a flop (like The Mob Doctor) will have to be unloaded at fire-sale prices.

Networks Live and Die By Their Ad Revenue.  A successful TV show generates many different kinds of income, from homevideo sales to international distribution to local station and cable syndication to merchandising, downloading and more.  Those monies, however, belong principally to the show’s producing studio, and not to the network (in many cases these days, the network is also corporately affiliated with the studio or is at least one of the show’s studios, but let’s not overcomplicate this).  Unlike cable networks, broadcast networks also don’t get monthly subscription fees.  With certain exceptions, the network’s return from a show is limited to its ad revenue–and for its part, it will almost never share even one penny of that revenue with any studio.

License Fees.  The network’s main expense on a show (apart from off-network marketing) is the price it has to pay the producing studio for the right to air the series, called the “license fee.”  This amount is (often heatedly) negotiated before a pilot is even produced, and once a show is on the air, it increases by contractual amounts each year the show continues, ultimately becoming more or less equal to the entire series production cost if it’s a long-running hit.  In fact, after enough years, the network often reimburses the studio all its past production deficits retroactively, meaning from that point on, the studio is in pure profit.  The license fee, as noted, is a case-by-case negotiation that takes into account the show’s budget, its cast, special effects, location shooting, etc., but in very broad strokes, it’s generally fair to assume that on a 1-hour series, a network pays something like $2M/ep as a license fee in the show’s first season, with $1M/ep on a single-camera half-hour (these have longer production schedules and location shooting, so cost more to produce than multi-camera sitcoms) and $750K/ep on a multi-camera half-hour.

Reruns.  The prices quoted in Ad Age are for initial airings only.  Although networks don’t air as many reruns as they used to (especially for serialized shows and reality series), they still have to fill 52 weeks of programming each year, and sitcoms and procedurals repeat frequently.  Ratings (and thus ad rates and revenues) are lower for those later airings, but the shows are also aired at negligible cost (basically Guild residuals), making them an unglamorous but important source of profit for the networks.

Tomorrow we’ll delve into the actual numbers for each network on the Ad Age chart, and try to see where the networks are making money–and not.