Case 7 - NBC - Case Study PDF

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NBC and Paramount have worked together for close to a decade on the popular TV show Frasier. Although the show is still extremely popular, many analysts and executives believe the show has now reached its peak, and in the coming years will see a sharp decline in viewership and ratings (and therefore ad revenue for the network carrying the show). However, at its current ratings, the show is still very valuable to NBC and walking away from negotiations would be a disaster for both parties. Best Alternative to a Negotiated Agreement (BATNA) is the consideration of how a party would proceed assuming that negotiations failed. For Paramount, their BATNA would be to take Frasier to air on a different network. The only real players that are have the viewership and resources to support such a show are the ‘Big Three’ television networks (ABC, CBS, NBC), and it is not apparent that ABC has the revenue to offer a price capable of covering the overhead of producing the show. Therefore, that limits the only alternative option Paramount has to CBS, which cannot offer the same licensing fees and ad revenues as NBC currently pays. In addition, executives’ expectations that viewers will follow the show across networks as they have across time slots may be too optimistic. Under a different network, the show will inevitably experience changes (partly due to the change in resources available) to the point where some fans will no longer be satisfied. There does not seem to be any real benefit to Paramount’s BATNA. Although both producer and network would be unified under the same parent company (Viacom) if Paramount decides to license the rights to Frasier to CBS, the only incentive to do so is driven by politics and egotism, not financial responsibility. On the other hand, NBC’s BATNA would be to replace Frasier with another highly rated sitcom to become its tentpole program. 20th Century Fox TV is considering stalling on contract renegotiations with ABC in order to secure a higher bid from NBC on its comedy show Dharma & Greg. If NBC loses the contract with Paramount on Frasier, it is likely that it will pursue a contract for Dharma & Greg. Because it is also a highly rated comedy show, this leaves NBC with at least an alternative to fall back on. However, making an offer to compete with a highly popular contract currently owned by another network will undoubtedly spark a bidding war that could end up being extremely costly to NBC, especially because they have more to lose by not filling the time slot. As a result, both parties have a lot to lose if negotiations fail. However, NBC’s option does seem to be less damaging to the network. Frasier is a show that is already past its maturity point, and NBC executives predict that it will not last the full 3 years of the proposed contract extension. In addition, much of Frasier’s value comes in its potential as a tentpole program, which is a position that could potentially be replaced by a similarly rated show. However, if negotiations for an exclusive contract with NBC fails for Paramount, it will be forced to sell the rights to Frasier to CBS which besides being a huge decrease from its current licensing fees, will only expedite the death of the show. Furthermore, the failure to reach a compromise with NBC will reflect poorly on Paramount as a studio, which could cause other networks to have doubts in future contract negotiations on other projects. The only real contender to NBC’s rights to Frasier is CBS, Graboff’s previous employer. According to Graboff’s estimates, CBS could afford to pay no more than $3 million in licensing fees to Paramount. If NBC were to offer any less than $3 million, it would be more attractive for Paramount to sell the licensing rights of Frasier to CBS. The lowest amount (the reservation price) that Paramount is willing to accept as a licensing fee for Frasier is $3 million. Similarly for NBC, the alternative to NBC walking away from negotiations is a potentially very costly bidding war to secure another highly rated sitcom to fill the prime-time slot. NBC’s reservation price is given by the greatest amount they would be willing to pay in licensing fees to air Frasier and is related to the breakeven point on the licensing fee. As a tentpole program, having a popular show of the same caliber as Frasier is more valuable to the network than its just the ad revenues earned that specific time slot because viewership (and therefore ratings and

ad revenues) spill over on both sides of the specified time slot. Although internal calculations of ad revenues put the breakeven point for Frasier at $5 million per episode, the real value of Frasier to NBC is likely higher than that. As a result, NBC’s reservation price for Frasier is likely to be somewhere between $5 million and $5.8 million, which is what the network currently pays for its most popular sitcom Friends....