The Leno gamble - what's really at risk

This week's TIME magazine has Jay Leno on the cover and describes "Jay Leno is the Future of Television" in its headline. The portion of the article that is not directly about Jay Leno is devoted to the same discussion offered here in November of 2007 in the series of posts headed The Screen Writers Guild strike, technology, and the future of scripted television.

Near the end of the article is the following paragraph:

Maybe the fact that NBC is, essentially, doing what cable channels do (that is, reducing costs and targeting its scripted shows) is a harbinger of the day when it, or another big network, will literally become a cable channel, trading the system of local affiliates for the freedom and licensing fees of cable.

That is the backhanded recognition of what NBC is putting at risk. As I wrote in April NBCU has no intention of serving the interest of NBC affiliates. The Washington Post's TV columnist Lisa de Moraes observed this week quite correctly:

NBC is now playing a different game, with new rules. That game is called Programming to Margins. NBC suits think they can win by slashing costs to rack up points with shareholders and thus declare a new form of victory in which you can win even if you haven't had a bona fide hit in years.

NBC suits know Leno's new comedy show won't attract as many viewers as the scripted dramas the other networks have scheduled at 10 p.m. weekdays: "CSI: Miami," "Private Practice," "The Mentalist," etc. They concede that this means advertisers will not pay as much for ad time on Leno's show as they will for ad time in those scripted series. The execs believe they have guaranteed their own success if only because Leno's show will cost so much less to produce. Leno recently bragged to a gathering of reporters that he can make a whole week's worth of "The Jay Leno Show" for the price of one episode of "CSI: Miami."

GE management which includes NBC management has created lowered expectations, particularly among shareholders. If the profit line on the NBCU division known as NBC rises for two quarters because of the decision about Leno, GE management has succeeded. That doesn't mean that the Leno Show has succeeded as entertainment.

Over the next three years, the network broadcast TV station properties will shift to meet the ratings as the NBC-owned New York station already has by reducing news and creating locally marketable local oriented programming. If anything, they are focusing on creating a record of delivering live-eyes on ads.

NBC owns broadcast stations in the following eight (out of 210) DMA's (designated market area) representing 25% of the nation's "TV homes":

1. New York City
2. Los Angeles
3. Chicago
4. Philadelphia
5. Dallas/Fort Worth
6. San Francisco/Oakland/San Jose
9. Washington, D.C./Hagerstown, MD
16. Miami/Ft. Lauderdale

But those large-population DMA stations aren't affiliates, they're owned - they have the resources of NBCU and GE plus large numbers of viewers within the DMA. In the remaining 202 DMA's representing 75% of "TV homes" somebody else owns the NBC affiliate stations. Consider the situation of the affiliates in the following DMA's:

107. Ft. Wayne
108. Reno
109. Youngstown
110. Tyler-Longview
111. Springfield-Holyoke
112. Boise
113. Sioux Falls(Mitchell)
114. Lansing

In these much smaller population DMA's, even if they captured the entire 5 pm - 6 pm viewers available, the affiliate cannot deliver anything resembling the number of eyes the NBC property in New York City can guarantee to advertisers as a minimum for that time slot where they've put new locally created programming. Nor are there the number of local businesses from which to solicit ads. So those affiliates aren't going to have the flexibility to deal effectively with the loss of advertising income from their 10 pm network show and from their 11:00 pm news show and maybe even from their 11:35 pm NBC late night show.

Five years from now these small DMA affiliate stations may be sorry they kept their NBC affiliation instead of embracing the NBC "Programming to Margins" business model as their own.

That model suggests that the smaller DMA stations may want to drop their expensive NBC affiliation in favor of a syndicated and local programming schedule costing 20% of their network affiliation, which would allow them to retain 100% of whatever advertising revenue they can generate.

Losing up to 50% of the "TV homes" is the long term risk NBC is taking by changing it's model from that maintained by CBS and ABC to a new model. It is not even that model of 10-11 pm local programming used by Fox which benefits the affiliates.

And if NBC longs to become a cable channel as TIME speculates, what will it do with its owned local stations? Those stations derive much of their current value from NBC programming. Without it, the value of these assets would plunge.

In the short term, NBC's Leno move may work for NBC within the GE corporate style. But it may not work for the affiliate stations. And realistically, if it doesn't work for the affiliates, it won't work for the NBC-owned stations. Sure NBC could become a cable channel but that won't help with the loss of asset value and the loss of goodwill in the broadcast industry.

Unlike the manufacturing properties owned by GE, maximizing quarterly profit margins within a 24-month or less window can't guarantee retaining the value of NBC over the five-year period. Sometimes accepting less profit for four years is a better five-year long-term strategy. It most certainly would have been for GE's banking properties and it's there that GE needs to look for helpful management cues for NBC, not in its aircraft engine division.