Pressures of Reality

Cable networks are hurting thanks to SVOD but some in the production industry claim they are also passing the pain on to the suppliers of their reality programming.

Some producers are calling it a perfect storm: a confluence of trends – audience cord-cutting, the rise of OTT subscription services, the migration of ad dollars to the online world – that has put U.S. ad-supported cable networks in cost-cutting mode. That, in turn, threatens the production companies that supply those networks with the vast majority of their unscripted programming.

With many of the companies that thrived through the unscripted boom of the past 15 years today working on profit margins of less than 10%, the U.S. unscripted production business, suggests ITV America CEO Brent Montgomery, is “operating with a broken business model.”

And the consequences could be dire. “This year is going to be the year when we see a lot of production companies go out of business,” warns Montgomery. “Most of the networks don’t realize what they’re doing. They want to squeeze the lemon, much like anybody would in hard times, but they’re going to pop the lemon.”

Producers say they are feeling the effects of the storm on a number of different fronts. In the development process – one that can involve many months of schmoozing talent and securing contractual agreements – producers claim they are being asked to do more for less.

John Ford, the general manager of the recently formed Nonfiction Producers Association, reports that networks have become “tight with money spent on development. A producer often will be asked to do $40,000 of development work for $20,000. And many of them are so eager to get the commission that they’ll go ahead and do that.”

When it comes to production, say show suppliers, networks are trying to exclude more and more items from the budgets on which producers’ fees are based. “A typical thing would be a network that calculates a 10% production fee for a producer will reduce the budget against which you can charge that,” says Ford.

In post-production, suppliers report networks asking for more rough cuts before approving episodes for airing. “Many producers complain about the number of cuts exceeding the contracted number,” says Bruce David Klein, president and executive producer at Atlas Media Corp. “That puts producers in a real bind because they want the best possible show and they want to please the network, but every cut can cost an extra $10,000 or $20,000 that is not budgeted.”

The networks, not surprisingly, see things a little differently.

According to Marc Graboff, president of global business and legal affairs, production management and studios at Discovery Communications, the unscripted production business model is “not broken, it’s under pressure because it’s a mature marketplace.”

Graboff concedes that in the current climate for networks relying on unscripted programming, “there’s more of a focus on cost-management than maybe there was in the glory days. Back then there was a growing marketplace and a lot of production companies were getting to the point where they sold themselves at high multiples and had to justify their earn-outs to the buyers.”

But, Graboff insists: “We’re not squeezing costs just to squeeze costs. We are being cost-observant. We are also trying to be transparent about what our expectations are from our production partners.

“We, and other networks are being maybe more vigilant about it now than ever before. But it’s not in our interests, or in other networks’ interests, to squeeze a production company so tight that they can’t do business again.”

Tensions in the unscripted production business appear to have surfaced recently in cases such as the legal battle between Discovery and LMNO Productions over the series 7 Little Johnstons and a handful of other shows and the contract dispute between the Writers Guild of America East and ITV-owned Leftfield Entertainment over long-running reality hit Pawn Stars.

If current conditions persist they could lead to more consolidation among production companies looking to cut overheads or to the demise of some companies launched since the U.S. reality business took off.

And while some in the production community see boutique companies being most vulnerable, others suggest that bigger players could be threatened too. Discovery’s Graboff says: “During the unscripted explosion a lot of companies ramped up and sold themselves to the Fremantles and Endemols for multiples that are unsustainable. Those are the ones potentially at risk.”

For now, however, networks and producers are looking for ways to fix the unscripted business model – or perhaps redesign it for the digital age and the ‘cord-never’ audience. “It’s about producers and networks having frank discussions,” says Atlas president Klein. “Producers have to understand that the networks have pressures they have to address, and networks need to understand that when you cut a budget you’re going to lose things.”

Graboff says that Discovery is already “endeavoring to become as clear as possible with our production partners as to what we expect and what we will accept as line items on budgets. We expect that in situations where it doesn’t make sense for them to produce something because we’re squeezing them so hard, they’ll push back and say they can’t produce it at that price. The market will sort these things out.”

Longer term, discussions might take in the issue of producers’ autonomy, particularly as services such as Netflix (which plans to launch 20 unscripted shows in 2017) and Amazon (home to new reality hit The Grand Tour) begin to compete more aggressively for the cream of unscripted programming.

“Whether it will be the new OTTs or the linear cable channels and broadcast networks, whoever creates a more autonomous creative environment for producers will win the day,” argues ITV’s Montgomery.

The search for a better business model might also lead U.S. unscripted producers – who, in contrast to their U.K. counterparts, rarely get a stake in their own shows – to rethink their stance on program ownership.

Until very recently, says Montgomery, pushing for program ownership was considered “too big of a mountain to climb. But we’ve been backed into a corner now. If there was ever a time for us to get serious and actually go after ownership it would be when we don’t have any other options.”

This article was originally published in NATPE Daily. Read more from NATPE Daily Day 2.