I’ve never understood it. Is it based off of viewership? If so how does that work? I’m not paying a fee to watch individual episodes. Does it comes from Advertisements? If so, why would it matter how many people watch the show?
In: Economics
Though American television is dominated by advertising revenue, there are other revenue models. The British Broadcasting Corporation (BBC) does not sell commercial advertisements. Most of it’s revenue comes from a licensing fee charged on every television sold in the U.K. In America this may seem like a rather small niche broadcaster, but in fact the BBC is the world’s largest television broadcaster by number of employees.
TV production studios make shows and sell them to networks, and also make money selling the streaming rights, DVD sales, and syndication as reruns.
The networks who bought the show then sell advertising that runs during the show. Also networks get fees from cable and satellite providers who carry their channel.
Broadcast/non-paid TV mostly makes money from selling ads.
Or, more precisely, they make money by selling *audiences*.
Let’s say you have a thing you want to sell. You can buy a spot to put your commercial in the middle of two shows: one that regularly gets about 100 viewers, one that regularly gets about 100,000 viewers. If both of these commercial slots cost the same and you could only buy one, which one would you buy? I think it’s pretty obvious.
But of course they’re not priced the same. That show with 100,000 regular viewers is worth a lot more than the one with 100 and the people who make it know that, so it costs more.
(This is also a simplification – in actuality there can be a complex chain of ownership and cash flow between ‘the network affiliate selling spots in the local market and paying a percentage of their profits to the network’ and ‘the studio that produced the show’. But it basically comes down to this. And so does Twitter and Facebook and, yes, Reddit.)
There is also another way for a show to make some profit: merchandise. Do you like Game of Thrones? Cool! Do you want a toilet seat cover with a picture of the Throne of Swords? No? How about a shoulder dragon based on one of Danerys’ baby dragons? No? A t-shirt maybe? Pins for whichever House you like? A full set of Funko statues? A full set of action figures so you can stage your own version of the ending where they are suddenly saved from the White Walkers by your collection of My Little Ponys? Replicas of the characters’ swords? Part of the profit on selling you all of those things goes back to HBO; some of it goes to Increasing Shareholder Value, some of it goes to pay for shows that don’t end up becoming giant successes.
(And yes I know HBO is a pay channel. It’s the currently popular show with a ton of merch.)
The commercials. I want people to come to my restaurant so I film a commercial.
Lots of people watch tv at 8pm so I pay more for a commercial slot at 8pm compared to 3am since fewer people are watching tv.
A toy maker (TV studio) makes a toy (TV series), and a teacher (the tv channel/network) decides to rent it to show to their students in their class (the tv audience), paying me an amount (license fee) that does not always cover the cost of making the toy (production budget). The teacher makes back the cost they paid me, by showing ads to the class while showing off the toy (like NBC), or by charging an admission price for students to see the toy (like Netflix).
The teacher and the toy maker usually negotiates how long the teacher owns the right to show off the toy to the different classes they teach (number of years on a single network), and in how many schools they can show it to (international distribution). The toy maker can decide to sell the toy to other schools (countries) by himself, but teacher will ask to lower the price he pays, since the toy is not exclusive to them. The toy maker then lower the amount they make back from the cost of making the toy from the teacher alone, but also increases the likelihood of them making even more money by selling it to other schools. The teacher can also pay a higher price in order to be the only person who is allowed to show off the toy to students.
After the number of years the teacher agrees to rent the toy expires, the toy maker gets the toy back, and is allowed to then rent it to other tutors (cable channels, or other distributors) to increase the toy maker’s profits. Sometimes, the toy maker (ABC Studios), works for the school (Disney), that the teacher (ABC Network) also works for, but is allowed to sell it to another school (NBC), because the toy was not right for the school they work for. At the end of the day, the toy maker will usually end up with the rights to the toy.
For example, Friends was made by Warner Bros TV Studios, but was broadcast on NBC. All advertising on NBC went to NBC. When Friends was “rented” to Netflix, the profits go to WB, not NBC.
Advertising and licensing.
Companies pay money to have their commercials aired with that money going towards the cost of producing the show. Producers can charge higher costs to advertise during popular shows with lots of viewers, providing a large incentive to make a hit show and replace unpopular ones.
From there, the producers can license the content to be sold/streamed elsewhere. Netflix, Hulu, Amazon, etc. all have to pay the producers for the right to stream their shows.
From commercials.
This is why ratings are tracked. If you can claim “30% of American households watch our show every Tuesday” and back that with viewership data, then you can command a pretty penny from advertisers. A 30 second commercial during The Big Bang Theory will command a lot more than a 30 second commercial at 2AM during a re-run of some Steven Segal direct-to-video movie. (interestingly that’s how he still makes money)
There might be some kickback or fee pass-thru from cable providers to _some_ specialy studios like HBO, Showtime or Turner Classic Movies, but generally its commercials.
Producers/studios sell shows to TV networks/broadcasters. The broadcaster then sells advertising space during/around the show.
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