The economics of a TV supershow and what it means for NBC and the industry

It is the first TV series to command more than $1 million a minute for advertising--a mark previously attained only by the Super Bowl. Its growing strength has helped a smart network dominate prime time--and news, mornings, and late nights, too. It has shattered the ceiling of what a network will pay to keep a show and even its supporting actors. It effortlessly creates cultural artifacts and major tourist attractions out of the quotidian doings of its characters. It has so permeated popular consciousness that the august New York Times's op-ed page warned recently that the show was contributing to the coarsening of American life. It will cost NBC about $120 million to bring it back for its ninth season. That's more than 10% of NBC's entire prime-time budget for 26 shows. But it probably is worth every penny, even before you start counting the $180 million or so the network will get from advertising alone.

Seinfeld is the rarest commodity in the entertainment business--a sure thing. The show's strategic importance to NBC reaches far beyond just the network's profit on the show. NBC has leveraged Seinfeld and its prime-time strength in such a way as to put considerable distance between it and other broadcast and cable networks. Indeed, by delivering the key demographics advertisers seek, NBC last year was nearly seven times as profitable as ABC, the only other network to make money in 1996.

RAINY DAY. All the while, NBC has been busily using Seinfeld-generated lucre to diversify into cable networks and international markets and to snare the long-term rights to hugely expensive future events such as the Olympic Games. "It almost defies logic what the value of that program is" to NBC, says top media buyer Betsy Frank of Zenith Media Services, who buys ad time for such clients as General Motors and Toyota's Lexus. "Seinfeld is one of the most important shows in history."

But NBC is assured of the show for only one more season, and it is gunning to build itself up so that the juggernaut continues after Seinfeld is gone. NBC CEO Bob Wright knows full well that, while NBC may be sitting pretty now, network TV is turning into a gruesome business. In 1992, 60% of viewers were tuned to one of the Big Three networks during prime time. But this past season, only 49% were watching. Viewers are defecting mainly to cable networks and upstart broadcast networks Fox, WB, and UPN.

Wright's plan is to hedge smartly against the inevitable day when his network no longer rules the ratings. Spurring him on is the unsettling knowledge that the economic underpinnings of the Big Three networks are getting rickety. NBC's ability to take advantage of its brawn will ideally propel the company into a different mode--one more profitable than the other old-line networks--in the coming lean years.

Getting Seinfeld for another season buys Wright more time. He also benefits from the financial weakness of his competitors. Right now, ABC's core network, not including its TV stations, is barely profitable and trending downward, while Fox breaks even and CBS, WB, and UPN lose money, according to Merrill Lynch & Co. media analyst Jessica Reif Cohen. Meanwhile, NBC's profits from the network alone stood at $500 million last year. "NBC has a vastly disproportionate share of the networks' profitability," Wright says. "By 1998, we'll have all of it. That's not a good thing. That tells you there is something wrong with the business if one company has all the profits."

NBC's profits don't begin and end with Seinfeld, though the show has been a big contributor. The network profit, plus the $500 million more kicked in by cable- and television-station operations, delivered parent General Electric Co. an operating profit of nearly $1 billion last year. For years, Wright has been wringing excess costs out of the network--about $400 million worth--all the while building up valuable new long-term assets.

Wright's most valuable short-term asset is undeniably Seinfeld, though the network doesn't actually own it. In a deal inked just days before May 12, when NBC unveiled its fall lineup, the Peacock Network agreed to pay more than $5 million per episode to bring Jerry, Elaine, George, and Kramer back for at least one more season. The sitcom is now the most expensive regular series in television history. As the "Hallelujah Chorus" from Handel's Messiah resounded through an auditorium filled with advertisers as the network presented its new fall schedule, NBC Entertainment President Warren Littlefield did little to downplay the importance of the show to the network. "Praise the Lord!" Littlefield shouted. "Seinfeld's back."

The return of the show was anything but assured, since the three supporting-cast members had demanded a combined $66 million for their services. But after the concerted efforts of the NBC brass, featuring the offering of GE stock options and an appearance by GE Chairman John F. Welch, a deal was struck to pay Jason Alexander, Julia Louis-Dreyfus, and Michael Richards $13 million apiece for the season. Star Jerry Seinfeld had already agreed to return. His price tag: $22 million as an actor, writer, and producer, plus a cut of the profits.

PARADOX. Seinfeld's audience actually shrank a bit in the past season, while NBC's total audience shrank by a sobering 10%. Even so, the network handed in a stellar financial performance (charts, page 120).

What's going on? Paradoxically, as the big networks lose viewers, advertisers will pay more for the shows that reach a huge audience in one fell swoop. NBC's top programs--such as Seinfeld, ER, and Friends--are the closest big advertisers can get to achieving critical mass. This is not just about pure reach, though. Seinfeld is the No.1 comedy, sure, but it also has cachet: Advertisers want to be at the most exclusive party. "There's so much coming at people, and they're tired of it," says Philip Guarascio, vice-president for advertising and marketing at GM. "So when you look at putting together ad plans, you have to account for media fatigue. What is it that wakes you up?" Big shows like Seinfeld and ER. Increasingly, undistinctive, unpromoted programs will fall out of favor.

That advertising benefit isn't limited to Seinfeld. The show's nine 30-second ad slots each week have become so precious that blue-chip advertisers often agree to buy time on the network's less desirable shows just to get on Seinfeld. Advertisers' fever over Seinfeld means that other shows on NBC get a spillover pickup in ad rates. "They act like they're giving away their children when they [sell time on] Seinfeld," says Paul Schulman, who buys about $175 million worth of TV time annually.

In fact, Seinfeld has changed the economics of television, and the effects are felt widely. At 11 p.m. on a recent Wednesday night in New York, a six-year-old Seinfeld rerun (about a white cashmere sweater with an unfortunate red dot) clobbered all the network-affiliate news shows, even WNBC's. The lucky station that has the syndication rights to Seinfeld reruns in New York, WPIX, even won the February Nielsen sweeps for the entire late-night time period. "Without exaggeration, it has changed viewing patterns in New York," exults WPIX station manager Paul Bissonette, who notes that the station is getting prime-time-level ad rates for the reruns.

Then there's the ripple effect on the demands that TV stars might now make for big raises. The industry is abuzz over the rich packages snared by the Seinfeld stars. "We've been talking a lot among ourselves about this," says Brooke Shields, star of Suddenly Susan, which will lead into a Monday night of comedy on NBC. "The stakes are higher now for everyone." Naturally, the people left picking up the tab for pricier talent are less sanguine about the idea. "Everyone wants to reach out and strangle NBC," says Jack Fentress, director of programming at Petry Media Corp., which sells commercial time for TV stations. The eye-popping Seinfeld paychecks "create problems not only with supporting actors but with leading actors in hit shows that aren't making as much as Seinfeld's supporting cast. Who's going to absorb these costs?"

HUMBLE START. Ironically, Seinfeld was a program NBC barely wanted when it premiered in 1989, and the series' ratings were middling for years. Director Rob Reiner, head of Castle Rock Entertainment, the show's producer, had to implore NBC execs to give the show a chance. Despite its humble beginnings, Seinfeld became a hit in 1993, after NBC gave it a break and scheduled it after the popular Cheers on Thursday nights. It was a tried-and-true tactic for the network, which has been dominant on Thursdays for more than a decade, as it funneled the strength of The Cosby Show into Family Ties, Cheers, and then Seinfeld.

Since then, Seinfeld has returned the favor. Shows placed in the half-hour before and after Seinfeld's 9 p.m. Thursday berth have benefited, because millions of viewers got into the habit of watching them. "You could read the phone book after Seinfeld and get a 25 [percent] share," says Steve Sternberg, a partner at BJK&E Media Group, the media-buying arm of Bozell Advertising. Over the years, Frasier, Mad About You, Caroline in the City, and Suddenly Susan have enjoyed the Seinfeld Effect. It's not foolproof: The Single Guy was canceled this season after it failed to make it on its own. Nonetheless, of the 17 new or returning sitcoms on NBC's new schedule, seven are or were placed next to Seinfeld at some point. Anchored by Seinfeld, "Thursday is our Cape Canaveral," notes Littlefield.

NBC furthered its ratings dominance by seeding new nights with Seinfeld spore. Frasier has made NBC strong on Tuesday, and the network hopes that Caroline in the City, Suddenly Susan, and The Naked Truth will do so on Mondays this season.

What's more, NBC has neatly turned Seinfeld's Thursday-night dominance into a dominance of prime time, which in turn lures viewers to its offerings in mornings, late night, and evening news. NBC reigns in all those areas. With the network's programs delivering such high ratings, NBC wins a second time as its own 11 TV stations, with their 55% margins, send huge profits back to headquarters.

To keep the party rolling, Wright's top entertainment executives--Littlefield and president of NBC West Coast Don Ohlmeyer--must deliver a bumper crop of new shows. One or two of these, they hope, will take off, a la Seinfeld. Historically, stale shows and a weak development slate have toppled other high-flying networks. And loss of momentum at NBC would be crippling. The network uses its promotional platform to whip up excitement for such NBC-produced extravaganzas as the recently aired Odyssey, which was one of the highest-rated shows that week. It also needs to encourage NBC viewers to watch its cable networks, MSNBC (a partnership with Microsoft Corp.) and CNBC.

NBC's top sports executive, Dick Ebersol, has been able to use the gusher of profits to make farsighted and hugely expensive buys of key sports programming, such as all the Olympics (excluding the next winter games) through 2008. That gambit is designed to provide NBC with ratings momentum for years to come, offering a boost to its regular programming in prime time and elsewhere, should ratings falter.

But Wright has been doing something else, too: For years, he has been quietly diversifying NBC away from its highly cyclical base, building up other assets--such as cable networks, Internet services, and international channels. Top business-development and cable executive Thomas S. Rogers has spent nearly a decade amassing a portfolio of nonbroadcasting assets now worth around $5 billion.

NBC's oldest cable venture, business channel CNBC, is available in 61 million households, though its ratings are modest. NBC spent $220 million before it broke even, but now CNBC's profits are growing rapidly, from $85 million in 1996 to a company-forecast $120 million this year. Cable networks make money in two ways, through ad sales and fees collected from cable operators for each home served whether viewers are watching the channel or not. That helps explain why, as an asset, CNBC is valued at between $1.5 billion and $2 billion.

When NBC launched its MSNBC cable and Internet joint venture with Microsoft, it was at almost no real cost to the network. It had acquired hard-to-get carriage on cable systems as part of its retransmission-consent negotiations with cable operators and had launched a low-rated chat channel, America's Talking. The $250 million that NBC expects to contribute to MSNBC until the venture breaks even is quite close to what Microsoft paid NBC to form the venture. Launched less than a year ago, it has tiny ratings and is not yet turning a profit. But because it reaches 35 million homes, MSNBC has an asset value of about $1 billion.

TOEHOLDS. Acquired for very little cash, NBC's other nonbroadcast assets include stakes in more than a dozen other cable networks, including Arts & Entertainment Television, Court TV, and American Movie Classics, as well as 25% ownership of Madison Square Garden, the New York Knicks, and the New York Rangers. It also has built international toeholds in Europe and Asia, but these efforts are still investments that cost the company about $65 million last year.

NBC's building of cable networks, which compete with local NBC stations for eyeballs and advertising dollars, is cause for some tension. Many of its 215 affiliates are unnerved by NBC's reuse of network programming on its cable channels, such as a version of Dateline on CNBC. But here, too, NBC's ratings strength buys it far more breathing room than it would otherwise have. With ratings and ad revenue humming and with the Olympics locked up (at a cost to NBC of nearly $4 billion) for more than the next decade, affiliates have trouble staging much fuss. It's this flexibility that has let NBC expand its cable holdings vigorously and, ultimately, reduce its dependence on broadcasting.

While these cable assets are enormously valuable and important to Wright's long-range plans, they don't yet generate much in earnings. They are delivering about $150 million to NBC's bottom line, says an NBC executive, while the network alone saw profits of approximately $500 million last year. Admits Wright: "There is no way I can offset [a huge decline in that high level of profitability] with earnings from other assets on the spur of the moment." Over time, he's confident the earnings from the cable networks and from NBC's channels in Europe and Asia will contribute what an "average" network would bring in during the course of a year. But he's not there yet.

That's why he still needs--and is willing to pay for--Seinfeld. Who knows, this year might see the debut of the next ratings powerhouse. The network's best hope this go-round is Veronica's Closet, a sitcom starring Cheers vet Kirstie Alley and produced by the team responsible for Friends and Dream On. It'll be hard to miss Veronica's Closet this fall. It's on right after Seinfeld.

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