FRASIER (A) ANALYSIS This case outlines the background of the negotiations between NBC (National Broadcasting Corporation) and Paramount for the extension of renegotiating the rights to the TV show, Frasier. While NBC wanted to pay under $5 million per episode in order to make a profit, Paramount seemed to be demanding $8 million per episode. This was a very big gap considering that there were 24 episodes per season and that Paramount wanted a three year term on the renegotiated contracted.
The key parties in this case are NBC (represented by Mark Graboff, Scott Sassa and Jeff Zucker) and Paramount (represented by Kerry McCluggage and Gary Hart). What is NBC’s BATNA? NBC’s BATNA was to either steal a show from another network or begin a new show in place of Frasier. The case points out that there were reports in the media about 20th Century Fox TV stalling its renegotiations for its sitcom, Dharma & Greg, with ABC, if NBC were to lose Frasier.
However, this meant that avenues would open up for networks stealing each other’s TV shows, which in turn, would increase operating costs for all networks. The second option (starting a new show) was not only an expensive, but a time consuming alternative, since new shows take time to build up an audience base (in addition to there being no way to predict its success or failure). What is Paramount’s BATNA? Paramount’s BATNA was to shop the show to other networks if the renegotiation talks broke down.
However, due to the high production costs of Frasier, they were limited to the two networks comprising the ‘Big Three’, ABC and CBS. Among these, CBS had the edge since Paramount and CBS were owned by Viacom. Also, from the case, it appears that ABC would not get involved due to the high price tag involved. NBC was paying about $5 million per episode in license fees. This is estimated to be higher than even their breakeven fee, which means they were making a loss on Frasier. NBC felt that neither ABC nor CBS could match these prices.
They estimated that the breakeven fee of CBS would be about $3 million per episode, which was significantly lower than the $5 million that NBC was paying at the time. Since Paramount could not negotiate for a price lower than $5 million with other networks, Viacom probably would not agree to a loss making deal unless it felt that Frasier would have a significant impact on other CBS shows (in other words, be a ‘tent pole’) as well as on CBS’ internal power struggle. What is your best estimate of their respective reservation prices (“walk away price”)?
Be sure and explain your answer. Don’t just give a number. The initial offer from Paramount was a 20% increase over what NBC was paying. This translates to roughly about $6 million per episode. However, NBC’s initial number was 5% less than what they were paying currently. This translates to roughly about $4. 75 million per episode. Later, Paramount came down by $500,000 per episode ($5. 5 million per episode). This still represented a sizable difference. Based on these facts, I would put Paramount’s reservation price being in the range of $5-$5. 25 million per episode.
This is because their BATNA is not very strong and the fact that NBC were the industry leaders in terms of license fees, especially for prime-time shows. Additionally, they called NBC to still work on the deal, which gives a strong hint that they were still open to negotiation. On the other hand, NBC’s reservation price would be in the range of $5. 5-$5. 75 million. Though NBC’s BATNA is also not very strong, they have other alternatives. And despite the popularity of Frasier, it is just one more show in NBC’s line-up. This gives them a slight edge. Is there a ZOPA?
Briefly explain. Yes, there is a ZOPA although it seems like there isn’t one, since NBC will not go above $5 million and Paramount seems to want at least $5. 5 million. I believe that if Paramount had continued the negotiations, they could have probably settled for something in the range $5. 25-$5. 3 million. This makes the ZOPA $5 million to $5. 3 million. NBC would have definitely jumped at this considering they were willing to take a small loss due to the tent pole effect and were also willing to pay more than the current license fee, as stated in the case.