Category: Analysis

How HBO Made Billions on Game of Thrones – Director’s Commentary Part I

One of my guilty pleasure TV series to watch is Forged in Fire on the History Channel. Like Making It, there is something really enjoyable about watching people make things, but especially when they do it really well. Especially in a positive atmosphere, which is what Forged in Fire and Making It emphasize.

Well, if I had a version of that hobby, it would be making business models in Excel. Especially bespoke models for brand new businesses. 

I just love it. I love taking a blank spreadsheet and figuring out how to fill in every line. More importantly, figuring out the data behind each number to get a model to be as accurate as possible. That’s my favorite part of the job. I’d do it even if no one was paying me to do it. If I can do that for things I love—like Star Wars, the Pac 12 or Game of Thrones—even better. 

These models don’t come cheap in terms of time required to build. Weeks of work usually. And the final result of even 4,000 plus words explaining them still usually don’t capture all the insights I think a well-built model provides. So—as I did with the Pac 12—today is the first article diving into all my extra thoughts on my Game of Thrones profit model.

I’ll dust off the FAQ format for it. If you have any questions, hit me up on Twitter, Linked-In or email (see the contact page) and I’ll answer those too.

First, can you remind me what your conclusions were?

Sure. In case you haven’t read the model, here is. It’s 35 lines and ten columns, so it’s small. (If you want the actual Excel, email me and I’ll consider sending. I’d have to clean it up first, though.)

Table 4 Final Estimate

The conclusion again is $2.28 billion is my estimate for how much GoT made from this series. That’s what I’d call my “median” estimate if I were running scenarios on this. And again, it is an estimate, not “truth”.

What do you mean by “not truth”?

Most numbers reported by the entertainment press, in my experience, come from one of three sources: the companies (via earnings reports or leaks), bad surveys or an investment bank releasing their analysis. My estimate would best fall in that last category; this is my estimate of the future.

But estimates are just that “estimates”. Since I don’t have every input—what I’d call “the actuals” in an internal document—I had to make a ton of assumptions. Still, estimates like these can be damn useful training for anyone in business. Unless you employ an industrial espionage firm—and I’m not a lawyer but I’d recommend you don’t do that—you don’t have your competitor’s numbers either.

I expect there is a chance some people who are “more in the know” than me can get someone in HBO to give them the real accounting sheets. Though, as Michael Ovitz’ autobiography testifies, there are quite a few people in H*Wood willing to tell you they know something for certain, even when they have no idea.

Let’s get into the model. Starting with the subscribers section. Explain the difference between accounting profit and your projected profit

Well, the key is that HBO (and all TV producers of wholly-owned series) think of a show in two ways. First, what is the “accounting” profit. That’s the amount they need to pay talent. That is usually made in an agreed upon definition called a “Modified Adjusted Gross Receipts” (MAGR). The people who work at the agencies have this knowledge as does HBO’s finance team. If it was leaked to me, we could make these estimates way more precise.

(Same with Star Wars. Feel free, readers, to leak me any info you want.)

MAGR, though, doesn’t come close to capturing the true value of the series. The MAGR definition usually ties the first run license fee (sometimes called imputed license fee) to the production costs. This gets nowhere near the true value of a TV show. It’s so “sub-optimal” that in my articles on subscription revenue, it didn’t even get its own “not-explanation”. I just dismissed using costs as a stand-in for value. Here’s this demonstrated for Game of Thrones.

Screen Shot 2019-05-23 at 4.36.34 PM

To quickly explain, to truly get at how “profitable” Game of Thrones had been for HBO, I needed to know how much subscriber value it added. Since this isn’t a hard and fast amount of cash—the way say theatrical box office or home entertainment sales are—networks like HBO usually set an agreed upon amount before the show airs. As you can see, it’s tied to the production budget of a series, usually at some percentage. Historically, 70% if the show can be sold to other windows.

As this table shows, though, if HBO had to pay off the actual subscriber value, then the talent collectively would have made something like $400 million more off the series. In other words, HBO was able to keep about $1.5 billion in profits from being shared with talent. 

Is this a bad deal for talent?

I mean, not as much as it seems. Estimating the value of subscribers is pretty complicated, and if you let lawyers into that calculations, it would get messy pretty quickly. Arguably this only comes up for the biggest hit TV series anyways, of which there are less and less.

How did you come up with your percentage for the imputed license fee?

Read More

GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 2)

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1)

The best analogy for content libraries on streaming services, for me, is theme parks. When I tried to value the new Star Wars land Galaxy’s Edge at Disneyland and Disney World, I wrote about this future scenario:

Next year, I’ll walk into Disneyland in the off-season (probably September-ish). I’ll be wearing a Star Wars shirt. My brother will probably rock a Marvel shirt. That said, I’ll also have a four year old wearing, if current trends hold, either an Elsa (Frozen) or Belle (Beauty and the Beast) dress. Other family members will likely have Mickey shirts on.

So how much of that trip do you allocate to the opening of Galaxy’s Edge? My family already averages one trip to Disneyland every year, and my daughter knows that Mickey lives at Disneyland. So she’d go anyways. But what about me? I’ll definitely go to see the new park at some point. 

Something about theme parks—maybe the permanence of the attractions—helps crystallize in my head the challenge of valuing content libraries. A theme park is a content library of rides, shows, shopping and food. Some of those attractions at Disneyland have been there since the 1960s. Those are the “library content” of Disneyland. Others are only one or two decades old. Those are the “recent library” of rides. Then there are the brand new attractions: Star Wars land, Cars land and a Guardians of the Galaxy ride. Those are the “new TV” of Disneyland rides.

The trouble is trying to value each of those pieces and disentangle them. At the end of the day, this both matters—because you need to make the best decisions possible to maximize revenue—and doesn’t—because at the end of the day the goal is to have revenues exceed costs on a total basis. Do the latter and how you get there doesn’t really matter.

My approach to valuing theme parks—calculating the money spent by both existing and new customers—gives us a good idea for how to value content libraries on streaming platforms. So let’s explain that. In today’s article…

– The rules guiding my approach to valuing content
– The “dream method”, which is what we’ll try to emulate
– The steps to the optimal method
– The HBO and Game of Thrones example explained
– Some other variations, caveats and thoughts

The Rules

As I wrote these last two articles, I kept coming back to the “rules” that define good business models. A few stuck in my head for valuing streaming video. Thinking that way…

– First, no double counting. If a customer gets attributed once to a piece of content, they don’t get to count twice. (A good rule of thumb, you can’t attribute more than 100% of your customers!)
– Second, CLV trumps monthly revenue and other calculations. If you attract a new customer, CLV is the best way to capture their true value to your business.
– Third, be humble in attributing success. No single show or movie accounts for 100% of its viewers in a library model.
– Fourth, use real data as much as possible.

The Dream Method – The Probability of Resubscribing

The dream method for HBO would be, basically, to be God Almighty. Looking down omnipotently, reading the mind of every customer subscribed to HBO and knowing why they subscribed, and what percentage of that should be credited to Game of Thrones. Add all the percentages together and you have it. (Maybe our Google/Amazon/Apple AI overlords will be there soon…)

In the meantime, we have data. Especially streaming data if you’re Netflix, Amazon or (partially) CBS or HBO. 

This data means you can track every customer. When their account starts. When it renews. When it lapses. And, crucially, what they watch the entire time. From the people who only watch movies to the people who complete every episode of Game of Thrones. In a big data sense, then you can compare their behavior to the customer who never watched Game of Thrones. 

Say the results looked like this…

…GoT Viewers resubscribe after a year period at a 92% rate.

…non-GoT Viewers resubscribe after a year period at a 80% rate.

That means, of customers who started the year subscribed to HBO, by watching GoT, they were 12% more likely to stay subscribed to HBO. That’s the best number if you can find that, because it basically means that GoT increases the probability of staying subscribed by a huge, statistically significant margin. Now that GoT is cancelled, if those GoT watchers suddenly flee HBO, well we can also reverse engineer that to know that GoT had been keeping them subscribed.

This could also be applied to new customers. If you take all the new subscribers for a given time period, you can look at the ones who watch GoT versus the ones who don’t and model their behavior. You can also tell which are the customers signing up to watch GoT right away, and which ones don’t. Add those up and you can attribute all the best approximation for value we have. (With heaping doses of regression analysis and machine learning.)

Yet, we don’t have the big data to do this. I mean me, as a commentator on the strategy of entertainment. If I were managing content strategy at a streaming company, I would set a team of data scientists working on. But I don’t have that team or that data here. As an outside observer, well, we need to make some assumptions, but we can try to replicate that method.

My Method – Attributing New and Remaining Customers by CLV

Read More

Read My Latest at Decider – How HBO Made Billions on Game of Thrones

I’ve been in a bunker these last couple of weeks and that bunker was an Excel bunker with internet access where I had one quest: to estimate how much money HBO made off Game of Thrones.

As I was writing my big series, “The game of thrones for the Next Game of Thrones”, I realized I needed a starting point. And figuring how much money Game of Thrones made was that starting point. It helped me understand exactly how the GoT Prequel could make money, but also tested my model. And I learned a ton figuring it all out. I’m up to 20 pages of research for this series and growing by the day.

(And I’m not close to being finished…this model inspired at least two more spinoff articles and maybe more guest articles.)

It was so good, I pitched Decider on it, and they accepted all 2,000 words of it (with tables).  Go check it out and share it on Twitter, Linked-In, Facebook and everywhere.

Seriously, I don’t ask for a lot of favors from my small, but growing, audience and this is one of those moments. If you’re a journalist, consider picking up the story, and I can answer any questions you have. (Email on the contact page or DM.) If you’re just a fan, still consider or emailing it to your entire office. Any little bit helps. Thanks in advance!

Again the story of how HBO made over $2 billion on Game of Thrones here.

GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 1)

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2)

Consider my current relationship with HBO’s Sunday night programming. Right now, I record two plus hours of content to watch during the week: first, Game of Thrones, then Barry and finally Last Week Tonight with John Oliver. Then, for the rest of the week, I don’t record any other HBO shows, but will watch the occasional blockbuster I didn’t see in theaters. (In full disclosure, that included The Meg and Skyscraper. Don’t judge me.) Oh, and on Saturday mornings, we often watch Sesame Street. To access this content, I pay $15 a month to my cable company. 

So the fun question is…

…if I were HBO, how much credit do I give each series?

This is not a trivial question or easily answered. Sure it seems simple—the highest rated shows are the most valuable—but quantifying that value is the tricky part. In fact, this requires teams of finance folks and economists and statisticians running “big data” analysis. Literally measuring millions of customer accounts engaging with billions of pieces of content across potentially hundreds of categorical variables. (Unless, of course, you don’t have streaming data, in which case HBO doesn’t actually know what shows I watch, because I’m DVRing them for later.)

The current HBO lineup is a good illustration of how personal motivations can be obscured over the millions of people watching HBO. I’d definitely subscribe to HBO only for Game of Thrones, but would I subscribe to keep watching John Oliver when GoT goes on hiatus? What about Barry? Is it enough to make me stayed subscribed? Probably not on its own. Of course I will wait for Silicon Valley and Westworld and maybe Watchmen and/or His Dark Materials…so…I mean I don’t have an answer for you.

Multiply my anecdote by millions of individuals—all with different profiles and behaviors, and you see the challenge facing both cable channels and streaming networks. Throw in the fact that I’ve now been a loyal subscriber for 5+ years, and it can be hard nee impossible to determine which, if any, specific show kept me on board versus built up brand loyalty and/or inertia

Yet, this question will be crucial to our three streamers to determine the winner in this future-of-TV-series I’m calling “The battle for the next Game of Thrones”. The goal for these three series is to bring in and retain new customers to help win the streaming wars. Since strategy is numbers, I need to quantify those subscribers.

That’s the goal of today’s article. Streaming video economics. With my usual caveat that this is a subject that we could write books on. (Though, it’s obscure enough that there aren’t actually a lot of books on it.) My plan is to…

…Explain a brief history of content libraries and why this is a contemporary problem.
…Briefly remind everyone that for decades TV and movie studios tried to value libraries poorly on purpose.
…Then, I’ll debunk three bad ways to do this. 

Tomorrow, I’ll show my way, but mainly to describe the incredible amount of assumptions I’ll need to make to pull it off. And guess what? I’ll dig into a valuation of a current TV series. Or better said, a just ended TV series.

The Growing Importance of Valuing Content Libraries

When I built my TV production model, I debated making bespoke models for the four main types of TV, broadcast, cable, premium and streaming video. Ultimately, though, I realized that I didn’t have to because among those four business models, there are really just two types of revenue, advertising and subscription, and each model is just on a spectrum for how much they rely on each: 

Spectrum Ad vs SubscriptionThat’s a fun table and way to look at it because over time, we’re moving more and more to streaming. But as we move there, we also see that the ability to determine which piece of content is the most valuable went from “easy and/or not necessary” to “much harder and/or crucial to growing subscribers”. Let’s describe that in the various phases.

Phase 1: Broadcast starts with all Advertising

At the dawn of TV, life was simple. All broadcasters had to do was look at ratings. The higher the ratings, the more money made from advertisers. The math here is pretty simple for networks: keep the highest rated TV shows. And since Nielsen kept a scorecard for everyone, they didn’t even need to do this math themselves. 

Phase 2: Cable starts collecting retransmission fees

This was really the first time that channels needed to start considering TV series as more than just advertising revenue drivers. As cable expanded, the channels insisted on fees per subscribers. Eventually these fees—the per subscriber fee a cable company paid each channel to air its content—surpassed advertising for cable channels as the largest source of income. 

The best example that comes to my mind was the dual Mad Men/Breaking Bad success of AMC, followed by The Walking Dead. Those three shows allowed AMC to drastically increase their retransmission fees, and it wasn’t all related to viewership/ratings. Mad Men was never a monster in ratings, but its fans were diehards and it was critically acclaimed, so it was of outsized importance to AMC. They used this to negotiate higher retrains fees. Since individual customers don’t pay retransmission fees, you still, as a cable company, didn’t need to value individual shows precisely, though. Just general feelings fit in, and still most cable companies ended up buckling in retrains battles.

Phase 3: Premium cable doesn’t have any advertising, so libraries are a bit more important

Really, HBO was the first subscription TV company. For years, it justified its extra cost by being exactly what its name portends, the “home box office”. The home for theatrical movies before broadcast and cable. With no commercials.

Then, it bolstered this with The Sopranos and Sex and The City. They weren’t the first series on HBO, but the ones that put them on the map. Really, this is the first time a platform had to grapple with how to value their TV series versus the rest of their content. But HBO didn’t really have the data to do this. It didn’t know if someone who watched The Sopranos was the same subscriber as someone who watched their movies.

It also didn’t really matter, because HBO wasn’t selling the subscriptions in the first place. The cable companies were, so it just needed to give off the imprimatur of value and keep people subscribing. Which it did. To guide its behavior, it could also keep using ratings data in general as guides to what is profitable and what isn’t.

Phase 4: Streaming means direct-to-consumer, which means valuing content libraries

Read More

GoT vs LoTR vs Narnia – TV Series Business Models (Scripted)…Explained! Part 2

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1)

Today, we continue our journey explaining how a TV show makes money for its producers. Last week, I started describing the model along with describing costs and the first set of revenue. Today, I continue explaining the revenue piece, touch on why I didn’t build this model for the upcoming Star Wars series, describe some of the fees involved, and provide some final thoughts. Finally, I link to my two main sources.

Revenue (continued)

The bulk of the value of a TV series—especially non-hits or mega-hits—comes in the first window. Especially when you talk about value as “money”. For 90% of TV series, the initial license fee usually represents most of the money a show will ever make. But if a TV series takes off, then the other windows will have much more value. And let’s start with one of the newest of those windows.

Home Entertainment

TV came to home entertainment late, and may be out of it soon. This window couldn’t take off like movies in the 1990s because the number of VHS tapes required was unwieldy. When DVDs made entire seasons the same size as a VHS, right as the quality of top series drastically improved (I’m thinking of The Sopranos here), then the TV home entertainment market took off. With the rise of digital you could buy series without any space at all. (This is a great example of technology enabling a business model.)

Yet, as soon as digital sales started, they ended, didn’t they? So the lifespan of this window was fairly small. I mean, why buy or rent a TV show episode if Netflix will buy the rights and stream them all for you? Still, I’m including it in the model because home entertainment is still something, but more importantly, it was REALLY a thing for Game of Thrones. Franchises that inspire super-fans—which is a short list—can still generate home entertainment sales. At the height, these can be in the millions of units sold per season, at least when GoT started. That can add up and really offset production costs.

So including the first-run licensing revenue, here’s our model so far.

Image 1 The Model So Far

Licensing – Renting Your Show to Other People

I don’t like the word licensing in TV. It sounds too close to selling either naming rights or toy rights. But it is used constantly in television. Instead, I’d call it “TV renting” because that’s really what you’re doing: renting the rights of your TV show out to various players. Still, licensing it is.

For all the sturm und drang about streaming video, in a lot of ways, they were just another window for licensing. Instead of counting the number of runs and paying broadcast residuals, you sold them for unlimited runs to a streaming network, and because it was digital (and not covered by guild agreements), the studios also had to pay less in backend compared to syndication. 

The variations in licensing come down to who you licensed to, when they get that license and where they are. Typically, production companies expend the most energy on the first, domestic window and everything else is a bonus. To summarize:

International Sales – The US TV model built up around selling to American domestic broadcast. Once you did that well, you could sell the rights of a TV show to the international market. That’s the big form of potential revenue. However, the shows that fit international market tended to be broad comedies, crime procedurals or genre series. (Many prestige shows don’t travel at all.) This has also blended in with digital sales as streamers can now buy out global rights instead of just US versus international.

Syndication – Again, another legacy of US TV model, syndication was selling a broadcast show—and sometimes a cable show—to TV broadcast network groups to run in off-primetime hours. This still goes on for shows like Friends to Mom to Law and Order: TBD. Since this was done for whole of series runs, often, this could be worth literally billions for a handful of shows. (Again, the kings are Friends, Seinfeld, Cheers, Simpsons, Everybody Loves Raymond, Two and a Half Men and other broad comedies.) 

Second Window Licensing – I’m using this to refer to cable channels getting in on the game. You could take your broadcast series, and instead of selling them in syndication, sell them to cable channels in deals that looked roughly similar, but had less impact on residuals and participations. And premium channels could get in on the game too (HBO sold Sex and the City, The Sopranos and Entourage). Recently, even streaming series (Bojack Horseman on Comedy Central) have been sold into syndication. Really, what you need to know is that a lot of TV producers made money by selling their shows to a second channel after the first window ended. And then…

Digital Sales – Digital sales can happen in the first, second or library windows. And many times it doesn’t even conflict with the syndication window above (unless the streamer pays for exclusivity on that window too) which is why Friends is on Netflix and TBS right now. (Friends is such a mega-hit in the TV business I use it a lot.) Since so much money is involved in digital, sometimes the streamers buy out global rights simultaneously, which is a change in business driven by the rise of global streamers.

This gives us four new revenue lines, the three categories above plus “library” which is the placeholder value for time periods after a series is fresh, say five years from the last season and older.

Image 2 With licensing Revenue

Tax Credits

Tax credits are a great euphemism. We could just call them, “government bribes to movie studios”. What else do you call a straight cash payment to a business to come to your state or country? It’s the utter opposite of the “free market”, and states of all political stripes take advantage of it. (*Cough* Georgia *Cough*)

I didn’t calculate this explicitly for films because at the size I was working—hundreds of millions—it would wash out in the production budget. (Though lots of big budget films, including Marvel films take advantage of these credits.) I’ve also seen these accounted for as “negative COGS” as opposed to revenue, if that makes sense from an accounting perspective. (It isn’t money you make, but money that offsets your costs.)

That said, for TV shows in the low millions of dollars range, a couple million dollars can really hit the bottom line. Some TV producers—I’ve heard—have the goal to breakeven on everything else, and their profit is the tax credit. Starting research for this series, I found this Variety article where Penny Dreadful managed to convince California to pay them $25 million. That’s a hefty bribe, er, paycheck.

Smaller Pieces – Merchandise, Product Placement

For 98% of shows (my assumption) licensed merchandise will never be a thing. People just didn’t buy NYPD Blue shirts or Cheers hats. Yet, that has changed as nerds have taken over the world. I own not one but two Game of Thrones shirts. Breaking Bad—another megahit—had two iconic shirts in both the Heisenberg and Pollos Hermanos t-shirts. So I’ll include this line item because if any of my fantasy series becomes a “megahit”, they’ll make some money off of that.

Read More

GoT vs LoTR vs Narnia – TV Series Business Models (Scripted)…Explained! Part 1

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2)

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 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:

Feature Film Biz Model

(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.

Participants

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.

TV Value Chain

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. 

Model with Participatns

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.

Costs

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:

Model with Inputs

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.

Model with costs

Revenues

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.

Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!

A big topic in the streaming world has been who owns what. All I can say is, “Finally!”

For many years, we—sort of speaking of the business press, especially the casual observers—have treated all streaming TV shows interchangeably. If Netflix branded a show an “original” for all intents, the press referred to it as an original and lumped all the originals together. With the Friends on Netflix issue coming to a head last fall, we’ve finally started to unpack what it means to have licensed content on a given platform.

(Here’s a good article by Beejoli Shah at The Information that makes the distinction between licensed and owned content. I hope we get more of this.)

Here’s my hot take, though: the licensed versus owned conversation STILL doesn’t explain enough. Why? 

In one word…co-productions.

This convoluted third category is like the love child between owned and licensed shows. Moreover, TV series can fall into different categories depending on the territory they are licensed in. Someone needs to step in and explain all this. 

Since I need to clarify this distinction for my series on Game of Thrones versus Lord of the Rings versus Chronicles of Narnia anyways, I may as well write a full article on it.

For the streamers each ownership model has different pros and cons, and understanding those different models can explain why certain shows get renewed, while others don’t, why certain shows are branded certain ways and others aren’t and, mainly, the economics of all of them. 

I’ll start by explaining wholly-owned series, then explain licensed series and co-productions. What they are, how they impact the business models and provide some examples. Along the way I’ll explain the traditional licensing windows and a geographical clarification.  And since this article was directly inspired by my big series on GoT versus LoTR versus Narnia, I’ll pull examples from those three streamers for each of these definitions (as best as I know). 

Wholly-Owned

This is simple: the network distributing a piece of content also owns the content. 100% free and clear. 

More granularly, the studio’s in-house production team owns all the rights to it. To get to this point—where a channel owns 100% of the rights—usually requires that the network developed the show itself. That means they either found the show runner—who wasn’t already under a deal with another T V production house—took her pitch and optioned her TV show; or they hired her under an overall deal, so that anything they produce they have first rights to. That’s step one, own the underlying IP. (Yes, if it is based on a book or movie or what not, you have to own all the rights to that too.)

The second step is to then pay all of the production costs. Most of the time, if you do those two things, you own a show outright.

What does this mean for a network/streamer? Well, they can do whatever they want with the TV series. (I’ll explain a qualification to this in a moment.) They can air the show for as many seasons as they want, as long as they’re okay with the production costs. They can keep it exclusively on their channel or syndicate it. They can raise or shorten the number of episodes. In short, they don’t have to negotiate with an outside producer because they are the producer.

The qualification to unlimited control is talent. Even a wholly-owned show has obligations to talent—especially key talent like showrunners or the lead actors—that can influence some of these pieces. If the talent’s contracts are up, and they don’t want to make the show anymore, they don’t have to (until they get a pay raise).

Since the 1980s, roughly, broadcast channels have become more and more likely to own their own shows, or at least air shows under the same corporate parent. (So NBC airs shows produced by Universal Cable Productions or Fox aired shows by 21st Century Fox Television.) This has happened since time immemorial, but became more common when the FCC relaxed primetime air time rules and ended “fin/syn” regulations (which I do not have time to explain today) in the 1990s. When the streamers got into the game, they prioritized “wholly-owned” shows because it enabled them to choose distribution plans they wanted.

(Note on verbiage: I called these “wholly-owned” at my previous job, and I’m sure different places can call them different names. I like wholly-owned much better than “original” because it is about who owns the series financially, not customer-facing branding.)

The downside to wholly-owned is one of costs. If you’re paying all the costs up front, that can quickly get expensive. For a licensed show, you can choose to pay a fraction of the total costs because the production house can make additional revenue later. Same with broadcast shows back in the early 2000s, when networks often paid 50-70% of the costs for co-productions. However, if you’re looking to own all the rights forever, or want exclusivity forever, owning the content completely is actually cheaper.

Examples

HBO – Game of Thrones. The Sopranos. The Wire. True Detective. Veep. Silicon Valley. 

(Basically, nearly their entire catalogue. HBO as a premium channel has tried to own 100% of their content. That’s why HBO Go/Now’s offerings have nearly every TV show they’ve ever made.)

Amazon Prime/Video/Studios – Transparent. The Man in the High Castle. Mozart in the Jungle.

(Amazon has a fair bit of wholly-owned content, but some of their biggest swings will fall in later categories.)

Netflix – Stranger ThingsGLOW. All the content coming from the huge overall deals with Shonda Rhimes and Ryan Murphy will fall in this category.

(Netflix is rarely the producer of record, according to Wikipedia. However, as this Digiday article makes clear, Netflix is essentially acting like the wholly-owned studio by owning rights for extremely long time periods. These shows are examples of series that are functionally owned by Netflix, even if another producer originated the project.)

Licensed

A “licensed” show is a TV show that the streamer doesn’t have any financial stake. They don’t own any downstream revenue. At all. It’s actually about as easy to understand as a “wholly-owned” show. If a wholly-owned show is 100% of the rights of project, a licensed show is zero percent of the rights. Zilch. Nada.

Read More