New Media Financing, Part 3: Controlling the Costs

More than a decade ago, I was working on a project that involved producing original 30-minute in-studio television programs. The cost of the shows had to be low enough to allow them to be bartered (given to stations free), or even aired through paying the stations for the time. I approached a number of producers in Los Angeles and said, "Here's an outline for the show, our budget is $300,000 per half hour, can you do it?" Not a single one would touch it for anywhere close to that budget, even though the series wasn't going to be technically difficult to produce and wouldn't require "name" talent.

It costs a lot of money to produce a network television show--according to The Hollywood Reporter, between $2.5 and $4 million per episode for an hour-long drama, while half-hour comedies are significantly less expensive at around $1 to $1.25 million per episode. For those costs, you get professional union talent both in front of and behind the camera, the best equipment, first-class music and sound, excellent post-production, and so on.

At the other end of the spectrum are user-generated videos like "Keyboard Cat" and the "Numa Numa" guy, shot and edited by a single person with a camcorder or webcam. The cost is virtually nothing, and sometimes, very rarely, a huge number of people watch them. But could you get a million or two people to watch the "Numa Numa" guy for 30 minutes a week, for 13 weeks?

Network television shows are very expensive to produce, but if they catch on, people will watch them over and over for years. They generate advertising revenues from day one. They can be sold to other countries and syndicated to local television stations, even while the original run of the series is still on the network. They can be packaged into DVD collections and resold. They can run on Internet sites like Hulu and generate more advertising revenue. The entire network series production system is based on creating these kinds of shows. The series that don't make it, that last a season or less, are a sunk cost, never to be heard from again. It's a little bit like the venture capital business, except that even a failed venture might have valuable intellectual property that can be licensed or sold, while a failed television series has virtually no residual value.

But what if the production model reflected reality? What if costs were based on the expectation that a show will fail? What if producers put real money into a show only once it was proven to be a hit? You'd see a very different model for funding series production, the model that I think needs to be applied to the Internet.

In the "Look out, she's about to blow!" model, everyone gets paid Union scale, not X times scale, until the show is a proven hit. DSLRs replace 35mm film; multicamera shooting techniques replace single-camera, decreasing the number of setups and saving both time and money. Teams are light and shoot fast. Sets go virtual; why make huge investments in practical sets when you can create them digitally and then build them once you know you've got a hit? Also, you don't have to tear down virtual sets. Editing and post-production are done on the desktop.

I can already hear a chorus of network executives and producers saying "That will never work! The production quality of our shows will be diminished, and we'll never get them to the point where they'll be hits. It'll be more expensive to upgrade production standards midstream than it would be to set high standards from day one."

But just because network executives and studios would find this an unacceptable way to approach production doesn't mean that it's unacceptable. For the Internet to take off as a platform that can generate its own hits, it has to be able to deliver compelling programming that will bring viewers back again and again. That requires more than a camcorder and an idiot jumping off a roof. It means operating as "close to the bone" as possible in order to keep costs in line with potential revenues, and to only ramp up costs once revenues can support them.

Comcast/NBC Universal: It's Not AOL Time Warner

Comcast's acquisition of 51% of NBC Universal from GE has been derided by some observers as the second coming of the AOL-Time Warner deal--two big media companies merging with few real synergies. On the contrary, I think that it's a very good deal for both companies--but it's not without risks.

AOL was "circling the drain" before the merger with Time Warner--subscriptions rates were flattening out, churn was increasing, as were subscriber acquisition costs. The company was hard-pressed to find growth, so it instead engineered one of the dumbest mergers in U.S. history, getting one of the biggest media companies in the world to essentially give itself to AOL. (Let's be clear...the merger was dumb for Time Warner but brilliant for AOL.)

By contrast, NBC Universal is in far better shape than AOL was. NBC's broadcast network is a mess, and the Universal movie studio is questionable (as it's been ever since MCA was acquired by Panasonic years ago), but its cable networks are generally strong, well-run and profitable. It's the cable networks that formed the primary reason for Comcast's interest.

The FCC is almost certainly going to require Comcast to either divest NBC's owned-and-operated television stations in markets where Comcast has cable systems (in Chicago, Philadelphia and Washington, D.C., among other cities) or its cable systems in those same markets. I suspect that it's the television stations rather than the cable systems that will be sold off.

Antitrust arguments against the merger are going to be a lot harder to make; for years, Time Warner owned Time Warner Cable (the second-largest cable operator), a movie studio and a collection of cable networks at least as powerful as those of the Comcast/NBC Universal combination without running afoul of antitrust regulators. Comcast has already pledged to make NBC Universal's cable networks available to competitors. The deal is likely to get done without major concessions beyond those required by the FCC.

The NBC television network can be fixed; it fell from first to fourth place in little more than a year, and one or two years of strong program development could turn things around. (To do so, however, Comcast will have to get Jeff Zucker and his cronies away from the network and install a new programming team.) Universal is a bigger problem, in that Comcast will be its sixth owner in less than 20 years, and no one in that time has figured out how to return the studio to success. The solution may be to sell off Universal in parts, keeping its library and selling off the ongoing studio operations.

NBC Universal's digital assets have been called a key reason for the deal, but I think that they're clearly the tail in this deal, not the dog. The most important digital asset is Hulu, but NBC Universal is a minority owner. Comcast will get a seat at the table, and Hulu will get to play in the TV Everywhere initiative, but it's not going to negate News Corporation's and Disney's interests.

I've learned from my own sources is that Comcast is working on its own low-cost, Roku-style set-top box to make its Xfinity service available on television sets without having to replace millions of existing set-top boxes. This could become the "official" mechanism through which Hulu will get to television sets.

In short, this deal makes sense for both Comcast and GE: Comcast gets control of a treasure trove of content, decreases its costs for distributing some of the most popular cable channels (they become internal transfer costs instead of outright expenses) and gets partial ownership of the Internet video distributor that poses the biggest risk to cable operators. GE gets out of the entertainment business without taking a financial bath, and can focus on industrial, medical and financial areas. The merger will almost certainly go through.

Cable Networks 2.0 (or 3.0)

The cable network model that we all know, which was based on the broadcast television model that we all know, is this: A centralized organization acquires programming, schedules and distributes it to affiliates (broadcasters) or cable operators. The network produces some of its own programming (or most of it, if it's a news or sports channel), but it acts primarily as an aggregator, scheduler and dsitributor.

It was a wonderful model for 1925, or 1949, but it's completely obsolete today. It was based on the technical limitations of the dawn of the radio and television eras, limitations that no longer exist. It was effectively impossible to have a two-way conversation between media creators and consumers prior to the Internet and broadband speeds. Now, we've got the means for that two- (or N-) way dialog. The cost of production and distribution is a tiny fraction of what it was even thirty years ago, which was in turn far less expensive than what was being done in the 1960s. YouTube...well, you know all about YouTube, and Vimeo, and Dailymotion, and, and...

My point is that the one-way, centralized network model is obsolete. I don't believe that a new, one-way network will be successful. Future cable networks will have to bake an open, two-way model into their architecture from the very beginning. What does that mean?

It means that the network becomes more of a curator than an all-powerful programmer. It selects and makes available content from external producers, internal teams and viewer/producers (since viewers can now easily be their own producers). It also enables viewers to curate their own programming and make their own selections.

The production process will become far more distributed. Viewers with a few thousand dollars and a high degree of patience can create content that looks as good as anything seen on broadcast television or cable. Field production is simple; it's done thousands of times a day. Studios can be built and sent anywhere. A shipping container can be turned into a perfectly functional television studio. Put it on a fast-and-dirty foundation and you've got a permanent studio. If you want room for an audience, there are a lot of older movie theaters out there being underutilized or gathering dust. Extend the stage, put in LED and fluorescent lights to keep the heating load down, and voila, instant studio!

You may argue that this model has already been tried, at Current, and it hasn't worked very well: Current TV just laid off 80 staffers, shut down production on some shows, and is consolidating two Los Angeles facilities into one. However, the problem wasn't with the production model, it was with trying to fit that model into a conventional cable/broadcast channel. The most-watched shows on Current have been InfoMania and SuperNews: Fairly conventional (from a structural point of view) 30-minute productions that viewers can find easily and that are repeated many times during the week. The bulk of Current's airday has been taken up with brief, four-to-eight minute videos, many of which are submitted by viewers. The problem is that it's been impossible to know exactly what's going to be on when. If you happen to tune in when they're showing a video that's engaging, you're likely to stick around for a while, but if you don't like what you see when you first tune in, you're unlikely to wait around for something better.

The problem with Current TV is that it's programmed from the top down, just like any other cable network, even though viewers contribute a lot of content. Current also has a web presence that allows a more egalitarian approach to programming (in other words, watch what you want, when you want), but with serious limitations: Cable operators prohibit Current.com from running its on-air feed live, or from making programs available prior to their airdates.

That brings me to my last point: The cable network of the future will reside primarily on the Internet, not on cable. So long as the cable operators can dictate terms of when and where programming can be shown, no cable network can become a truly two-way operation. That's why Current is struggling, and why Hulu is only a shadow of what it could be.

In the future, the cable network will be equivalent to the "curated feed", but the open ecosystem will reside on the Internet.