I’ve spent a lot of time trying to make the “ideal” TV Series business model over the last few weeks. Getting that right—and a bout of stomach flu/Avengers: Endgame that ruined/thrilled the end of last week—has been holding up this article.
But honestly, why bother?
As I was reflecting on my Game of Thrones vs LOTR series, I was thinking about my “gut” section from the introduction. Essentially, my gut thinking is what—if I were a traditional trade print columnist—I would have turned into my editors. It has a thesis, some data points and tells a nice little narrative about how well set up HBO is compared to Amazon. Add a little more certainty to the rhetoric and I’m done!
But it didn’t have any “proof” in it. To use my own terminology, it didn’t have any numbers. Since “strategy is numbers”, in my opinion “gut thinking” can’t prove the case. Today, we start on the path towards developing some numbers. I want to prove my case, which honestly I haven’t decided one way or the other yet.
My bar for “proof” in a business plan, though, isn’t the same bar as scientific proof. It’s not “scientific” because you can’t use the scientific method on future events. Instead, you can be rigorous. Have a model that you trust, and let its predictions be your guide. If your model captures, say, 80% of the potential of a business, that’s pretty good. That lets you know if a strategy is sound or not. For my Lucasfilm series, I had to develop a film model to make my conclusion. Today, I have to do the same thing for TV series.
Consider this the “Appendix: TV Series Business Models (Scripted) Explained”. The good news is once we have this model, I can build bespoke models for the Game of Thrones prequel, Lord of the Rings prequel and Chronicles of Narnia adaption. In today’s article, first I’m going to compare the film and TV models, distinguish between the participants in a model, describe the costs of a TV series, and explain the key revenue drivers during the initial window. In Part II, I’ll show everything else.
Thoughts on “What These Models Are For”
The purpose of any model depends on its uses. I’m trying to use these models for “strategic” purposes. The strength of any content company is it’s underlying IP, both the floor and ceiling of performance. And specifically how much cash they will generate. That means the numbers need to be close to reality, but not close enough to audit. These aren’t accounting statements, but strategic models to help us understand the underlying performance/economics. My goal is to build a model that will be flexible enough that I can use it for multiple projects. (I have an idea for how to use my film model for another project for example.)
Also, these “show my work”. If you opine on the business of entertainment, and don’t have any models (even rules of thumb) guiding your work, you’ll end up just reinforcing your priors. Even a simple model forces you to understand the drivers of a business. These models and my explanations will allow you to critique my conclusions and/or build your own if you disagree.
Comparing Film Financing to TV Financing
To refresh your memory, here’s my business model for a feature films:
(An aside: If you want another model of film profit, Deadline runs an annual “top profit” tournament for feature films. Their numbers for the Star Wars films are a bit lower than mine, and if I have time, by the end of the year, I’ll dig into the drivers why.)
Let’s start with the biggest difference between the TV and film models. Feature films are much easier. Essentially, once you have one piece of revenue—the theatrical box office—well everything else flows from that. So much so that often you can use percentages to get a pretty good guess of what the total revenues will look like. The studios have people who have this down to a science based on opening weekend, current deals and other categorical variables like genre, rating and such.
TV doesn’t have any similar starting point. Ratings can fluctuate season to season—as I showed in my most recent article—and even then the four major routes of TV—broadcast, cable, premium and streaming—each have different business models. Moreover, in success, the path a TV show can go is as varied as the initial platforms, while 90% of studio movies follow the same path. Meanwhile, the number of films made each year dwarfed the number of scripted TV shows historically, especially if you count “series” versus “seasons” as unique data points. To top it all off, the business model for TV has changed significantly in the last 20 years, from one about deficit financing in the hopes of syndication to adding in home entertainment (DVDs then EST), to adding in streaming to streamers having their own plans. So lessons from even 20 years ago no longer apply.
What does this mean for my TV series models? I’m not going to have a neat waterfall tied to percentages of box office like I did with film. I tried to do that, but I didn’t like the results. So I’m going to build a shell where all the potential revenue streams go in, and then build three bespoke models for each TV show. The first step to that shell, though, is determining which participants go in, which is another change from out film model.
If something does apply from my Star Wars film model, it is the inevitability of Hollywood accounting. (Which was since revealed in gory detail in the Bones Arbitration.)
Basically, a studio will always try to pretend it never made money on a TV show or movie to avoid paying talent. As a result, like my film model, our TV model needs two versions: one for the studio, one for the talent.
Let’s not stop there. My film model has two main participants: the studio, who paid for the film, and the talent, who acted/directed it. I could have added a third participant, which in a lot of cases is the “producer” if a film is independently produced. That happens so rarely for blockbuster films, and doesn’t happen for Star Wars films at all, that I didn’t include it. In terms of the value chain, the producer sits between talent and distributors.
For TV, though, producers and distributors are different more often. For my TV model, I need to add/account for this third participant. Sometimes they will be the same person—GoT on HBO—but sometimes they won’t be—New Line/Tolkien estate for LoTR on Amazon Prime/Video/Studios. And talent will still require a place in both. So my goal—and I’ll see if I can pull this off visually—is to make a model that can show all three pieces simultaneously in a way that doesn’t make the reader’s eyes bleed.
So that’s the shell. The plan is to start with revenue for the “TV producer” (in two parts) and then next week, fingers crossed, I’m going to talk about how the network or streamer makers money off the TV show. (That, um, is complicated.)
The Four Main Pieces for a TV Producer
Fortunately, the the four main pieces of the film model—revenue, costs, fees and talent participation—are the same. I’m going to talk about them in roughly the same order I did in my film model, which is in chronological sequence. First the monies going out, then coming in, then going back out again. Like last time, I’ll “build” the model as I explain each section.
In film and TV financing—well like most industries—the costs come first and the revenues may not come for years. Or ever. When it comes to the TV producer, the two main costs are development and production costs. In other words, how much it costs to produce a half-hour or hour of programming. Development comes before it all, as you’re getting all the pieces lined up (writing the script) and then actually making the episodes.
Then comes making the show. This is a key to understanding why TV producers are always so cash strapped. The TV production house pays all its costs up front. It pays the actors to show up, it rents studio space. It hires all the below-the-line workers. All paid in cash up front.
A simple multiplication problem then defines how much a TV series as a whole will, in general cost you: number of episodes times cost per episode. There are a few key drivers here, which I call my “inputs” in the model. First, the number of episodes in a season and the number of seasons a series goes for. Essentially, a 6 episode season is half as much (roughly) as a 12 episode season. (Some costs are amortized but in general this applies.)
The drivers of episode costs are related to the length of the episode and the quality of that episode. Very simply, it costs more to make longer shows. (You shoot a thirty minute sitcom in 3 to 4 days and a 60 minute drama for 5 to 8 days.) This even applies to the length of an episode; a 22 minute sitcom for broadcast versus 60 minutes for premium cable. On top of that length, “quality” can drive up costs. Or the production values. Shooting on a soundstage for a multicam sitcom gives one look, that saves costs, while shooting outdoors in Iceland for a prestige drama is another thing altogether.
To keep these straight, in my head, I added an information bucket above my model to capture the key production details. I’m calling these the inputs. So here’s the model now:
The last driver is talent costs. Especially as a series progresses into future seasons. Getting top flight talent attached to a series and to keep working on a series requires lots of money, usually paid per episode.
Finally, if we’re talking all costs, marketing costs come into play. In TV, the network/streamer pays the upfront costs for the season, and it’s up to them to market the show. I’ll only take these costs into account for the distributor/network/streamers, which is how this three part model could get confusing. To make it even more confusing, the fee the network pays, while revenue for the studio, is a cost for the network. Here’s the shell of the model, with the “inputs” on top and the costs that I’m going to account for.
Let’s get to the fun part: making money. My goal here is to list as many major sources of funding that I can, in order of perceived size. Or better phrased, their expected value. (Syndication is the largest bucket historically, but has a low probability of being achieved.)
First Run, Initial or Imputed License Fee
This is where you start as a TV producer. When you sell a show to a network, you negotiate fiercely for the network to pay you as much as possible up front. This is calculated as a percentage of the production budget. Historically, like 1980s historically, this was pretty low, I believe around 50%. According to Harold Vogel, this creeped up to 70% by the dawn of the 2000s, and in my experience and reported, now as streamers want more rights, this is well over 100% and sometimes up to 130% of the budget.
This fee is needed by the TV producer, because otherwise they are deficit financing, which is risky. The broadcast networks paid only a fraction of the budge and the TV producer had to make the rest on syndication. Since streamers offer so little potential future windows (Netflix gobbles all the windows up), the fees have increased since the producers have no chance at future revenue.
For that last case, what that means is that in exchange for all the future windows I’m talking about, the producer is paid essentially an upfront profit. So the producer makes the show for $5 million, get paid $6.5 million and call it a day. In the old days, the producer made the show for $5 million, and got paid $3.5 million, and needed the rest of these windows to make up the shortfall.
That’s why I’m calling this line three different things, that kind of mean the same thing and also don’t. If a TV producer sells just the first run rights to a network—with no co-production terms—that’s a “first run license fee”. However, for someone like a streamer, this license may extend beyond that first run, so you could use “initial” to just cover the length of the deal. Really, those two terms are semi-interchangeable.
However, when the network also has a piece of the show, calling it a “license” fee is a little disingenuous. Especially if it is wholly-owned by the network. Do you trust the network to tell you what a show is valued at? Isn’t that exactly how the Who Wants to Be a Millionaire? and Bones controversies started? As a result, this fee is really an agreed upon price, which I call an “imputed fee”, that’s also based on the production costs. It acts the same way, but since the money isn’t actually trading hands it is imputed versus real. (And as I just clarified, it shows up as a cost for networks in this model.)
That’s enough for one session. I’ll be back early next week with the rest of the accounting.