Its Own Hits Unlike Other Tv Networks example essay topic

Background The entertainment industry demonstrates a multi channel structure, with companies owning several forms of companies in each link of the value chain. The industry is converging toward a single model, which combines production of content with multichannel distribution. All companies try to sell content in many ways, e.g. movie, TV show, book theme park, etc. All but two of major players in the industry conform to this model. Non-conforming companies have regulatory barriers (foreign owned) or do so out of choice. Some companies (Disney) buy distribution channels, i.e. networks (ABC); others build their own (News Corp., Time Warner) or do both Viacom (WB, CBS).

The newest trend is to combine production and distribution with added distribution possibilities of internet (AOL Time Warner, Vivendi Seagram) CONTENT DISTRIBUTION Resources Creation Delivery Retail Actors / Writers Television Production / Movie Production Broadcast Television Networks / Cable television Networks Movie distribution Local Affiliates / Local cable companies / Local theaters In this industry we find vertical integration through direct ownership, as well as commercial transactions via long-term contracts and one-time "spot market" transactions. Ironically, even the resources can be "owned" - as in the case of the old "studio system" which tied actors to studies for a number years. In today's industry, these arrangements are still in place, with actors signing on for "x number of picture" contracts with various studios. Production companies can either be independent or owned by integrated companies.

In either case, production from one company may be sold to a competing network or distributor. Finally, local television affiliates and local movie theaters are sometimes bound by contract, sometimes entirely independent, or sometimes owned by networks. This last situation is usually the case with large metropolitan areas, where the networks want to have a closer link to the customer. Agents and other facilitators play a commercial conduit role of helping to bring together various people and companies along the value chain. The reasons for vertical integration include lowering risk (regardless of where profits are) and locking in distribution for high-risk production. But production companies supply all networks and networks access all suppliers, so motive for consolidation is as much to gain bargaining leverage as to lock in distribution.

All companies are aiming for synergies, cross-selling to end users and cross platform selling of advertising In looking at the mergers along the value chain, companies are looking for complementary access (i.e. Viacom strong with the young audience, /CBS with the old). However, all consolidation does not live up to its billing, with Disney as a good example. Disney has been hurting since its merger with ABC. The cultures have clashed, as have egos. Entertainment Industry Experience - Value Chain Before government regulation in the 1950's, the large Hollywood studios had been vertically integrated.

Three studios owned production and worldwide distribution. This system was broken up by regulation, and it was not until the late 1980's that the federal government again allowed companies owning studios (TV production units) to own TV broadcast networks (distribution). In 1988, there were many separate companies such as: - Warner $3.4 billion movies and TV production - Time $4.2 billion publishing and cable - Disney $2.9 billion cartoon & theme parks - Capital Cities / ABC $4.4 billion network & stations - Paramount $3.2 billion movies & publishing - Viacom $. 6 billion TV syndication & cable - News Corp. $3.5 billion tabloids and production studio (20th Century Fox) just starting network By 2001, the industry was dominated by six vertically integrated global companies: AOL Time Warner ($36.2 billion) Disney ($25.1 billion) Viacom ($20.4 billion) Vivendi (Universal, $16.3 billion) News Corp. ($13.4 billion) Only one large company was left, Sony (Columbia pictures, $19 billion) that concentrates on production and only one large company left, GE (NBC, $5.8 billion) that concentrates solely on distribution. Between 1985-2001, there were a number of M&A transactions that resulted in this vertical integration: Time Warner merged (1991), bought Turner (1995), built Warner network, and acquired by AOL (2001).

Disney buys Capital Cities / ABC (1995) Viacom buys Paramount (& Blockbuster) (1993), builds UPN, then buys CBS (1999) Vivendi (a water utility) buys Seagram (2001), which had bought Universal (MCA) /Polygram from Philips Vivendi brings together content of Universal with Canal+, one of Europe's largest pay TV providers Seagram had content film, music, theme parks, but lacked distribution, i.e. TV network though it held a non-controlling interest in Barry Diller's USA networks. With purchase of Seagram, Vivendi aims to deliver music and video clips on broadband to TVs, PC's, mobile phones, and handheld devices. Vizzavi will be its portal and will directly compete with AOL, especially in Europe. News Corp. bought 20th Century Fox studio (1985), built Fox network and acquired content (sports teams like Dodgers & interests in other teams such as Knicks).

They built the Fox network (number 2 n network among 18-49 year olds) from scratch. Fox is unique in that it produces and owns most of its own hits, unlike other TV networks. It studios also supply other networks. These shows include Dharma and Greg and the Practice, which it supplies to ABC, Chicago Hope, which it supplies to CBS, and Buffy the Vampire Slayer, which it supplies to WB (see article below). Along with Warner, Fox is one of the top Hollywood TV studios. It achieved this position early in 1990's, by snaring half dozen top comedy writers with lucrative salaries - thus tying up the resource.

Even if it sells shows to other networks, it not only profits from the sale, but also profits from syndication revenues over time. In a desire to be "everywhere", Fox built or bought cable channels in nearly every content area, e.g. Fox Sports that competes with ESPN, Fox News that competes with CNN, etc. All of the major entertainment companies, except for Sony and Vivendi, now own U.S. TV broadcast network (distribution). However, these companies are prohibited from owning US television networks because of foreign ownership (similar to some restrictions on US utility ownership). Fox, whose parent company News Corp is owned by Rupert Murdoch, got around this issue by Murdoch taking up US citizenship.

All of these companies except for General Electric (NBC) own production studios (idea factories for generating content). Without content, NBC is forced to pay $13 mill per episode to Warner to renew top rated ER. Reasons for Vertical Integration As the entertainment industry moves to vertical integration through ownership, the question is why this integration could not just be purchased or contracted for, or achieved through alliances. Why is ownership necessary?

One reason is the convergence of computing, telecom, information, and entertainment. This creates a hierarchy with content, the scarcest commodity, being the most valuable. However, the fundamentals of content are high overhead, high risk, and low margins. The cost of making, marketing movies continues to increase, as the likelihood of a success becomes guesswork.

While a couple hundred movies are made per year at a cost of over $50 million a piece, just 20 consume 40% of total box office revenues. The odds are no better in TV production. One rationale for joining production and distribution is to guarantee outlets for production. With a captive outlet, there is a built-in output for content.

Networks cut costs by owning / supplying more of their own prime time programming. While commercial relationships still exist between production and distribution channels, networks try to be "understanding" of their own production units (ABC tries to be "understanding" toward Disney). But there are limits. Production companies cannot force bad shows on networks. Paramount, for example, cannot force CBS / UPN to carry shows that don't have an audience In 1998, Fox produced 14 series with only 6 appearing on Fox. "Hits" that appear on other networks go into Fox "library" and are then syndicated on Fox global satellite & other Fox platforms.

Production companies that also own networks - other outlets for their product - also have additional bargaining power in the industry. If producer can threaten to pull "hit" shows from network, they gain bargaining power. For example, Warner can threaten to pull ER from NBC and its put on own network. "Hot" network too can also demand price for putting a show on the air. Thus, the entertainment industry is one in which the large entertainment companies have production as well as multiple forms distribution. However, production companies supply all networks and networks access all suppliers.

Everyone is buying each other's programs. In this system the real rationale for vertical integration is by locking in distribution, companies have leverage in negotiations with production companies and networks. They are more able to hedge their bets as long as can credibly threaten to go elsewhere Another rationale for vertical integration is the ability for big entertainment companies to sell content, i. e., the same character or idea, marketed in many ways. For example, the Rugrats, Nickelodeon cartoon characters, turned into a Paramount film, a Simon & Schuster book, and a website.

The content can come from anywhere - movies, TV, music, publishing, merchandising, theme parks, internet sites and the content is repeatedly churned to maximize returns. For the model to work there has to be synergy along the value chain. Different parts of the business have to be aligned so that they add value to each other. Within Disney, there is a central "synergy" department so that content providers' ideas are known and the company uses them. All parts of Disney try to take advantage of the same ideas. However this does not always work.

ABC is not doing better financially or in the ratings since merger with Disney; but ESPN is spinning off restaurants, a magazine, & a website, and has benefited There is still another type of synergy-complementary assets (e.g. relationships to old - CBS - and young - Viacom). Originally, CBS cable flopped and, lost young viewers to "hip" cable upstarts. Viacom deployed MTV, Nickelodeon, and other cable networks popular with young audiences to help CBS. Personalities now crisscross from MTV, etc. to CBS. CBS is number one in total viewers, but third in advertising revenues because of its old audience. There is a hope that Viacom with its younger audience can revitalize CBS.

Closeness to Customers Each revolution in distribution and transmission gives companies with content (production) more outlets for their product. All companies are big businesses that can create content and distribute in many different of ways. The evolution has been from broad mass audiences (TV networks), aggregation of specific audiences (children, new, movies, comedy) on cable, to catering to individual interests via direct satellite services (15% of U.S. homes) and digital cable ( 250 stations), to markets of one and entertainment on demand on internet (similar to distribution generation in the electric industry). Truly interactive TV will enable viewers to see cartoons, movies on demand, and build their own newscast.

Networks that try to please everyone are losing out to those that target individual groups. Americans began watching less television as their choices multiplied. Combined audience share for nightly network news fell from a peak of 75% in 1980 to 47% in 1998. Many news choices now exist - CNN, MSNBC, Fox News, CNBC (business), ESPN (sports), etc. Cable, in addition to providing choice to the customer, also has an advantage over conventional TV in that it provides two sources of revenue: subscriptions and advertising. Well-established cable networks have become the most profitable parts of entertainment businesses.

Almost all media moguls rose through cable and it was the most profitable entertainment business of the 1990's. As the world fragments, the network's value remains only in order to reach the mass medium; networks are weak in profitability. In 1998 only NBC made money; in 2000, NBC earned $375 mill, ABC $225 mil, CBS $95 mill, Fox $48 mill. Networks are moving toward shows with lower production costs, such as news and reality TV. Consolidation Along the Value Chain The entertainment industry offers up several good examples of vertical integration along the value chain, in many cases where the result did not live up to expectations. When the Disney-ABC merger was announced in 1995, it was at the time the largest ever media merger.

Both companies's hare prices leapt. But since then, the earnings of the combined companies have dropped, executives have defected, and the stock plunged. There has been slow growth and declines in operating income, net income, and earnings per share. The ROE slipped below 10%. The culture is seen as insular and arrogant, hierarchical, and slow moving, based on centralized decision-making, which is not appropriate to the needs of rapidly changing entertainment business. Capital Cities (ABC) had been very decentralized.

All Disney's businesses, with the exception of theme parks, have been slumping. They are trying to rely on creativity and good products to make a turnaround, but their "wholesome" brand is viewed as weaknesses to kids who are "growing up quicker". ABC lost money in 1998 because audiences splintering & program costs keep rising (NFL rights). Prime time results were disappointing since the merger; in 1999, ABC trailed NBC and CBS in ratings.

The biggest hits on ABC (the Practice, Dharma and Greg, etc.) are produced by Fox; Disney's Touchstone studio has not produced a hit for ABC or anyone else since 1991. Disney did something interesting in 1999 by merging their production company (Touchstone) into their distribution outlet (ABC). The aim was that Disney would produce and distribute more of its own content; however, the merger created internal revolt, and talent loss. Moreover, it sealed off ABC from other studio and this could result in further decline The merger of AOL and Time Warner is another consolation with uncertainties ahead.

There is crowding at the top with a dual leadership structure -Levin (Time Warner) - CEO & Case (AOL) -- chair -Parsons (Time Warner) - TV, movie, & music production - 35% revenue -Pittman (AOL) - networks, cable, magazines, online - 65% revenue Cross promotion may collide with the need to generate real revenue. This vertical integration cannot get in the way of lucrative deals with other companies (like Aol $21 million agreement with CBS MarketWatch). At the same time, the individual pieces of the merged company are facing challengers. CNN's ratings are falling (down over 40% among 25-54 year olds). It is viewed as having second-rate programming, production, talent; MSNBC has emerged as's strong competitor, as has Fox News. CNBC and CNNfn also provide strong competition to each other.

Again, in the entertainment industry, there is a need for corporate culture to be speedy and collaborative; however, Time Warner has a history of being slow moving and conflicted in decision making, although it has had past successes that may make it difficult to change. For example Time Warner paid cash bonuses based on performance of individual units, while AOL's compensation was based on stock reports. Time Warner reported quarterly, while AOL reports weekly. In combining the two companies, the challenge will be to institutionalize decisiveness & innovative ness Conclusions -The Value Chain in the Entertainment Industry -Makes sense to think about acquisition of distribution -In theory, many potential advantages including risk reduction (regardless of where profits move in a position to gain) -Does not make sense to lock-in distribution, but rather to use distribution as bargaining tool (ends dependence, provides credible threat to go elsewhere) -Acquisition of distribution provides closeness to customer (cross-selling) and possibility of developing new products, differentiating existing products, and catering to individual customer needs -Catering to individual needs can yield higher profit margins than selling undifferentiated commodity -But synergy with acquisition of distribution may be hard to achieve -Have to look for complementary assets that work with one's own company -Have option of creating (i.e. building own) distribution, rather than acquiring existing company -Bigger long term investment, but don't face challenge of revitalizing what acquire or clash of competing cultures -Creating gains from combined companies not easy to accomplish 'Slayer' It Ain't So The WB's 'Buffy' is still negotiating its future. EW reports on the chilling effects the outcome may have on network TV by Lynette Rice Hundreds of ad buyers are crammed into a New York City ballroom, as they are every year, to hear what the WB has in store for fall.

The room is plastered with posters of the network's personalities: Alyssa Milano, David Boreanaz, Jessica Biel, and -- wait a minute -- where's Sarah Michelle Gellar, the WB's No. 1 star? She's across town, in another ballroom, at a presentation by Fox, 'Buffy the Vampire Slayer's new crypt. That could be the scenario come May, when the networks unveil their fall schedule to advertisers. And it's a possibility that's set off a battle as bloody as any the Slayer has waged. The WB and 'Buff's producers, Twentieth Century Fox, are fighting over the drama's future, and many in the business consider the possible and precedent setting outcome -- that the studio would yank its show from the WB, which launched it five years ago, and put it on its affiliate network, Fox (both are owned by Rupert Murdoch's News Corp.) -- to be nothing short of industry shaking. 'It's the worst thing that could happen,' 's ays Marty Adel stein, a partner in the talent agency Endeavor.

'Fox [the studio] has a lot of shows on other networks and they do a lot of shows for their own network. They " re good at spreading it around. But this would send the sign: Why pick up a show from a studio if it's going to eventually end up on its own network? It's bad for business. ' 'Or perhaps just for the way broadcast network business has been conducted up until now. Given the dramatic shifts in the TV landscape (mega mergers; nets insisting on co-owning shows with producers), others argue that the rules must change.

'If Fox [the studio] did this in the old days, it would be out of business with one third of its clients,' 's ays Pax TV CEO Jeff Sagansky, former head of Entertainment at CBS. 'Now there are so many networks. Even if the studio were to lose the WB as a client, there are plenty of other places to sell shows. ' ' Adds another studio head: 'Why not let Fox put it on their own network and reap the benefits of the advertising revenue?' 'Self dealing, as it's often called, is still akin to sacrilege for the WB's Jamie Kellner, who, in effect, raised 'Buffy': 'Nobody wanted the show; it didn't perform [at first] but we stuck with it. ' ' The position of the WB's founder (and, as of this month, CEO of Turner Broadcasting, a division of AOL Time Warner, Entertainment Weekly's parent company) is that his fledgling network is finally on target to make a profit next year -- unless forced to pay 'Buffy's studio, Twentieth Century Fox, its $2 million plus per episode asking price. Kellner is offering $1.6 million.

'It's not our No. 1 show,' ' he argues. 'It's not a show like 'ER' that stands above the pack. ' 'Such statements set Joss Whedon's blood boiling. Granted, 'Buffy' isn't No. 1 (that would be 'Seventh Heaven'), but, as the Slayer's creator points out, his show 'put the WB on the map critically,' ' and it continues to be the network's most acclaimed series.

'For [the WB] to be scrambling to explain why it's not cost efficient -- it's their second highest rated show,' 's ays Whedon. 'They need to step up and acknowledge that financially. ' ' It's not like the studio expected to make money before now. Producers routinely lose millions in a show's first five years -- and that's assuming there is a first five. Up until then, the network pays a nominal licensing fee -- anywhere between $900,000 and $1.1 million for a drama -- and the studio swallows the deficit. (the WB currently pays $1 million to air an episode of 'Buffy,' ' less than half of what it costs to make.) But after the fifth year, a hit show's studio can generally get the networks to cough up big bucks ('Friends' and 'Frasier's licensing fees, for instance, both skyrocketed when their contracts were up).

Kellner is arguing that (a) 'Buffy' isn't enough of a hit, and (b) the rules for an emerging network are different than those for a mature network. To which Twentieth Century Fox has replied, tough luck; if you can change the rules, we can threaten to do the same, and take our show to another network -- even if it's our own. Thanks to a clause in 'Buffy's contract (allowing the studio to move the show to any network if it reaches an impasse with the WB), Twentieth Century Fox may do just that. Though studio insiders have floated ABC as a possible bidder, sources there say reports of the Slayer moving to Alphabet City are unlikely.

Which leaves Fox. What sort of fallout does the studio anticipate? 'I don't believe [moving 'Buffy'] will have any impact at all,' 's ays Gary Newman, president of Twentieth Century Fox TV. 'I have been assured by network heads that they fully understand our position. They understand we have a business to run. ' ' 'Buffy' might, in fact, be a better fit on the older skewing, male dominated Fox.

(Certainly it will have a champion in Fox Entertainment prexy Gail Berman, who helped develop the show while working for San dollar Productions and still claims an exec producer credit.) One of Kellner's biggest arguments for keeping 'Buffy's licensing down is its fans; rather than sucking in new teens -- the lifeblood of the WB -- the show attracts increasingly older viewers. When the drama moved to Tuesdays in 1998, it averaged a 19 share among 12 to 17 year olds; now it's lucky to get a 12. Conversely, 'Seventh Heaven' is averaging a hefty 18 share. 'Our audience is a younger audience,' 's ays Kellner. 'Maybe what we should be doing is to not stay with the same show for many years, and refresh our lineup. ' 'The idea that ['Buffy' viewers] are getting too old now is a spurious argument for not paying for a show that has as much to do with the WB being the WB as anything else,' ' counters Whedon, who, in fact, has never bought the argument that his show is for teens.

'We were told the median age of [our viewers] was 26 to 29 years old in year 2 of the show. ' 'Whedon acknowledges a debt to Kellner ('There's no other place where 'Buffy' could have happened') but considers it paid in full. 'There are advantages and disadvantages,' ' he says of leaving. 'Other networks reach more people, but other networks also have more hit shows they need to promote. We could be exposed to a new audience, but we could also be buried. But if we decide to move, I'm fine with it.

' 'Keeping close tabs on 'Buffy' is Columbia TriStar Television, which could have a fight of its own next season when 'Dawson's Creek's contract is up. Like 'Buffy,' ' 'Dawson's was a landmark show for the WB, and its production costs have also risen dramatically over the years. Columbia fears Kellner may hardball them, too. 'It's increasingly difficult to get shows on the air and to make them financially successful. Networks need to realize that,' 's ays Len Gross i, Columbia TriStar's president. 'Deficits are large, and even with a big hit, returns are shrinking [because of increased overhead and sharing profits].

Something's got to give. ' 'Buffy's fate must be decided before May's up fronts. For those who believe the Hell mouth will open should the studio choose its sister net, Sagansky says phooey. Good as 'Buffy' is, it's always going to have limited appeal; it won't make or break either network. 'This is not a game changer, he says. 'It's not a 'Seinfeld. ' '.