Financial Interest and Syndication Rules - Deficit Financing

Deficit Financing

Before the fin-syn rules, the networks attained greater control and less risk by forcing production companies to deficit finance their programs while also demanding a percentage of the syndication revenues. Deficit Financing is an arrangement in which the network pays the studio that makes a show a license fee in exchange for the right to air the show. The license fee is in exchange for the right to air an episode a few times (as a first- and re-run episode), and does not cover the complete cost of production. The studio remains in ownership of the show. Before the fin-syn rules were established, networks would put into practice "profit participation." Here, they gained greater control and avoided the risks by forcing the production companies to deficit finance their programs. Such practice led multiple production companies into financial hardships. Independent producers and those not signed with major working studios were hit the hardest because most of the profit revenue went to the networks. By the mid-1960s, Amanda D. Lotz explains that from profit participation, the networks gained as much as 91 percent of the programming revenue. That is when the government stepped in and got involved with the fin-syn rules in the 1970s.

Deficit financing minimized the substantial risks and costs of developing programs for the networks while initially affording the studios considerable benefits as well. In successful cases, the studio receives a large return on its investment when it re-sells the show in a combination of syndication windows because the sales provide nearly pure profit: no additional work typically goes into the show and the network receives none of the payment. However, if the show is cancelled by the network before producing enough episodes to be syndicated, or if no syndication buyers want the show, the production company must absorb the difference between the cost of production and the original license fee, which can now amount to millions of dollars for each season.

As of 2004, most reality television producers think that deficit-financing will never fly because the vast majority of reality production companies are too small to wait long enough for the big payoff. Instead of syndication, producers have been covering gaps between license fees and rising production costs by selling shows' formats to foreign territories and developing integrated marketing deals with advertisers.