Multiple-Issue Negotiations 643Michael Ovitz, exploring the possibility of dumping Leno and giving The Tonight
Showto Letterman. One group of NBC executives stood firmly behind Leno.
Another group preferred replacing Leno to losing Letterman to CBS. Giving
Letterman The Tonight Showwould mean paying him much more, as well as buy-
ing out Leno’s contract. Moreover, the network still would face certain risks:
Would Letterman’s brand of irreverent comedy appeal to the more mainstream
television audience in the earlier time slot? What show would replace Late Night?
Even if it retained Letterman as host of The Tonight Show, NBC had to face the
fact that its new lineup (with an undetermined late-night entry) would produce
only about $75 million in annual net revenue.
In the end, NBC offered The Tonight Showto Letterman—but with the con-
dition that he wait a year until Leno’s current contract was up.^4 Letterman
yearned for a chance to showcase his talents in the earlier time slot. But he had
been hurt and angry when NBC bypassed him for The Tonight Showin the first
place. Now, NBC’s last-ditch offer was too little too late. He decided to leave
NBC. CBS executives were elated. Over a five-year horizon, they expected the
new Letterman show to generate $35 million in net revenue per year. Over a
longer period (assuming the establishment of a second show following
Letterman), net revenues surely would increase, perhaps substantially.
When Willie Sutton was asked why he robbed banks, he replied, “Because
that’s where the money is.” In some sense, this advice applies to the Letterman
bargaining. Good negotiators should find their way to where the money is; that
is, they should conclude value-maximizing deals. Let’s step back and evaluate
Letterman’s possible deals with NBC or CBS.
Table 15.2 lists the main possibilities and the monetary consequences to
each of the parties in the negotiations. (Values are annual estimates over the
three years of Letterman’s contract.) For comparison purposes, the first agree-
ment shows the original status quo. NBC obtains $100 million in revenue and
clears $63 million in profit after paying star salaries and $15 million to produce
each show. Letterman earns $5 million, and CBS is out of the late-night business.
Now consider the new agreement. According to analysts’ projections, NBC’s
net revenue is expected to drop to about $50 million per year. With its revenue
cut in half (and only a modest savings in star salaries), NBC’s profit is decimated.
CBS’s projected revenues are not quite sufficient to cover its costs. Did Michael
Ovitz squeeze out the best deal for Letterman from CBS? The answer certainly
seems to be yes. Clearly, CBS views snagging Letterman as an investment: Future
revenue growth from Letterman is judged to be worth the initial loss.
The third column shows Letterman’s good fortune. Besides his own salary,
Letterman’s production company stands to earn $10 million in profit ($25 million(^4) This account is based on B. Carter, The Late Shift: Letterman, Leno, and the Network Battle for the Night
(New York: Hyperion, 1994); K. Auletta, “Late-Night Gamble,” The New Yorker, February 1, 1993,
pp. 38–46, and B. Carter, “A Letterman Deal with ABC Was Just a Signature Away,” The New York
Times, March 18, 2002. p. C1.
c15BargainingandNegotiation.qxd 9/26/11 11:03 AM Page 643