BY:Neil J. Rosini, Michael I. Ruddell
(Originally published in the Entertainment Law column in the New York Law Journal on Wednesday, January 2, 2013)
A recent announcement by the CBS television network that it ordered on a “straight to series” basis 13 primetime episodes based on the book “Under the Dome” by Stephen King (the story of a New England town that finds itself sealed off from the world by a transparent force field) helps illustrate programming cycles in the television industry as well as its current state. A bit of television history supplies a backdrop to where the business is today and why the CBS announcement indicates a notable departure from the way most free television network deals have been made.
In the early years of television, network programming was determined to a large extent by sponsors and their advertising agencies (e.g. “Texaco Star Theatre” with Milton Berle). After the quiz-rigging scandal in the 1950s, however, the networks assumed greater control over selecting and producing the programs they broadcast.
Across the decades that followed, the networks were dominant. As recently as 1980, more than ninety percent of television viewers on a given evening were watching ABC, CBS and NBC, the three then-existing networks. Even if a producer successfully sold a program to a network, the network generally controlled the valuable syndication rights, often through an affiliated entity. In 1970, the FCC adopted the Financial Interest and Syndication rules that precluded the networks from owning prime-time programming and from syndicating series in which they had a financial stake to local stations in the U.S. after the network license period expired.
The development of new cable and satellite technologies further changed the television landscape. These included the development of basic cable systems, pay cable channels such as HBO and Showtime, direct satellite distributors, and home video devices. These alternatives to network programming drastically diminished the percentage of viewers watching networks during prime time. (More recently, streaming services such as Netflix and Hulu, presented further challenges to network hegemony.)
With network power fragmenting, the Financial Interest and Syndication Rules were abolished in 1993. No longer prohibited from owning and syndicating their own programs, networks were free to produce programs again, including scripted series like comedies and dramas, but the costs were high. Recoupment of those costs through syndication of rerun rights to local television stations and cable networks became more difficult for series that were not hits. A remedy appeared in the form of programming more unscripted series like game shows, reality shows, and news magazines and fewer scripted series, like comedies and dramas.
Between 1991 and 2011, scripted network television hours in primetime (including movies) fell by almost ten percent, and broadcast time for scripted one-hour shows fell by four hours in 2011 alone. By 2012, unscripted programs amounted to about a third of the primetime hours available including hour-long series like “Dancing With the Stars,” “Survivor,” “The Biggest Loser,” “The Amazing Race,” “The Voice,” “The X Factor,” “American Idol” and “Extreme Makeover.” (Some of these programs even appear more than once per week.) The category has proven irresistible for networks because of strong ratings, relative simplicity of production, and correspondingly low production budgets. Even though the syndication market is weak or non-existent for unscripted primetime network programming, the reduced production cost more than compensates.
On cable, however, programming of scripted dramas proliferates. As in the past, pay cable has maintained a schedule of new dramatic series like “Boardwalk Empire,” “Game of Thrones, and “True Blood” on HBO and “Homeland” and “Dexter” on Showtime. But basic cable has been making its mark, too, with critically acclaimed series such as “Mad Men” and “Breaking Bad” as well as “The Walking Dead” on AMC and “Royal Pains” and “Burn Notice” on USA Network. The six-hour mini-series “Hatfields and McCoys” is doing well on the History Channel, which will also exhibit a mini-series about Bonnie and Clyde, now in production. A number of these series enjoy great popularity and are lauded for their excellent writing — by writers whose services were not required for unscripted network programming.
Even Netflix’s subscription video-on-demand (SVOD) service has become a competitor in this space. Its exclusive presentation of “House of Cards,” a political drama with a nine-figure budget for 13 episodes starring Kevin Spacey, who also developed the series, will premiere on February 1. In another divergence from the ordinary, Netflix will make available for streaming all 13 episodes in this series on the same premiere date. (Netflix did much the same thing early in 2012 with its first original series, “Lilyhammer,” about a U.S. mobster making a fresh start in Norway, when it offered all eight episodes in full on the same day.) Earlier, Netflix acquired U.S. debut rights for an historical drama series entitled “Borgia” (not Showtime’s “Borgias”), a European production in English guided by the American showrunner, Tom Fontana, who created “Oz” and wrote and produced other well-known network dramatic series in the U.S.
These non-network program sources broke away from the broadcast pattern of premiering in the fall or winter and exhibiting new programs primarily during a “broadcast season” that typically ended in spring. With the pendulum swung to one side, it seemed inevitable that a free television network would nudge it back by breaking away from broadcast network patterns itself.
“Under the Dome”
The CBS announcement of its order of “Under the Dome” includes several departures from the customary network approach. The typical way that network scripted series have been produced begins in a development process with submission of a concept by an outside producer, or through a network affiliate like ABC Studios. If the project is of interest, the network will commission either a story or a pilot teleplay; and if the writing is successful, the network might commission a pilot to be produced. The network will have the option for a period of time to elect whether to order a minimum number of episodes of a series based on the pilot. If it does so, the network will pay a license fee for each episode that it orders, which customarily increases each year that the series remains on the air. The supplier will be responsible for any amounts in excess of the license fee that is paid, the theory being that if the series is successful, the supplier will be able to recoup its deficits and a great deal more from the syndication of the series in the U.S., the licensing of rights in territories outside of the United States, home video uses, the exploitation of merchandising rights and other rights such as soundtrack rights.
According to press reports, the order of “Under the Dome” by CBS diverges from this customary path in several ways. First, it was ordered “direct to series” (that is, without a pilot). Also, the series is scheduled to begin in summer, which is a departure from the customary “broadcast season” approach.
Another difference from the typical pattern is the way the series is being financed. Variety reports that “Dome” episodes will be financed in part by making them available for streaming through an SVOD service (such as Amazon, Netflix or Hulu), shortly after the episodes premiere on CBS. This approach contrasts with CBS’s usual “tight rein” on exhibitions of its programs online, out of concern that they may reduce primetime ratings and the value of future exhibitions via broadcast or cable syndication. But the competition among SVOD platforms and the large funding at their disposal, reportedly caused CBS to re-think its approach. Production costs of “Dome” also will be covered by pre-production sales to international exhibitors, rather than selling those rights at a later date. The result is reportedly a “high-end” production with a budget of approximately $3 million per episode, even though CBS will pay a lower-than-usual license fee of about $1 million per episode. CBS is promising “in-season” production values notwithstanding fewer viewers watching programs in the summer season (and commensurately lower advertising revenues). 
Selling rights prior to production to foreign exhibitors helped “Dome” producers lock in series financing and reduce risk. But taking this route also eliminated the significant payments that can result when a series first earns its place as a domestic hit before being offered outside the U.S. to exhibitors who have not only seen the series but also the public’s favorable response. Similarly, by enabling SVOD providers to stream the series promptly after episodes premiere on the network, the producers might not realize the level of income that would have flowed from syndication to broadcast and cable networks if the series is a hit.
The financing mechanism also might affect the contingent compensation payable to those entitled to share in it (which might include, among others, the showrunner, the actors, and the author of an underlying work). This is because, as noted above, sources of revenue from off network exploitation are being used in part to cover production costs and may not appear in gross proceeds at all for the purpose of computing adjusted gross receipts or net proceeds in which the participant would share (e.g., gross proceeds less distribution fees, distribution expenses, and production costs with interest and overhead charges).
Of course, there still might be significant financial benefits in addition to sharing in contingent compensation for producers and talent in connection with a successful series. For example, even though we do not know the nature of his financial arrangements, it would not be unusual for an author of the stature of Stephen King to receive a payment for the option of the property, a purchase price for the acquisition of the property, a rights fee for each episode which is produced, and perhaps a fee per episode based on his services in some production capacity, for example, as one of the executive producers, all in addition to a percentage of contingent compensation.
The increase in scripted one-hour dramas, particularly on the cable networks, has been good news for writers who otherwise would face severely diminished opportunities to practice their craft. The changing paradigm may expand those opportunities. It also has the effect of complicating rights and talent arrangements, requiring attorneys and agents to keep abreast of new developments.
 Hindman, Douglas Blacks; Wiegand, Kenneth, “The Big Three’s Prime-Time Decline: A Technological and Social Context,” Journal of Broadcasting & Electronic Media, March 2008.
 Howard, Pat, “The Scripted TV Project: 1991 vs. 2011,” August 18, 2011, at http://www.thetvmanifesto.com/2011/08/the-scripted-tv-project-1991-vs-2011.
 Handel, Jonathan, “SAG Primetime Market Share Set to Fall Below 50% This Fall,” Hollywood Reporter, March 25, 2012, at http://www.hollywoodreporter.com/live-feed/sag-aftra-pilot-market-share-303875.
 Littleton, Cynthia, “Sony Pictures TV busy with telepics for cable,” Variety, December 2, 2012, at http://www.variety.com/article/VR1118062969.
 Masters, Kim, “David Fincer Battles Over Budget on Netflix’s ‘House of Cards,'” Hollywood Reporter, March 7, 2012, at http://www.hollywoodreporter.com/news/netflix-house-cards-david-fincher-media-rights-capitol-297444.
 Littleton, Cynthia, “CBS sets innovative order for ‘Under the Dome,'” Variety, November 29, 2012, at www.variety.com/article/VR1118062857.