The New Cable Model: Why It's Better to Own Than to Rent (Analysis)

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Creator Kurt Sutter and star Katey Sagal developing a dark comedy for FX.

What do "Louie," "The Walking Dead" and "Royal Pains" have in common? All were homegrown by their cable networks' own studios, with FX leading an aggressive charge.

This story first appeared in the Oct. 19 issue of The Hollywood Reporter magazine.

When Louis CK won his writing Emmy for Louie on Sept. 23, the first one he thanked was FX Networks president John Landgraf "for giving me this show." The accolade was more than the usual executive suck-up. The fact that Louie even made it on the air is a testament to a Landgraf-pioneered strategy that has allowed small-budget, niche comedies to thrive on basic cable.

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FX Productions, which now produces or co-produces 11 series including Archer and It's Always Sunny in Philadelphia, has generated north of $100 million in annual gross revenue and is expanding rapidly. In recent months, the studio has put a slew of shows in development, inked first-look deals with both Nina Jacobson's Color Force (The Hunger Games) and Paul Giamatti's Touchy Feely Films and has launched a larger miniseries division with former HBO executive Gina Balian as its chief.

The key to the strategy: ownership. FX is among a growing group of cable networks demanding increasing control over the content they broadcast. HBO is the godfather of the own-and-air model, but nets as diverse as AMC and USA are following suit with such series as The Walking Dead and Royal Pains. FXP simply is ramping up faster than most -- and with a low-cost, talent-friendly model that has proved particularly lucrative. "It's not our primary business," notes Landgraf, who relies more heavily on affiliate and advertiser cash, "but it's become a shockingly important third revenue stream."

The irony, of course, is that FXP launched in 2005 as a way to dabble in a genre few believed had value. "Back then, the big traditional studios didn't think there was any money to be made from cable comedy, so they ignored the space," says one executive. What Landgraf and his team figured out: Half-hours could make sense if you made them cheaply and -- importantly -- if you owned them. (Comedy tends to generate lower ratings during the first run but holds up better in repeats; so if you're simply licensing a series, you're paying more to get less and aren't able to take advantage of that ancillary revenue.) To lure talent to the fledgling studio, Landgraf peddled a model predicated on creative freedom, bigger slices of profits and fewer levels of management (and, as a result, notes).

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All three have remained selling points, especially for someone like Louis C.K., who has enjoyed unprecedented control and the ability to deal almost exclusively with Landgraf, who with Eric Schrier -- FXP executive vp and head of series development at FX -- oversees the network and studio. "You feel like you're working with partners as opposed to employers there, and that makes a big difference when you come in on a Sunday night because a script isn't working," says Rob McElhenney, creator of Sunny, FXP's earliest effort, who is now collecting big profit checks on a show that is expected to generate an estimated $300 million in revenue. (Landgraf won't comment on McElhenney or his fellow producers' cut, except to say, "They've all bought really nice houses.")

More recently, FXP has found it increasingly difficult to justify co-productions with other studios -- much less licensing arrangements -- for any of its comedy vehicles. "We've just figured out a way to make comedies less expensively than almost anybody can do it," notes Schrier of a template that has them producing half-hours for $400,000 to $700,000 an episode (a network sitcom can cost four times that). The studio has been slower to move into drama ownership, a pricier front-end proposition with historically less backend potential, though that, too, is changing. In fact, if Guillermo del Toro's The Strain is ordered to series, it will be the studio's first drama that FXP owns outright.

"We have the ability and the infrastructure to produce this stuff ourselves; and to tell you the truth, part of what's gotten complicated about this is that we like to be really generous with our talent," notes Landgraf, who recently restructured a deal with Louis C.K. to give him a bigger piece of Louie and has inked a development deal with Sons of Anarchy star Katey Sagal. Still, FXP, which primarily is designed to service FX and FX Movie Channel, hasn't ruled out the occasional licensing arrangement, as it has done for 20th TV's American Horror Story, if the content and talent -- in this case, co-creator Ryan Murphy -- warrants it.

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The model has its downsides, of course. Ownership can lead to costlier flops (Testees) and the possibility of alienating hits from other studios. But for the shows it does pick up, ownership could mean longer runs. For instance, if FXP wholly owned the Sony TV-produced Damages -- and thus benefited more from such ancillary revenue as the nearly $2 million an episode in international license fees -- Landgraf says he would have kept the drama on the network for more than three seasons. He's been considerably more patient with such low-rated FXP-produced efforts as Sunny, Wilfred and Louie, which can generate millions via international sales, syndication, DVDs and merchandise. "Six or seven years ago, we set out to do things differently economically," says Landgraf. "And then we woke up one day and we're like, 'Holy moly, we've got a real business here.' "