By Julia Dillard
The television business is always evolving, so it’s difficult to capture it in one document. However, in this section, we will do our best to try and give a snapshot of the industry as it currently exists. Think of this as an extremely condensed document to help you understand some of the complex inner workings of our business. If you have any questions about these concepts, reach out to your representatives (agents, lawyers, managers) for further clarity.
BUYERS & SELLERS
The business of TV is, in essence, a manufacturing business. Buyers and sellers work together to deliver an entertaining product to consumers. This section will explain how they operate to help you navigate our quickly changing and dynamic business landscape.
Defining Studios and Networks in the Age of Streaming
Streaming services that produce their own original content largely upend this traditional structure, as they are both the Studio funding the production (who owns the IP), and the Network exhibiting the product. In some instances (increasingly rare) streaming services also license content from external studios, in which case they function as just the Network. For example, The Crown is exhibited by Netflix but the IP of the show is owned and produced by Sony, while Stranger Things is a Netflix for Netflix production. This structure is not limited to streaming services. HBO also utilizes a similar structure, in which they have an internal studio division that produces shows, such as Game of Thrones. Still, they also exhibit externally produced shows, such as Lovecraft County, produced by Warner Bros Television (WBTV and HBO are both owned by the same company but they function as separate Network and Studio in this arrangement).
To understand why the emergence of streaming services has so profoundly disrupted the industry, it is helpful to understand the historical context of the television industry.
Fin/Syn Laws and Vertical Integration
In 1970, the FCC imposed a set of rules to encourage a competitive marketplace known as The Financial Interest and Syndication Rules (popularly known as “fin/syn”). To prevent the broadcast networks from becoming monopolies, the FCC prohibited them from owning any TV series that they aired in prime time. Additionally, broadcast networks were not allowed to air syndicated programming if they had a financial stake in that IP. In practice, it was illegal for networks to own the television shows they aired.
To allow the industry to adjust to changes that the new cable technology introduced, President Clinton’s administration repealed Fin/Syn in 1993. Studios and Networks combined to create vertically integrated media conglomerates, as the networks were now allowed a financial stake in the shows they aired. New networks were also created in the wake of this decision, such as The CW, an eventual joint venture between Warner Brothers and CBS.
Due in part to the nature of talent (writers, directors, actors) deals and the laws surrounding fair dealing, the silos between networks and studios largely remained in place, creating a layer of separation within conglomerates between studios and affiliated networks.
The technological disruption of direct-to-consumer streaming services has upended this paradigm again. We’re too early into these changes to know where these changes will lead us, but it is changing dramatically, and regularly.
Deal Types
Once a network has decided to develop a television show, the Studio and Network (assuming they are separate entities) strike a licensing deal to determine the exhibition rights of the Network, and the exhibition rights that the Studio will retain. These deals are complex, nuanced, and include many important deal points. However, there are five points that we will discuss here as they directly impact the show a showrunner will get to make:
Episodic Budget
License Fee or Premium
Territory
Technology
Distribution Windows
In the below section, “How Studios Utilize IP to Make Money,” we will discuss the last three (territory, technology, and distribution windows) in more detail. But, for now, all we need to know is that the more rights the Studio gives away to the first run Network, the fewer rights they have left to exploit later in other markets to help them turn a profit.
When negotiating the episodic budget, the Studio, Network, and producers (that means you, showrunner) are attempting to find a happy medium between the creative ambition of the show you want to make and the money the Network and Studio want to spend. While it can be helpful to have a target number to hit while budgeting, it is equally beneficial to prepare a draft budget as you begin to write that includes your ambitions for the show. Simply put, if your ambition is to make a world building show about a futuristic society that takes place mostly at night in the rain, and your Network and Studio are only prepared to pay for a family show set mostly in a nuclear fallout shelter – you’ve got problems. As the showrunner, you must be involved in negotiating the
Deficit Financing
In the deficit financing structure, a studio covers the remainder of a show’s budget after the licensing fee has been agreed to, in which case profits for the studio usually come years later (it can take years to realize revenue from other sources, foreign, syndication, etc). A domestic (meaning American) Network pays a license fee to a Studio for the exclusive right to exhibit a new show. Customarily the license fee is a percentage of the show’s budget, generally between 70-90%. In exchange, the network almost always has the exclusive right to exhibit the show in domestic markets. How long the exclusivity lasts is based on the distribution windows, which are explained in the section below. For linear networks (linear networks refers to platforms that exhibit episodes as scheduled programing) the license fee usually includes the right to rerun episodes once or twice a year and allows viewers to access episodes “on- demand” (either via an MVPD/cable provider on-demand service, an affiliated streamer, or the network's own website) for a specific length of time. On domestic streamers and premium cable, the length of their exclusive right to exhibit the show in the domestic market profoundly affects the size of the license fee. Network rights are heavily negotiated, and the more rights awarded to the Network, the higher the license fee, and the less the Studio needs to deficit (the Studio may end up only have to deficit 10% if the license fee is 90% of the budget – although this always means the Studio is getting fewer rights to exploit later).
Once the Studio and Network have agreed upon the budget and license fee, the Studio then deficits the rest of the cost of production, hoping to turn a profit on the show by eventually reselling the show in different markets, on different platforms, and for different lengths of time. The Network sells advertising spots (broadcast or cable), carriage fees to MVPDs (Comcast, Direct TV, etc., more on this below), direct to consumer subscriptions, or a combination of all three in order to make a profit.
Cost +
The “Cost Plus” deal has become increasingly common in the past decade. As demonstrated in the green box above, a Studio partners with a Network with an international distribution model in this structure (the Network wants the worldwide rights, think Netflix). The Network pays 100% of the agreed-upon budget, plus a premium. In exchange, the Network receives the (usually exclusive) right to exhibit the show worldwide for run-of-show plus a certain amount of time, usually 10 years. “Run-of-show” is completed when the network elects not to order any more episodes or additional seasons. The contractual limitations to this deal are typically related to technology exclusivity, which is further explained below. The premium (the Plus) is pure profit for the Studio. If the show turns a significant profit inclusive of the premium, the studio then shares the revenue with profit participants based on their percentage of MAGR after the profits go through the “waterfall” (more on this below).
For shows that are produced by a Network/Studio hybrid (ex. Netflix for Netflix), sometimes a “backend buy-out” will be built into the deal between producers and the Network/Studio hybrid. In practice, a backend buy-out is just more money upfront, representing what the showrunner and other profit participants could have made in a traditional deficit financing model. In addition, the backend buy-out sometimes includes season pick-up bonuses to further simulate the financial rewards of a successful show. In this case, the Network/Studio hybrid also determines the budget internally, with input from the producers and showrunner. As showrunner you need to insist to be involved in these discussions to make sure the budget being agreed upon is enough to fund your ambitions for your show.
Co-Productions
When two unaffiliated Networks or two unaffiliated Studios agree to make a show together and share the costs and possible profits (think Warner Bros making something for CBS), a co-production is born. These deals are sometimes between two companies from different countries, but they can also be domestic-only deals.
Domestic co-productions usually take place for two reasons. The first would be each entity holds an integral part of the creative (an overall deal with the showrunner, life rights, IP, music library, etc.) and so they have to come together to make the deal. The second would be that the Network has a Studio branch, and as a matter of policy, they only do co-production deals. It used to be that the split of deficit and ownership of the show was always 50/50, but that is beginning to change. Now the split of ownership and deficit (or budget, in the case of an initial licensing Cost Plus deal) is up for negotiation, and subject to many different factors, including length of the initial licensing deal, other distribution windows, exclusivity, and more. These factors are explained in more detail below.
An international co-production agreement is advantageous when a show is exceptionally expensive, has a built-in audience overseas, and/or the production wants access to specific tax incentives in a particular country. From a financing perspective, these deals can be either a cost-plus model or a deficit model. In both cases, because it is the norm in international television for the Networks to own their own content, co-productions expand the number of IP holders to two companies. The split in ownership is up for negotiation, but it is generally correlated directly with the deficit or budget split.
However, what makes co-productions truly unique from a showrunner’s perspective is the number of executives giving notes. As the showrunner, you’ll need a clear understanding of how everyone plans to work together, who intends to give notes and at what point in the process, and which of the co-producing companies will be running point on the project. When there are two Networks or two Studios, there can be two sets of notes, two sets of visions, and two sets of priorities. Usually, a lead studio is selected to oversee both the creative direction of the project and the production. For international deals, sometimes the “local” company acts primarily as the physical production company, dealing with the day-to-day running of the set and giving notes. In domestic co-productions between two Studios, this is referred to as the “Lead Studio.”
Minimum Orders
As part of the license deal negotiations, the studio and network will determine the minimum order of episodes. From a showrunner's perspective, this is one of the most critical aspects of the deal, not only from a creative standpoint but also from a budgetary and managerial point of view. You need to be part of this discussion.
Traditional broadcast shows often had 22-episode seasons. However, for the first season, they typically stagger the episode orders. First, they order the “front 13” episodes (including the pilot, which is almost always already produced). These first 13 episodes make up the minimum order. If the show’s ratings are high (enough), the Network executives will then order the “back 9,” which are usually the last 9 episodes of the season (adding up to 22 episodes). They then typically move to full-season orders for season two and on. To state the obvious, longer episode counts mean you, your crew, and your cast are employed for longer. Higher episode orders also make it easier to utilize amortization and can help keep the per episode budget lower.
Episode orders have been shrinking significantly over the last decade on streamers, premium cable, and, to a slightly lesser extent, cable. Now, a standard order could be much shorter, anywhere from 6 to 13 episodes. These “short orders” mean there is no need for a back 9, so the minimum order is typically the total episode count for the season. A benefit of short orders includes access to actors who usually worked primarily in film and can now fit the shorter production schedules with smaller episode counts into their schedules.
Streamers are also more likely to employ “straight-to-series” orders, which bypass the pilot step altogether. When we receive a straight-to-series order at JWP, we try to build a hiatus into our budget between the first episode and the rest of the season. We do this because we find the pilot step helpful in nailing the show's tone and ensuring we and our partners are happy with all creative aspects of the show before we produce the rest of the season.
Once a show’s first season has been produced, the network normally has a pick-up date for the next season already negotiated in the license deal. If a network does not elect to pick up the next season, the studio and producing partners can collectively decide to shop the show to other networks, who might elect to pick up the show. In this case, a new first-run license deal would need to be negotiated.
PLATFORMS
As a showrunner, it is important to understand the difference between MVPDs and OTTs, not only for how it might affect the structure of your show and the roll-out of your season but also to understand how these different platforms can affect your potential profits.
MVPDs vs OTTs
Multichannel Video Programming Distributors (MVPDs) are traditional cable or dish- based companies, like Comcast, DISH, and DirecTV. These services provide several linear television channels (ESPN, FX, HBO, etc.) as part of a package for consumers to purchase. These packages are typically tiered, and can include a combination of the following channel types:
Basic Cable - ABC, FOX, CBS, etc. (which are really broadcast channels being delivered through the more reliable cable technology)
Expanded Basic Cable –TNT, Bravo, Disney Channel, etc.
Premium Cable – Showtime, HBO, Starz
Networks charge MVPDs carriage fees to allow their channel to be included in the MVPD’s bundles. In recent years, vMVPDs (Virtual MVPD) have emerged, the most popular of which is YouTube TV. In this case, the model is the same as other MVPDs, with the only difference being the delivery method uses the internet instead of cable.
FAST (Free Advertisement-supported Streaming Television) are linear channels (not On Demand) which uses the internet as the delivery service, usually accessed through an application built into a smart TV. Examples include Roku Channel, Pluto TV, and Freevee. These channels are typically just used for second window distribution, but have in recent years begun producing original content.
Over The Top services (OTTs), such as vMVPDs, Netflix, Amazon Prime, and Hulu, are online only. OTT services are usually not sold in bundles, with notable exceptions, such as the Disney+, Hulu, and ESPN bundle. OTT services can be further broken down into different types of Video On Demand (VOD). The difference between VODs (which are also known as “streamers”) is described below.
VODs
SVOD – Subscription Video On Demand. The most recognizable type of OTT, examples of SVODs includes Netflix, HBO Max, and AppleTV+. With a subscription-based model, alternate release schedules from the week-to-week model are very common. Netflix pioneered the binge-viewing model, in which an entire television season is made available at once. In recent years, batch drops have also become more common, in which one-half of a season’s episodes will be released, followed by the second-half a month or two later. A third popular release strategy is to drop the first two or three episodes for the series premier and then move to a week-to-week schedule. Subscription services also tend to closely guard their viewership numbers, which can make it difficult to determine a show’s level of success.
AVOD – Advertisement Video On Demand. Like the name implies, AVODs, such as Hulu, Paramount +, and Peacock have an advertising-based revenue model. Most AVODs have a tiered or hybrid model, in which viewers can pay a lower subscription fee to view with advertisements, or a higher fee to skip advertisements altogether. Either way, ad breaks are often built into original shows for AVODs. AVODs are also more likely to have a week-to-week release schedule, as these schedules are more conducive to advertising deal practices.
TVOD – Transactional Video On Demand. This “pay-per-view” model is associated mainly with films but does exist for TV. In this case, the viewer pays to either “own” or rent an episode, season, or entire series of television on services such as Google Play. This model sprung up to replace declining DVD sales and rentals and is typically only used for second window distribution.
PVOD – Premium Video On Demand. Rare in TV, but still worth mentioning, PVOD is usually a single title add-on to an SVOD service. For example, Disney+ released Mulan (2020), but for an additional fee on top of the monthly subscription.
Upfronts
Broadcast networks, cable networks, and AVODs participate in Upfronts, a convention between the television and advertising industry that takes place in New York each May. The several days long convention has a reputation for opulence, in which networks present their upcoming slate for the next season by trotting out their stars, musical performances, hosting parties, showing trailers, or even screening pilots in their entirety. Showrunners are increasingly asked to attend the upfront by their show’s Network to promote the show and woo advertising executives.
HOW STUDIOS UTILIZE IP TO MAKE MONEY
As discussed in the deal section above, the terms of a licensing deal, especially a first- run deal, can take a long time to decide. Below are the major terms negotiated between the studio and network.
Distribution Windows
Distribution Windows are all about time and how long a platform will have the right to show your series. The higher the license fee, the longer a network typically has the right to the show. As discussed above, this is particularly true for the Cost+ model, in which the network licenses the show exclusively (in most cases) for a longer length of time, usually about ten years, in all territories and with all other technology mediums frozen (more on this below). First-run Network partners in the deficit finance model typically have the show exclusively for the first few seasons, after which the show’s completed seasons can then be sold into syndication and foreign markets.
A syndicated show runs on a different television network than the one on which it initially premiered, or a show that was not created for a specific network. Syndication generally comes in two forms: first-run syndication and off-network syndication. In off-network syndication the studio will start selling the series in syndication while new seasons are still premiering on the original Network (think Big Bang Theory reruns showing five nights a week on a local station out of prime time while it was still the number one show on CBS). This most commonly happens once a show reaches 88-100 episodes. To be clear, only earlier seasons of the show will rerun on other platforms, including linear Networks and SVOD services. This is typically viewed as mutually beneficial for the first-run Network partner and Studio because consumers who discover the show in syndication are more likely to watch the show’s new episodes, driving up viewership for the first-run Network. First-run syndication is discussed in the territory section below.
Once a show goes “off the air,” and new episodes are no longer being made, the Studio will continue to license the show whenever and wherever they can.
Territories
Territories refer to the physical locations where the show will be distributed. In Hollywood, domestic distribution almost always refers to the United States and Canada, and the international market refers to everything else. The international market is split into territories, sometimes a single country, and other times a larger region. In a typical deficit financing deal, only the domestic territory is licensed at first and then the show can be licensed on the international market. In a Cost+ model, the show’s international rights are licensed by the first-run network, which is a worldwide streamer. Studio executives’ anxiety about the international market is understandable, as the ultimate success of a show in the deficit financing model can depend on the international run. However, common sayings like “comedy doesn’t travel” have begun to break down in recent years as the industry’s understanding of international markets has expanded.
First-run syndication is the practice of licensing a new show to multiple local affiliate broadcast stations rather than one centralized station. The territory is the local affiliate’s physical broadcast radius. This type of syndication is typically reserved for non-scripted shows, such as game shows like Wheel of Fortune.
Technology Exclusivity
Technology Exclusivity is about the medium of distribution. For example, if the show is in its first-run on a broadcast Network, can the Studio still sell the AVOD rights? Typically, the Studio and Network agree to “freeze” certain distribution types, while the Network has the exclusive right to exhibit it on their distribution platform. For example, suppose a show is in syndication on AMC. The Studio and Network might agree to freeze broadcast, premium cable, SVOD, and AVOD rights in that territory for that distribution window, excluding the pre-existing deal with the first-run Network. Other times, the Network might agree to leave SVOD rights open for the studio to license in exchange for a lower license fee. Once the rights revert to the Studio after first-run, they almost always reserve TVOD rights and physical DVD sales, so they can continue to exploit these rights everywhere. Technology exclusivity is extremely complicated and currently experiencing a lot of change as the industry continues to evolve.
BACKEND: THE WATERFALL
Even if a Studio has received revenue for a show, a show may not have reached a profit participant’s break-even point. First, the Studio needs to recoup its expenses through a process referred to as the waterfall. Once the waterfall is complete, profit participants can receive their share of the backend. The below explanation is a simplified guide to a complex accounting procedure but will help give a general understanding of how a waterfall works. If you would like to learn more, I recommend reading Ken Basin’s “The Business of Television.”
The waterfall starts with Gross Receipts, which is all revenue that is attributed to the show (license fee, foreign sales, syndicated sales, etc). The Gross Receipts are then reduced by the studio's Distribution Fee, which covers the studio's overhead costs associated with distributing the show. This Distribution Fee is typically between 10-25% of the gross receipts. The initial domestic license fee, is usually excluded from the Distribution Fee. The percentage of Distribution Fee applied to your deal is determined by the Backend Definition, which is negotiated by your representatives with the Studio during the negotiation for your deal when you are hired. A 15% distribution fee is the most common. At some Studios, if the show's first- run licensing deal utilized the Cost+ model (in which there isn’t a traditional domestic license fee), a portion of the budget is often used to calculate an artificial domestic license fee for the distribution fee calculations. Usually, around 75% of the budget is attributed as the license fee in this case, but it can be up to 100% of the budget in some A-level deals. The remaining 25% of the budget and Cost+ premium are attributed to the international rights and therefore included in the gross receipts when the distribution fee is calculated.
Next, Distribution Expenses are subtracted, which refer to the accountable costs from distributing the show, such as royalties to talent, the cost of dubbing the show, advertising expenses, etc. After the distribution fee and expenses have been deducted, Overhead Fees are subtracted. Overhead fees refer to the Studio's costs associated with the show's production. This fee is typically between 10-15% of the budget and any overages and a part of the negotiation for a profit participant's backend definition. Next, the Studio recoups Interest, charged on the budget and any overages. The interest is simple and usually 1-2% above the current market prime rate.
Next, the Studio recoups Cost of Production, including the budget and any overages. In today’s world, this would include the cost of COVID precautions. If a show received a tax incentive of some kind, some Studios will calculate the tax incentive as gross revenue, and the cost of production reflects the gross budget. In this case, the tax incentive would be subject to interest, the overhead fee is based on the gross budget, and the tax incentive is included in gross revenue when the distribution fee is calculated. However, some profit participant representatives push for tax incentives to be treated as a reduction in the production cost of the series, in which case the net budget is used for the interest and overhead fee, and it’s not included in the gross receipts.
Finally, Third Party Participations are deducted, creating the finalBelow is an example of a waterfall for a showrunner. Let’s assume the following for this show:
A budget of $5 million per episode
A domestic license fee of 75% of the budget.
There were no tax incentives.
It ran for 5 seasons, with 12 episodes per season.
There were $3 million worth of budget overages for all 5 seasons.
For the sake of simplicity, the show’s budget and license fee stayed the same for all 5 seasons.
It made an exceptionally round number of $500 million in gross receipts.
The distribution expenses were exactly $15 million.
The Current Market Prime Interest Rate is 3.25%, and an additional 1% interest will be charged.
There are three other profit participants, all with a backend definition of 15% distribution fee and 15% overhead fee. Participant A has 3 points, Participant B has 5 points, and Participant C has 7 points. They are all off-the-top of the showrunner’s participation.
The showrunner of this show has 15 points with a backend definition of 15% distribution fees and 15% overhead fee.
Gross Receipts = $500,000,000
Distribution Fee = (Gross Receipts - First Run Domestic License Fee) x 15%
First Run Domestic License Fee = Budget x 75% x Episode Count
First Run Domestic License Fee = $5,000,000 x 75% x 60
First Run Domestic License Fee = $225,000,000
Distribution Fee = ($500,000,000 - $225,000,000) x 15%
Distribution Fee = $41,250,000
Gross Receipts (less) Distribution Fee
$458,750,000
Distribution Expenses = $15,000,000
$458,750,000 (less) Distribution Expenses
$443,750,000
Overhead Fee = Cost of Production (calculated below) x 15%
Overhead Fee = $303,000,000 x 15%
Overhead Fee = $45,450,000
$443,750,000 (less) Overhead Fee
$398,300,000
Interest = 4.25% charged on Cost of Production
Interest Charged = $12,877,500
$398,300,000 (less) Interest Charged
$385,422,500
Cost of Production = Overages + (Budget x Episode Count)
Cost of Production = $3,000,000 + ($5,000,000 x 60)
Cost of Production = $303,000,000
$385,422,500 (less) Cost of Production
Third Party Profit Participant’s MAGR = $82,422,500
Participant A = 3% of MAGR = $2,472,675
Participant B = 5% of MAGR = $4,121,125
Participant C = 7% of MAGR = $5,769,575
Third Party Participants Total = $12,363,375
$82,422,500 (less) Third Party Participants Total
Showrunner MAGR = $70,059,125
Showrunner’s Backend = 15% of MAGR
Showrunner’s Backend = $70,059,125 x 15%
Showrunner’s Backend = $10,508,868
ADDITIONAL RESOURCES
To learn more about how the television industry currently functions, check out the below articles and books.
Appleton, Dina, and Daniel Yankelevits. Hollywood Dealmaking: Negotiating Talent Agreements for Film, TV, and Digital Media. Allworth Press, 2018.
Basin, Ken. The Business of Television. Routledge, Taylor & Francis Group, 2019.
Castillo, Michelle. “Netflix Tries a Different Model for TV Shows, Paying More up Front but Keeping More Later on Big Hits, Insiders Say.” CNBC, CNBC, 15 Aug. 2018,
McAllister, Matthew. “The Financial Interest and Syndication Rules” New York University, The Museum of Broadcast Communications.
McFarland, Kevin. “The TV Business Has Changed Forever-and That's a Good Thing.” Wired, Conde Nast, 20 June 2016.
Moore, Schuyler M. The Biz: The Basic Business, Legal, and Financial Aspects of the Film Industry in a Digital World. Silman-James Press, 2018.
Rodriguez, Ashley. “Some of Netflix's Biggest Hits Come from Outside the US. International TV Producers Describe How Streaming Deals Are Structured and How the Market Is Changing.” Business Insider, Business Insider, 6 July 2021
Sandberg, Bryn. “TV's New Math: What If $100m Netflix Deals Actually Shortchange Creators?” The Hollywood Reporter, The Hollywood Reporter, 25 Apr. 2019.
“SVOD AVOD OTT VMVPD: Acronym Overload!” Strategus
“What are FAST channels?” The Free TV Project