The Economic and Business Realities of Reality Television

Richard Crew. The Business of Entertainment. Editor: Robert C Sickels. Volume 3: Television. Westport, CT: Praeger, 2009. 

In early 2003, as American Idol, The Bachelorette, and Joe Millionaire were racking up impressive ratings, executives at the major broadcast television networks made bold predictions about the future of reality television. “The world as we knew it is over … I think people will be ordering fewer dramatic pilots,” predicted Les Moonves, president of CBS Television. “The audience is never wrong. They have a huge appetite for this, and we’ve got a responsibility to satisfy that appetite,” proclaimed Sandy Grushow, the chairman of the Fox Entertainment Group. Then, amazingly, four months later while presenting their upcoming fall schedules to advertisers, network executives “put down reality shows as no better than schedule fillers, bad for the image of a network, bad for the business in general.”

Fast-forward 18 months to the key November 2004 rating period, and bad news arrived for the broadcast networks: For the first time in television history, the rival cable networks attracted more viewers than the traditional networks during the primetime viewing hours. And during the same rating period, some very telling developments: Younger audience demographics, the ones advertisers cherish, were growing for reality shows, while older adult viewers were continuing to watch scripted comedy and drama series. Specifically, reality programs on television’s broadcast channels received top ratings among adults ages 18-49 in six of the top 10 and 11 of the top 20 shows. So, although cable programming now had more total primetime viewers than the major networks, reality television was drawing young viewers back to the broadcast television. This was the “audience that had been drifting away to cable channels before reality came along.”

There is business logic behind the foregoing statistics and executive tactics, and that will be examined later in this essay. But first, simply put, the broadcast networks had three significant problems early in the new millennium. They needed to lure back younger audiences because viewers under 35 had turned away from comedies. Next, the networks had to shed overhead because the expense of producing comedy and dramatic shows was increasing up to 10 percent each year. And as always, the networks needed to make a profit, and the trend was not positive. NBC, for example, once the king of network comedy, saw its 2005-2006 season ad sales fall by $800 million from the previous year.

The networks found a silver bullet—one change they hoped would solve their three problems: reality television. During the 2005-2006 television season, broadcasters added 51 reality programs to their schedules and lower cost, unscripted television programming became the life-blood of free TV in the United States. Ted Magder, who studies the international trade in media products, concludes, “Reality TV may have captured the attention of audiences, but it also looks good on the books and balance sheets of those whose business is television.”

This chapter examines reality television from an economic and business perspective. It tracks the business reasons for the initiation of reality television in the 1950s, the economic reasons for its growth and success from the 1980s forward, and finally the reason there is an international element in almost every new reality program today. The chapter concludes that television is moving toward a two-tiered system: In the near future the broadcast and cable networks will primarily offer lower-cost reality shows, sports, and game shows, while premium pay services such as HBO will continue to become the home of scripted drama and comedy.

Reality Programs Necessary for Television’s Early Growth

From the 1950s—when the NBC, CBS, and ABC oligopoly emerged—and into the 1980s, there were two dominant program forms: the sitcom and the drama. Modest innovations occurred from time to time, as when the sitcom stretched the definition of family (such as Three’s Company and Will & Grace), and the drama added serial elements(Hill Street Blues, Grey’s Anatomy). But Harvard Professor Emeritus Richard Caves, who examines entertainment economics, explains that this overall sameness in broadcast network schedules occurs because “nobody knows.” Caves borrows the phrase from the screenwriter William Goldman, suggesting that television industry executives know “a great deal about what has succeeded and failed in the past,” but their future predictions are no better than a roll of the dice. Therefore, as long as tried-and-true formats continue to work, there is little incentive to try anything totally new. Particularly when there were only three networks for viewers to choose from and only 22 hours of primetime per week, broadcasters enjoyed “demand premium” as the U.S. economy grew concurrent with the number of advertisers. Fixed supply and growing demand equaled higher advertising prices.

The origins of reality television go back to the late 1940s when broadcasters needed to attract viewers willing and able to purchase TV sets that averaged $800 in post-World War II dollars. Reality-based programming filled time until network shows were accessible to larger audiences. Candid Camera (1948) and Truth or Consequences, starting in 1950, used hidden cameras and artificial realities to capture the reactions of ordinary people. What’s My Line? in 1940,I’ve Got a Secret in 1952, and To Tell the Truth in 1956 brought real people into the broadcast studio. Most of these programs were either owned or invested in by advertisers during the 1940s and 1950s. In the late 1970s, Evening Magazine and PM Magazine (the same series using different titles in different television markets) utilized newly developed portable tape equipment to create a daily video magazine featuring “ordinary people doing extraordinary things and extraordinary people doing ordinary things.” PM and Evening Magazine also fulfilled a business objective: to program the primetime access period at local stations, while providing enough public affairs material to satisfy the FCC’s requirement for renewing the licenses of broadcast stations.

Reality Shows Launch a Network

In the late 1980s, the “first recognizable wave of reality-based series” emerged. ”Fox redefined U.S. network practices by producing cheap reality programming, which could compete in a competitive environment of network, cable and independent broadcasting.” Fox first introduced America’s Most Wanted in 1988, a program similar to the successful British series Crimewatch UK. The ride-along reality series Cops followed in 1989. The cost of producing each was less than half that of scripted programs, according to Richard Kurlander, a former vice president of station programming for Petry Television. Each used the fast-evolving, portable videotape technology pioneered by Sony, did not employ professional actors, and hired nonunion “story shapers” rather than script writers. These reality shows got extra traction with viewers when a 22-week Writers Guild of America (WGA) strike in 1988 shut down all other scripted comedies and dramatic programs. As a result, network ratings for NBC, CBS, and ABC were down 9 percent, and it was estimated that the strike cost a half billion dollars in lost revenues and wages. When an agreement was finally reached 22 weeks later, it looked similar to a deal that could have been brokered before the walkout began. The fledgling Fox network gained viewers during the five-month strike primarily because of the unscripted America’s Most Wanted.

The WGA strike was only the tip of an economic restructuring taking place in U.S. television in the late 1980s. With the growth of cable television, home video recorders, the new Fox network, and additional independent television stations going on the air, the existing television audience began to fragment. With advertising revenues spread over a larger number of distributors, the networks needed to cut programming costs. And two more business developments in the industry added to the pressure on programming overhead. Each of the big-three networks was sold in the mid-1980s, resulting in large amounts of corporate debt. Simultaneously, changes in audience measurement techniques were implemented to identify specific market segments, resulting in lower ratings for the broadcast networks.

Reality television became a viable economic option in the 1990s. By putting some reality shows in their programming mix, broadcast networks could average down the cost of programming across the entire primetime schedule. The networks could keep ordering the higher priced and more popular comedies and dramas but still contain overall program costs.

Imports, Hybrids, and Amateurs

America’s Funniest Home Videos premiered on U.S. television in 1990. While production expenses were kept moderate through the use of viewer-provided video, more significantly, the series was inspired by the Japanese variety show Fun Television with Kato-chan and Ken-chan. Starting with America’s Most Wanted, continuing with America’s Funniest Home Videos, and soon to follow with The Real World and then with Survivor, these “fresh” U.S. reality TV programs were “actually the result of an increased international circulation and recirculation of products through globalized media markets.” This reality programming trend would become more obvious from the year 2000 on, and its economic significance will be discussed later in this chapter.

Nummer 28 aired on Dutch television in 1991, the first show to put strangers together in the same environment for an extended period of time while taping the resulting drama. One year later, The Real World debuted on the MTV cable network. As of 2008, The Real World is the longest continuously running reality television series in the United States. The landmark series combines (seemingly) hidden cameras with contrived situations (all pioneered by Candid Camera),while adding the personal revelations of What’s My Line?, the videotape techniques of PM and Evening Magazine, and the voyeuristic appeal of Cops. ”The combination of techniques resulted in a format that is more structured and crafted than any that had come before.” It also fits reality television scholar Annette Hill’s astutely critical observation that television creates fresh programming by cannibalizing itself. The modest expense of creating a controlled environment in which young, nonactors experience living on their own together made the series affordable to MTV, which was venturing into nonmusic video programming.

Over the years, the talent show, another form of reality television, has been a highly popular format, perhaps because viewers can witness a seemingly average person become a star. The first TV talent show, The Original Amateur Hour, moved from radio to TV in 1948 and “discovered” Pat Boone and Gladys Knight. Starting in 1983, Star Search “found” such stars as Britney Spears and Justin Timberlake. By 2008, American Idol, modeled on the British series Pop Idol, had added Kelly Clarkson and Carrie Underwood among others to the popular music scene. Idol incorporated a twist to the talent show format by including the audition process—although this idea had been used before on Chuck Barris’ series The Gong Show, which aired from 1976 to 1978. From a business perspective, talent shows with amateur performances have significantly less overhead than ones totally scripted and acted by professionals.

Resource Prices Influence Programming

If you teach a parrot to say “demand and supply,” the old joke goes, you will have trained an economist. And textbooks on economics would probably agree because the tools of demand and supply are key to understanding economic issues. In the case of television programs, demand and supply determinants help to explain the significance and impact of reality television.

Costs, particularly resource prices, are a major factor affecting the supply of a product. When costs change, it will affect the supply of a product. In virtually every expense line of a reality television show’s production budget—from game, reality/game, talent/audition shows, to newsmagazine, talk, cooking, and home makeover shows—resource prices are lower than traditional scripted programming. Fictional programs such as comedies and dramas require highly talented writers, actors, sets, studios, and specialized production personnel. By comparison, nonfiction reality shows use smaller crews, have fewer paid performers, and require less studio and set time. In 2008 dollars, a scripted one-hour network program can cost $3 million per episode, compared to $1.5 to $2 million for a one-hour reality show. Cable network episode costs are moderately lower (they generally reach smaller audiences than the broadcast networks), but the differentials between scripted and reality programming are similar.

Following economic theory, lower resource prices reduce production costs and increase profits—in this case, for the television networks when they buy or produce reality programming. But while the economic advantage offered by nonscripted shows is obvious, until the end of the 1990s, reality programs were not consistently drawing large numbers of viewers or advertiser-friendly demographics.

Reality Takes Off

Spooked by the chance of another devastating writers’ strike, in 1999 CBS ordered two unscripted, strike-proof shows: Survivor, based on the Swedish show Expedition Robinson; and Big Brother, a series already a success in the United Kingdom. When the strike was averted, CBS aired both series anyway in the summer of 2000. Survivor was an immediate success. Drawing 51 million viewers for the final August episode, it was the second most-watched program that year. A whopping 59 percent of the advertiser-attractive adult demographic ages 18-49 were tuned to Survivor. With a first season cost of $700,000 per episode, advertisers were charged $600,000 for each commercial during the final show—twice the rate charged at the beginning of the Survivor season. While Big Brother had a slower start that summer, it gained popularity in subsequent seasons. One year later, with the possibility of both writers’ and actors’ strikes, CBS, Fox, and ABC execs moved more reality series into production.

NBC, however, decided to emphasize comedy programming because it had a strong track record with shows such as Frasier, Seinfeld, and Friends. But even NBC, which touted 16 half-hour comedies in the late 1990s, had shrunk its comedy lineup to just four by the 2004-2005 season. Perhaps because NBC had not moved aggressively enough from comedy to reality, as previously noted, its 2005-2006 ad sales were down $800 million from the previous year.

Many important advertisers were slow in warming to reality television programming. The reality genre’s excesses in the 1990s were unattractive to prestige advertisers because shows such as Fox’s When Good Pets Go Bad tarnished the image of reality shows. The gross-out stunts on NBC’s Fear Factor, which began airing in 2001 following the success of Survivor, made it an unfavorable buy as well. And reality series prior to 2003 demonstrated they attracted lower-income audiences and didn’t score significant numbers of 18-49-year-old viewers. But big reality hits such as American Idol and Joe Millionaire turned that around, pulling in both large numbers of upscale and younger viewers. In the winter of 2003, Joe Millionaire and American Idol gave the Fox network its first February ratings victory ever for the key 18-49-year-old demographic. When season two of Idol debuted on January 21, 2003, drawing 26.5 million viewers, it gave Fox its highest ratings ever except for a sporting event. Then the finale of Joe Millionaire on February 17, 2003, drew 34.6 million people to Fox, the highest rating in the network’s 17-year history.

Coming off these amazing performances, why then, as described earlier, did network executives belittle their upcoming reality shows as “schedule fillers” and “bad for the business” in May 2004?

Reality TV Hurts Vertically Integrated Companies

This brings us to the elephant in the boardroom. Each of the major broadcast networks is part of a larger production studio that seeks to control the production, distribution, and exhibition of their products. This is vertical integration. And these studios have historically depended on scripted dramatic and comedy series to make their operations profitable.

In May 2004, network executives needed strong sales during the “upfront” selling season because the traditional fall lineup of comedies and dramas had always brought higher ad rates than reality shows. So, intentionally de-emphasizing the rising popularity of reality shows, the network executives continued to push their scripted product. From a business perspective, reality television shows on a network schedule can actually hurt companies that are vertically integrated.

The large conglomerates that own the broadcast networks depend upon scripted programs to provide long-term profits once a program series reaches 90 to 100 episodes. That’s the point when backend sales to individual TV stations (known as “syndication”), cable networks, and international markets generate secondary profits. In addition, tertiary profits could come from music, books, and other merchandising tie-ins, video games, Internet exploitation, and even theme park attractions. Scripted shows such as Seinfeld and Friends, for example, had billion-dollar back-end revenue. One Wall Street analyst calls this “the huge lollipop at the end of the rainbow.”

By contrast, reality shows garner less revenue from advertisers, and even the most popular series don’t repeat well. Reality burns out much more quickly than conventional series, so reruns don’t sell well to cable or in syndication. Additionally, the overseas market for fully produced reality programs is small because countries that purchase nonfiction series prefer to purchase formats and produce their own culturally specific versions.

With the networks generally resistant to reality television programming, how did it finally come to dominate primetime schedules? And why do cable networks such as MTV and Bravo build their original program lineups around reality programs? The abundance of reality programming today is best understood by looking at the determinants of demand, classically put forward by economists Alfred Marshall and Paul Samuelson. Two demand determinants in particular deserve examination: tastes/preferences and the availability of substitutes.

Young Viewers’ Changing Tastes and Preferences

Economic theory posits that all markets are shaped by collective and individual tastes and preferences. These patterns are partly determined by culture and partly influenced by information and knowledge of products and services (including advertising).

MTV has studied the under 25-year-old audience and dubs them “media-actives” because “they have never known a world of limited options and forced choices: therefore they take an active role in their media experience.”56 In 2003, Betsy Frank, MTV Networks’ executive vice president of research and planning, suggested that reality television is a preview of the impact these younger audiences will have on television. Events since 2003 support her point. For example, a 2006 Nielsen Media Research report on the top 10 regularly scheduled broadcast television programs revealed that 60 percent were “unscripted.” This shows that the popularity of scripted television—sitcoms and dramas—has been declining, and reality television shows are taking their place.

MTV discovered that relevance is everything to the “media actives.” They are the first generation to grow up with cable, particularly channels created just for them such as Nickelodeon, Disney, and MTV. Videogames have given them their own reality. And the Internet has customized a world with specific relevance for their interests. Frank suggests “anything irrelevant will not be on their media menu for long.” By example, MTV discovered that most of their best shows only last two or three seasons. While The Real World is an exception, the location and the cast still change every year to keep it fresh. TV historian Tim Brooks comments that the MTV’s program schedule is purposely slapdash. “For them to imitate the structure of a traditional network would be negative,” he observed. “That would remind teens that the network is really run by grownups.”

These teens are bringing their media-active habits into adulthood. A 2003 study by the media research company Bolt, Inc. found that 80 percent of 12-24 year-olds say they are often online while watching television.61 Reality television capitalizes on this interest by creating Web sites that offer their viewers online experiences—some interactive—both before and after episodes appear on television.

Today’s viewers under 35 are bored with the network comedy format pioneered by Lucy and Ricky that features the setup and joke sequence. Networks have tried tweaking the format in various ways, with only limited results. The most recent assortment of sitcom failures was the Friends spinoffs “featuring young single people quipping sardonically to one another.”

Traditional television drama has also declined in popularity with younger viewers. This chapter’s author discovered the discontent viewers ages 23 to 38 have with actors and scripted series when he moderated several focus groups of Survivor viewers in 2003. Expressing the opinion of most group members, one participant said Survivor is,

way more interesting than a committee of writers, trying to write a show … If somebody wrote that a woman Boy Scout leader would decide a guy is so annoying (that) she’s not only going to deprive him of $100,000, but is willing to lose $900,000 in order to keep him from having that, it would be hard to believe … in a sitcom or drama.

When the group participants were asked, “What do you like about Survivor?” more anecdotes like the previous one were offered. In this research study, multiple young adult viewers clearly stated they were tired of predictable, scripted shows with actors that conveniently resolve at the end of each episode.

In economic terms then, the tastes and preferences of television consumers under 35 have increased the demand for reality product. And a corresponding decrease in this group’s taste/preference for traditional sitcoms and drama has decreased demand for scripted programming.

Availability of Program Substitutes

Consumption choices are influenced by the alternative options facing users in the relevant marketplace. Prior to the mid-1980s, television distribution channels were scarce. Then, as the number of cable and satellite subscribers grew, the audience for the major broadcast networks grew smaller. According to Harvard economist Richard Caves, the decrease in the share of broadcast viewing has been in direct proportion to the gain in audiences by basic cable networks. The broadcast networks’ response was to reduce the cost of their programming and, thereby, the quality. At the same time, cable was upgrading their programs to serve an expanded audience.

Three overlapping distribution systems—broadcasting, cable, and satellite TV—define television networking in 2008. And six multimedia transnational corporations actually own a majority of the important network properties across all three of these industrial sectors. With this consolidation in networking, television’s newest business model no longer favors the major broadcast networks. None of the broadcast networks attract more than 20 percent of the primetime audience today. The cable networks alone have several advantages over broadcast networks: They deliver higher quality signals (vs. over-the-air signals), they have two revenue streams—subscription and advertising vs. advertising-only for broadcast, and “they target smaller niche audiences, program and promote their brand identities to viewers all year long, and aggressively cater 24/7 to consumer needs across a wide array of programming choices.”

With the availability of these attractive alternative goods, the demand for the major broadcast networks’ programs continues to decrease. In 2004, broadcasters began to actually repeat episodes of popular programs within the same week, usually on Saturdays, the lowest-rated night of the week. At the end of 2007, NBC announced it would purchase a block of reality-type programming—up to three consecutive hours—from a well-known cable show reality producer to be telecast one evening in primetime each week.

Another reason reality television has become attractive to the broadcast networks is that it permits the scheduling of new, inexpensive programming year-round. The cable networks had successfully counter-programmed them for many years by premiering new shows and offering new episodes of continuing programs during the summer. Most of the broadcast networks now use reality television to level the playing field in the summer, so that they also schedule new programs year-round.

It appears that in the future, the broadcast networks will look more like the larger cable networks and vice versa, and an abundance of modest-priced reality television programs will continue to appear on all of them.

Network Trends for Reality, Comedy, and Drama

There are now signs that the habits of the Tivo culture—those viewers with digital video recorders (DVRs)—are working against scripted programming. As previously noted, Nielsen Media Research reported in 2006 that 6 of the top 10 regularly scheduled TV programs were unscripted (reality shows, game shows, and football). Nielsen has added another category as well: the top 10 “time-shifted” primetime TV programs. Scripted programming may be slowly disappearing from the most popular program list, but 9 out of the top 10 Tivo-ed shows that year were scripted comedies or dramas. This suggests that viewers with DVRs watch reality and game shows “live,” as they do with sporting events, while recording scripted shows for later viewing. Networks and advertisers must now be concerned that, in addition to low ratings for scripted fare, commercials in certain shows are being skipped as well. If audiences for unscripted shows watch “live,” they have a better chance of seeing the commercials.

And the future will probably get worse for scripted programming on the broadcast networks. Nielsen is now also reporting the top 10 broadcast programs for product placement—that is, commercial mentions or visuals of products purposely integrated into program content. Nine of the 10 shows receiving the highest number of “product mentions” were reality and game shows. This additional benefit that unscripted programs can offer to their sponsors may help win over any previously dubious advertisers.

Meanwhile, premium cable channels such as HBO and Showtime are freed of the need to please advertisers because their economic model is based on monthly fees. Unique and distinctive scripted programs are appearing regularly on these networks because there is less pressure to generate nightly ratings. Some of these programs have shown they can reach significant numbers of viewers. In 1999, for example, HBO was the first cable channel to develop a series that received larger audiences than the leading series on the broadcast networks. The same series—The Sopranos—outpaced network competition many Sundays in adults ages 28 to 49 during its eight-year run. This is an extraordinary achievement because HBO is only seen in one-fourth to one-third of American homes. These channels attract creative writers and producers by offering greater freedom to go beyond traditional broadcast concepts.

HBO in particular has developed a strong counter-programming strategy to fill some of the openings for scripted shows that the broadcast networks have created. HBO “has offered its subscribers The Larry Sanders Show, Sex and the City, and Curb Your Enthusiasm, which, like The Mary Tyler Moore Show, All in the Family, and Seinfeld, are comic commentaries on contemporary American manners and culture.” The network regularly creates made-for-TV films that rival the quality and scope of those normally shown in movie theaters, and its high-quality dramas, such as The Sopranos and The Wire, receive praise from critics and subscribers alike. From his study of HBO’s programming, Al Auster concludes, “there seems little doubt that along with dominating the Emmy Awards each year, HBO will continue to be the venue where the must-see shows will be found.”

While one current programming trend is the production of high-quality, scripted programming on the premium cable services, another is the import of proven reality television formats from international markets. When a reality series is successful in one country, sometimes the cultural aspects can be stripped out, the template sold to the United States, and the product can be made to look like any other U.S. production. From an economic perspective, this helps mitigate the “nobody knows” conundrum: reducing uncertainty and increasing the probability of success. In comparing U.S. and international media products, Magder found that four out of five original U.S. productions fail after one season or less, whereas three out of four imported formats succeed here.

Two of the large international syndicators of reality television to the United States are Freemantle and Endemol. Freemantle Media, the U.K. company that brought Pop Idol to the United States as American Idol, operates in foreign markets the same way as the U.S. fast food giant McDonald’s. It has subsidiaries in some countries and franchise-holders that produce local versions of product in others. The Dutch company Endemol has sold reality formats to many countries, including Big Brother, Survivor, and Fear Factor to the United States. Magder describes Endemol as crafting a television format to become “an international brand with distinctive and carefully modulated local variations—the formula tweaked from country to country, like the sugar content in Coca-Cola.” These companies will continue to bring overseas products to the United States because the problems of new reality series can frequently be avoided by purchasing a program format that has already been successful in another culture.

Adding It All Up

It is conceivable that reality television could eventually go the way of the western, a TV genre hardly seen anywhere today, even here in its country of origin. But right now the economics of television favor inexpensive programming—and today’s advertiser-prized audience of adults 18-49 doesn’t seem to mind the less costly looking shows. They say they are getting original stories and seeing original characters that professional writers can’t dream up.

The quality of scripted programs on television’s premium services such as HBO suggests television may be moving toward a two-tiered system for programs. The broadcast networks, and even cable services, may continue to primarily offer lower-cost reality shows, sports, and game shows, while the premium cable services become the places that viewers can consistently find high-quality, scripted TV drama and comedy.

With reality television programs elbowing scripted shows out of TV’s schedules, the Hollywood studios will not reap the large rewards that scripted TV brings with its potential for multiyear back-end sales. Because vertically integrated companies owning broadcast television networks makes less sense when the amount of scripted programming declines, one or more of the major networks could eventually be sold. But a veteran media financial analyst doesn’t believe that long-term media values will diminish significantly because the syndication business is just one of the many assets that contribute to studio profits.

The economic and business realities point to reality programming being much more than a fad. Compared to traditional scripted programming, reality television is regularly delivering shows that appeal to younger, more upscale audiences. At the same time, reality TV can cost about half as much to produce. As far as what may someday do a better job of reaching the next young generation and meet future business and economic realities, “nobody knows.” But all signs point to reality television having a very long and dominant run on broadcast and cable networks in the United States.