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After a terrible season, Fox is destroying the wall between networks and studios

The Simpsons has made over a billion dollars for 20th Century Fox.
The Simpsons has made over a billion dollars for 20th Century Fox.
Fox

As a reminder, I'm at the summer Television Critics Association press tour through next week. If you're curious about what that means, read a quick explanation here. And follow my writing from the tour at my blog.

Since former Fox network president Kevin Reilly left his job (officially, it was his decision, but with the low ratings the network posted last season, it seems likely he isn't exactly being mourned on the lot) in May, the network has taken its time plotting out just what its future will look like. The past year has been one of the worst in recent memory, with even old stalwart American Idol plummeting in the ratings (though it's still one of the network's highest rated shows). For every bright spot, like the performance of Sleepy Hollow, there were three or four dark clouds, like the collapse of the ratings for the Tuesday comedies. It seems time for a change.

Fox has come up with an unorthodox solution. 20th Century Fox, the corporation that owns the Fox TV network, has restructured itself so that Dana Walden and Gary Newman, co-presidents of 20th Century Fox TV, will now head up the Fox Television Group, which will oversee both the studio and network sides of the business.

This is super confusing, I know, so let me break it down and explain both why this is important to the future of television and why it became the major theme of this morning's executive session with Peter Rice, the Fox Network Group CEO and Chairman, and Walden and Newman's boss. (Walden and Newman had previous commitments and were unable to attend.)

Aren't Fox TV and the Fox network the same thing already?

No. Here's why.

For a long time, television had a hard division between the entities that aired television shows (networks) and the entities that produced them (studios and production companies). The rule, until the revocation of the financial interest and syndication rules in 1993, was that the same corporate entity couldn't own both the studio and the network. For the most part, this wasn't a problem, because CBS, NBC, and ABC were their own companies. They cultivated deep relationships with specific production companies and studios.

The arrival of Fox in the ‘80s changed all of this. Fox was a branch of the 20th Century Fox corporation, which also had a TV studio (the aforementioned 20th Century Fox TV) that produced content for several networks. The network successfully argued to the FCC that not being able to bid on programming from its own studio put it at a competitive disadvantage, and Fox filled its schedule with shows its corporate sibling had developed. (One of them, The Simpsons, is still with us today.) The same went for cable networks, which were often simple ways for media corporations to stake a claim on the television landscape.

This, argued the existing networks, placed them at a competitive disadvantage (something they had been arguing since the late ‘70s anyway), and soon, the fin-syn rules were abolished. Within a few years, every network had established its own production arm, and within a few years after that, they were all owned by or had absorbed older media companies. And then, of course, they were stocking their networks with shows from their corporate production partners, which maximized the chance to make money off those shows.

Why is that the case?

The reason for this is simple: a television show makes very little money on its first-run broadcast, when the prices advertisers pay to show commercials are lucky to cover the bare production costs of the show, to say nothing of marketing and other expenses. Therefore, the studio absorbs the costs of production, while the network pays that studio a so-called licensing fee, which grants it the exclusive right to broadcast the program a certain number of times (or over a certain period) before those rights revert to the studio.

This means the studio usually runs at a deficit during production, because the real money is in the long haul. In the past, this meant being able to sell the show into syndicated reruns, when local stations and cable networks would purchase rebroadcast rights, often at a substantial mark-up for a big hit program. This tended to happen after four or five seasons (usually at a number between 88 and 100 episodes, though it was smaller for shows aimed at kids), and when effective, it turned into a money-printing machine for the studio. (For instance, the valuation of both The Simpsons and Family Guy is in the billions for 20th Century Fox.)

This shift toward networks running their own content has been accelerating recently.

Because network television is collapsing, right?

Yes! But there's more.

Twin forces are pushing more and more networks toward owning more and more of their own content (or, more accurately, licensing content from corporate siblings, but you know what I mean). The first is that the ratings for network television are collapsing at an astonishing rate, at least for live broadcast. Once you add in all viewers for programs, viewership is roughly level with where it was when the millennium began, but advertisers are skeptical of paying top dollar for viewers who might skip the ads on their DVRs, or for streaming where the viewership is still significantly lower than it is for first-run broadcast.

The second is that there are many, many more ways to make money off of a program on the studio side now. In addition to syndication deals, there are now cable rebroadcast deals, which can sometimes kick in before traditional syndication deals and give a particular cable network the rights to reruns of old shows before other cable networks get them. (TBS has a deal of this sort in place for The Big Bang Theory right now.) There are streaming deals, where one of the major streaming services pays premium to get exclusive rights to a show. (Netflix's purchase of exclusive rights to New Girl is likely one of the reasons that show was renewed early, even though its live ratings are collapsing. The show's ratings increase by an average of 121 percent when the first month after broadcast is taken into consideration.) And there are foreign sales, which the studio can also capitalize on while networks cannot.

There are other ways to make money off of these programs, but these are the three most prominent ones. And studios are inventing more and more ways to make that money with every year that passes. Meanwhile, networks are limited in that they can only make money off of ad sales, for the most part. (Networks are also negotiating to get treated more like cable networks and make money off of being default parts of cable packages, but that's a subject for another time.)

Since ratings are collapsing and advertisers are skeptical about paying for DVR and streaming viewing, that limits networks' ability to be profitable in and of themselves. Thus, they are better off working as distribution arms for their corporate siblings. That helps everyone in the same corporation maximize profits from one program as much as possible. (And make no mistake: a successful television program is wildly, wildly profitable.)

The future of television will probably necessitate the network middle man slowly disappearing, because it's an inefficiency the system likely doesn't require. But for now, this system is still profitable enough to be perpetuated for a little while longer.

What does all of this mean?

Fox is betting, like ABC, that being part of a larger corporate monolith is the best way to ride out a few years in the bottom half of the network rankings. The separation between first and last among the big four networks is smaller than ever before, and that means everybody is in the same boat, to some degree. If everyone's ratings are abysmal, then the best way to fix that problem is make sure it just doesn't matter.

What's more, having the studio and network in the same place also maximizes the ability of that studio to sell to other networks, a seemingly counterintuitive process that still happens, perhaps because some shows don't make sense for certain networks. (Homeland, for instance, is a Fox  studios production, but it would never make sense on Fox the network. That's why it's on Showtime.) It was a point Rice was only too happy to keep returning to over and over again. Fox might be consolidating its television operations by putting Walden and Newman in charge of most of them, but it's still going to be business as usual. For now. And it's that "for now" that will be the big question for everyone in the next decade.

I heard Fox was killing pilot season. What did that mean, and does it still apply?

Before he left, Reilly decided that one of the ways to combat the changing face of television was to get rid of the traditional pilot season and switch to a year-round development cycle. Instead of everybody making a bunch of pilot episodes for new shows at the same time, in Reilly's plan, a pilot would be made when it was ready to be made, or a show might even be picked up without shooting a pilot, simply based on a promising set of scripts.

Many suspected Rice would back away from this key incentive of Walden and Newman's predecessor. And while he said he thought Reilly had been "misinterpreted" and suggested it wasn't true that Fox would never do pilots, Rice also reiterated the desire for a year-round development cycle, on needing to be flexible to work with the changing face of television and the numbers of actors who want to work in the medium now. (Will Forte, for instance, is doing Last Man on Earth at Fox pretty much because he didn't have to go through the regular pilot process.)

Fox is the last broadcast network to go at the TCA press tour, and Rice's answers to these questions underline what's been a theme for everybody here: nobody knows what's next, in a way that's unlike any other point in TV history. That's scary, to be sure, but when you're a last-place network like Fox, it can also be exhilarating. Now there's nothing left to lose.

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