With its 2017 acquisition of Scripps Networks, Discovery became the dominant player in the unscripted cable market with 19 networks, with all but OWN focused entirely on reality fare.
Using its newly found clout, I hear Discovery has put forward a new model for financing its series, and it has the unscripted producing community up in arms.
Profit margins for cable reality producers have been consistently shrinking over the past decade as basic cable networks grapple with declining linear ratings. With networks also controlling ownership in the vast majority of the cases, reality companies rely almost entirely on license fees — often in the neighborhood of $300,000-$400,000 per episode — to cover production costs and keep about 10% in profit. They get those license fees paid by the network as they go into production on the episodes.
Discovery is changing that. According to sources, in its new contract template implemented across the board by all of its networks, production companies are required to finance the series themselves and take out a loan if they don’t have the funds to do so (I hear they are being sent to Citibank, which has a partnership with Discovery). The networks are paying the budgets upon delivery of the completed order, compared with pay as you go, which is the common practice. That allows Discovery to protect its cash flow and delay payments for as long as a year and more after ordering a series.
The model raises a number of concerns. Production companies, especially smaller indies that don’t have strong financial backing and don’t own production facilities, need to take out a loan of millions of dollars and pay interest, which I hear could cut already razor-thin profit margin almost in half. Producers I have spoken with note that they have asked Discovery to add the interest as a line in the budget but were rebuffed, with the network group countering that if they cover the interest, they would reduce the show’s production budget. Other sources familiar with the situation dispute that, saying that the interest is being added to series’ budgets.
There are also the issues of production overages and reshoots, which networks and production companies always wrangle over and networks usually end up covering (at least partially). Producers fear that, if Discovery executives require reshoots for the completed orders, they will have to shoulder the cost if they want to get the original license fee agreement honored by Discovery so they can pay off their bank loan. (The networks also are believed to have a right of refusal to pick up the already produced seasons and pay for them.)
The new budget paradigm is said to be the brainchild of Discovery CFO Gunnar Wiedenfels. He comes from Europe, where this model is widely used, but producers there retain ownership of their shows, which is not the case in Discovery’s modification.
In the U.S., the only area producers point to as employing a similar mechanism is independent films, which are financed by the producers and are then acquired by a distribution company. But the producers again have ownership.
The new Discovery business model involving self-financing by producers does not allow them to have IP control, with their shows still owned by Discovery.
This appears to be a belt-tightening strategy by Discovery and a way to keep cash on the books following a string of big-ticket deals for sports rights and Scripps. It is raising eyebrows among producers who struggle to make any profits on Discovery series, especially as the company’s chief executive officer David Zaslav sits atop the list of highest-paid public company CEOs with $129.4 million pay package for last year.
“We have engaged in constructive discussions with our producing partners to better manage our cash flow as we invest more in content than ever before,” Discovery said in a statement to Deadline. “We have gotten a positive response so far from both big and small production companies.