Cable networks are TV's biggest stars

By Scott Collins, Los Angeles Times

Sept. 30, 2012 12 AM PT

Showtime’s terrorism thriller “Homeland” has nearly everything: big-name stars, glossy production values and a surprising triple Emmy sweep last week.

The one thing it lacks? A giant audience. But under TV’s new economics, big ratings don’t necessarily matter anymore.

“Homeland” is a tense drama about an emotionally troubled CIA agent played by Claire Danes, who’s plagued by doubts about a U.S. Marine (Damian Lewis) held captive by Al Qaeda. It costs about $3 million an episode to make but averaged fewer than 2 million viewers in its initial airings — less than one-tenth of what a broadcast hit such as CBS’ “NCIS” gets.

With its second-season premiere Sunday, “Homeland” is already a case study in how rapidly changing technology and competitive pressures have upended the TV business, allowing niche shows to thrive.

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This is a reversal of standard TV business practices in place for half a century. Traditionally, studios were willing to lose money on a series initially in hopes the show would grow into a smash hit and get resold as repeats to local stations and cable networks.

Giant checks would then roll in and those profits would help pay for years of development of other shows — many of which would end up as costly flops. NBC’s sitcom “Friends” is a good example of a show that hit it big in the syndication market. Its total value has far exceeded $1 billion, keeping its studio, Warner Bros., in the chips for years.

But over the past few years, cable networks such as Showtime, HBO, AMC and FX have dumped millions of dollars into original programming and have been rewarded with far more critical acclaim than Nielsen ratings points. “Girls,” the HBO series nominated in the best comedy category, didn’t muster even 1 million total viewers during its first season, according to Nielsen. That’s a fraction of the audience seen for CBS’ hit comedy “The Big Bang Theory.”

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It’s the same story with other Emmy nominees such as FX’s comedy “Louie” and HBO’s “Curb Your Enthusiasm.” AMC’s 1960s period piece “Mad Men,” which won the drama category for four years in a row until “Homeland’s” victory this year, would almost certainly be judged a flop if it aired on a broadcast network.

“What you’d call a ‘hit’ used to have a lot more viewers than it does now,” said Joe Germscheid, director of consumer engagement at Minneapolis-based ad firm, public relations and branding firm Carmichael Lynch. “A show still needs a lot of views, but it also needs a cultural currency.” That can include everything from awards to blog items to mentions in social media platforms such as Facebook and Twitter.

There’s a good reason cable networks are reaching for that currency — and grabbing lots of awards along the way — with relatively little-watched shows: They can translate into hefty dollars from emerging platforms.

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Networks and studios can make a lot of money off digital outlets — and those sums are growing. Last year, Netflix paid Lionsgate Entertainment — which makes “Mad Men” — at least $75 million to stream all seven seasons of the series. That amounts to $1 million per episode.

Premium cable networks also bring in money by selling shows on iTunes and other media platforms. And though the networks are wary of making deals with Netflix since the video streaming service recently entered the original programming business, some of their shows — “The Larry Sanders Show” from HBO and “The Tudors” from Showtime — can still be found there.”

Showtime and HBO, among the premium channel services itemized separately on cable bills, don’t accept advertising and are supported entirely through subscriber fees.

“Netflix, for a lot of people, is the great equalizer,” Germscheid said. “You listen to your buddies talk about ‘Game of Thrones,’ and it used to be if you didn’t have HBO you were left out. Now you can get caught up in a week.”

Another competitive advantage for cable is it can roll the dice more easily than executives at ABC, CBS, NBC or Fox.

“They need these quality shows,” Chet Fenster, managing partner and director of content creation for media agency MEC Entertainment, said of cable networks, “to enhance the brand.”

Showtime, the CBS Corp. unit that made “Homeland” with News Corp.’s Fox21 division, doesn’t have to fill up 22 hours per week with original programming. It orders just 10 or 12 episodes of a series per season unlike the big broadcasters that ask for 22 or 24, a demanding number that can strain the creativity of any writers room.

And neither basic nor premium cable networks labor under the same FCC restrictions for language and obscenity that bedevil the broadcasters. And the targets for ad income in prime time are so high, some executives say, that it forces broadcasters to take few risks when it comes to content anyway.

“If you’re a broadcaster, every single half-hour is worth so much to you that you’re losing money hand over fist if you’re not maximizing revenue wherever you can,” said John Landgraf, president of the FX cable network.

DVRs, now in about half of American TV homes, are allowing networks to claim viewers aggregated over several days and multiple airings rather than just on premiere night — even though many executives worry that the device’s ad-skipping functions are slowly strangling the business. The basic-cable networks also get a far greater share of income than broadcasters do from subscriber fees paid by local cable operators

And the cable outlets cut corners where they can: FX shells out less than $500,000 per episode for “Louie,” the edgy comedy starring Louis CK. That covers the stand-up comic’s salary as well as all production expenses. On a big network sitcom, that type of bare-bones budget wouldn’t even get the entire cast to the set: “Big Bang Theory” pays a reported $300,000 per episode to Kaley Cuoco, just one of its three major stars.

The huge growth in overall programming doesn’t appear to be crimping profits at cable networks such as FX. The News Corp.-owned network will spend $455.8 million on programming this year, up 25% compared with 2009, according to media research firm SNL Kagan. And yet FX is expected to log earnings of nearly $625 million this year — proving the power of those subscriber fees to push cable firms into the black.

But cable networks also have a dirty little secret: In an industry notorious for tossing around huge sums of money, niche programming is not a get-rich-quick path.

“Almost no shows on cable are profitable in and of themselves,” Landgraf noted.

Does that mean they’re not worth doing? Not at all.

Instead, all those Emmy-winning shows serve as loss leaders that attract more attention to the network — hopefully boosting viewership, advertising and subscription income along the way. There can be a lot of money in relatively small audiences — and no one knows that better than CBS Corp. chief Leslie Moonves, whose responsibilities include oversight of Showtime.

At an investors’ conference last month, Moonves waxed enthusiastic over the growth possibilities for the pay network.

“They’ve gone from 13 million [subscribers] to almost 22 million over the last five or six years,” Moonves said. “Showtime … is much hotter than it ever was because of their programming.”

He added that Showtime, home of “Homeland,” would rake in $750 million in profit this year.

“That’s quite a nice growth story,” he said.

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