The Walt Disney Co. bought ABC so it could profit from both making and broadcasting the network's hits.
Nine years later, the deal is finally paying off.
After a long run of modest hits and disappointing flops, ABC stands to make hundreds of millions of dollars on advertising, syndication and DVD revenue from "Desperate Housewives" and "Lost," two of this season's top-rated programs. The shows are the work of Touchstone Television, Disney's TV studio, and are its first hits since "Home Improvement" in 1991.
Disney and other media giants have been hungry for such homegrown megahits since the government lifted regulations a decade ago that kept networks from owning the programs they broadcast. Under the old rule, shows were produced and owned by studios that licensed them to networks; studios collected money from the licensing fees and in some cases syndication, while networks kept revenue from advertising.
The change helped networks boost their earnings and triggered a rush of consolidation with the Hollywood studios that make TV programs. It was a major reason behind the merger last year of NBC and Universal, which makes the network's popular "Law and Order" shows. It also led Disney to buy Capital Cities/ABC in 1996.
"The media companies have wanted this all along," said Paul Kim, an analyst with Tradition Asiel Securities.
Independent TV producers have complained that the change would make it nearly impossible for them to compete with the major studios. But media companies including Disney said the consolidation was necessary given the rising costs of making shows.
Like many entertainment companies, Disney had long been in the business of producing TV programs, including past hits such as "Ellen" and "The Golden Girls."
Now, with Touchstone producing most of ABC's new shows, Disney said it stands to make nearly $1 billion from its two new hits along with the Jennifer Garner spy drama "Alias" and soon-to-be syndicated sitcoms such as "According to Jim" and "My Wife and Kids."
The success was a long time coming for Touchstone, which has stumbled with ratings flops such as the 2001 Jason Alexander vehicle "Bob Patterson."
"You have to remember, when the consolidation of ABC Primetime and Touchstone occurred, it in essence became almost a startup company," said Mark Pedowitz, president of Touchstone. "We were starting from scratch. The inventory was old inventory."
Touchstone has had some success in the past few years, producing "Scrubs" for NBC and "Alias." But for the most part, it churned out dramas and comedies that just didn't catch fire with viewers.
It did famously develop the megahit "Crime Scene Investigation" only to see Disney sell its stake in the show after deciding it wasn't worth the financial risk. The franchise has since helped propel CBS to the top of the primetime ratings.
Touchstone's fortunes changed last fall with the debuts of "Desperate Housewives" and "Lost." The studio also produces "Kevin Hill," a modest ratings success on UPN.
"We've become hot," Pedowitz said. "We took chances and we'll still take chances. My point of view is, within some restraint, put it on the screen and let the viewer determine if it will work or not."
ABC decided to produce the primetime soap opera "Desperate Housewives" even after the concept was rejected by other networks.
"They had nothing to lose," said Harold Vogel, an analyst with Vogel Capital Management. "At the same time, competing shows begin to get tired."
But challenges remain for Touchstone, including keeping its new hits around long enough to reach syndication with at least 100 shows. And there's no guarantee that its other shows will automatically make it to ABC's schedule. With the network rebounding, outside producers are anxious to sell their shows to ABC.
"When you get this job, you get an immediate objectivity, which is, 'I want the best stuff,'" ABC Entertainment president Steve McPherson said. "We've got to be in business with everyone."
McPherson moved to ABC last year from Touchstone, where he helped develop this year's network hits.
Touchstone's success has led to a flurry of award nominations for its shows and a number of high-profile deals with writers and actors who want to develop shows for the studio. Recently, David James Elliott, star of the CBS show "JAG," said he would leave the show at the end of the season and develop new projects with ABC and Touchstone.
Pedowitz has gotten credit for aiding the turnaround. After handling business and legal affairs at Touchstone, he became head of the company last year.
"While the specifics of his job may have shifted, he's finding his footing," said J.J. Abrams, who created "Alias" and is co-creator of this year's hit show "Lost."
