Hollywood’s Reality: TV

Hollywood’s dirty secret? Television. Without the flow of revenue from TV, or without the sale of ads on cable, networks, and foreign TV, every major U.S. studio would go bankrupt.

Hollywood’s dirty secret? Television. Without the flow of revenue from TV, or without the sale of ads on cable, networks, and foreign TV, every major U.S. studio would go bankrupt. Time Warner is by far Hollywood’s largest movie producer, but while its PR people love to talk about its big successes—like the latest installment of Harry Potter—the movie business is only a sideline compared to TV.

   Last month over breakfast, a top executive, who had the real numbers, did the dismal math for me. In its last fiscal year, Time Warner had a banner year at theaters and did well with DVDs and merchandise licensing, but around 87 percent of its earnings came from TV. Part came from non-ad-related carriage fees paid by cable networks and subscriptions to its pay-TV network (HBO), but the bulk came from basic TV dependent on old-fashioned spot ads and new-fashioned product-placement deals

   The same is true at the other Hollywood dream factories, including Disney, Fox, Comcast NBC Universal, Viacom (Paramount), and Sony.

   The TV money comes to Hollywood in three different streams. First, there’s TV production. Except for Viacom, which foolishly gave CBS its TV production when the two split in 2005, the Big Six have studios within studios that produce most of the TV series seen on network and cable TV. After their initial runs, the studios then reap a huge harvest by syndicating them worldwide.

   Second, each studio has a vast library of movies, animated shorts, and TV series—Time Warner has more than 40,000 of them—that it licenses to basic cable, local stations, and foreign networks.

   Third, they own, except for Sony, some of the largest ad-supported cable networks. They also own four out of five of the over-the-air networks. So they make money directly as well as indirectly from ad sales.

   The great advantage of TV licensing is that most of the revenue, except for residual payments to unions, goes straight to the bottom line. Even the most successful theatrical franchises capture only a small fraction of the box-office revenue because of the enormous cost of getting the film and the audience into theaters. And that does not include the cost of producing those movies.

   Consider Harry Potter, the most successful franchise ever. The numbers come direct from the (secret) Time Warner 2010 distribution report for Harry Potter and the Order of the Phoenix. The “gross” reported to the press (worldwide ticket sales) was $938.2 million. That sounds pretty impressive, but most of it belonged to the theaters, which remitted back to Time Warner’s distribution arm only $459.3 million.

   From that sum, Time Warner reimbursed the out-of-pocket expenses of $182.6 million for creating the “gross,” including a $131.1 million ad bill from TV stations, newspapers, and other media; a $29.2 million lab bill for 7,000 prints; an $8 million tax and customs bill; a $5.6 million dubbing bill for foreign markets; and a $3.5 million shipping bill. This left Time Warner with just $276.7 million. It then had to factor in its in-house distribution costs, including the salaries of a global army of theater-relation people, lawyers, media buyers, and PR personnel. This came to roughly $46 million. So, even a super-sized Harry Potter hit yielded only about 23 cents for each dollar of revenue.

   With TV rights, the licensee pays for all the advertising, dubbing, taxes, and even taped copies. Except for the residual they pay the guilds and unions (currently 10.3 percent), it is nearly all pure profit. And no matter how badly a movie does at the box office—and many do not pay back their marketing costs—a studio can sell it as part of a package led by one of its big hits. Time Warner, for example, got $92 million last year from the ABC Family network alone for licensing the rights to a Harry Potter-led package of 32 movies.

   Hollywood’s fortunes are so inexorably tied to the universe of TV advertising that it’s hardly surprising former TV executives now run all the major Hollywood studios. They know a crucial reality: whatever hurts TV’s ability to sell ads, hurts their own bottom lines. Consequently, when new-age players such as Netflix, Apple, Google, or even Hulu (Hollywood owned) threaten to undercut the ad base of the traditional TV networks, they’re also threatening to gut Hollywood’s golden goose. Once this is understood, their behavior makes sense.