In the television industry's first venture in which a broadcast network and an outside program producer would share advertising income and other revenue, Capital Cities/ABC Inc. agreed yesterday to form a jointly owned television production company with the Hollywood team of David Geffen, Jeffrey Katzenberg and Steven Spielberg.
"It is the first time, to my knowledge, that a network has shared revenues with a production entity," said David Londoner, a broadcasting analyst for the investment firm Wertheim Schroder & Co. "In agreeing to do so, it appears to have crossed a line that the networks have never crossed before."
The agreement was driven by market forces bigger than ABC's desire to sign up the creative talents of Hollywood's newest independent entertainment company, or by the incentive for Mr. Geffen, Mr. Katzenberg and Mr. Spielberg to line up a distribution system for the television programs they intend to create as part of their planned popular-culture empire. In large part, the deal was a response to a fundamental change in the economics of television.
Traditionally, under a set of federal strictures known as the financial interest and syndication rules, the three main broadcast networks have been precluded from owning most of the prime-time series they broadcast.
Instead, they have acquired this programming by paying programmers the bulk of the production costs for network series in the form of license fees. The network recovers its investment from sales of advertising for the two times that a license typically entitles it to broadcast a program.
Under this system, the program's producer typically does not recover its portion of the production costs -- or make profits, if any -- unless and until it sells the rerun, or syndication, rights to the series several years later.
But as of November 1995, ABC, CBS and NBC will no longer be bound by these so-called fin-syn rules. Instead, like the newer, smaller Fox network they will be permitted to produce and own as much programming as they choose and to sell the rerun rights.
The impending change is forcing the networks and programmers alike to re-examine their strategies. The networks are already beginning to use their in-house production companies and have been looking at ventures or mergers with television studios.
Two leading television producers -- Time Warner and Paramount -- are scrambling to start their own broadcast networks in an effort to ensure a distribution system for their programming.
In the joint venture announced yesterday by ABC and the three Hollywood executives, each side is said to be committing up to $100 million initially for production of programs, agreeing to add more if necessary during the life of the seven-year deal.
Michael Wolf, head of the media and entertainment practice at the consulting firm of Booz Allen & Hamilton, described the arrangement as a good deal for both sides.
"This guarantees the new company access to distribution by getting its programs on ABC," Mr. Wolf said, "and gives them a partner with a vested interest in making sure the programming is successful. From ABC's viewpoint, it gives them access to creative talent and a participation in the upside in programming."
A joint venture with the new Hollywood team was in keeping with earlier production moves by Capital Cities/ABC. It already produces "My So-Called Life" and several other series, including "The Boys Are Back," through the in-house ABC Productions unit, which is headed by Brandon Stoddard, the former ABC programming executive.
In an interview yesterday, Robert A. Iger, president of Capital Cities/ABC, summed up the strategy: "We see that our suppliers are becoming distributors themselves. We felt it was imperative to protect the supply of programming."
Meanwhile, Mr. Geffen, Mr. Katzenberg and Mr. Spielberg can share the expense and risk of starting a new television production studio. "As the entertainment industry looks to the future," Mr. Katzenberg said yesterday, "it is clear that one of the most important considerations will be the ever-evolving relationship between the Hollywood studios and the broadcast community."
The new alliance gives ABC a tie to executives with wide experience in television. Mr. Spielberg, while better known for his movies, currently has the season's hit "E.R." on NBC, as well as two other series on that network: "Earth 2," a new series off to a promising start, and "Seaquest DSV," an older series still searching for an audience. His company, Amblin Entertainment, has also produced numerous other television series.
Mr. Katzenberg, meanwhile, oversaw the television division of Walt Disney Co. and ran its film studio until his departure from Disney in September. He is credited with discovering the comedian Tim Allen, star of the most popular program on television, "Home Improvement," which is produced by Disney for ABC.
Of the three, only Mr. Geffen has not been in the television business -- although he laughingly confirmed yesterday that he did, indeed, own a television set. He has, however, been a hugely successful record and film executive and yesterday he said that the main issue in the television business, as in records and movies, was "attracting talent."
Although both sides were secretive about the terms of the deal, people close to the situation said yesterday that Capital Cities/ABC would pay the joint venture a form of a license fee for the first several years that a series was on the air.
After that, the joint venture would somehow share the advertising revenues that the series had attracted, although the details were not disclosed. The two sides would also share the revenue from any subsequent foreign sales and domestic syndication, these people said.
The production joint venture, which has not yet been named, will in most cases give ABC the first option to broadcast the studio's programs, but will not preclude other networks from picking up programs that ABC chooses not to run.
The venture is expected to concentrate mainly on the production of comedy series. In recent years, the rerun market for comedies has been stronger than the market for drama or action series.