Hollywood's Broke: The Real Story Behind DIRECTV's 'Damages' Renewal by Lawrence Meyers 8 Aug 2010 post a comment Share This: Satellite operator DIRECTV pulled off a brilliant move, along with Sony Pictures Television and FX Productions, in renewing Damages for two, 10--episode seasons. The engrossing, critically-acclaimed drama created by Todd A. Kessler, Glenn Kessler & Daniel Zelman, was averaging an unprofitable 1.4 million viewers on FX. So why did the deal get done, and who stands to benefit? Don't look to the LA Times, because they didn't get it right, calling it a "vanity play" and "marketing hook". Wrong. It's very likely to be a home run financially for DIRECTV. And another example of why Hollywood is in big trouble. The Hollywood business model is such that quality programming has a tougher time reaching audiences via the traditional network route, because network programming is barely viable these days. The content provided is not reflective of the tastes of the majority of the country, and the comments my articles receive provide anecdotal evidence of this. The whole point of a broadcast network is that it BROAD casts programming. But now, these are NARROW casts, leaving out huge swaths of the country. Damages is a program I would hope that more viewers would embrace because it is primarily concerned with presenting extremely complex moral dilemmas, with life-or-death consequences. It was too good to be picked up by a network, and found a home on a cable network. Nevertheless, the present state of even cable economics made it unprofitable to continue on FX. Enter DIRECTV. It is alternative distribution platforms like this that we should all be supporting with OUR DOLLARS. Because it has the gumption to promote good programming. It also can earn money where networks can't. For starters, DIRECTV improved on the deal it made with NBC for Friday Night Lights. It's a great show, but the error was in allowing NBC to air the show at all. DIRECTV should have aired it exclusively for what I estimated was a license fee of $1 million per episode. The problem with the deal was that FNL fans just had to wait until the show returned to NBC in the spring rather than be forced to order DIRECTV service. I believe there was marginal, if any, monetary benefit from this deal to DIRECTV. There's no way NBC gave up any ancillary revenue streams on that deal. One might make the claim that this was a "retention play", but since DIRECTV's churn is only 1.5%, I dismiss that notion. Damages, however, will air exclusively on DIRECTV's original programming channel, The 101. I'd like to think that my pitch at the satellite company's offices last summer about the economic benefits of buying or creating original programming had something to do with it. Here's why: Damages had 1.4 million viewers, of which some 300,000 are estimated as DIRECTV subscribers already (owing to the company's 20% market share). That leaves 1.1 million viewers for DIRECTV to capture with this deal. My sources peg the license fee per episode at around $1 million, but I'm going to bump it to $1.25 million to account for the cost of re-runs that DIRECTV is also getting. That's a total outlay of $25 million for 20 episodes. It's unlikely that Sony is giving up any ancillary revenues from this deal, retaining foreign sales, syndication rights, DVD, downloads and other media. So where does DIRECTV pick up $25 million for the deal to make sense? There are different ways to determine the value of an individual subscriber, but based on DIRECTV's buyout of smaller satellite operators, I peg each subscriber's value conservatively at $625. That means that if only 40,000 of the show's remaining 1.1 million viewers come to DIRECTV to keep current with Damages, then DIRECTV breaks even. That's only 3.6% of the show's current audience. And for every 40,000 new subscribers beyond that, DIRECTV sees a 100% return on investment. The key to this deal is that DIRECTV's churn is so low. At 1.5%, it tells Wall Street that once someone becomes a subscriber, they remain a subscriber. As I told the company last year, if DIRECTV wants to become a player in original programming, the business model is there. There are limitations as to budget and genre, but the potential ROI on a relatively small investment blows away anything network or cable television can provide. They are stuck with declining audiences and portfolio theory. DIRECTV has increasing audiences, is a walled garden, and can subsequently sell its original programming after its initial airing to other outlets. The first stop is Pay TV and, specifically, to STARZ. Why? Because John Malone's Liberty Media owns a huge chunk of the satellite operator and 100% of the pay cable channel. After that, DIRECTV could sell the show to network or cable, then foreign, and DVD. DIRECTV has the financial resources for this model. They generated $2.4 billion in free cash flow last year, and $1 billion in Q1 alone. They sit on $3.5 billion in cash. By committing $250 million to original programming, and staggering the schedule of these shows, they could have an episode of an original show every day for a year. The risk to the balance sheet is minimal. The potential ROI is greater than the company's (wise, but safe) aggressive stock repurchase plan. Admittedly, original content is not the key to the company's growth -- its growing presence in Latin America is -- but why not diversify the deployment of capital? New CEO Michael White has inherited a top-notch company is outstanding financial shape. They are doing just fine, even during the recession. Is there any need for him to take an original programming risk? Well, let me put it this way -- they've spent $13 million annually for FNL which yielded no return, they're spending $25 million for a show with a likely chance of breaking even and good chance of a profit… The next step seems pretty logical to me. Original programming on a wider scale. It won't take much to appeal to the vast portions of America being left out of current network programming.