The Television Overlords

For example, NBC, in unity with its parent, RCA, decided in the mid-1950s to upgrade the size of the markets in which it owned stations. This plan served both the manufacturing interests of RCA and the broadcast interests of NBC. Inconveniently, Westinghouse, a rival in the equipment field, owned an NBC-affiliated station in Philadelphia, close to a central RCA complex. Westinghouse was told that if it wished to continue its affiliations with NBC, it must transfer its ownership of the Philadelphia station to the network and accept in its place the NBC station in Cleveland, a $3 million cash settlement, and a less desirable market. After an agonizing internal struggle, Westinghouse succumbed. The FCC, which had conducted a thorough investigation disclosing the coercive tactics, shrugged its shoulders and concluded that if Westinghouse, a giant in its own right, "agreed," the FCC had no choice but to approve the transfer. Subsequently the Justice Department and the federal courts invalidated the transfer and the FCC ultimately required that NBC return to Cleveland, and Westinghouse regained its station in Philadelphia. Westinghouse, it should be noted, is the largest of the non-network multiple owners.

While there is now and then private grousing among affiliates, direct confrontation on general policy by an individual or group of affiliates, when it occurs, is kept within definite bounds. The areas in which there is occasional dissent have to do with network compensation payments, the amount of commercial time adjacent to or within a network program permitted the affiliates, and sexy programs.

The national media market in which television is pre-eminent is a network domain. The networks create a national audience for advertisers. Each network produces or selects a program schedule for nationwide distribution; each selects for affiliation approximately 200 local stations in as many cities, reaching into practically every television household; each rents interconnection facilities from the Telephone Company to transmit simultaneously to each affiliate the programs and advertising messages which originate largely in Hollywood and New York; each network determines the time at which such programs will be broadcast locally; and finally, each network contracts with national advertisers through advertising agencies to defray the program and time costs and supply the advertising "plugs," and these monies the network shares--unevenly--with its affiliates.

Except for news, public affairs, and sports, the overwhelming proportion of network programs are not produced by the networks, but the networks acquire rights from program packagers, TV film companies, and feature-film distributors. These suppliers engage in intensive competition to persuade the three overlords to look favorably upon their works--pilot programs and story lines into which they have sunk tens and hundreds of thousands of dollars--and to bless them with network acceptance. Not surprisingly, allegations of abuse abound.

The tangible result of this complex of technical and economic arrangements is that for a single Wednesday hour, 9 P.M. to 10 P.M., advertisers pay the networks roughly $950,000 for a total of 18 minutes of advertising participations (6 minutes per network). Payments by advertisers for the network participations are not publicly disclosed, but the trade publications occasionally disclose so-called price lists used by networks in negotiations with advertising agencies. In addition to the network commercials, "nonprogram" matter includes promotional announcements, credits, public service spots (for example, the anti-cigarette ads), and commercial spots inserted locally by each affiliated station.

Advertisers compete for this opportunity because they are assured that over 32 million television homes (out of an industry estimate of 57.5 million TV homes) are tuned to the network programs during the hour--and to the accompanying commercial messages.

The overwhelming proportion of potential viewers in the other 25 million TV households are not using their sets because the family members are not at home, are engaged in other activities, or are not interested in any of the programs, televised. Only a small percentage of the public during prime time tunes to the non-network programs beamed by unaffiliated stations (usually in the score of major metropolises where there are more stations than networks).

The networks play a dual role in the system: they not only control network program production or selection and network distribution, but through their owned stations in the larger markets control network program exhibition for some 25 to 30 percent of all TV homes. In the three most important centers--New York, Los Angeles, and Chicago--only the networks themselves through their owned stations broadcast network programs.

Two financial yardsticks of network dominance are their shares of industry revenues and profits. Of the $2.275 billion television revenues recorded for 1967, 53 percent ($1.216 billion) went to the three network overlords, including their 15 owned stations. The remainder was shared by 604 other TV stations. Similarly, of the industry's profits, only slightly less than 40 percent ($160 million) went to the three network organizations.

Among the overlords, CBS and NBC are more equal than ABC. The Big Two lead in ratings, fulltime affiliates, and profits. Financial figures for the industry are published annually by the FCC, but without disclosing individual network or station expense. However, a highly regarded and generalIy accurate trade-press newsletter (Television Digest) has published this "secret" information. The figures for 1967 revealed that ABC lost $17 million on its network operations, and received only 8 percent of the combined network and owned-station profits as contrasted with CBS's 48 percent and NBC's 44 percent.

NETWORK OPERATIONS: 1967

CBS NBC ABC

Network revenues $362 $327 $264

(before federal income taxes)

Network profits 42 3 (17)

Owned-station revenues 95 95 73

Owned-station profits 35 40 29

(before federal income taxes)

Combined network and owned- 77 71 12

station profits

Percentage share of network 48% 44% 8%

and owned-station profits

(Television Digest, vol. 8, no. 19, May 6, 1968, p.1)

The above figures do not include revenues that networks gross from other television activities. For example, after programs have exhausted their network runs, high-rated series (for example, Perry Mason, The Flintstones, Gilligan's Island, The Munsters, I Love Lucy, The Twilight Zone, Route 66) are sold market-by-market to any station that will pay the price (affiliated or not) as "syndicated" programs. The networks also sell their series to television authorities in other countries, and because costs have been recovered from domestic sales, they are competitive with lower-budgeted foreign productions. Not only do the networks dominate the U.S. television program market, they are also an important source of popular American TV programming on world television.

The network system creates rich rewards not only for the overlords but for the constituent affiliated stations. Indeed the mutual interest of the networks and the affiliated stations in the system explains the vitality and durability of the network institution both economically and politically. A station can plug into a network line and receive a daily stream of programs having broad appeal to its public. Of course each station also includes in its daily schedule programs which it produces or acquires from non-network sources: notably news, weather, and sports, films produced for TV (distributed by independent syndicators as well as by networks), and feature films.

The network pays the affiliate somewhat less than 30 percent of the gross charges for broadcasting the program. In addition, the station is permitted by the network to sell a prescribed amount of commercial time within and adjacent to the network programs, the proceeds from which it does not share with the network. In a large market a single 20-second "adjacency" will bring $1000 to $1500, because the network program has created a mass audience for the station. It is no wonder that when a station sells for $20 million or more, the tangible property may be valued only at $2 million whereas the primary asset is the network contract. Several of the media barons, including Westinghouse, Time Inc., and Corinthian, have sought to persuade the Internal Revenue Service, the tax courts, and the federal judiciary that the network contracts should be eligible for amortization, thus reducing the annual tax obligations of stations they bought.

Only in the largest markets do unaffiliated stations--and usually only one such independent station per market--reap the fullness of the television bounty.

From the early days of broadcasting, the power of the network "chains" has troubled Congress, the FCC, and the Justice Department as well as disaffected elements within the industry. Various network investigations and hearings have led to restrictions: a network organization may not own or operate more than one network; it may not option the time of its affiliates; it may not contract for more than a two-year term; it may not control the rates charged by affiliates for non-network times; and it may not prevent an affiliate from contracting with more than one network. And, of course, it may not own and operate more than seven AM radio stations, seven FM radio stations, and seven television stations of which no more than five may be VHF stations. These and other network rules and regulations have corrected the grosser abuses of network power.

But network dominance persists. It persists because network service is integral to the nation's broadcast service and has been so recognized by Congress and the FCC. It persists because network service enjoys overwhelming public acceptance. A network commands talent and resource immeasurably greater than those available to any single station or groups of stations.

Networks are the source of Laugh-in, Bonanza, Mission Impossible, Mayberry RFD, FBI, Bewitched, the Bob Hope specials; of coverage of professional and college football, the World Series, the Olympics, political conventions, presidential campaigns, presidential messages, the daily news, space flights, United Nations debates, congressional hearings, and unscheduled "special events." Much of this would not otherwise be available with anything like the immediacy and thoroughness that network economics makes possible.

Earlier, the same three networks, CBS, NBC, and ABC, dominated radio. Ultimately their control was undermined, not by governmental actions, but by changing technology. Popular recordings gave stations an alternative and competitive program service. Concurrently, the superior television medium captured the night-time audiences, the prime target of network advertisers.

If networking in television is changed in the future, the cause will be technology and not governmental intervention. A prevalent myth is that if networks were licensed or directly regulated by the FCC, they would become significantly more responsive to the public interest. The truth is that most network practices are within the purview of existing FCC authority. This is particularly true because each TV network owns stations which are licensed. In some areas, the network acts "as if" it were licensed by the FCC. For example, a complaint of unfairness lodged against a network program need not be pursued with each of the 200 affiliated stations that may have aired the program but with the network that originated it.

Technological changes in the offing could alter the present network system. For example, when a satellite-to-home service becomes economically feasible, network overlords could reach the public directly without the assistance of local affiliates. This would undermine most of the television barons and, at least initially, further strengthen the power and profitability of the networks. However, if enough channels were available for satellite-to-home broadcasting, or if by governmental decree use of the available channels were required to be leased on a common-carrier basis (or even rationed), other national program suppliers could compete with the networks. Conceivably, the network could slip from being overlords to being merely greater barons than any current counterpart.

Alternatively, if all homes were connected by cable--as is technically feasible and not impossible economically within the next two decades--the networks could rent national channels and reach directly into all homes. Such a system wood open a larger number of other communications channels to competing program suppliers.

In the long run, television audiences could become as fragmented as radio audiences, and TV network dominance would wane.

Challenges are also posed by the advent of subscription television and the introduction of the EVR (electronic video recording). Neither is an immediate threat to the networks. Furthermore, if subscription television should prove popular, the networks have made explicit that nothing would prevent their entry into that field; while the EVR, the visual counterpart of the stereo record, is an invention of CBS.

More likely during the next five years is the appearance of a fourth network to compete with, and share the profits with, the other three. As experience in radio suggests, this will be a change without a difference.