• by Wayne Friedman , October 20, 2006

Two years after NBC Universal Television took an $800 million ad revenue drop in the upfront, it will make $800 million in cuts from staff reductions and production savings. Is there a correlation between the advertising--especially in today's environment--and the layoffs? Absolutely.

"It is a response to current advertising conditions," says Mark R. Fratrik, vice president of Chantilly, Va-based BIA Financial. "With J&J not being in the upfront, with automotive cutting back, it has been a long time in NBC's thinking."

Analysts say NBC is concerned about being in fourth place among all the networks. But the real issues are the increasingly troubling equations of production costs versus advertising sales, says Fratrik, especially when high-priced dramas yield mediocre ratings.

For example, published reports claim that rookie NBC show that "Heroes" costs a whopping $2.7 million an episode. The good news is that "Heroes" is doing well, with almost a 6.0 rating in adults 18-49--the highest among all new network shows. But shows like "Studio 60" cost about the same as "Heroes," yet deliver half the 18-49 rating that "Heroes" does.

During the upfront, according to Ad Age, "Heroes" grabbed $171,000 for a 30-second spot; "Studio 60" took in $210,000. The price tag for "Heroes" will no doubt rise--perhaps in the $200,000 to $240,000 range.

With 20 national spots per hour, at $200,000, that would reap a gross $4 million per episode. Of course, NBC also has re-run availabilities, as well as consumer pay-per-play fees and ad revenues from its many digital platforms.

In the old days, this formula would come out somewhat differently. A network could negotiate a low license fee (versus the production costs) from the producer. But the math doesn't really work any more. "Heroes" is produced by NBC Universal Television Studio, while "Studio 60," the exception to the rule, is produced by Warner Bros. Television.

Which still leaves scores of other network shows out of the money loop. That's why Jeff Zucker, chief executive of NBC Universal Television Group, says there will be fewer scripted shows in the future.

Fratrik surmises that Zucker's threat is targeted at the weaker 8 p.m. hour that kicks off the prime-time schedule. Networks have mostly backed away from traditional half-hour sitcoms. So Fratrik expects to see more reality shows, game shows and new shows from NBC during that hour.

NBC stations are already on the right track, say analysts. Its O&O stations have been praised for their ability to sell more in the digital space than most other stations groups. Analysts believe NBC stations are now getting 15% or more of their ad revenues from the digital space. In the broader picture, NBC expects to generate $1 billion in digital revenues from subscription program fees and ad revenues by the year 2009.

"The reality of network television is that the model doesn't work as well as it used to," says Fratrik. "They are not going back."