Smithsonian Institution: Additional Information Should Be Developed and Provided to Filmmakers on the Impact of the Showtime Contract
Released: 2006-12-15T00:00:00

Letter

Background

The Smithsonian is a unique entity possessing a dual nature, described by former Chief Justice Taft, the Chancellor of the Board of Regents in 1927, as a “private institution under the guardianship of the Government.” Initially established by Congress in 1846 to carry out the federal government’s trust responsibilities under the bequest of James Smithson, the Smithsonian is a privately endowed institution, largely funded by federal appropriations and governed by a Board of Regents composed of federal officials and private citizens. In fiscal year 2005, the Smithsonian had operating revenues of just under $1 billion and about 6,000 employees. Approximately 75 percent of the Smithsonian’s operating revenues were from federal sources—60 percent from direct congressional appropriations and 15 percent from government grants and contracts— and the remaining 25 percent was from restricted and unrestricted trust funds. Restricted trust funds include gifts, grants, and earnings on endowments from individuals, foundations, organizations, and corporations that specify the purpose of the funds. Generally, they support a particular exhibit or program, or are used to manage the collections or support research projects. Sources of unrestricted trust funds include investment income, earnings on unrestricted endowments, membership programs, and net proceeds from business activities. Unrestricted trust funds can be used to support any Smithsonian activity or need. Revenue generated by the contract with Showtime will be unrestricted trust fund revenue.

The Smithsonian has about 136.5 million objects in its collections, but only a small percentage of the objects are on display in the museums at any given time. The museums recorded about 24 million visits in fiscal year 2005, which was down significantly from the 33.7 million visits recorded in fiscal year 2001. In the years since the 9/11 terrorist attacks, visitation has fluctuated around 20 million to 25 million annually. While most of the Smithsonian’s exhibited collections are in or around Washington, D.C., Smithsonian content was viewed by 109 million visitors to its 447 Web sites in fiscal year 2005—12 million more Web visitors than in 2004. In addition, Smithsonian magazine has a readership of more than 7 million monthly. Smithsonian officials saw the new channel as an opportunity to bring more Smithsonian content to a television viewing audience.

A Smithsonian directive on collections management states that the Smithsonian will provide reasonable access to its collections and collections information, consistent with its stewardship responsibilities. Access, as defined by this directive, is the opportunity for the general public, scholars, and Smithsonian staff to utilize the diverse collection resources of the Smithsonian. To carry out its mission “for the increase and diffusion of knowledge among men,” the directive states that the Smithsonian promotes access to its collections and associated information through research opportunities, traditional and electronic exhibitions, educational programs and publications, reference systems, loan exchange of collections, and electronic information services. Smithsonian directives allow access fees to be charged and also allow restrictions to accessing collections and collections information due to resource limitations, object availability, intellectual property rights, applicable restrictions, and preservation constraints. The Board of Regents retains ultimate oversight authority and fiduciary responsibility for Smithsonian collections.

The Smithsonian’s statutory charter gives broad discretion in the conduct of its affairs, including managing the Smithsonian’s authority to enter into contracts. In 1846, Congress authorized the Board of Regents to conduct the “business of the Institution.” The Board of Regents has the authority to accept funds from private sources, use the interest earned on the trust fund to further the Smithsonian’s purpose, and acquire, display, restore, loan, sell, or otherwise dispose of items of historical or artistic interest. These authorities have been delegated to various individuals within the Smithsonian, including the Deputy Secretary/Chief Operating Officer of the Smithsonian, SBV’s Chief Executive Officer, and the Office of General Counsel.

The new venture is tasked with creating new programming services, the first of which is expected to be a digital on-demand television channel— Smithsonian on Demand. Digital television is a new television delivery technology that uses digital technology to capture images and sounds, in contrast to traditional analog television service. Digital television allows a broadcaster to offer multiple programs (multicasting) or a single program of high definition television. Images and sound are captured using digital technology, providing a better picture resolution, a wider screen, CD- quality sound, and better color rendition. This technology represents the most significant development in television technology since the advent of color television in the 1950s. In February 2006, the Digital Television Transition and Public Safety Act of 2005 established a deadline of February 17, 2009, for the complete transition from analog television to digital television. A full-power television broadcast license that authorizes analog television service may not be renewed to authorize such service for a period that extends beyond February 17, 2009. In February 2005, we reported that about 86 million households view television via a cable service or have a subscription to a direct broadcast satellite service, and approximately 21 million households rely exclusively on free over-the- air broadcasting.

As of September 2006, the new venture had developed a list of 74 potential programs for the new channel’s initial season. The list included (1) 15 “mission critical” programs selected by the new venture from a list of 30 potential programs proposed by the Smithsonian; (2) 36 programs that the new venture was working on with individual Smithsonian units and a few existing programs that contain Smithsonian content that the new venture proposed acquiring the rights to; and (3) 23 programs to be acquired that contain no Smithsonian content but feature content with which the Smithsonian is generally associated, such as arts and culture, history, and science. On or around June 1 of each calendar year, during the first 29 years of the contract, the Smithsonian will provide the new venture with 30 or more written program ideas. The new venture is required to select at least one-half, but no more than 15 of the program ideas to develop, produce, and exhibit during the next calendar year. The Smithsonian also generally has the right to review rough and final program cuts to ensure that the program’s content is factually, historically, and scientifically accurate and in compliance with the other quality control requirements in the contract, including consistency with the high standards, quality, and image of the Smithsonian.

While the Smithsonian has not earmarked how the revenue from the new venture will be spent, it has a number of pressing funding needs. For example, in April 2005, we reported on the deteriorated condition of several of the Smithsonian’s facilities. At that time, the Smithsonian estimated that its planned capital and maintenance projects for 2005 through 2013 would cost about $2.3 billion. However, we cautioned that this estimate could grow because it was largely based on preliminary assessments. We also noted that the Smithsonian’s historical funding levels, from federal appropriations and trust funds, would be insufficient to cover the facility projects planned for 2005 through 2013. We recommended that the Smithsonian establish a process for exploring funding options with the Administration and the Congress, leading to the development and implementation of a strategic funding plan to address the Smithsonian’s revitalization, construction, and maintenance needs. The Smithsonian agreed with our findings and recommendation and informed us that Smithsonian’s Board of Regents has established an ad hoc committee to identify various ways to raise additional funds for the Smithsonian. The committee’s work is ongoing.

In Negotiating the Contract with Showtime, the Smithsonian Generally Followed Its Internal Guidelines Regarding Competition, Oversight, and Conflicts of Interest

In entering into the contract with Showtime, the Smithsonian generally followed its internal guidelines regarding competition, oversight, and conflicts of interest. Regarding competition, only SBV’s limited written contracting guidance, which promotes the use of commercial business practices and consultation with the Office of General Counsel, was applicable to the solicitation of a strategic business partner in this case. SBV officials applied a general principle of commercial business practices—fostering competition—by initially reaching out to multiple major media companies, and they relied heavily on consultation with the Office of General Counsel to guide their actions. In addition, the Board of Regents has broad oversight responsibility for all Smithsonian programs and activities, including the establishment of any new program or activity. The Board of Regents exercised this authority over SBV by periodically reviewing documents related to the contract terms and approving the final contract terms. SBV’s Board of Directors acts under the authority granted to it by the Board of Regents to provide advice to the chief executive officer on a variety of issues. Finally, the potential conflict of interest that arose during the contract negotiations was disclosed and reviewed in accordance with the Smithsonian’s Standards of Conduct for employees.

In adhering with the commercial business practice of fostering competition, SBV reached out to 18 major media companies when they began exploring the idea for a television venture in the spring of 2002. This initiated a 3-year search process for a strategic business partner and a final deal (see fig. 1). In August 2002, one company expressed interest in proceeding beyond initial discussions toward developing a more definitive structure and offered terms that the Smithsonian found favorable. For the next 9 months, SBV and the media company negotiated a term sheet and letter of intent. While SBV and the company were negotiating the final terms of the agreement, the company’s board declined to proceed with the investment, and the deal fell through. In the final months of 2003 and early months of 2004, the Smithsonian had conversations with a second company, which also ended without reaching an agreement because the company became concerned that developing a new Smithsonian channel may undercut its existing channel. Soon after this, the Smithsonian was approached by, and had preliminary discussions with, several companies that expressed renewed interest. Finally, in August 2004, the Smithsonian began negotiations with Showtime because its initial investment offer was the most favorable. The two entities engaged in serious negotiations for more than a year to finalize the contract; the final terms of which are comparable with, or in some cases more favorable than, the deal that Smithsonian had previously negotiated in 2003.

Smithsonian’s Board of Regents and SBV’s Board of Directors provided oversight of the activities regarding the television venture in accordance with their respective bylaws. The Board of Regents’ meeting minutes show that the board was periodically informed of SBV’s efforts to find a strategic business partner. Furthermore, SBV’s Board of Directors’ meeting minutes show that it was also engaged in the process (see fig. 1). SBV’s Chief Executive Officer presented a business plan for the proposed venture to the Board of Regents in June 2002. In May 2003, the Board of Regents authorized the Secretary to enter into an agreement for the formation and operation of a television channel with the first company. SBV provided interim status updates to both its Board of Directors and the Board of Regents on its efforts to secure another partner for the initiative between the time that the first deal fell through and when it began negotiating with Showtime. The SBV Board of Directors forwarded a motion to the Secretary recommending that SBV finalize agreements with Showtime on terms as presented by the Chief Executive Officer. In May 2005, the Board of Regents signaled its agreement and authorized the Executive Committee to empower the Secretary to enter into definitive agreements with Showtime to form a joint venture. Six months later, the Board of Regents’ Executive Committee approved the final terms of the agreement.

A potential conflict of interest that surfaced during contract negotiations was handled according to the Smithsonian’s Standards of Conduct. Prior to working for the Smithsonian, SBV’s Chief Executive Officer helped establish the Sundance Channel, a company in which Showtime is one of three owners. As part of that endeavor, he received an equity interest in the Sundance Channel from one of the two non-Showtime owners and retained that interest when he came to the Smithsonian. During the Smithsonian’s negotiations with Showtime, one of the owners of the Sundance Channel—through which the SBV Chief Executive Officer had his interest in the channel—was in negotiations to sell some of his interests, with Showtime and the other owner of the Sundance Channel being potential buyers. SBV’s Chief Executive Officer disclosed this potential conflict of interest to the Smithsonian’s Ethics Officer. The Ethics Officer reviewed the disclosure and concluded that the interest did not represent a conflict under the Smithsonian’s Standards of Conduct or a prohibited financial interest under federal law because SBV’s Chief Executive Officer did not have a general partnership interest in the Sundance Channel and was not participating in negotiations concerning the sale of interests in the channel. SBV’s Chief Executive Officer confirmed that he had no role, and did not participate, in the sale negotiations involving the Sundance Channel. GAO’s Ethics Officer reviewed the documentation and the Smithsonian’s decision and concurred with the findings.

The Smithsonian Traded Semiexclusive Commercial Distribution Rights to Produce and Distribute Certain Audiovisual Programs Using Smithsonian Content for 30 Years for National Exposure and a New Revenue Stream

The Smithsonian granted the new venture a 30-year, semiexclusive right to produce and commercially distribute certain audiovisual programs using Smithsonian trademarks and/or content in exchange for national television exposure and a new revenue stream. According to a Smithsonian official, the goal was to extend the reach of the Smithsonian nationwide by participating in the development of programming about the Smithsonian’s national collections and its research. The new channel is projected to reach more than 31 million households by 2010, which the Smithsonian hopes will increase its brand recognition and have a synergistic effect on other revenues by increasing memberships, merchandise sales, and concession sales through increased visitation to the museums. In soliciting a suitable business partner, the Smithsonian wanted to find a company that would support the Smithsonian’s mission and have the financial and technical ability to develop new programs and launch a new digital television channel. Showtime was attracted to the vast amount of Smithsonian content and the Smithsonian’s good reputation and widely recognized brand name. Both parties characterized the contract as unique and the year-long negotiations as long and hard fought. Terms of particular interest have been the contract’s length, opportunities for contract termination, and the public’s ability to access and use the collections, in contrast with the rights the Smithsonian retains over programming content, the revenue Smithsonian will receive, and the expectation of increased exposure to the Smithsonian brand.

The 30-year contract term raised many questions with members of Congress and the public because in relation to other contracts, particularly those that the Smithsonian has entered into for other business activities, it is unprecedented. However, according to officials involved in the contract negotiations, Showtime’s joint venture contracts are normally in perpetuity. Generally––and in this case––this is because starting a new channel is a high-risk endeavor that requires a significant investment. Showtime is investing 100 percent of the initial capital in the partnership and is therefore accepting all of the financial risk of the new venture. While Showtime agreed to a shorter term than most of its other media contracts, it has the right, through the new venture, to terminate the contract at certain intervals with or without cause. The Smithsonian may not terminate the contract without cause. However, the Smithsonian negotiated performance benchmarks in the contract that the new venture must meet. The Smithsonian may terminate the contract if the new venture fails to (1) launch its first channel by a specific date, (2) invest a minimum amount of money in programming to be exhibited on the new channel within an initial phase of the contract, and (3) earn a specific amount of average gross revenues by a specific date.

Another question raised has been continued access to and use of the collections by the public. The contract contains no restrictions on public access to the collections. However, the noncompete clauses generally prohibit the Smithsonian from entering into agreements or engaging in activities that would compete with the new venture. Of particular concern is that PBS is identified as a directly competitive service. Additional noncompete clauses provide that the Smithsonian must: cease operation of a Smithsonian Web portal called Smithsonian.tv, which was an aggregation of programming available through the Smithsonian’s Web site; not allow others to produce programs of The Smithsonian Associates’ “Campus on the Mall” events; and not provide any other provider of audiovisual programming with pan- Institutional, “priority” guided access to Smithsonian content similar to that provided to the new venture.

In return, the Smithsonian negotiated a number of exceptions to these noncompete clauses, which are designed to eliminate or minimize their impact on the Smithsonian’s normal programming activities. For example, nonrecurring news and public affairs programs; academic and curriculum- based programs; and in certain cases scholarly programs, were all deemed not to compete. The Smithsonian was also able to negotiate an exception that allows it to produce a fixed number of programs annually with other entities (one-offs). Initially the Smithsonian is allowed six one-offs annually, but the number is reduced to five when the new channel is available to at least 25 million households. There are a number of other detailed parameters regarding the one-off programs. will not permit any Scholarly Program to be exhibited or exploited by a Commercial Distributor unless first offers such Scholarly Program to the for no additional charge to the , for exhibition and/or distribution by the .

The provision states that before scholarly programs can be distributed by a commercial distributor, they must first be offered to the venture, but the language is silent about whether it applies only to Smithsonian-generated scholarly programs, or if it also applies to third-party generated scholarly programs. Smithsonian officials stated that it was their intent and understanding that the provision would not apply to third party-generated programs. In contrast, Showtime officials stated that it was their intent to cover the unlikely possibility, however remote, that a scholarly program would be marketed commercially after it was distributed for scholarly purposes. According to Showtime’s interpretation, even if the idea for the program was generated by a third party, the Smithsonian would be required to acquire the commercial distribution rights to this program and offer them to the new venture at no cost or not allow the third party to commercially distribute the program. After we raised this issue during our review, the Smithsonian and Showtime reached an agreement stating that the Smithsonian is not required to offer third-party generated scholarly programs to the venture, but it does stipulate that if such program is commercially distributed, it will be counted as a one-off.

In exchange for the concessions made by the Smithsonian and the rights granted to the new venture, the Smithsonian also received a new revenue stream that consists of four components: (1) minimum annual payments starting at $500,000 for the early years and growing to millions of dollars per year as the contract progresses; (2) a share of revenues to the extent that the share exceeds the minimum annual payment; (3) an initial 10 percent equity interest in the venture; and (4) an option to acquire an additional equity interest. The annual payments will total a minimum of $99 million over the 30-year term of the contract. The net present value of the minimum required annual payments is $45 million. However, a significant amount of the contract’s value is more likely to be in the revenue sharing and equity interest components. In addition to the minimum annual payments, the Smithsonian is entitled to a percentage of gross revenues to the extent it exceeds the minimum annual payment. The Smithsonian has the right to sell its equity interest to Showtime for cash for a period after each of the 8th, 10th and 12th anniversaries, subject to certain restrictions. If the Smithsonian exercised this right in year 10, it estimates that the cumulative value of the contract would be more than $150 million, assuming that it acquired the additional equity in year 5 and sells its total equity in year 10. Of the total estimate, only a small portion would be from the minimum annual payments.

The Smithsonian Has Been Working to Implement the Contract, but It Has Provided Insufficient Information to Interested Parties

Since the contract became effective in January 2006, the Smithsonian has been working to put in place policies and procedures necessary to implement the contract, but the information it has provided about the contract’s impact to interested parties has been insufficient. The contract was signed on Thursday, December 22, 2005, and it became effective 10 days later on January 1, 2006. The Smithsonian did not have in place the policies and procedures necessary to implement the contract when it became effective on January 1, 2006, and it did not publicly announce the creation of the new venture with Showtime until March 9, 2006. As a result, decisions on some filming requests received in early 2006 were delayed until March 2006 when the Smithsonian established a central review committee in the Office of Public Affairs to review filming requests for compliance with the contract and began informing its PIOs about the changes to the filming application process.

The news of the contract was first reported in The New York Times and The Washington Post on March 31, 2006, and April 4, 2006, respectively. These and subsequent newspaper articles expressed a number of concerns by filmmakers and other interested parties about the contract. In addition, in late April 2006, the Smithsonian received correspondence from Congress and a group of more than 200 filmmakers, producers, academics, and others expressing concerns about the lack of transparency in the Smithsonian’s process and their understanding of certain contract terms. The group noted that there has been an explosion in the creation of documentary films in recent years and that limiting the use of Smithsonian resources will have a chilling effect on creativity, and it argued that the contract violates the mission and purpose of the Smithsonian. In a separate letter to the Smithsonian, the American Historical Association expressed concerns regarding the secretive nature of the contract and the potential violation of the trust of Americans who have donated materials to which they believed the public would have free, open, equal, and nondiscriminatory access in perpetuity.

In response to these concerns and growing criticism of the contract, the Smithsonian responded with letters and mounted a public affairs initiative. In April 2006, the Smithsonian issued a “Statement on Smithsonian on Demand,” and on May 4, 2006, it issued a fact sheet on Smithsonian on Demand. The Smithsonian also posted on its Web site a revised list of “Frequently Asked Questions about Filming at the Smithsonian Institution” along with a new filming application form. In response to congressional concerns, the Smithsonian provided a copy of the contract to Congress; and the Secretary of the Smithsonian, along with other Smithsonian staff, appeared before the House Committee on Administration on May 25, 2006, at a hearing about the contract. However, the information that has been disseminated has lacked the specificity necessary to dispel the concerns of interested parties, whether legitimate or based on misinformation; and it has, in some cases, failed to reassure them that the impact will be as limited as the Smithsonian has repeatedly asserted.

To monitor the impact of the contract on filmmakers, the review committee that was established in March 2006 to review filming applications for compliance with the Smithsonian’s obligations under the contract developed a spreadsheet to track filming requests. The tracking spreadsheet includes basic information about each filming application, such as the name of the film, producer, distributor, date requested, proposed run-time of Smithsonian content, description of the program, and the review committee’s decision to approve or deny an application. While there is a place for the committee to record why an application was declined, the committee does not provide a detailed rationale for decisions in which a film request is either denied because it involved more than incidental use or approved as a one-off. Since the contract does not define the term incidental use, Smithsonian officials said it will be interpreted over time, in practice, by the precedents that the review committee will set with its decisions on individual filming applications. The vast majority of the filming applications involve minimal use of Smithsonian content, so the rationale used for decisions on these applications is not particularly useful in defining what constitutes incidental use. Conversely, the handful of decisions each year in which the review committee determines that more than incidental use is being requested by a filmmaker will be useful in clarifying the Smithsonian’s interpretation of incidental use. If the Smithsonian does not document these key decisions in detail, it may be difficult to provide useful information to filmmakers about what constitutes incidental use and ensure accountability with consistent decision making over the term of the contract.

Some of the key characteristics of effective and efficient government programs are transparency and clear criteria that are consistently applied to ensure accountability. Similarly, the Smithsonian should have a process in place for reviewing filming requests that, to the extent possible, is transparent to filmmakers and that has clear criteria that are consistently applied over the term of the contract. However, the Smithsonian has not yet developed a mechanism or process to synthesize its decisions over time to provide filmmakers with additional guidance for their use in developing future filming requests. A review committee member mentioned that the committee directs filmmakers to the Smithsonian’s Web site for answers to “Frequently Asked Questions,” but it provides little information about Smithsonian on Demand. As a result, filmmakers and other interested parties remain uncertain about what factors the Smithsonian will use in its decision-making process regarding filming requests and in general about the impact of the contract.

In August 2006, the Smithsonian established a separate Smithsonian on Demand Committee to coordinate the Smithsonian’s program concepts for submission to the venture, coordinate the Smithsonian’s review of programming content, and provide recommendations regarding content review and other administrative issues related to the contract. As of September 30, 2006, this committee had not had its first meeting to discuss the list of initial programs proposed by the new venture, so it is too early to assess how well this process will work. See figure 2 for a timeline summarizing some of the key events that have occurred during the first 9 months of the contract.

In general, the Smithsonian has been working to implement the contract. The first priority was to get a process in place to resolve filming requests and now other policies and procedures are being implemented to deal with actual production issues with the new venture. While the Smithsonian on Demand Committee had not yet met to discuss the list of proposed programs as of September 30, 2006, committee members had seen the list and requested additional information on eight of the programs that the new venture is considering for possible exhibition on the new channel that do not involve any Smithsonian content. The provisions of the contract state that, the Smithsonian can comment on the factual, historical, and scientific accuracy of a program and whether the program is consistent with the reputation of the Smithsonian. In response to the Smithsonian’s comments on these topics, the new venture must either (1) edit the programs based on the Smithsonian’s comments or (2) choose not to exhibit the program. Again, it is too early to know how those discussions and negotiations will play out regarding these eight programs.

The Impact of the Contract on Interested Parties Is Uncertain

The impact of the contract on interested parties is uncertain because it only has been in effect since January 1, 2006, and it is still too early to tell what the long-term impact of the contract will be. Specifically, we reviewed the impact, or potential impact, of the contract in three areas: (1) the direct impact on filmmakers during the first 9 months of the contract; (2) the projected impact on filmmakers based on the Smithsonian’s historical analysis of filming contracts for a 6-year period, from 2000 through 2005; and (3) other potential impacts raised by interested parties. During the first 9 months of the contract, from January 1, 2006, through September 30, 2006, two filming requests were denied due to the contract and four were approved as one-offs out of a total of 117 filming requests reviewed by the central review committee. However, it is too early to assess the total impact of the first year of the contract until the remaining 3 months of the year are concluded. Regarding the Smithsonian’s historical analysis of filming contracts, we found the Smithsonian’s analysis to be unreliable for the purpose of estimating the contract’s potential impact, primarily due to incomplete data and oversimplified selection criteria. For example, in some cases, projected run-time was not available on the spreadsheet used for the analysis. Moreover, the criterion used in the analysis was not the same as the criteria being used in practice by the review committee. In the analysis, the Smithsonian defined incidental use as less than 15 percent of projected run-time of Smithsonian content in the film. However, the review committee considers multiple factors about the proposed use of Smithsonian content in making the actual decisions about incidental use. Aside from direct potential impacts on filmmakers, larger concerns have been raised about damage to the Smithsonian’s image and goodwill. Concerns have been raised by filmmakers, curators, and other interested parties regarding the appropriateness of the Smithsonian limiting the use of the collections held in trust for the American public, as well as other potential impacts, including hampering collaborative partnerships and future donations.

Direct Impact on Filmmakers during the First 9 Months Was Minimal

The direct impact to filmmakers during the first 9 months of the contract has been minimal because, for the requests it has wanted to pursue, the Smithsonian has been able to accommodate those involving more than incidental use of Smithsonian content within its annual allotment of one- offs. During the first 9 months of the contract, the Smithsonian’s central review committee reviewed 117 filming applications, of which 2 were denied due to the contract and 4 were approved as one-offs. The four one- offs were approved to air in various years—one in 2006, one in 2007, and two in 2008. See table 1 for the decisions on remaining applications through September 30, 2006. It is too early to assess the total impact of the first year of the contract until the remaining 3 months of the year are concluded.

Some interested parties have raised the issue that having a cap on the number of one-offs will cause the Smithsonian to be more selective in the programs it approves. The Smithsonian has denied two requests due to the contract, even though there was still space available under its one-off allocation. The contract initially included separate limits for “branded” and “nonbranded” one-off programs. A branded program is defined by the contract as a program containing a Smithsonian mark in its title, in its main credits, or, under certain circumstances, in its end credits. The contract originally specified that the initial allotment of six one-offs annually could include no more than three branded and no more than three nonbranded programs. To obtain more flexibility under the contract, the Smithsonian recently reached an agreement with Showtime on new contract language that would eliminate the current requirement that no more than three one-offs can be nonbranded in any given year. Under this agreement up to the total annual allotment of one-offs could be nonbranded, but the number of branded one-offs would still be limited. In addition, during any time period in which the distribution of the new channel reaches 25 million households, the number of branded one-offs allowed is reduced from three to two, and the total annual allotment of one-offs is reduced from six to five. Furthermore, these two branded one- offs can only be exhibited via a broadcast outlet, which is defined as “free, over-the-air broadcast television networks and local television stations.” The initial business plan for the new channel projected that it would reach the threshold of 25 million households by 2008. If the Smithsonian’s projection for the distribution of the new channel is realized, the Smithsonian will only be able to approve three more one-offs for initial airing during 2008.

The Smithsonian’s Historical Analysis of Filming Contracts Is Unreliable and It Should Not Be Used to Estimate the Contract’s Potential Impact

On the basis of a historical analysis of filming contracts over a 6-year period from 2000 through 2005, the Smithsonian contends that it will be able to accommodate the same level of filming activity as it has in the past. However, we found the Smithsonian’s analysis to be unreliable for estimating the potential impact of the contract, primarily due to incomplete data and oversimplified selection criteria. In April 2006, the Smithsonian conducted an in-depth historical analysis of about 350 filming contracts from 2000 through 2005 utilizing information provided in a spreadsheet by the Smithsonian’s Office of Contracting, with input from the Office of General Counsel, to estimate the number of programs that contained more than incidental use of Smithsonian content. In some cases, the actual filming contracts were reviewed by Smithsonian staff to confirm and supplement the information in the spreadsheet. The following criteria were applied to the 350 filming contracts to identify programs with more than incidental use of Smithsonian content: news, public affairs, academic, curriculum-based, scholarly, and local access programs were excluded from the analysis; programs distributed exclusively on DVD/home video, as a streaming video or webcam or by a foreign distributor without a domestic partner were excluded from the analysis; and of the remaining programs, those projected to use Smithsonian content during more than 15 percent of the program’s total run-time were identified as using more than incidental use of Smithsonian content (i.e., 6 minutes of Smithsonian content in a 60-minute program would equal a run-time of 10 percent).

Upon completion of this review, the Smithsonian initially determined that filming contracts for 17 programs involved more than incidental use of Smithsonian content over the 6-year period. This analysis has been a cornerstone of the Smithsonian’s assertion that its annual allotment of six one-offs, totaling 36 programs over 6 years, would more than accommodate future demand from filmmakers who wish to use more than an incidental amount of Smithsonian content. The Smithsonian later revised the number of programs on the list from 17 to 23, after asking its museums in June 2006 to provide any additional programs they thought contained more than incidental use that were not accounted for in the original analysis. The individual museums provided six additional contracts that neither the Smithsonian Office of Contracting or the Office of General Counsel had record of.

When we attempted to replicate the Smithsonian’s analysis, we found several problems with the analysis, which led us to conclude that it is not a reliable measure of the contract’s potential impacts. Specifically, we found that the data used in the analysis were incomplete and the selection criteria were oversimplified. Calculating run-times of Smithsonian content was an integral part of the analysis, however run-times were not available for some of the entries in the spreadsheet. Also, some of the filming contracts could not be located to verify or supplement the information in the spreadsheet; and when the filming contracts were available, they did not consistently contain projected run-times for Smithsonian content. Furthermore, the run-times used in the analysis were projected run-times based on the filming contracts and not the actual run-times of Smithsonian content in the final programs. Examples of the oversimplified selection criteria include the following: The Smithsonian used a projected run-time of 15 percent or less of Smithsonian content as its definition for incidental use. However, this criterion is not being used in practice by the central review committee to make decisions about requests to film Smithsonian collections or staff. The central review committee told us that it has not defined the percentage of run-time in a program that would constitute incidental use, but it is instead using a combination of run-time and content to determine what constitutes incidental use. To illustrate the sensitivity of the analysis, using a run-time threshold of just 13 percent, a deviation of 2 percentage points, would add at least nine filming contracts to the list of programs that would have been affected by the contract.

Programs distributed via the Internet were excluded from the analysis, but this distribution method may compete with the new venture’s activities under the contract. Therefore, at least one program distributed via the Internet should have been included in the analysis.

Through our evaluation of the Smithsonian’s analysis, we found at least 6 additional programs that we believe the Smithsonian should have included on its list of 23, raising the total to at least 29 programs. According to the Smithsonian, all of the 29 programs were nonbranded programs. To estimate the potential impact of the contract, the 29 programs can be analyzed in two different ways—(1) in aggregate against the total number of one-offs allowed over a 6-year period, which could range from 30 to 36 programs and (2) on an annual basis against the annual allotment of five or six one-offs. By comparing the Smithsonian’s original result of 17 programs to a 6-year allotment of 30 to 36 one-offs, the Smithsonian asserted that the contract would have no major impact on outside filmmakers. However, comparing the revised figure of at least 29 programs to the 30 programs at the lower end of the one-off allotment indicates that it is much more likely that outside filmmakers may be impacted by the contract. The annual distribution of the 29 programs exceeded the annual limit of six one-offs in 1 year, and it exceeded the lower limit of five one- offs per year in 3 of the 6 years (see fig. 3).

Regardless of the problems with the Smithsonian’s historical analysis, the underlying assumption of the analysis that the past demand for filming will be a good forecast of the future demand, may also be flawed. If the new channel is successful and there is an increased demand for programs featuring Smithsonian content, particularly as important historical milestones occur, the future demand may exceed that of the past. For example, one of the filmmakers with whom we spoke highlighted that 2008 will mark the 50th anniversary of the National Aeronautics and Space Administration (NASA), and that there is likely to be a number of requests to film at the National Air and Space Museum for programs commemorating the space program.

Other Potential Impacts Have Been Raised by Interested Parties

Aside from direct potential impacts on filmmakers, larger concerns have been raised about damage to the Smithsonian’s image and goodwill. In the minds of stakeholders, these concerns have been exacerbated by the lack of information provided by the Smithsonian about the impact of the contract. Concerns have been raised by filmmakers, curators, and other interested parties regarding the appropriateness of the Smithsonian limiting the use of the collections held in trust for the American public for the direct benefit of a single commercial enterprise, as well as other potential impacts of the contract. Interested parties have also raised concerns and pointed to potential impacts of the contract that may not be directly related to filmmaking, including hampering collaborative partnerships with other entities, future donations, and future availability of Smithsonian material via the Internet. Specifically, A PBS member station official with whom we spoke indicated that the station regularly works with museums, such as the Smithsonian, and other entities to create well-known programming. Consequently it was troubling to the official when, in July 2006, a Smithsonian official declined the station’s request for the Smithsonian to be listed as a strategic partner on a definitive historical documentary series that it was producing, citing that the contract prohibited it from entering into such a partnership with the station. Recently, however, the station official indicated that the Smithsonian has reopened discussions with the station to collaborate on the effort.

Individual donors have inquired about the terms of the Showtime contract and how these terms might affect the availability of their donations for use by filmmakers and the general public. While access to the Smithsonian collections has always been controlled and subject to individual donor agreements, limits pertaining to more than incidental use of Smithsonian content, including collections and staff, for the purposes of filming, is a new limitation resulting from the contract. Organizations such as the American Historical Association have expressed concerns that the contract may be a violation of the trust of generations of Americans who have donated materials to which they believed the public would have free, open, equal, and nondiscriminatory access in perpetuity.

Some interested parties have raised questions about the loss of Smithsonian.tv, which was an aggregation of various Smithsonian programs, and the impact the contract may have on future digitization of the Smithsonian collections for access by the public via the Internet. The Smithsonian has said that the programs formerly aggregated on Smithsonian.tv are being moved to other pages of the Smithsonian Web site and that the contract will not affect its digitization efforts.

Conclusions

The question of whether or not the Smithsonian’s contract with Showtime is in the best interest of the Smithsonian and the American public will only be answered after the passage of time, as events unfold. Moreover, the contract is final and is moving forward; as long as Showtime and the new venture abide by its terms and meet the performance benchmarks, the Smithsonian cannot terminate the contract. If the new channel does well, the Smithsonian could reap significant financial benefits through revenue sharing and the appreciation of its equity interest. If the channel does poorly, the Smithsonian would not lose any money directly because it did not invest any initial capital into the partnership; however, its image and goodwill could be damaged, and opportunities for making alternate use of Smithsonian content during the contract period may be lost.

The Smithsonian recognizes that its public relations have suffered throughout the implementation of the contract, as evidenced by the numerous negative newspaper articles over the past year. While the Smithsonian provides Board of Regents meeting minutes to Congress, they are voluminous and lack tables of contents, and thus may not, by themselves, be the most ideal communication mechanism for alerting Congress to significant policy decisions made by the Smithsonian. Moreover, the Smithsonian did not conduct any additional congressional or public outreach to solicit input or provide information about the television venture concept prior to the contract becoming effective. As such, the Smithsonian lost opportunities to address concerns proactively, and it has instead had to address issues as they arise within the framework of the contract.

We recognize the difficulty associated with trying to establish a clear definition of incidental use of Smithsonian content and understand that the parties to the contract made a conscious decision not to define it in the contract. In practice, the Smithsonian’s decisions on the hundreds of filming requests it receives each year, over time, will set the precedent for how the term is defined. However, the Smithsonian does not have a mechanism or process in place to (1) document those key decisions in detail, (2) synthesize those decisions over time into a record of precedents of what constitutes more than incidental use that could be used as guidelines for filmmakers submitting filming requests, and (3) communicate those guidelines to the filmmakers that need it. Without such a process, it may be difficult to provide useful information to filmmakers about what constitutes incidental use and ensure accountability with consistent decision making over the 30-year term of the contract. Consequently, filmmakers and other interested parties may remain uncertain about what factors the Smithsonian will use in its decision-making process regarding filming requests.

Recommendations for Executive Action

To improve the implementation of the contract and increase the information available to interested parties, we recommend that the Secretary of the Smithsonian take the following two actions: fully document decisions for filming applications that are denied because they involve more than incidental use or are approved as one- offs to establish a record of precedents, which will define over time what constitutes incidental use and help to ensure consistent decision making by the review committee; update the “Frequently Asked Questions about Filming at the Smithsonian Institution” on the Smithsonian’s Web site to better describe what the contract means for filmmakers, especially as it relates to incidental use of Smithsonian content.

Agency Comments and Our Evaluation

GAO provided a draft of this report to the Smithsonian and Showtime for review and comment. The Smithsonian commented that it generally agreed with our findings and recommendations and will take actions to implement our recommendations. Showtime also generally agreed with the report and endorsed the Smithsonian’s comments. The Smithsonian’s and Showtime’s written comments are in appendixes III and IV, respectively. The Smithsonian and Showtime also provided joint technical comments, which we incorporated as appropriate.

While the Smithsonian generally agreed with our findings and conclusions and intend to take actions to implement both recommendations, the Secretary of the Smithsonian commented on our observations regarding the Smithsonian’s historical analysis of filming contracts. Specifically, the Smithsonian believes that the historical data support its conclusion that the contract’s potential impact will be minimal and that the actual impact to date has been minimal as well. In addition, during the May 25, 2006, House hearing, the Secretary used the Smithsonian’s analysis to assert that under the contract, the Smithsonian had “almost double the capacity” necessary to accommodate future filming requests involving more than incidental use of Smithsonian content. We concluded that the Smithsonian’s historical analysis was not sufficiently reliable to support such an assertion. Notwithstanding any historical analysis, we agree that if the number of filming requests for more than incidental use of Smithsonian content averages around five per year, the Smithsonian will be able accommodate those requests. During the first 9 months of the contact there were six such requests—two were denied and four were approved as one-offs. We acknowledge that the direct impact on filmmakers to date has been minimal. However, because the 30-year contract has been in effect for less than a year, it is still too early to judge the potential impact that the contract may have on interested parties in the future.

We are sending copies of this report to interested congressional committees, as well as the Secretary of the Smithsonian, and Showtime. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-3841 or nazzaror@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

We were asked to (1) evaluate the extent to which the Smithsonian Institution (Smithsonian) followed its internal guidelines with respect to competition, oversight, and protecting against conflicts of interest when negotiating the contract with Showtime Networks Inc., (Showtime); (2) identify what the Smithsonian gave up and received in return under the contract; (3) evaluate the Smithsonian’s implementation of the contract; and (4) identify what, if any, impacts the contract has had on outside parties.

To evaluate the extent to which the Smithsonian followed its internal guidelines for competition, oversight, and conflicts of interest, we obtained and reviewed bylaws and meeting minutes for the Smithsonian’s Board of Regents and Smithsonian Business Venture’s (SBV) Board of Directors, documentation related to a potential conflict of interest, and Smithsonian guidelines regarding contracting and conflicts of interest. We also interviewed the Smithsonian and Showtime officials involved in negotiating the contract. To evaluate the extent to which the Smithsonian followed its guidelines regarding competition, we analyzed information from the boards’ meeting minutes and conducted interviews to understand the process by which the Smithsonian developed and solicited the on- demand television concept to potential partners and compared that with SBV’s contracting guidelines. Regarding board oversight, we reviewed meeting minutes from both boards to determine the frequency and extent of board involvement in the process. Finally, regarding conflicts of interest, the GAO Ethics Officer reviewed the Smithsonian’s Standards of Conduct in effect during the time of the negotiations, the SBV’s chief executive officer’s disclosure of a potential conflict, and the Smithsonian Ethics Officer’s opinion regarding the potential conflict.

To determine what the Smithsonian gave up and received in return, we reviewed the contract and other Smithsonian documents such as existing directives governing access to the Smithsonian collections. We also interviewed Smithsonian and Showtime officials who were involved in the contract negotiations to determine each party’s interpretation of certain contract provisions. We also attempted to evaluate the reasonableness of the contract’s term in relation to its economic provisions by comparing the Showtime contract with those of a similar nature, but were not able to identify suitable analogies. We were, however, able to obtain information on typical media contract lengths and provisions through interviews with media industry experts. Finally, we conducted an economic analysis to determine the net present value of the minimum annual payments.

To evaluate how the Smithsonian has implemented the contract, we reviewed relevant Smithsonian documents and interviewed Smithsonian staff that have been involved with implementing changes resulting from the contract. Specifically, we obtained and analyzed the Office of Public Affairs review committee’s spreadsheet that is used to track filming requests to determine the total number of filming applications the Smithsonian received between January 1, 2006, and September 30, 2006, the number of applications that were accepted, declined, withdrawn or closed, or pending, and the reasons for the committee’s decisions. We also interviewed public information officers from the National Museum of Natural History, the National Museum of American History, and the National Air and Space Museum, which are the museums that receive the majority of filming requests, to get their perspectives on how the filming request process has changed as a result of the contract. In addition, we reviewed other Smithsonian documents pertaining to actions it has taken in response to the contract, such as establishing a committee to develop program ideas, coordinate the Smithsonian’s review of programming content, and provide recommendations regarding content review and other administrative issues related to the contract.

To identify what, if any, impact the contract has had on the Smithsonian’s operations and outside parties, we reviewed the methodology and results of the Smithsonian’s analysis of filming contracts from 2000 through 2005 to determine the reliability of the analysis. We discovered several problems with the Smithsonian’s analysis that led us to determine that the analysis was unreliable, and we discuss those limitations in this report. We also interviewed Smithsonian staff that have been involved with implementing changes resulting from the contract and reviewed statements from individuals and organizations that have spoken out about the contract. Finally, we interviewed a selective sample of interested parties that could potentially be affected by the contract. We selected the individuals with whom we spoke from a wide range of disciplines, including filmmakers, curators, and historians.

We conducted our work from June to November 2006 in accordance with generally accepted government auditing standards.

Appendix II: Smithsonian’s Filming Application Review Process

Filming reqt come into musm Public Informtion Officer (PIO) or i roted to them from musff new or public ffirrpoe?

Reqt indled y PIO nd/or Smithonin Office of Public AffirNo ppliction or contrct reqired Reqtor directed to fill-ot “Appliction for Filming Smithonin Intittion,” which detil the nre of the reqnd provide revelnt informtion. Reqter then submit ppliction to PIO.

PIO determine, based on ppliction, whether reqt i pproprite nd content with the Smithonin’ filming policy. Conidertion inclde whether reqt will/i: 1. Content with the Smithonin’ mission; 2. Rech the pproprite audience; 3. Involve pproprite use of Smithonin fcilitie, collection, nd ff rerce; 4. Whether the relevnt ff or ctorve the time to cooperte with the reqt; 5. Whether the relevnt ff or ctor re intereted in cooperting with the reqt; 6. Whether nde co or expen will e incrred cooperting with the reqt; 7. Whether the intended use me deftory of or impct the Smithonin’ reption negtively; 8. Compete with or detrct from n exiting or plnned Smithoniuse or project. pproprite?

Reqt denied y musm PIO PIO ubmit propoal to review committee overeen by the Office of Public Affair for final determination on three additional criteria (in conultation with the Office of General Counel, a necessary). 1. I the requet part of an academic, cholarly, or curriculum-baed proram? 2. I the film bein ditributed via a noncommercial ditributor? 3. I the propoed ue of Smithonian content incidental in the context of the finihed proram?

If “ Ye” to a one-off?

Filmmaker may ubmit project independently to the new venture (eparate process)

Filmmaker can reduce the amount of propoed Smithonian content o that it i conidered incidential uIn the case of scholarly programs, uestions 1 and 2 above must be answered “yes” for the program to be approved.

Appendix III: Comments from the Smithsonian Institution

Appendix IV: Comments from Showtime Networks Inc.

Appendix IV: Comments from Showtime Networks Inc.

Appendix V: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the individual named above, Jeffery D. Malcolm, Assistant Director; Jean Cook; Michele Fejfar; Richard P. Johnson; Jamie J. Meuwissen; and Anne Stevens made key contributions to this report. Also contributing to the report were John Finedore, Carol Kolarik, Alison O’Neill, Jena Y. Sinkfield, and William Woods.