Overall, the first-quarter impact of the strike could see combined broadcast network operating profits more than double to $300 million (up more than 120% from the prior season)--even on a 46% decline in ad revenues to nearly a combined $1 billion for the three months, according to Bernstein Research analyst Michael Nathanson. The estimates assume that initial 15% ratings declines could accelerate to 45% declines, due to what generally is a 30% difference between rerun and first-run series episodes. The networks' overall costs are down about 60%, since only fixed costs and minor amortized costs are associated with repeat episodes.

CBS could post 27% profit gains--or an incremental 10 cents per share --above current estimates, due to the high number of prime-time repeats. Fox and ABC are well-positioned in early 2008, with a high portion of gross ratings points riding on non-scripted reality and popular returning series. At mid-season, 63% of CBS' prime-time schedule has been devoted to reruns. NBC has led with the largest portion of its prime-time schedule--34%--comprised of scripted series. But the name of the game is reality series, which comprise 30% of prime time at Fox, 34% at ABC, 32% at NBC and 26% at CBS.

"The WGA strike, in the short term, will have a hugely positive impact on broadcast cost structures, as expensive first-run scripted content will be replaced by much cheaper repeat scripted show and low-cost new reality programs. The networks will also gain, due to lower losses at their production studios as deficit-financed shows are halted, and from reduced pilot development losses and terminated bad development deals," Nathanson said.

Slashing of network program budgets and making staff cuts will produce earnings windfalls for the networks' corporate parents. Media conglomerates with varying exposure to cable networks will benefit from the steady flow of subscription revenues, as well as the overflow of advertising dollars from broadcasters' tight scatter market. Viacom (with nearly 30% of its revenues drawn from cable networks) could be the biggest winner of all, with an 80% boost to operating margins, or a $312 million boost to operating profits over current analyst estimates.

The wild cards continue to be how much recession-spooked advertisers will pull back in spending and the ultimate erosion of network revenues by cash or makegoods to advertisers. Adverse long-term implications, such as an inability to recapture the viewer exodus during the strike, will not be clear until later this year, when the loss of original series episodes takes its toll on international, domestic syndication and DVD sales, and returning audiences for the 2008-2009 season can be gauged. The Big 3 networks' prime-time ratings have declined 15% season-to-date.

For now, the broadcast networks are aggressively mitigating their losses. They have reversed the nearly 50% ratings declines for reruns of their lucrative late-night talk shows, to save the estimated $300 million in annual earnings they collectively generate.

The networks are jamming their schedules with reality and event programming that will command bigger than usual premiums from advertisers: $1 million per 30-second spot on Fox's returning "American Idol" and $2.7 million per 30-second spot in this year's Super Bowl. However, in time the strike's divisive economics will likely prompt media chiefs to permanently modify their flawed prime-time business model. One smart change: to more deliberately and continuously produce programs and sell advertising.

It is difficult to accept any rationale for returning to an 80%-plus new series failure rate. Or the deficit financing that spends more than $3 million per episode for high-end scripted drama series and $2 million per comedy series episode. Why not spend half as much on more programming from independent producers, such as Media Rights Capital, Worldwide Pants and Universal? And how will networks justify axing writers and producers while little else in media company food chains, including lucrative pay packages of top executives, is cut?

The biggest threat to the networks' troubled business model looks to be the dearth of new original fare to feed digital downloads, which are at the heart of its future and the writers' strike. A number of other formidable forces bubbling in the background could throw changing TV network economics into a destructive tailspin. For now, the networks are making the most of one bad situation--that appears worse for everyone else.

This commentary is insightful. I recommend it to others.