The economy of U.S. studio biz model is financial, art.

Author:Serafini, Dom
Position::Economy of U.S. studios
 
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Naysayers who underestimate the business of traditional television had better research the rich potential of the medium. The only drawback could be that those riches are concentrated among some 100 companies worldwide and, in turn, these companies get most of their content from just seven U.S. studios: CBS, Disney-ABC, NBCUniversal, Paramount, Sony Pictures, 20th Century Fox and Warner Bros.

Before reporting on the comments of U.S. studio executives regarding current and future opportunities, let's analyze the global audiovisual market and what it represents for the U.S. TV industry.

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According to a study by France-based IDATE, the 2013 world TV market will generate a total business of $323 billion, with 44 percent coming from advertising, 47 percent subscription fees and nine percent public funding. Considering that programming costs account for about 50 percent of total TV outlet income, we can safely assume that content represents at least a $160 billion portion of that amount. As a point of reference, in the U.S., cable networks alone collectively spend over $20 billion a year on programs.

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Granted, the U.S. represents nearly 36 percent of the total global TV market, but Europe is not far behind with 30 percent, followed by Asia-Pacific (21 percent), LATAM (nearly nine percent) and MEA (nearly three percent).

In terms of TV/video rights exports, the U.S. generates an estimated $20 billion a year, which, added to the U.S. domestic TV business, would bring the total TV content sales business to nearly $70 billion a year. If we further consider that up to 70 percent of that business is controlled mostly by U.S. studios, some $50 billion is shared among seven companies, for an average of $7 billion each per year.

Recently, Chase Carey, president of 21St Century Fox, reported that in 2016 the company expects to generate $9 billion, which would include its theatrical business.

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That's a serious and rich TV business indeed, and given the numbers and the growth potential, the future could not be brighter. Only five countries absorb more than 58 percent of U.S. audiovisual exports (the U.K., Canada, Germany, Japan and France). Reportedly, the value of imported drama series for 119 European broadcasters alone across 21 countries reaches $7 billion a year, or 15 percent of total programming investments, of which the U.S. takes at least 80 percent.

There are also emerging countries with large domestic TV markets such as Brazil ($14.1 billion), China ($11.3 billion) and India ($6.9 billion) that are already big consumers of American movies (with India the fourth largest and China the seventh largest) with great growth potential for TV content.

The U.S. studios' economic power, though, has to match their financial power, considering that each episode of a drama picked up by an American broadcast TV network carries a deficit of at least $2 million, which, for a 13-episode order, adds up to $26 million. Multiply that by the 29 new dramas introduced this fall alone, the additional episodes to complete the season and the newly discovered summer original programming, and it is clear that only a studio system can finance production deficits to the tune of $1.5 billion a year collectively.

Indeed, the U.S. television studios' business model is so unique that no other country has been able to duplicate or replicate it. Basically, this is because it doesn't make any business sense. Would any other TV industry in the world be willing or able to spend more than $500 million a year on development to come up with shows that have up to an 80 percent failure rate? (In the view of a former top-level studio executive, the failure rate can indeed reach 80 percent, hut the norm is just 20 percent, with large studios averaging close to 50-60 percent). And this is after having invested $240 million to produce pilots (last May out of 98 pilots commissioned to the major six U.S. studios, about 50 were actually picked up), and accumulating the aforementioned estimated $1.5 billion in deficit per year.

Fortunately for the studios, to generate cash they can also collaterize their library for financial loans and monetize them with transactional revenue. Reportedly, a TV library loses an estimated 11.4 percent of its value from year two to it, and 7.5 percent from year 12 to 21, after which depreciation virtually ceases.

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Let's do the numbers: A studio produces for its own broadcast TV network (or others) a primetime drama carrying a $2 million deficit per episode and takes a tax write-off on it. From that same show, the network grosses an average of $7 million and nets $5 million. The studio then recoups the deficit internationally (including the seven to to percent cost of doing business) and generates $1 million per episode in re-runs (off-net) in domestic syndication. In effect, an hour-long drama costs a studio $3 million, while generating...

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