The economics of television

Larry Ribstein —  26 February 2011

I was forced to watch my first episode of “Two and a Half Men” last week.  Family members drugged me unconscious and then bound and gagged me, locked my head in the direction of the television and taped my eyelids open. 

The most horrible moment came when I realized that this was neither satire nor science fiction but a real, top-rated sit-com.  Also, I wasn’t sure about the math.  Who was the “half”?  Shouldn’t it be, say, “One and a quarter men”? 

It turns out that Bud Fox (“Newsflash: I am special, and I will never be one of you”) has misbehaved (or, perhaps, is auditioning to be the next dictator of Libya) and he was canned. The show was then canceled (apparently nobody was interested in “.75 men”).

I will now turn to the interesting part — the economics.

According to the WSJ, the producer (WB) will lose significant revenues from sale and syndication of the show, but the network will lose little or nothing.  CBS will make plenty of money showing reruns (will the audience even notice?).  Also, an analyst told the WSJ that CBS could make more money by replacing the show with one it produces itself rather than paying the high fees to WB (again, will the audience notice?).

This suggests that only producers and not networks make money from hit shows. So why don’t networks show any crap they can come up with on their own, instead of the crap they buy from production companies?  Or, in other words, how do networks make their money apart from production?  Is there enough demand for television shows now that producers are able to suck out all of the profits?

Also, it looks like Charlie Sheen was underpaid, since it seems the show couldn’t go on without him. In other words, two and a half minus one = zero

Larry Ribstein

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Professor of Law, University of Illinois College of Law

4 responses to The economics of television

  1. 

    The network might’ve made money initially, when it probably paid a fee equal to 70% of the show’s budget (and a skinny budget, too). After it becomes popular, the producers, line producer, and talent have the leverage, increasing the Network fee during re-ups to barely break-even.

    At that point, break even is fine because the network incubates new shows in the immediately preceding and succeeding time slots, and it sells them during commercials. (The WSJ article hinted at this). Networks and producers know that networks accrue value (albeit not direct revenue) from hits by exposing all those eyes to the network’s own marketing.

    This is common, the networks barely make direct revenue from any mature, highly rated show, the NFL, olympics, etc.

  2. 

    Ah, got it.

    That’s a pretty fascinating question, and one where my meager insights derive mostly from my obsessive reading of “Entertainment Weekly.” But I think there’s maybe some risk-spreading involved (Fox studio might not be sure about a show, so better to have another network bear the risk in case it turns out to be a flop). Also, at some point, the successful shows become “too successful” to cancel, because the ratings hit may drag down a network in the ratings war. (I think commercial rates are set based on the actual show, but the networks seem to fight over who has the best overall ratings, so maybe there’s something there.) So I think the production studio doesn’t really gain the upper hand until sometime after 4 or 5 seasons, when its made enough episodes to sell into syndication. Until then, I suspect it’s the networks that are reaping the gains.

  3. 

    The networks are owned by studios that also produce shows, sometimes for their own networks, sometimes for other networks. The synergy that results from a studio-network match sometimes makes the difference between renewal or cancellation. A couple of years ago, Fox (network) had two similarly rated sci-fi shows on Friday nights: “Dollhouse” and “Terminator: The Sarah Connor Chronicles.” Both had some critical acclaim, and “Sarah Connor” had somewhat better (but still pretty bad) ratings. Yet, Fox opted to renew “Dollhouse” for a second season but did not renew “Sarah Connor” for what would have been its third season. The difference was that “Dollhouse” was produced by Fox, whereas “Sarah Connor” was produced by Warner Brothers (which does not have a network).

    • 

      I understand that. What I don’t understand is why the networks ever buy shows from non-owned producers (as in the situation discussed in my post) if the producers suck out all of the profits in the licensing fee.