David Letterman's contract -- Did CBS pay too much for the TV host?

By Mark Harris
Updated January 29, 1993 at 05:00 AM EST

Calculated on a dollars-per-footstep basis, it was undoubtedly the richest deal in entertainment history. The GE (formerly RCA) Building, which has been home to NBC’s Late Night With David Letterman for 11 years, overlooks the Rockefeller Center skating rink in midtown Manhattan. About 300 paces to the north stands CBS’ corporate headquarters, a bleakly imposing tower known as Black Rock. On the evening of Jan. 14, David Letterman finished taping his show in NBC’s Studio 6A, then quietly walked off the premises and journeyed two blocks uptown to CBS. The trip earned him $42 million.

At the network he left behind, some staffers clustered around monitors to watch the most public, protracted TV bidding war in years end in an explosion of flashbulbs at near-simultaneous press conferences 3,000 miles apart. At a Santa Monica, Calif., TV media junket, NBC Entertainment president Warren Littlefield forced himself toward exuberance to announce that ”the host of The Tonight Show will continue to be Mr. Jay Leno!” Minutes later, in New York, Letterman, with a proprietary pat on the arm from CBS chairman Laurence A. Tisch, entered his own press conference as the highest-paid person on network television.

In the bicoastal frenzy of spin control that followed, two competing stories emerged. In the version of events NBC would have you believe, a race between Leno and Letterman for The Tonight Show had finally ended, with Leno victorious. Sorry, no sale: Even Leno wasn’t buying. ”I have the job!” he reminded reporters testily. ”What we’re celebrating is, I haven’t been fired!” In fact, Leno was ultimately a peripheral player in the real contest — a behind-closed-doors battle between CBS and NBC for the services of David Letterman. And in the end, the Eye had it.

Ever since CBS first came courting Letterman with its zillion-dollar offer in December, NBC executives knew they were almost certainly going to lose one of their two late-night stars, and they agonized over which one to save. ”We did everything we could to keep both of them,” says an NBC source close to the negotiations. ”We explored every possible option, and I mean every option” — including giving Letterman his own nightly show at 10 o’clock, a move that would have forced the network to drastically reconfigure its prime-time schedule. But ultimately, Letterman was less interested in prime time than in The Tonight Show. ”Trust me,” says NBC’s Littlefield. ”This was always about the 11:30 time slot. Any other stuff was so infinitesimal it never mattered.”

Although NBC was reportedly ready to hand Leno’s job over to Letterman if the Late Night star would wait until 1994 (a rumor the network denies), CBS ultimately offered him ownership of his show, a greater financial package — a $14 million annual salary for three years — and the prize he had wanted all along: an 11:30 p.m. slot that starting this August will place him head to head with Tonight. In the very strange world of show-biz computation, CBS’ decision to pay $42 million (plus an estimated $25 million in production costs to Letterman’s company) for a host who currently draws just under 3 million viewers — fewer than the lowest-rated show in prime time — is defensible, even prudent. Put simply, the numbers add up. According to a 1991 Arbitron study, NBC’s late-night schedule generated $272 million in revenues, of which $20 million was pure annual profit from Letterman’s show. CBS’ late-night revenues were, by contrast, a puny $75 million. Though much will be made of the forthcoming ratings contest between Leno and Letterman, a more important comparison may be that Letterman will almost surely draw more viewers than the low-riding CBS ”Crimetime after Primetime” lineup he is replacing. And if his ratings even come close to those for The Tonight Show, which earns as much as $75 million in yearly profits for NBC, CBS’ return on its investment will be impressive.

But what appears to be a good deal for CBS, ironically, would have made a very bad one for NBC. First of all, the tab would have been much higher: NBC would have had to double Letterman’s current salary of $7 million per year, lay out $25 million to shift control of the show from NBC Productions to Letterman, and pay a hefty penalty for getting rid of Leno — $8 or $9 million to buy up his contract and boot him in 1994, and as much as $18 million for the privilege of firing him immediately. The alternative — keeping Letterman in his 12:30 a.m. time slot — was feasible only on one small condition: NBC would have had to pay Letterman a $50 million bonus.

That penalty, engineered by Letterman’s representative, Creative Artists Agency’s Michael Ovitz, effectively reduced NBC’s options concerning Late Night to two: Move it or lose it. (Small wonder that at the press conference welcoming Letterman, CBS Broadcast Group president Howard Stringer pointedly thanked CAA ”for a negotiation of matchless skill and great integrity.”) Given a total bill that would have edged perilously close to $90 million for NBC, moving Letterman — whose ratings and revenues might not have exceeded or even matched Leno’s — was just not worth it.

Paradoxically, NBC may need some of the money it didn’t spend on Letterman to absorb the financial hit it will take from losing him. The Late Night cash cow will be dry as of Friday, June 25, Letterman’s last night. In addition, Leno’s Tonight Show may become less of a money machine once it begins to face competition from Letterman’s still-untitled hour. It won’t be called Late Night With David Letterman; that title is owned by NBC and is the only element of Letterman’s current show that NBC unequivocally refuses to surrender or sell to CBS. ”We’ll try to work Buttafuoco into the title,” Letterman promised at his press conference.

For the next six months, both networks face an awkward public relations challenge. CBS, still crowing about Letterman, will now have to turn discreetly silent until fall as its current lineup of cheap crime dramas staggers toward its overdue death. The network may need that time to convince its 200-plus affiliates — more than half of which now delay or preempt CBS’ 11:30 p.m. shows — to fall into line behind Letterman; in many cases, the program that the CBS affiliates will be asked to dislodge from their 11:30 time slot is The Arsenio Hall Show, a move that is almost sure to take another bite out of Hall’s already shrinking audience.

Over at NBC, executives are trying to come to terms with the prospect of promoting one late-night star who will soon depart and another who seems to be cultivating a newfound (if overly calculated) grumpiness. Leno, who tirelessly lobbied NBC affiliates and refrained from on-air jokes about his own precarious position for as long as his job was in genuine jeopardy, has lately begun peppering his Tonight Show comments with such one-liners as ”’When Are You Gonna Make Up Your Mind?’ — that could be the NBC theme song,” and, more ominously, ”I guess we start renegotiating that contract tomorrow.” Leno probably isn’t kidding; faced with even the shadow of a threat of losing him, NBC is likely to move quickly, quietly, and generously to raise his comparatively paltry salary of $3 million per year.

Until June, NBC will also have to bear a stream of in-jokes from Letterman; on a list of the Top Ten Good Things About Being a Lame-Duck President, he slipped in one self-reference: ”Shows don’t have to be any good until we get to CBS.” And the stinging comments from Letterman’s guests have already begun. Even NBC’s own Bob Costas recently came on Late Night to tell Dave, only half jokingly, ”First we lose baseball to CBS, now you’re halfway out the door… The whole network is going down the drain.”

Costas may be exaggerating the plight of his cellar-dwelling employer, but not by much. Next fall, when Letterman’s new show makes its debut and, as Leno aptly states, ”the war begins again,” NBC will face brutal competition. Curiosity alone should propel Letterman’s show past Leno’s in the ratings for the first week or two. And there are already signs that once the ratings shake down, the news for NBC could get even worse. An unpublished 1991 study of 1,300 viewers of late-night television found that 53 percent of those who didn’t watch Late Night With David Letterman said it was only because the show was on too late. Given the choice between Letterman at an earlier hour and The Tonight Show, 57 percent chose Letterman — and that was before Leno replaced Johnny Carson. Moreover, NBC still has to contrive an adequate replacement for Letterman at 12:30 a.m. The network has asked Saturday Night Live creator Lorne Michaels to oversee a still-in-formation ”comedy hour.” Dana Carvey, NBC’s first choice to serve as host, is still under contract to SNL and is undecided about leaving.

In a lesser but still compelling version of the 11:30 Leno-Letterman contest, NBC’s new 12:30 show could eventually be competing with a new CBS hour produced by, you guessed it, Letterman. But for the next five months, late night’s crown prince of crankiness will concentrate on his current show while remaining deliberately, amusingly sketchy about his plans at CBS. At his press conference, he mowed down all requests for details. Will the show stay in New York or move to Los Angeles? ”Oddly enough, Muncie, Ind., is in the running.” Which way are you leaning? ”Right now, just a little bit to the right.” Have you demanded anything of CBS? ”We’d like to be in color.” What will you miss most about NBC? ”The back rubs from Irving R. Levine.” Sitting on stage behind Letterman, the CBS brass guffawed its approval. The network’s newest star and self-described ”luckiest man alive,” well before his first day on the job, was already giving CBS exactly what it paid for. Who would ever have guessed that TV’s most infamously boss-baiting personality would — for a mere $42 million — turn into a model employee?