It is not much of a stretch to define TV programming as a system that mostly delivers viewers to merchandise displayed in blocks of ads. And with more than $60 billion at stake in advertising revenues each year, networks and cable services work hard to attract the audiences and subscribers that bring in the advertising dollars. But although broadcast and cable advertising have declined in prominence, one recent study reported that more than 80 percent of consumers say that TV advertising—of all ad formats—has the most impact or influence on their buying decisions. A distant second, third, and fourth in the study were magazines (50 percent), online (47 percent), and newspapers (44 percent).20 (See Figure 6.4 for costs for a thirty-second commercial during prime-time programs.) To understand the TV economy today, we need to examine the production, distribution, and syndication of programming; the rating systems that set advertising rates; and the ownership structure that controls programming and delivers content to our homes.

Production

The key to the TV industry’s success is offering programs that viewers will habitually watch each week—whether at scheduled times or via catch-up viewing. The networks, producers, and film studios spend fortunes creating programs that they hope will keep us coming back.

Production costs generally fall into two categories: below-the-line and above-the-line. Below-the-line costs, which account for roughly 40 percent of a new program’s production budget, include the technical, or “hardware,” side of production: equipment, special effects, cameras and crews, sets and designers, carpenters, electricians, art directors, wardrobe, lighting, and transportation. Above-the-line, or “software,” costs include the creative talent: actors, writers, producers, editors, and directors. These costs account for about 60 percent of a program’s budget, except in the case of successful long-running series (like Friends or The Big Bang Theory), in which salary demands by actors can drive up above-the-line costs to more than 90 percent.

Most prime-time programs today are developed by independent production companies that are owned or backed by a major film studio, such as Sony or Disney. In addition to providing and renting production facilities, these film studios serve as a bank, offering enough capital to carry producers through one or more seasons. In television, programs are funded through deficit financing. This means that the production company leases the show to a network or cable channel for a license fee that is actually lower than the cost of production. (The company hopes to recoup this loss later in lucrative rerun syndication.) Typically, a network leases an episode of a one-hour drama for about $1.5 million for two airings. Each episode, however, might cost the program’s producers about $2.5 million to make, meaning they lose about $1 million per episode. After two years of production (usually forty-four to forty-six episodes), an average network show builds up a large deficit.

Because of smaller audiences and fewer episodes per season, costs for original programs on cable channels are lower than those for network broadcasts.21 On average, in 2012–13 cable channels paid about $1 million per episode in licensing fees to production companies. Some cable shows, like AMC’s Breaking Bad, cost about $3 million per episode, but since cable seasons are shorter (usually ten to thirteen episodes per season, compared to twenty-two to twenty-three for broadcast networks), cable channels build up smaller deficits. And unlike networks, cable channels have two revenue streams to pay for original programs—monthly subscription fees and advertising. (However, because network audiences are usually larger, ad revenue is higher for networks.) Cable channels also keep costs down by airing three to four new programs a year at most, compared to the ten to twenty that the broadcast networks air.

Still, both networks and cable channels build up deficits. This is where film studios like Disney, Sony, and Twentieth (now 21st) Century Fox have been playing a crucial role: They finance the deficit and hope to profit on lucrative deals when the show—like CSI, Friends, Bones, or The Office—goes into domestic and international syndication.

To save money and control content, many networks and cable stations create programs that are less expensive than sitcoms and dramas. These include TV newsmagazines and reality programs. For example, NBC’s Dateline requires only about half the outlay (between $700,000 and $900,000 per episode) demanded by a new hour-long drama. In addition, by producing projects in-house, networks and cable channels avoid paying license fees to independent producers and movie studio production companies.

Distribution

Programs are paid for in a variety of ways. Cable service providers (e.g., Time Warner Cable or Cablevision) rely mostly on customer subscriptions to pay for distributing their channels, but they also have to pay the broadcast networks retransmission fees to carry network channels and programming. While broadcast networks do earn carriage fees from cable and DBS providers, they pay affiliate stations license fees to carry their programs. In return, the networks sell the bulk of advertising time to recoup their fees and their investments in these programs. In this arrangement, local stations receive national programs that attract large local audiences and are allotted some local ad time to sell during the programs to generate their own revenue.

A common misconception is that TV networks own their affiliated stations. This is not usually true. Although traditional networks like NBC own stations in major markets like New York, Los Angeles, and Chicago, throughout most of the country networks sign short-term contracts to rent time on local stations. Years ago, the FCC placed restrictions on network-owned-and-operated stations (called O & Os). But the sweeping Telecommunications Act of 1996 abolished most ownership restrictions. Today, one owner is permitted to reach up to 39 percent of the nation’s 120 million–plus TV households.

Although a local affiliate typically carries a network’s entire lineup, a station may substitute a network’s program. According to clearance rules established in the 1940s by the Justice Department and the FCC, all local affiliates are ultimately responsible for the content of their channels and must clear, or approve, all network programming. Over the years, some of the circumstances in which local affiliates have rejected a network’s programming have been controversial. For example, in 1956 singer Nat King Cole was one of the first African American performers to host a network variety program. As a result of pressure applied by several white southern organizations, though, the program had trouble attracting a national sponsor. When some affiliates, both southern and northern, refused to carry the program, NBC canceled it in 1957. More recently, affiliates may occasionally substitute other programming for network programs they think may offend their local audiences, especially if the programs contain excessive violence or explicit sexual content.

Syndication Keeps Shows Going and Going . .

Syndication—leasing TV stations or cable networks the exclusive right to air TV shows—is a critical component of the distribution process. Each year, executives from thousands of local TV stations and cable firms gather at the National Association of Television Program Executives (NATPE) convention to buy or barter for programs that are up for syndication. In so doing, they acquire the exclusive local market rights, usually for two- or three-year periods, to game shows, talk shows, and evergreens—popular old network reruns, such as I Love Lucy.

Syndication plays a large role in programming for both broadcast and cable networks. For local network-affiliated stations, syndicated programs are often used during fringe time—programming immediately before the evening’s prime-time schedule (early fringe) and following the local evening news or a network late-night talk show (late fringe). Cable channels also syndicate network shows but are more flexible with time slots; for example, TNT may run older network syndicated episodes of Law & Order or Bones during its prime-time schedule, along with original cable programs like Rizzoli & Isles or Major Crimes.

Types of Syndication

In off-network syndication (commonly called “reruns”), older programs that no longer run during network prime time are made available for reruns to local stations, cable operators, online services, and foreign markets. This type of syndication occurs when a program builds up a supply of episodes (usually four seasons’ worth) that are then leased to hundreds of TV stations and cable or DBS providers in the United States and overseas. A show can be put into rerun syndication even if new episodes are airing on network television. Rerun, or off-network, syndication is the key to erasing the losses generated by deficit financing. With a successful program, the profits can be enormous. For instance, the early rerun cycle of Friends earned nearly $4 million an episode from syndication in 250-plus markets, plus cable, totaling over $1 billion. Because the show’s success meant the original production costs were already covered, the syndication market became almost pure profit for the producers and their backers. This is why deficit financing endures: Although investors rarely hit the jackpot, when they do, the revenues more than cover a lot of losses and failed programs.

First-run syndication is any program specifically produced for sale into syndication markets. Quiz programs such as Wheel of Fortune and daytime talk or advice shows like The Ellen DeGeneres Show or Dr. Phil are made for first-run syndication. The producers of these programs usually sell them directly to local markets around the country and the world.

Barter versus Cash Deals

Most financing of television syndication is either a cash deal or a barter deal. In a cash deal, the distributor offers a series for syndication to the highest bidder. Because of exclusive contractual arrangements, programs air on only one broadcast outlet per city in a major TV market or, in the case of cable, on one cable channel’s service across the country. Whoever bids the most gets to syndicate the program (which can range from a few thousand dollars for a week’s worth of episodes in a small market to $250,000 a week in a large market). In a variation of a cash deal called cash-plus, distributors retain some time to sell national commercial spots in successful syndicated shows (when the show is distributed, it already contains the national ads). While this means the local station has less ad time to sell, it also usually pays less for the syndicated show.

Although syndicators prefer cash deals, barter deals are usually arranged for new, untested, or older but less popular programs. In a straight barter deal, no money changes hands. Instead, a syndicator offers a program to a local TV station in exchange for a split of the advertising revenue. For example, in a 7/5 barter deal, during each airing the show’s producers and syndicator retain seven minutes of ad time for national spots and leave stations with five minutes of ad time for local spots. As programs become more profitable, syndicators repackage and lease the shows as cash-plus deals.

Measuring Television Viewing

Primarily, TV shows live or die based on how satisfied advertisers are with the quantity and quality of the viewing audience. Since 1950, the major organization that tracks and rates prime-time viewing has been the Nielsen Corporation, which estimates what viewers are watching in the nation’s major markets. Ratings services like Nielsen provide advertisers, broadcast networks, local stations, and cable channels with considerable detail about viewers—from race and gender to age, occupation, and educational background.

The Impact of Ratings and Shares on Programming

In TV measurement, a rating is a statistical estimate expressed as the percentage of households that are tuned to a program in the market being sampled. Another audience measure is the share, a statistical estimate of the percentage of homes that are tuned to a specific program compared with those using their sets at the time of the sample. For instance, let’s say on a typical night that 5,000 metered homes are sampled by Nielsen in 210 large U.S. cities, and 4,000 of those households have their TV sets turned on. Of those 4,000, about 1,000 are tuned to The Voice on NBC. The rating for that show is 20 percent—that is, 1,000 households watching The Voice out of 5,000 TV sets monitored. The share is 25 percent—1,000 homes watching The Voice out of a total of 4,000 sets turned on.

The importance of ratings and shares to the survival of TV programs cannot be overestimated. In practice, television is an industry in which networks, producers, and distributors target, guarantee, and “sell” viewers in blocks to advertisers. Audience measurement tells advertisers not only how many people are watching but, more important, what kinds of people are watching. Prime-time advertisers on the broadcast networks have mainly been interested in reaching relatively affluent eighteen- to forty-nine-year-old viewers, who account for most consumer spending. If a show is attracting those viewers, advertisers will compete to buy time during that program. Typically, as many as nine out of ten new shows introduced each fall on the networks either do not attain the required ratings or fail to reach the “right” viewers. The result is cancellation. Cable, in contrast, targets smaller audiences, so programs that do not attract a large audience might survive on cable because most of cable’s revenues come from subscription fees rather than advertising. For example, on cable, AMC’s award-winning Breaking Bad was considered successful. However, that show rarely attracted an audience of over 2 million in its first four seasons. But by the fifth and final season, its audience had grown to 6 million viewers, and the show’s finale drew over 10 million viewers in 2013. (The show’s creator, Vince Gilligan, has credited Netflix with Breaking Bad’s rating surge, because its streaming service allowed viewers to catch up with the series.) By comparison, CBS’s NCIS drew an average audience of 21.6 million for each show in 2012–13.

Assessing Today’s Converged and Multiscreen Markets

During the height of the network era, a prime-time series with a rating of 17 or 18 and a share of between 28 and 30 was generally a success. By the late 2000s, though, with increasing competition from cable, DVDs, and the Internet, the threshold for success had dropped to a rating of 3 or 4 and a share of under 10. In fact, with all the screen options and targeted audiences, it is almost impossible for a TV program today to crack the highest-rated series list (see Table 6.1). Unfortunately, many popular programs have been canceled over the years because advertisers considered their audiences too young, too old, or too poor. To account for the rise of DVRs, Nielsen now offers three versions of its ratings: live; live plus twenty-four hours, counting how many DVR users played shows within a day of recording; and live plus seven days, adding in how many viewers played the shows within a week. During the 2011–12 TV season, many shows starting drawing much larger audiences when they added DVR playbacks to their original first-time scheduled showing on the networks.22 This trend has continued, and those series that benefit from large boosts in live plus seven numbers include huge hits like The Big Bang Theory, moderate performers like Agents of S.H.I.E.L.D., and more niche-specific shows like New Girl.23

In its efforts to keep up with TV’s move to smaller screens, Nielsen is also using special software to track TV viewing on computers and mobile devices. Today, with the fragmentation of media audiences, the increase in third- and fourth-screen technologies, and the decline in traditional TV set viewing, targeting smaller niche markets and consumers has become advertisers’ main game.

The biggest revenue game changer in the small-screen world will probably be Google’s YouTube, which in 2011 and 2012 entered into a joint venture with nearly a hundred content producers to create niche online channels. YouTube advances up to $5 million to each content producer, and it keeps the ad money it collects until the advance is paid off; revenue after that is split between YouTube and the content producer. Some familiar names have signed on, including Madonna, Shaquille O’Neal, and Amy Poehler. Among the popular channels already launched are the music video site, Noisey, which had twenty-seven million visits in its first two months, and Drive, a channel for auto fans, which had seven million views in its first four months. (See “Tracking Technology: Changing Channels: Big Studios Diversify on YouTube” on page 222 for more on YouTube’s foray into original programming.)

The way advertising works online differs substantially from the way it works on network TV, where advertisers pay as much as $400,000 to buy one thirty-second ad during NBC’s The Voice or ABC’s Modern Family. Online advertisers pay a rate called a CPM (“cost per mille”; mille is Latin for “one thousand”), meaning the rate per one thousand impressions—which is a single ad shown to a person visiting an online site. So if a product company or ad agency purchases one thousand online impressions at a $1 CPM rate, that means the company or agency would spend $10 to have its advertisement displayed ten thousand times. Popular online sites where advertisers are reaching targeted audiences could set a CPM rate between $10 and $100, while less popular sites might command only a $.10 to $.20 CPM rate from ad agencies and product companies. For some of its new YouTube TV channels, analysts are predicting that Google might be able to charge as much as $20 CPM for a relatively popular site.

The Major Programming Corporations

After deregulation began in the 1980s, many players in TV and cable consolidated to broaden their offerings, expand their market share, and lower expenses. For example, Disney now owns both ABC and ESPN and can spread the costs of sports programming over its networks and its various ESPN cable channels. This business strategy has produced an oligopoly in which just a handful of media corporations now controls programming.

The Major Broadcast Networks

Despite their declining reach and the rise of cable, the traditional networks have remained attractive business investments. In 1985, General Electric, which once helped start RCA-NBC, bought back NBC. In 1995, Disney bought ABC for $19 billion; in 1999, Viacom acquired CBS for $37 billion (Viacom and CBS split in 2005, but Viacom’s CEO, Sumner Redstone, has remained CBS’s main stockholder and executive chairman; in 2014, his holdings in both CBS and Viacom totaled $6 billion). And in January 2011, the FCC and the Department of Justice approved Comcast’s purchase of NBC Universal from GE—a deal valued at $30 billion.

To combat audience erosion in the 1990s, the major networks began acquiring or developing cable channels to recapture viewers. Thus what appears to be competition between TV and cable is sometimes an illusion. NBC, for example, operates MSNBC, CNBC, and Bravo. ABC owns ESPN along with portions of Lifetime, A&E, and History. However, the networks continue to attract larger audiences than their cable or online competitors. For the 2013–14 season, CBS led the broadcast networks in ratings, followed by NBC, ABC, Fox, Univision, and the CW. CBS averaged over 11 million viewers per evening (while the CW drew about 1.5 million viewers each evening), although NBC reached more of the viewers most cherished by advertisers—eighteen- to forty-nine-year-olds.

Major Cable and DBS Companies

In the late 1990s, cable became a coveted investment, not so much for its ability to carry television programming as for its access to households connected with high-bandwidth wires. Today, there are about 5,200 U.S. cable systems, down from 11,200 in 1994. Since the 1990s, thousands of cable systems have been bought by large multiple-system operators (MSOs), corporations like Comcast and Time Warner Cable (TWC) that own many cable systems. For years the industry called its major players multichannel video programming distributors (MVPDs), a term that included DBS providers like DirecTV and Dish. By 2014, cable’s main trade organization, the National Cable & Telecommunications Association (NCTA), had moved away from the MVPD classification and started using the term video subscription services, which now also includes Netflix and Hulu Plus (see Table 6.2 on page 224). Some critics suspect that the new classification term provides legal cover for the 2014 proposed merger between Comcast and TWC—for years the dominant two U.S. cable companies with by far the most cable subscribers. But if cable attorneys can argue that the on-demand service Netflix dwarfs Comcast and TWC—36.2 million subscribers compared to 22.6 and 11.4 respectively in 2014—then the FCC and Justice Department might permit the merger.

In cable, the industry behemoth today is Comcast, especially after its takeover of NBC and move into network broadcasting. Back in 2001, AT&T had merged its cable and broadband industry in a $72 billion deal with Comcast, then the third-largest MSO. The new Comcast instantly became the cable industry leader. In 2014, Comcast also owned E!, NBCSN, the Golf Channel, Universal Studios, Fandango (the online movie ticket site), and a 32 percent stake in Hulu (with Fox and Disney). In 2014, there were about 660 companies still operating cable systems. Along with Comcast, the other large MSOs included Time Warner Cable (formerly part of Time Warner, Inc.), Cox Communications, Charter Communications, and Cablevision Systems.

In the DBS market, DirecTV and Dish control virtually all the DBS service in the continental United States. In 2008, News Corp. sold DirecTV to cable service provider Liberty Media, which also owned the Encore and Starz movie channels. The independently owned Dish was founded as EchoStar Communications in 1980. In 2014, to counter the proposed merger talks between cable giants Comcast and TWC, DirecTV began investigating deals with both Dish and AT&T. Over the last few years, TV services (combined with existing voice and Internet services) offered by telephone giants AT&T (U-verse) and Verizon (FiOS) have developed into viable competitors for cable and DBS.

The Effects of Consolidation

There are some concerns that the trend toward cable, broadcasting, and telephone companies merging will limit expression of political viewpoints, programming options, and technical innovation, and lead to price-fixing. These concerns raise an important question: In an economic climate in which fewer owners control the circulation of communication, what happens to new ideas or controversial views that may not always be profitable to circulate?

The response from the industries is that, given the tremendous capital investment it takes to run television, cable, and other media enterprises, it is necessary to form business conglomerates in order to buy up struggling companies and keep them afloat. This argument suggests that without today’s video subscription services, many smaller ventures in programming would not be possible. However, there is evidence that large MSOs and other big media companies can wield their monopoly power unfairly. Business disputes have caused disruptions as networks and cable providers have dropped one another from their services, leaving customers in the dark. For example, in October 2010, News Corp. pulled six channels—including the Fox network—from over three million Cablevision customers for two weeks. This standoff over retransmission fees meant Cablevision subscribers missed two World Series games, various professional football matches, and popular programs like Glee and Family Guy. Then, in August 2013, Time Warner Cable took CBS off its systems for a month in a bitter dispute over retransmission fee hikes the network sought. In addition to blacking out WCBS in New York, Los Angeles, Dallas, and five other markets, the cable company yanked Showtime from its systems. These examples illustrate what can happen when a few large corporations engage in relatively minor arguments over prices and programs: Consumers are often left with little recourse or choice in markets with minimal or no competition and programming from just a handful of large media companies.

Alternative Voices

After suffering through years of rising rates and limited expansion of services, some small U.S. cities have decided to challenge the private monopolies of cable giants by building competing, publicly owned cable systems. So far, the municipally owned cable systems number in the hundreds and can be found in places like Glasgow, Kentucky; Kutztown, Pennsylvania; Cedar Falls, Iowa; and Provo, Utah. In most cases, they’re operated by the community-owned, nonprofit electric utilities. There are more than two thousand such municipal utilities across the United States, serving about 14 percent of the population and creating the potential for more municipal utilities to expand into communications services. As nonprofit entities, the municipal operations are less expensive for cable subscribers, too.

The first town to take on a national commercial cable provider (Comcast now runs the cable service there) was Glasgow, Kentucky, which built a competing municipal cable system in 1989. The town of fourteen thousand had seven thousand municipal cable customers in 2014. William J. Ray, the town’s Electric Plant Board superintendent and the visionary behind the municipal communications service, has argued that this is not a new idea:

Cities have long been turning a limited number of formerly private businesses into public-works projects. This happens only when the people making up a local government believe that the service has become so essential to the citizens that it is better if it is operated by the government. In colonial America, it was all about drinking water. . . . In the twentieth century, the issue was electric power and natural gas service. Now, we are facing the same transformation in broadband networks.24

More than a quarter of the country’s two thousand municipal utilities offer broadband services, including cable, high-speed Internet, and telephone. How will commercial cable operators fend off this unprecedented competition? According to Ray, “If cable operators are afraid of cities competing with them, there is a defense that is impregnable—they can charge reasonable rates, offer consummate customer service, improve their product, and conduct their business as if they were a guest that owes their existence to the benevolence of the city that has invited them in.”25