Chapter 10
Into the Henhouse
They knew how to deal with advertisers, with local station affiliates and independents, with running news organizations, and with the entertainment component that made up a large part of the product they delivered to consumers. A fourth network, started by the engineer Allen DuMont, whose background was in the set manufacturing part of the business, lasted into the 1950s but then disappeared. Other efforts by entertainment companies like Paramount Pictures to establish themselves in the network broadcast game did not last very long. As it evolved in the three decades after the end of WWII, the network broadcasting business was only one segment of the complete industry that brought news, sports, entertainment, and advertising—which paid for the rest—into the American home
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The networks and the local stations produced national and local news, sporting events, and a range of other shows. The major entertainment pieces that filled the evening (prime time) hours—the comedies 喜劇, dramas, and made-for-television movies—they bought from the studios. The movie studios already had the experience and the infrastructure to produce this fare, and they leapt at ( 抓住機會) the opportunity to grow a new revenue stream after the government ended their direct ownership of movie theaters on antitrust grounds. 反托拉斯
The glamour of the movie business, even with the “movie” confined(侷限在) to the small-screen world of television, attracted a number of smaller players into the production business, to compete with the established studios. There was no shortage of creative talent pitching show concepts to the networks.
The networks bought the shows they approved from the production companies, or rather, they bought enough episodes to see if the program would find an audience. If it did, they contracted for another round. The networks paid the producers between 80 and 90 percent of the producers’ costs, leaving the producers to look elsewhere for full cost recovery and a profit. They found it in the syndication market. Regulations severely limited the number of prime-time shows a network might own for itself. The rest belonged to the producers, who were able to sell the rerun rights to syndicators. Syndicators put packages of shows together and resold them to local stations and even networks to run after the popularity of the shows had been established. To qualify for syndication, a show needed to last for sixty episodes, and most did not qualify. Those that did, however, provided revenue for the producers. By the 1970s, more than half the total revenue of the film studios came from its television productions: shows sold directly to the networks; syndication sales; made-for-television movies; reruns of old films.
Government regulation limited the number of local stations a network could own. Recognizing that economies of scale might make television distribution a natural monopoly, and fearful that control of major sources of news might ultimately rest in very few hands, successive administrations had allowed the companies in the business to expand but retained some upper limit. Even after the absolute number of VHF stations was raised from five to twelve, the networks were still prevented from reaching more than 25 percent of the population through their own outlets—the “owned and operated” stations. But they struck “affiliated” deals with many local stations, each of whom was committed to a single network carrying many, but not all, programs from that network. It was cheaper for the local stations to accept these popular programs than to find alternatives with the same appeal. Independent companies in the business of owning affiliates faced the same limitations on ownership as did the broadcast networks. The owned and operated and the affiliated stations were more profitable than the independents. They spent more on local programming, like news and features, and had larger audiences. The independents had to rely on reruns, old movies, local sports, and other shows with narrowly focused audiences.
The affiliated stations did not buy shows from the networks. Revenue flowed in the other direction: the networks paid the affiliates to carry their programs. For that, the networks received the fees that came from their six minutes per hour of prime-time advertisements. The affiliates had three minutes of advertising time for themselves, which they could sell to local sponsors or national advertisers or use for public service announcements. Local broadcasting, especially for the owned-and-operated and the affiliates, was the most lucrative (最有利可圖的) part of the entire business.
This vitally important connection suggests that when we look at the networks, we need to treat their owned and operated local stations, and probably even their affiliates, as part of the same segment (broadcasting per se) of the industry. But the rest—the production firms, the syndicators, and the advertisers—were clearly in separate portions of the overall industry, no more tied than a publisher is to a book merchant or a fructose grower to a beverage manufacturer.
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BARRIES TO ENTRY ??
The first is the history of market share stability. If newcomers have not been successful in establishing themselves within the industry, and if there has been little movement in the market shares of the incumbent firms, then the chances are good that barriers to entry exist. The second feature is return on capital. If the incumbent firms in the business have been earning a higher than normal return on capital, that fact supports the claim that barriers do exist.
Our other key test for the existence of barriers to entry is high return on capital. In the two years 1984 and 1985, the three networks combined had operating income of $2 billion on revenues of $15.8 billion, or 12.6 percent. These figures include both the network business and the owned and operated stations, which, as we have seen, had much higher margins. The 12–13 percent operating margins have to be seen in the context of the capital requirements for these firms. These requirements were minimal. Most ads were sold before the start of the season, limiting investments in accounts receivable. There was no inventory. During these years, distribution of the shows to the local stations was handled by AT&T, leaving only studios and broadcasting equipment
The only source of competitive advantages not involved in creating barriers to entry around the network business was technology. The incumbent networks had no proprietary hold on the equipment necessary to capture and send broadcast signals to the television sets that had become ubiquitous in American homes.
Customer attachment was a different matter. Successful shows developed a loyal following, and they frequently lasted for years. The other networks took care not to schedule their own most popular programs at the same time. In the days before the remote channel changer (according to some historians of technology, the only rival to the ATM machine for the most humane invention in the last half of the twentieth century) a substantial portion of the viewership of one show stayed put when the hour ended and the next program began. Network executives crafted 工藝; 使詭計 their schedules to give new programs a boost by launching them in the wake of established and popular programs. Television viewers were not completely captive 受俘虜的 customers; they could and did change channels and opt for a new program in place of an established one. Still, incumbents held an advantage over entrants, who would need to accumulate an audience over time in the face of network programming competition.
The government imposed restrictions on the broadcast industry. It rationed the scarce radio spectrum to prevent signal interference, and it used regulation to preserve the public interest in competition and free access. It limited the networks, and other nonnetwork broadcasting companies, to ownership of local stations reaching no more than 25 percent of the population. This restriction created the system of affiliated stations, associated with the networks but less tightly tied than the owned and operated ones. But most of the other government policies buttressed the barriers to entry. The Federal Communications Commission licensed local stations and assigned them the frequencies over which to broadcast. In each of the largest metropolitan areas, the FCC issued no more than seven VHF licenses. In smaller locales, even fewer VHF licenses were available. These had gone, in the 1940s, to the existing radio networks, giving them a permanent leg up in their ability to reach audiences. When cable technology emerged in the 1960s, the FCC initially constrained its geographic spread and restricted subscription services, in an effort to keep access free to viewers. Gradually, however, television audiences could tune in to more channels both through cable systems and improved UHF technology.
The government also regulated the costs that the networks paid to AT&T to transmit their programs to the stations. Originally, these charges were structured so that it cost only slightly more to send a full day’s programming than it did a single hour’s. This was not a pricing scheme that encouraged small broadcasters with only a few hours of programs to distribute.
However, economies of scale were the most powerful competitive advantage that kept the networks protected from eager new entrants, and these were not changing. Network broadcasting is largely a fixed-cost business
Programming costs are fixed.
Network distributions costs are fixed.
Local distribution costs are fixed.
Local production costs, like news programs, are somewhat fixed.
Advertising costs are fixed.
A prudent executive at that time, deciding whether to invest millions of dollars to break into the network business, must have realized how formidable was this array of competitive advantages protecting the incumbents and their profit margins. He or she would also have seen that as a group, the networks were losing market share and that some of their advantages were eroding due to changes in technology (like the remote control, the VCR, and satellite transmission) and government regulations (like easing the limitations on the reach of cable services).
All moved into television at the start of the video era. Over the years, they worked out a set of tacit rules that kept competition in check and profits high. They did not undercut one another on price, either
either on what they would charge or what they would pay. Unlike the soda makers, they learned how to play the prisoner’s dilemma for the benefit of all.
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The networks’ revenues came from selling time to sponsors. They took care never to offer this time at discount prices. First, most advertising time was prebought by the sponsors under long-term contracts. Time was available closer to the actual broadcast date in a spot market; the spot rates were higher than the contract rates. Contracting was done by all three networks during a limited time period, which restricted bargaining by ad buyers. The networks did not undercut one another on price. Second, they restricted the supply by limiting the number of advertising minutes in prime time under the mantle of a public interest code of conduct. When the ads were sold, they came with an estimate of the size of the audience that would be reached. If actual viewers fell short of the estimate, the networks made good on the advertising contract by offering the sponsor more ad slots at no charge. This “make good” practice used up more of the precious minutes, tightening supply just at those times when, due to failure to deliver, demand might have fallen. If there were not enough buyers at an acceptable price, the networks either ran ads for their own shows or they broadcast public service announcements. They did nothing to encourage sponsors to wait until the For Sale signs were posted. The net result was that network advertising prices continued to rise steadily even as their joint market share of viewers eroded.
The networks approached the purchasing of programs with the same attitude they employed in the selling of advertising time. They did not vigorously compete with one another for new shows. Program ideas were shopped during a two-week period, so if one network expressed an interest, there was not enough time for a program’s producers to see if another would outbid it. When a pilot episode had been filmed, the network retained the right to turn it down, and the studios were left to shoulder the expense. These decisions also took place within two weeks, when the networks were putting their schedules together. This time-limited competition kept the networks from bidding against one another for programs that looked like winners. Nor did the networks try to woo established programs from one another. When a series did shift networks, like Taxi, which moved from ABC to NBC in 1982, it was
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