Multiple-Issue Negotiations 645NBC preserves most of its original revenue but must pay Letterman’s price and
also must buy out Leno (his salary plus about a $3 million annual penalty). NBC’s
profit from this option is even less than its profit if Letterman defects to CBS.
Thus, in addition to its loyalty to Leno, NBC seems to have had a financial rea-
son for not matching CBS’s deal.
What is harder to explain is why NBC did not pay what was necessary to
keep Letterman in his 12:30 slot. The fourth agreement has NBC giving
Letterman $35 million per year, thereby beating CBS’s deal. By doing so, NBC
retains its $100 million late-night gold mine and earns $33 million in net profit.
This is nearly twice the profit NBC can hope for if it loses Letterman. Given the
monetary estimates in Table 15.2, this is the value-maximizing agreement. In
this agreement, the parties’ combined value is $68 million. By comparison, the
combined value is somewhat less than $50 million in either the second or third
agreements. Keeping NBC’s late-night lineup intact appears to be where the
money is.^5 CBS’s entry into the late-night sweepstakes (via the second or third
deals) has two value-reducing effects. First, it slices up the market, thus lower-
ing total revenue. (Indeed, ABC’s competing news show, Nightline, was proba-
bly the main beneficiary of the talk-show wars.) Second, adding a third show
raises the networks’ total costs. For completeness, the table shows a fifth possi-
ble deal in which Letterman agrees to a 12:30 show with CBS. Although such
a move avoids an 11:30 head-to-head battle, the parties’ total value is still sig-
nificantly less than a don’t-rock-the-boat agreement.
If money were the only thing that mattered, Letterman and NBC appear
to have missed a mutually beneficial agreement. Of course, one can argue over
the exact revenue and cost implications of the deals. (However, a quick sensi-
tivity analysis shows that NBC’s retaining Letterman at 12:30 remains the effi-
cient agreement, short of drastic alterations in the revenue and cost figures.)
Nonmonetary factors, particularly Letterman’s disappointment when he was
spurned as Johnny Carson’s successor, may offer the best explanations for the
ultimate negotiated outcome.
Does history ever repeat itself? In 2002, ABC made an aggressive effort
to lure Letterman from CBS after negotiations to renew his contract had
become acrimonious. The ABC offer was the financial equal both for
Letterman and his production company of what CBS had on the table, and
Letterman pondered the decision for nine days while on vacation in St. Barts.
Among other issues, Letterman was concerned about the fallout of displac-
ing the venerable ABC news show, Nightline, if he made the move. At the same
time, CBS set in motion a contingency plan to attract late night host Conan
O’Brien from NBC should it lose Letterman. In the end, Letterman decided
to stay with CBS.(^5) Note that the fourth agreement produces exactly the same total value ($68 million) as the origi-
nal status quo. Of course, the main difference is how this profit is divided. By virtue of CBS’s com-
petitive offer, NBC is forced to concede a substantial payoff to Letterman.
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