To NBC: Think Hard Before Getting Hitched

To NBC: Think Hard Before Getting Hitched

To NBC: Think Hard Before Getting Hitched

Moneybox
Commentary about business and finance.
Sept. 22 1999 12:15 PM

To NBC: Think Hard Before Getting Hitched

In the wake of Viacom's acquisition of CBS, which, among other things, paired CBS' television network with Paramount's television-production studio, the reigning conventional wisdom is that NBC, now the only network without a studio partner, needs to find one as fast as it can. (Sony and Universal are oft-mentioned candidates.) But the conventional wisdom is wrong. NBC needs a studio much less than the studios need it. Even with the erosion in popularity of broadcast television, NBC remains a real catch. It doesn't need to rush into the arms of the first suitor who comes along.

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The vogue for vertical integration--in which a network produces and distributes its own shows--does reflect an important new reality, which is that since 1995 networks have been able to have a financial interest in their own programming. (From 1970 to 1995, the FCC forbade that, which is what made independent producers such as Carsey-Werner and Lorimar billion dollar companies.) And the studio business can be an immensely profitable one because of the myriad opportunities for merchandising, licensing, and syndication. Just look at what Fox did with The Simpsons and The X-Files. But the studio business is also, by its very nature, erratic and expensive. For every Simpsons, there are three Malcolm and Eddies. It might be nice for NBC to be able to produce and own its own shows (as it already does with Dateline and the Tonight Show). But it's not necessary.

Just look at the numbers. NBC, which is owned by GE, brings in somewhere between $500 million and $1 billion in net income every year. If you valued NBC the same way the stock market values CBS or Time Warner, it would be worth $25 billion. While the company was hurt when it lost the NFL and had to pay through the nose to keep ER and Friends, it remains the most profitable broadcast network, its cable properties are booming, and even its Internet strategy appears to be taking off.

Advocates of NBC's allying itself with a studio point to the $13 million an episode the network had to shell out to keep ER and the $6 million an episode it paid for the final season of Seinfeld and say, "Look at the money it could have saved." But even if NBC had a studio, there's no guarantee that it would have made ER. Disney, for instance, has yet to produce a hit for ABC since the companies merged. More important, if an NBC studio made ER and gave its sister network a price break, it would be wrecking its own business.

The great delusion in the way the media write about vertical integration is the assumption that merging two companies makes it economically sensible for one to sell its products to the other below the price that it could charge in the marketplace. But in fact it doesn't. If Paramount starts charging CBS less for its programs than it could get from ABC, it will become less valuable. And conversely, if CBS starts taking programs from Paramount that it would otherwise have rejected, it will become less valuable. "A bad program is a bad program, and the only thing that happens if you put a bad program on a network is that your ratings drop," says Dennis McAlpine, media analyst at Ryan, Beck. "And if you do good programming, you're going to get picked up. Vertical integration doesn't change that."

The other pro-merger argument being offered is that if NBC owned a studio, it would have an easier time bargaining with the studios owned by other networks, because Warner Bros. would know that if it didn't give NBC a break on the price of ER, NBC would drive a hard bargain when it sold shows to the WB Network. This argument is, of course, crazy. No one takes less money than they can get because they might be rewarded for their generosity later on.

In the space of 10 years, the networks have gone in and out of favor more often than the Who has mounted comeback tours. But through it all, and even with the continued erosion of viewership, one thing has remained unchanged: Broadcast television offers unparalleled access to huge numbers of American viewers. "Fragmentation is a problem, and it will continue to be," Barry Diller of USA Networks told me a few months ago. "But the ability to aggregate 10, 20, 30, and on a good day 40 percent of all living Americans makes broadcast an enormously powerful medium." When the studios come calling, NBC should (and it looks right now, with its recent investment in Paxson Communications, as if it will) remember that.