Payout Time for the Peacock Network

In the current world of network television, even being No. 1 means having to try harder--and, especially, having to pay more. Just ask ratings champ NBC.

NBC’s Peacock has ruled the prime-time roost the past two seasons but now faces the chore of paying a lot more than chicken feed for the programs that put it on top.

The result has been a dizzying series of negotiations related to some of TV’s most popular series, beginning in April with NBC’s three-year renewal of “Frasier” for a price that averages out to about $3 million an episode. All told, the agreement with Paramount, which produces the show, represents a commitment by NBC of more than $200 million, based on the 24 episodes produced each season.

Renewal deals followed with the studios behind “Friends,” picked up through a sixth season at a substantial increase; and “Seinfeld,” which garnered a record of roughly $4 million an episode for the coming year, covering the major raises received by Jerry Seinfeld and his three co-stars.

Later this year discussions will commence regarding future seasons of “ER,” which may send network executives in search of a doctor, or at least some aspirin. NBC is getting a bargain now for TV’s top-rated drama, as the network is estimated to be paying no more than $1.5 million for the right to broadcast each episode, when the show generates more than $1 million per minute of advertising time.

Industry sources say the network will likely have to more than double that fee to keep the show, since production company Warner Bros. Television can potentially test the appetite for “ER” at other networks. The Emmy-winning series would represent a major prize for any broadcaster and brings NBC ancillary benefits the studio is sure to raise in seeking to up the ante--among them the vast audience the show feeds into late newscasts and “The Tonight Show With Jay Leno,” which delivers its biggest ratings of the week on Thursday nights.

The price tag for such programs has climbed to unprecedented highs even as network ratings sink to historic lows. Yet the industry consensus is that while the business has gotten worse for everybody, NBC’s problems are nice to have relative to those plaguing television’s economic structure in general.

Both NBC executives and industry analysts point out that the network is at least paying for success, as opposed to shelling out ever-larger sums for new programs that often fail.

“The cost of the mega-hit has increased,” acknowledged Don Ohlmeyer, president of NBC, West Coast, who declined to discuss specific figures on any of the shows. “That’s the nature of all businesses. When you have a successful baseball team and you win the World Series a few times, you have to pay [the players] what the market will bear.

“The whole goal of the business has been to find hits. This isn’t something that was invented yesterday. When ‘Roseanne’ was a hit, [ABC] had to pay through the nose for it.” (ABC agreed to pay more than $3 million an episode for “Roseanne” under a long-term deal reached in 1994.)

That sports metaphor seems especially valid. In both fields, “stars” (in TV’s case, hit series) have limited careers and tend to decline with age. Just as pro teams look for the next hot rookie prospect, networks must gradually replace their big scorers to stay on top and risk falling off their perch by hanging on too long to veterans.

Unlike football or basketball, however, networks don’t operate under a salary cap when it comes to signing all-stars; moreover, new hits have become increasingly elusive as more channels and other time-consuming alternatives nibble away at the audience. Costs have gone up, then, as viewership keeps declining.

Balancing that grim scenario, however, has been a steady rise in ad revenues. Even with the audience scattering, networks remain the only avenue through which advertisers can reach 30 million viewers at once--as “ER” and “Seinfeld” do routinely. Rates for network time have remained high precisely because many advertisers would rather reach that audience in one fell swoop than spread their money among 20 cable channels.

NBC’s hits thus command premiums from media buyers, with time in “ER” and “Seinfeld” costing in excess of $1 million per minute and movie studios particularly eager to run ads Thursdays to tout films opening that weekend. Led by that night, the network sold a record $2.15 billion in prime-time advertising for the coming season, roughly $600 million more than its nearest competitor, ABC.

“The ratings are coming down, but the revenues are coming up. That’s the key thing,” said Arthur Rockwell, an entertainment industry analyst at Yaegar Capital Markets. “Rates that advertisers pay are still going up, which is what makes it viable. . . . It’s diminishing marginal [profit] returns, no doubt about that, but what’s the alternative?”

Ohlmeyer insisted that NBC will “walk away” from deals that don’t make sense, but that may be easier said than done given the stark reality of how hard it is to find programs TV viewers want to see.

Prime-time mainstays “Roseanne” and Fox’s “Married . . . With Children” were let go after last season largely because of their expense, but ratings for both had slipped far enough that the decisions weren’t especially difficult. By contrast, “Seinfeld” is in top form in its eighth year.

“If something works, you stay with it,” Rockwell said. “It’s going to cost you more, but to go with something else is to risk disaster.”

“What kills you in this business is failure, not success,” Ohlmeyer said. “I’d much rather pay a little bit more for a ‘Friends,’ ‘Seinfeld’ or ‘ER’ than a show that doesn’t perform.”

NBC finished third in prime time for the 1993-94 season before those shows spurred its dramatic turnaround. While “Friends,” “Seinfeld” and “ER” dominated Thursday, “Frasier” established a new Tuesday beachhead--in the process cutting into the audience for ABC’s “Home Improvement.”

With hits harder to come by, the value of such franchise shows goes beyond what they bring in from advertisers. The half-hours between “Friends,” “Seinfeld” and “ER” virtually assure new programs a wide audience.

Some within the industry are waving caution flags about what the negotiations will do to future demands, with reports that “Home Improvement’s” Tim Allen is already seeking a contract that would rival Jerry Seinfeld’s in order to return next season. Others say few shows or stars are positioned to raise such concerns.

“There’s a tiny handful of programs that can command these enormous returns,” said Harold Vogel, an entertainment industry analyst at Cowen & Co. “That is the control factor.” Although “Seinfeld” set the bar higher, he added, “any network would be happy to have five ‘Seinfelds.’ ”

NBC may be able to rationalize the price of its hits, but if trends continue and ratings keep falling, the networks will find themselves spending more extravagantly just to sustain mediocrity. Small wonder that, as the millennium approaches, even being the ratings leader doesn’t look like much fun.

“This stuff isn’t supposed to be fun. This is a business,” Ohlmeyer said. “All things being equal, I’d rather be first than third.”

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The Price of Success

The per-episode cost of hit series has gone up at NBC, with negotiations to come later this year on one of its biggest hits.

“Frasier”: $3 Million

“Seinfeld”: $4 Million

“ER”: ?

Source: Industry estimates