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For both TV and cable, primary costs include production (creation of programming). TV networks also invest heavily in distribution (airing of the programs they’ve created) by paying affiliate stations a fee to show their content. Cable operators distribute their programs most often by downlinking them from communication satellites and transmitting them to their various communities.

Production

Key players in the TV and cable industry—networks, cable stations, producers, and film studios—spend fortunes creating programs that they hope will keep viewers captivated for a long time. Roughly 40 percent of a new program’s production budget goes to "below-the-line" costs such as equipment, special effects, cameras and crews, sets and designers, carpenters, electricians, art directors, wardrobe, lighting, and transportation. The remaining 60 percent covers the creative talent—or "above-the-line" costs—such as actors, writers, producers, editors, and directors. In highly successful long-running series (like Friends or ER), actors’ salary demands can drive these above-the-line costs from 60 percent to more than 90 percent.

Many prime-time programs today are developed by independent production companies owned or backed by a major film studio such as Sony or Disney. In addition to providing and renting production facilities, these studios serve as a bank, offering enough capital to carry producers through one or more seasons. In television, after a network agrees to carry a program, it’s kept on the air through deficit financing: The production company leases the show to a network for a license fee that is less than the cost of production, assuming it will recoup this loss later in lucrative rerun syndication.

To save money and control content, many networks and cable stations create their own programs, including TV newsmagazines and reality programs. For example, NBC’s Dateline requires only about half the outlay (between $600,000 and $800,000 per episode) demanded by a new hour-long drama. In addition, by producing projects in-house, the networks avoid paying license fees to independent producers.

Distribution

Whereas cable companies rely on subscriptions to fund distribution of content, the broadcast networks must pay their affiliate stations a fee to show the programs the networks have created or have licensed from independent production companies. In return for this fee, networks have the right to sell the bulk of advertising time (and run promotions of its own programs) during the shows—which helps them recoup their investments in these programs. Through this arrangement, local stations not only receive income, they also get national programs that attract large local audiences to the local ad slots they retain as part of their affiliation contracts with their network.

The networks themselves don’t usually own their affiliated stations, except in major markets like New York, Los Angeles, and Chicago. Instead, they sign contracts with local stations (one each from the two-hundred-plus top regional TV markets) to rent time on these stations to air their network programs.