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Upfronts 2017: Network Ownership Rises, License Fees Slide In Tough Negotiations

Deadline logo Deadline 5/19/2017 Nellie Andreeva
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For years, broadcast networks’ ratings have trended down while costs have been going up. For a long time, profit margins were so big that it didn’t matter that much. Not anymore. A trend that started a couple of years ago came to the forefront this year, with the networks coming down hard on outside studios for more content ownership and lower license fees, turning negotiations on new and returning series into a battle.

The Goldbergs, ABC’s second-highest-rated comedy series in adults 18-49 behind Modern Family, came close to looking for a new home before landing a two-year renewal at ABC after bruising license-fee negotiations with Sony TV. And we saw ABC cancel its second most-watched comedy, the 20th TV-produced Last Man Standing. CBS canceled Warner Bros TV-produced 2 Broke Girls but renewed CBS Studios’ lower-rated Elementary. And NBC canceled (before reversing its decision) Sony TV’s Timeless while renewing the lower-rated Uni TV series Chicago P.D., Chicago Med and Taken (a co-production with EuropaCorp TV USA) as well as Warner Bros TV’s Blindspot, whose license fee was reduced.

Following soft Q1 ad sales that spooked investors, CBS Corp Leslie Moonves was quick to point out this week that “for the first time, less than 50% of the company’s revenue comes from advertising vs. more than 70% several years ago,” adding, “The backend is now worth more than the frontend, with most of the money coming from CBS-owned programming that airs elsewhere. There have been more changes (in that regard) over the last year than there have been in a decade.”

The rising importance of controlling a series’ backend has been a key to most of the squabbles between networks and studios this year. But I hear what made things particularly frustrating for sellers was the fact that the networks would make ownership demands and propose a license fee at the pitch stage, eventually reaching an agreement with the studio only to come back and push to change the terms once the project had advanced to the pilot and especially the series pickup stage.

For instance, I hear ABC, which originally had agreed to a 25% ownership in projects from Sony TV, pushed to double its stake as it was about to make series pickup decisions. WBTV’s hot ABC pilots, drama Deception and comedy Splitting Up Together, were the very last to be picked up by the network after what I hear were similar eleventh-hour additional demands by the network that resulted in some license fee/ownership concessions from the independent studio — specific to each show — and midseason orders for both projects.

Meanwhile, CBS had originally taken on domestic distribution of drama Wisdom Of The Crowd, from Universal TV, but, also in the final stage, successfully changed terms of the co-production, with CBS TV Studios taking on the lucrative international distribution instead.

Last year marked the first time Warner Bros TV had agreed to a network ownership with the CBS drama Training Day and a single-camera comedy pilot which didn’t go. While the economics of a single-camera comedy are pretty bad, with very little financial upside from off-network/SVOD sales, making studios more than willing to share the burden with the network via co-production, multi-camera comedies are cheaper to produce and have generated some of the biggest syndication hits of all time, including Friends, Seinfeld and more recently The Big Bang Theory. There had been rumblings that WBTV had been unwilling to do co-productions on multi-camera comedy projects, but Moonves confirmed at the network’s upfront press breakfast that both the network’s new comedy series from Warner Bros — the single-camera Me, Myself & I and multi-camera By The Book — are co-productions with CBS TV Studios. However, I hear the co-production terms are different on the single-and the multi-camera comedy.

NBC and Fox did not go into such last-minute bargaining due to the fact that they only picked up new series fully owned by their sister studios.

I went back 20 years, and there was not a season where NBC or Fox did not order at least one new scripted show coming from a studio other than their own. That 20-year span included the early 2000s, marked by a big push into content ownership among the broadcast networks, demonstrating how profound the current shift, which emerged at the 2015 upfronts, has been.

“Inevitably, the world continues to move toward vertical integration and focus on networks supplying themselves,” one industry observer said.

That was also reflected in the networks’ renewal choices. CBS Studios’ Elementary was renewed by CBS for a 13-episode sixth season averaging a 1.2 adults 18-49 rating (Live+7), while WBTV’s 2 Broke Girls was canceled after six seasons with a 1.9 rating despite a herculean effort by the studio to save it. A year ago, while explaining CBS’ decision to renew Elementary and cancel WBTV’s Person Of Interest, Moonves pointed out that Elementary, which CBS owns 100% and has off-network and SVOD deals, the previous year had “made approximately an $80 million profit for the corporation,” while Person Of Interest, “broke even.”

I hear there are a number of instances where networks and their parent companies lose money on series if the ratings do not garner enough ad revenue to offset their license fees unless they come from a sister studio and have off-network/SVOD/international deals in place to generate a supplemental revenue stream.

The push for ownership has been especially dramatic on the drama side. Last season, there were 11 new drama series picked up by the Big 4 broadcast networks that had been developed by outside studios, three solely owned by those studios including breakout hits This Is Us on NBC (from 2oth TV) and Lethal Weapon on Fox (from Warner Bros TV). This year, it’s four new outside drama series total, at least three of them co-owned by the networks.

“Network dramas are expensive as license fees have gone up,” one TV executive said. “As dramas’ linear ratings have declined continuously, advertising revenue alone can no longer support them, with repeatability, especially for serialized dramas, also down significantly. Without access to auxiliary revenue that only ownership allows — including international sales, SVOD (primarily for serialized drama) and off-network (procedurals, a market that is pretty soft at the moment) — the economics of sustaining a high-end drama series from an outside studio are super challenging.”

As a result, the networks have been getting tougher and tougher in renewal negotiations.

“With the ad market depressed, license fees are down and flat,” one industry insider said. If a network “doesn’t own a series completely, they are taking a hard line.”

Stiff competition from cable and especially streaming networks like Netflix and Amazon, which have been focused on subscriber growth and are willing to pay what it takes for marquee original programming, has driven up talent salaries. What’s more, below-the-line costs on broadcast series also have gone up significantly over the past six years.

As a result, “first-year shows start higher (in production costs) than they used to,” one studio executive said. “So studios are trying to get out from under some economic hardship” of having to deficit series which are very expensive from Day 1.

That financial relief used to come four seasons into the run of a series — a major milestone — when the networks would start covering the full cost of production and money from the show’s off-network syndication sales would start flowing in.

Networks and studios would occasionally squabble over license fees in the past though that would usually come around Season 6-7 when the casts of successful series negotiate new deals with major salary increases, thus raising a show’s production costs. But now that has trickled down to the very beginning, with networks trying to lower license fees as they are picking up a pilot to series, and on marginal series, they keep pushing for that — as well as for more ownership — virtually every season. Things come to a head after Season 4, the moment a network is supposed to start covering 100% of a series’ costs, which appears to be a thing of the past.

It is a trend that started in earnest several years ago with CBS’ Person Of Interest as one of the first high-profile series renewed for a fifth season with the network not paying 100% of the cost. Now, this is considered commonplace.

Word is that ABC originally offered to only cover a little over half of The Goldbergs‘ budget for Season 5, which would’ve made it hard for Sony TV to continue to produce the show. It came down to the wire, but the two sides struck a deal and the series landed a two-year renewal.

NBC’s drama The Blacklist, also from Sony TV, is the network’s third most-watched and highest-rated drama series, in which NBC has a 25% stake. Yet, the series took a license fee cut to get a Season 5 renewal. (It still is very profitable for Sony TV, with NBC also benefiting via its ownership stake.)

Because of drama series’ stronger after-market potential with SVOD and international sales, studios generally have been more willing to take a license fee reduction over giving up ownership on drama series, which likely was the case with the renewals of The Blacklist and Blindspot, both of which have streaming deals and are strong international performers.

I hear another four-year old comedy series, Fox’s Universal TV-produced Brooklyn Nine-Nine, which normally would’ve gotten a license fee increase for Season 5, was renewed with a flat license fee.

The two biggest broadcast comedies, CBS/WBTV’s The Big Bang Theory and ABC/20th TV’s Modern Family, which both recently landed two-year renewals, have reportedly seen their license fees get a haircut during both these and the previous network negotiations.

Meanwhile, Code Black‘s Season 3 renewal by CBS came with changes in the co-production agreement between ABC Studios and CBS Studios.

With domestic off-network market soft and SVOD sales challenging because all networks have full in-season stacking tights, international distribution has become very important, especially for drama series. Even as growing local production is creating more competition for U.S. shows, it still is a lucrative avenue and it does factor into renewal decisions. That’s why we saw series with anemic linear ratings as ABC’s Quantico (1.4 adults 18-49 rating in Live+7), fully owned by ABC, and NBC’s Taken (1.4), co-produced by Universal TV, as well as Elementary (1.2) score a pickup. All have strong international appeal; most if not all have undergone a license fee reduction or ownership terms change.

It’s hard to pinpoint a solution to the current ground war between studios and networks as both feel a financial squeeze. We may see an effort to curb the rising production costs of broadcast series though it would make them less competitive in pursuing top talent.

One way to avoid haggling with a network over terms is to have an undeniable product from A-list auspices.

The only new series for next season that was not the subject of attempts by the network to wrangle an ownership stake or force a license fee reduction was CBS’ The Big Bang Theory straight-to-series prequel Young Sheldon, which was picked up off a one-line pitch. It has great pedigree – coming from top comedy writer-producer Chuck Lorre and being an extension of the biggest scripted series on broadcast TV, Big Bang.

“The big shows still win,” Moonves said earlier this week.

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