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entitled 'Smithsonian Institution: Additional Information should Be 
Developed and Provided to Filmmakers on the Impact of the Showtime 
Contract' which was released on December 15, 2006. 

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Report to the Subcommittee on Interior, Environment, and Related 
Agencies, Committee on Appropriations, House of Representatives: 

United States Government Accountability Office: 

GAO: 

December 2006: 

Smithsonian Institution: 

Additional Information Should Be Developed and Provided to Filmmakers 
on the Impact of the Showtime Contract: 

Smithsonian's Contract with Showtime: 

GAO-07-275: 

GAO Highlights: 

Highlights of GAO-07-275, a report to the Subcommittee on Interior, 
Environment, and Related Agencies, Committee on Appropriations, House 
of Representatives 

Why GAO Did This Study: 

In March 2006, the Smithsonian Institution (Smithsonian) announced that 
it had entered into a 30-year contract with Showtime Networks Inc., 
(Showtime) to create a digital on-demand television channel. Members of 
Congress and other interested parties, particularly filmmakers, raised 
issues about the contract’s potential effects on public access to and 
use of the Smithsonian’s collections, its confidential nature, and the 
process by which the Smithsonian negotiated it. This report discusses 
(1) the extent to which the Smithsonian followed its internal 
contracting guidelines, (2) what the Smithsonian gave up and received 
in return under the contract, (3) the Smithsonian’s implementation of 
the contract, and (4) the contract’s potential impact on outside 
parties. GAO reviewed the contract and pertinent documents, and 
interviewed Smithsonian and Showtime officials. 

What GAO Found: 

The Smithsonian followed its internal contracting guidelines regarding 
competition, oversight, and conflicts of interest. When it began 
exploring a television venture in 2002, it approached 18 major media 
companies and negotiated with two before reaching a deal with Showtime. 
The process was overseen by Smithsonian Business Ventures’ (SBV) Board 
of Directors and the Smithsonian’s Board of Regents, who approved the 
contract in November 2005. When SBV’s Chief Executive Officer disclosed 
a potential conflict of interest, the Smithsonian’s Ethics Officer 
reviewed the disclosure in accordance with Smithsonian policies and 
concluded that no conflict existed. GAO’s Ethics Officer concurred with 
the Smithsonian’s decision. 

The Smithsonian granted the new venture a 30-year, semiexclusive right 
to produce and commercially distribute audiovisual programs using 
Smithsonian trademarks and/or content in exchange for national 
television exposure and new revenue. The Smithsonian projects that the 
new channel will reach more than 31 million households by 2010 and will 
have a total value of over $150 million after 10 years. The 
Smithsonian’s major concession is a noncompete clause that generally 
prohibits it from engaging in activities that would compete with the 
new venture. The Smithsonian negotiated exceptions for various news and 
educational programs. 

The Smithsonian has been working to implement policies and procedures 
necessary under the contract since it became effective in January 2006, 
but the information that it has provided to interested parties has been 
insufficient. The Smithsonian and Showtime waited until March 2006 to 
publicly announce the new venture and did not implement internal 
processes to review filming requests for compliance with the contract 
until after the public announcement. The Smithsonian has created a 
committee to review filming requests, but does not document in detail 
its rationale for key decisions or attempt to synthesize these 
decisions over time. Also, the “Frequently Asked Questions” on the 
Smithsonian’s Web site provides little information for filmmakers about 
the new contract. 

It is too early to determine the long-term impact of the contract. 
Access to the Smithsonian’s collections and staff for research purposes 
remains unchanged, but the direct impact on filmmakers will depend 
largely on how many request permission to use a substantial amount of 
Smithsonian content. So far, 6 of 117 filming requests have involved a 
substantial amount of Smithsonian content—2 were denied and 4 were 
approved as exceptions. The Smithsonian contends that it will be able 
to accommodate the same level of filming activity as it has in the past 
based on its historical analysis of filming contracts. GAO found that 
this analysis was unreliable because it was based on incomplete data 
and oversimplified criteria. In addition, concerns have been raised 
about damage to the Smithsonian’s image and the appropriateness of 
limiting the use of the collections held in trust for the American 
public. 

What GAO Recommends: 

GAO recommends that the Smithsonian better document its key decisions 
regarding filming applications and that it update the “Frequently Asked 
Questions about Filming at the Smithsonian Institution” on its Web site 
to better describe what the contract means for filmmakers. 

The Smithsonian generally agreed with GAO’s findings and 
recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-275]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Robin M. Nazzaro at (202) 
512-3841 or nazzaror@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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

The Impact of the Contract on Interested Parties Is Uncertain: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Smithsonian's Filming Application Review Process: 

Appendix III: Comments from the Smithsonian Institution: 

Appendix IV: Comments from Showtime Networks Inc.48: 

Appendix V: GAO Contact and Staff Acknowledgments50: 

Table: 

Table 1: Filming Application Decisions from January 1, 2006, through 
September 30, 2006: 

Figures: 

Figure 1: Timeline of Key Negotiation and Oversight Actions: 

Figure 2: Timeline of Key Contract Implementation and Related Events: 

Figure 3: Annual Distribution of 29 Programs from 2000 through 2005 
with More than Incidental Use Based on Smithsonian Filming Contracts: 

Abbreviations: 

CEO: Chief Executive Officer: 
FAR: Federal Acquisition Regulation: 
PIO: Public Information Officer: 
SBV: Smithsonian Business Ventures: 

United States Government Accountability Office: 
Washington, DC 20548: 

December 15, 2006: 

The Honorable Charles H. Taylor: 
Chairman: 
The Honorable Norman D. Dicks: 
Ranking Minority Member: 
Subcommittee on Interior, Environment, and Related Agencies: 
Committee on Appropriations: 
House of Representatives: 

On December 22, 2005, the Smithsonian Institution (Smithsonian) entered 
into a 30-year contract with Showtime Networks Inc., (Showtime) to form 
a limited liability company that would create new television channels 
and related businesses, the first of which is intended to be a digital 
on-demand channel called Smithsonian on Demand. The new on-demand 
channel will feature, among other things, programs developed using 
Smithsonian content, including the Smithsonian's vast archives, 
collections, and experts. Smithsonian Networks (the new venture) is a 
new independent joint venture between the Smithsonian and Showtime, and 
it was created to develop, launch, and operate the new 
channel.[Footnote 1] After the public announcement of the contract in 
March 2006, filmmakers, historians, archivists, librarians, and others 
began raising issues about the potential effects of the contract on the 
public's continued access to and use of the Smithsonian's collections. 
These interested parties and some in Congress have also questioned the 
confidential nature of the contract and the process by which 
Smithsonian officials solicited and negotiated the contract. 
Smithsonian officials stated that they were surprised by the reaction 
to the contract. The Smithsonian believes that keeping contract 
provisions confidential is necessary to prevent the disclosure of 
proprietary business information. Furthermore, officials believe that 
the venture provides an excellent opportunity to harness new digital 
technology to further the Smithsonian's mission while generating 
revenue to support other activities. The contract illustrates the 
delicate balance entrusted to stewards of a public trust--managing 
collections for the public good, while at the same time utilizing that 
resource to creatively generate revenue to support those stewardship 
responsibilities. 

Congress established the Smithsonian in 1846 to administer a large 
bequest left to the United States by James Smithson, an English 
scientist. In accordance with James Smithson's will, Congress 
established the institution in Washington, D.C., "for the increase and 
diffusion of knowledge among men." To that end, the act provided for 
the administration of the trust by a Board of Regents and a Secretary, 
who were given broad discretion to carry out the business of the 
Smithsonian.[Footnote 2] The Board of Regents is composed of 17 
members.[Footnote 3] The board's bylaws provide that it "shall hold 
meetings at such times and places as [it] may from time to time 
determine," and, as such, the board generally holds three business 
meetings annually. In addition, the Board of Regents' Executive 
Committee--composed of three Board of Regents members elected by the 
full board--can exercise all powers of the Board of Regents when the 
full board is not in session. 

While the Smithsonian has grown greatly since its founding 160 years 
ago, it retains its essential character as a trust establishment of the 
United States, and it is often referred to as "the nation's attic." The 
Smithsonian is now the world's largest museum and research complex, 
consisting of 19 museums and galleries, the National Zoo, and 9 
research facilities. In fiscal year 2005, the Smithsonian had operating 
revenues of just under $1 billion, with about 75 percent from federal 
sources and the remaining 25 percent from other sources, including 
revenues from business activities. The Smithsonian's business 
activities include Smithsonian and Air & Space magazines, museum 
stores, restaurants, IMAX theaters, the Smithsonian Gift Catalogue, 
consumer product licensing, e-commerce, and commercial media 
enterprises. 

In 1998, the Board of Regents authorized the Secretary of the 
Smithsonian to reorganize the various business activities within the 
Smithsonian into a centralized business entity, Smithsonian Business 
Ventures (SBV). SBV's mission is to generate revenue from business 
activities to support the Smithsonian's mission. SBV is funded by the 
revenue from its business activities and does not use federal funds for 
any of its activities, including employee salaries. SBV's structure is 
very similar to that of a private company, with a chief executive 
officer, chief financial officer, and a board of directors. The SBV 
board of directors acts within the authority granted to it by the Board 
of Regents to provide advice and recommendations to the Board of 
Regents and Secretary concerning the operation of SBV. In addition, the 
chief executive officer must consult with and seek the recommendations 
of the SBV board of directors concerning issues including, but not 
limited to, industry standard business deals, joint ventures, 
licensing, and perceived trade-offs between commercial and traditional 
approaches to accomplishing the overall mission of the Smithsonian. The 
Smithsonian's Board of Regents exercises its authority over SBV by 
reviewing plans for and approving major new initiatives. SBV, in 
conjunction with the Smithsonian's Office of General Counsel, were the 
primary Smithsonian entities involved with negotiating the contract. 

The new venture brings together, in a public-private partnership, the 
Smithsonian's wealth of staff resources and collections with Showtime's 
production and distribution capabilities and experience. Because the 
Smithsonian's contract with Showtime was not a federal procurement 
contract, standard federal contracting guidelines that the Smithsonian 
generally uses for guidance for contracts involving federal funds, such 
as the Federal Acquisition Regulation (FAR), were not used.[Footnote 4] 
The Smithsonian does not have any written guidance regarding how 
nonprocurement contract negotiations should be conducted; however, 
SBV's guidelines state that SBV should follow commercial business 
practices in its contracting. While SBV's guidelines do not define 
commercial business practices, according to SBV, the underlying 
principles include, among other things, fostering competition, 
leveraging purchasing power to get the best value, and operating in a 
highly ethical manner. In the absence of specific Smithsonian-wide 
guidelines or policies, SBV works closely with the Office of General 
Counsel and the Office of Contracting to negotiate contracts. 

According to Smithsonian officials, every year hundreds of people 
request to film or photograph the Smithsonian's premises, collections, 
or staff. In 2001, the Smithsonian created institutionwide guidance to 
streamline procedures and standardize fees for processing and approving 
these filming and photography requests across the institution. This 
included a standard application that filmmakers had to submit to the 
museum Public Information Officer (PIO). When reviewing these 
applications, museum PIOs considered several factors such as 
compatibility with Smithsonian's mission and availability of staff, 
before deciding whether to approve or decline the request. While the 
policies and procedures governing filming requests are still in effect, 
they have been supplemented by new procedures developed since the 
contract became effective. Audiovisual programs developed with footage 
of Smithsonian content are now classified into several categories: 
news, public affairs, academic, curriculum-based, scholarly, and 
commercial programs.[Footnote 5] 

The contract specifies that the Smithsonian cannot engage in activities 
that would compete with the new venture, nor can it allow other 
filmmakers to use Smithsonian content to produce programs for 
commercial distribution that would directly compete. Direct competitors 
include, but are not limited to, Public Broadcasting Service (PBS), 
Arts and Entertainment (A&E), The History Channel, National Geographic 
Channel, and The Discovery Channel. In addition, the contract limits 
the number of programs that can be accessed on a single Smithsonian Web 
page within a Smithsonian Web site, since the availability of a 
collection of programs via the Internet is also considered competition 
with the new venture. These provisions are generally referred to as the 
noncompete clauses. Key exceptions to the noncompete provisions include 
(1) nonrecurring news and public affairs programs; (2) academic, 
curriculum-based, and scholarly programs; (3) programs with only 
incidental use of Smithsonian content;[Footnote 6] and (4) an initial 
annual allotment of six programs that the Smithsonian can produce with 
entities other than the new venture, referred to as one-offs. While the 
contract contains definitions for the terms academic, curriculum-based, 
and scholarly, it does not specifically define incidental use. 

Following the inception of the new venture with Showtime in 2006, the 
Smithsonian updated the guidelines for processing and approving filming 
and photography requests to align them with the noncompete clauses of 
the contract. For nonrecurring news and public affairs programs, the 
process that was in place before the contract has not changed. Filming 
applications are not required for nonrecurring news and public affairs 
programs, and decisions regarding acceptance of those requests are 
still made at the museum level. For the other types of requests-- 
academic, curriculum-based, scholarly, and commercial--a filming 
application is still required and an additional review step has been 
added. If the museum PIO reviews the application and determines that 
the museum can accommodate the request, the PIO forwards the 
application to the Office of Public Affairs review committee--composed 
of three PIOs and two museum representatives--which decides on a case- 
by-case basis whether or not the proposed film falls within one of the 
exceptions to the noncompete clauses.[Footnote 7] The review committee 
approves filming applications that fall within one of the exceptions 
and must either deny those that do not or pursue the film as a one-off. 
For applications that the committee chooses not to pursue as a one-off 
and denies because the request is to use more than an incidental amount 
of Smithsonian content, filmmakers have the option of reducing the 
amount of Smithsonian content to incidental, or they may independently 
contact the new venture to discuss producing the film. Appendix II 
contains a flowchart illustrating the Smithsonian's filming application 
review process. 

Filmmakers and other interested parties have raised issues about the 
Smithsonian's process of entering into the contract with Showtime, as 
well as the changes in the Smithsonian's filming procedures and other 
potential impacts resulting from the contract. In this context, you 
asked us to (1) evaluate the extent to which Smithsonian followed its 
internal guidelines with respect to competition, oversight, and 
protecting against conflicts of interest when negotiating the contract 
with 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. This report is nearly 
identical to the sensitive, but unclassified report you received on 
December 15, 2006. However, the original report contains confidential, 
business sensitive information identified by the Smithsonian and 
Showtime. Therefore, certain details, such as specific dollar amounts, 
percentages, and time frames related to the financial value of the 
contract, have been generalized or omitted to enable the public release 
of this document. In total, eight numbers were generalized and three 
sentences were omitted. 

To examine the extent to which the Smithsonian followed its internal 
guidelines for competition, oversight, and conflicts of interest, we 
obtained and reviewed meeting minutes for the Smithsonian's Board of 
Regents and SBV's Board of Directors, as well as Smithsonian guidelines 
regarding conflicts of interest and contracting. We also interviewed 
the Smithsonian and Showtime officials involved in negotiating the 
contract. To determine what the Smithsonian gave up and received in 
return, we reviewed the contract and other Smithsonian documents, 
interviewed Smithsonian and Showtime officials that were involved in 
the contract negotiations, and conducted an independent economic 
analysis to estimate the value of the contract. We also attempted to 
identify contracts of a similar nature for comparison, but we were not 
able to find suitable analogies. To examine how the Smithsonian has 
implemented the contract and what, if any, impact it has had on the 
Smithsonian's operations and outside parties, we reviewed relevant 
Smithsonian documents, analyzed historical and current film request 
data, and interviewed Smithsonian staff that have been involved with 
implementing changes resulting from the contract. We also reviewed 
position papers and 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. Appendix I provides a 
more detailed description of our scope and methodology. We conducted 
our work from June to November 2006 in accordance with generally 
accepted government auditing standards. 

Results in Brief: 

In entering into the contract, the Smithsonian generally followed its 
internal guidelines regarding competition, oversight, and conflicts of 
interest. In adhering with the commercial business practice of 
fostering competition, the Smithsonian reached out to 18 major media 
companies when it began exploring the idea for a television venture in 
2002. The Smithsonian negotiated for nearly a year with the only 
company that expressed interest at that time. When that deal fell 
through, the Smithsonian was approached by and had preliminary 
discussions with a second interested company that ultimately decided 
not to pursue the opportunity because it was concerned that developing 
a new Smithsonian channel might undercut its existing channel. Finally, 
in 2004, a third company--Showtime--expressed an interest in the idea, 
and the two entities engaged in serious negotiations for more than a 
year to finalize the contract. According to SBV officials, the Board of 
Regents oversight for the Showtime contract was similar to its 
oversight on other contracts. The board gave approval for SBV to pursue 
the venture in 2002. Since that time, the minutes of the Board of 
Regents meetings show that the board was periodically informed of the 
efforts to find a suitable business partner and enter into a contract, 
and these minutes were provided to Congress. In November 2005, the 
board approved the contract based on a summary sheet of the key 
provisions. During the contract negotiations, SBV's Chief Executive 
Officer disclosed a potential conflict of interest regarding his 
indirect ownership interest in the Sundance Channel. One of the owners 
of the Sundance Channel, through which the SBV Chief Executive Officer 
had his interest in the channel, was in negotiations with Showtime and 
the other owner of the Sundance Channel to sell his interest. In 
accordance with Smithsonian policies, the Smithsonian's Ethics Officer 
reviewed the disclosure and concluded that no conflict existed as long 
as SBV's Chief Executive Officer was only a silent partner and did not 
participate in the Sundance Channel sales negotiations. GAO's Ethics 
Officer reviewed the documentation and the Smithsonian's decision and 
concurred with the findings. 

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. The Smithsonian projects 
that the new channel will reach more than 31 million households by 
2010, and it is hoping that the increased national television exposure 
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. The 
Smithsonian's new revenue stream from the contract includes four 
components: (1) minimum annual payments of $500,000 for the early years 
that gradually increase to millions of dollars per year as the contract 
progresses (undiscounted and nominal); (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 (undiscounted and nominal) over the 30-year term 
of the contract. The Smithsonian estimates that the cumulative value of 
the contract after 10 years will be more than $150 million, of which 
only a small portion will be from the minimum annual payments. The 
major contract concession by the Smithsonian is the noncompete clauses. 
While most of these provisions are relatively straightforward, 
Smithsonian and Showtime officials had different understandings of a 
provision on the commercial use of scholarly programs. The provision 
states that before scholarly programs can be distributed by a 
commercial distributor, they must first be offered to the new 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, whereas Showtime officials had a 
different view. Upon raising this issue during our review, the 
Smithsonian and Showtime reached an agreement that the provision does 
not apply to third-party generated scholarly programs. 

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 
Smithsonian and Showtime waited more than 2 months after the contract 
became effective to publicly announce the creation of the new venture. 
The Smithsonian did not establish a central committee in the Office of 
Public Affairs to review filming requests for compliance with the 
contract and make determinations about the incidental use of 
Smithsonian content until March 2006, so decisions regarding filming 
requests received in early 2006 were delayed. The committee has since 
developed a spreadsheet to track filming requests, but it does not 
contain a detailed rationale for decisions in which a film request is 
either denied due to more than incidental use or pursued as a one-off. 
As a result, it may be difficult for the Smithsonian 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. However, the Smithsonian has not yet 
developed a mechanism or process to synthesize its decisions over time 
into a record of precedents that would provide filmmakers with 
additional guidance for their use in developing future filming 
requests. The review committee members mentioned that they direct 
filmmakers to the Smithsonian's Web site for answers to "Frequently 
Asked Questions," but the site provides little information about 
Smithsonian on Demand. As a result, filmmakers and other interested 
parties remain uncertain about the Smithsonian's criteria for making 
decisions about filming requests and about the contract's impact in 
general. More recently, in August 2006, the Smithsonian established a 
separate Smithsonian on Demand Committee to provide recommendations 
regarding content review and approval of programs for the new channel. 
Since this newest committee had not reviewed any films as of September 
30, 2006, it is not clear how the review and approval issues will be 
resolved. 

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. While 
access to the Smithsonian's collections and staff for research purposes 
remains unchanged, the direct impact on filmmakers will depend largely 
on how many filming applications the Smithsonian receives annually 
requesting to use a substantial amount of Smithsonian content that are 
not otherwise permitted by the noncompete clauses. If the number of 
those requests is small and the Smithsonian decides to accommodate them 
within their annual allotment of one-offs, then any direct impact on 
filmmakers will be minimal. However, if the number of those requests is 
large, then some filmmakers' requests will be denied. During the first 
9 months of the contract, from January 1, 2006, through September 30, 
2006, 2 out of 117 filming requests were denied due to the contract, 
and 4 were approved as one-offs. Based on an 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 that this 
analysis was unreliable for the purpose of estimating the contract's 
potential impact because it was based on incomplete data and 
oversimplified 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 15 percent or less 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. 

To improve the implementation of the contract and increase the 
information available to interested parties, we recommend that the 
Secretary of the Smithsonian (1) 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, and (2) 
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. We requested comments on the draft report 
from the Smithsonian and Showtime. The Smithsonian commented in writing 
that it generally agrees 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. 

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.[Footnote 8] 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."[Footnote 9] 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.[Footnote 10] 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.[Footnote 11] 

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.[Footnote 12] 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.[Footnote 13] 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. 

Figure 1: Timeline of Key Negotiation and Oversight Actions: 

[See PDF for image] 

Source: GAO analysis of Smithsonian data. 

[End of figure] 

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.[Footnote 14] 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.[Footnote 15] 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;[Footnote 16] 

* 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. 

While most of the noncompete provisions are relatively straightforward, 
a provision related to the commercial distribution of scholarly 
programs was unclear, and Smithsonian and Showtime officials had 
different understandings of this provision. Under section 6.2.4, the 
distribution of scholarly materials generally does not constitute 
competition, with the following limitation: 

[the Smithsonian] will not permit any Scholarly Program to be exhibited 
or exploited by a Commercial Distributor unless [the Smithsonian] first 
offers such Scholarly Program to the [new venture] for no additional 
charge to the [new venture], for exhibition and/or distribution by the 
[new venture]. 

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.[Footnote 
17] The net present value of the minimum required annual payments is 
$45 million.[Footnote 18] 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.[Footnote 19] 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. 

Figure 2: Timeline of Key Contract Implementation and Related Events: 

[See PDF for image] 

Source: GAO analysis of Smithsonian data. 

[End of figure] 

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. 

Table 1: Filming Application Decisions from January 1, 2006, through 
September 30, 2006: 

Action taken on filming application: Accepted; 
Number of applications: 48; 
Percent of applications: 41%. 

Action taken on filming application: Accepted as a one-off; 
Number of applications: 4; 
Percent of applications: 3. 

Action taken on filming application: Denied for reasons unrelated to 
the contract[A]; 
Number of applications: 34; 
Percent of applications: 29. 

Action taken on filming application: Denied due to the contract; 
Number of applications: 2; 
Percent of applications: 2. 

Action taken on filming application: Withdrawn or closed[B]; 
Number of applications: 26; 
Percent of applications: 22. 

Action taken on filming application: Pending; 
Number of applications: 3; 
Percent of applications: 3. 

Total; 
Number of applications: 117; 
Percent of applications: 100%. 

Source: GAO analysis of Smithsonian data. 

[A] Reasons for denials at the museum level unrelated to the contract 
include issues regarding availability of collections or staff or 
appropriateness of the request. 

[B] Applications may be withdrawn or closed for reasons such as the 
filmmaker deciding that they are not going to pursue the film or the 
Smithsonian not receiving the required information from the filmmaker. 

[End of table] 

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.[Footnote 20] 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). 

Figure : Annual Distribution of 29 Programs from 2000 through 2005 with 
More than Incidental Use Based on Smithsonian Filming Contracts: 

[See PDF for image] 

Source: GAO analysis of Smithsonian data. 

Note: Like the Smithsonian's analysis, our evaluation was limited by 
the incomplete data provided in the spreadsheet and cases in which 
original contracts could not be located to validate information. In 
addition, while the contract stipulates that the one-off programs will 
be counted in the year that they are first exhibited or distributed, 
the Smithsonian's analysis used the year the filming contract was 
awarded instead, causing an inaccurate estimate of the annual 
distribution. 

[A] The Smithsonian's analysis included one program for which the 
contract was dated December 2003. 

[B] The Smithsonian's analysis included one program for which the 
contract has not been finalized. 

[End of figure] 

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 
[Hyperlink, 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. 

Signed by: 

Robin M. Nazzaro: 
Director, Natural Resources and Environment: 

[End of section] 

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. 

[End of section] 

Appendix II: Smithsonian's Filming Application Review Process: 

[See PDF for Image] 

Source: GAO analysis of Smithsonian data. 

Note: The shaded area represents new review procedures put in place as 
a result of the contract. 

[A] In the case of scholarly programs, questions 1 and 2 above must be 
answered "yes" for the program to be approved. 

[End of Figure] 

[End of section] 

Appendix III: Comments from the Smithsonian Institution: 

Smithsonian Institution: 
Smithsonian Institution Building: 
1000 Jefferson Drive SW: 
Washington DC 20560-0016: 
202.633.1846 Telephone: 
202.786.2515 Fax: 

Lawrence M. Small: 
Secretary: 

December 1, 2006: 

Robin M. Nazzaro: 
Director, Natural Resources and Environment: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Re: GAO's Report on Smithsonian Institution's Contract with Showtime: 

Dear Ms. Nazzaro: 

The Smithsonian Institution is pleased to receive this report from the 
United States Government Accountability Office (GAO) on the 
Institution's contract with Showtime Networks Inc (Showtime). We 
appreciate the time that GAO and its staff took to understand this 
complicated issue and to approach this topic in a fair and unbiased 
way. 

Overview of Response: Smithsonian Will Implement GAO Recommendations: 

Aside from the few exceptions discussed below, we believe the report 
accurately describes the events surrounding the negotiation and 
execution of the contracts with Showtime, as well as the establishment 
and implementation of the new filming policies that this contract 
necessitates. In addition, we agree with both of GAO's "Recommendations 
for Executive Action" detailed at the end of its report: First, 
although we currently document decisions on filming requests, we will 
document them in more detail for the reasons you suggest. Second, we 
will update our website to provide filmmakers and other interested 
parties with more information about what the contract means for 
filmmakers. 

Smithsonian Statement on Creation of Smithsonian Networks/Smithsonian 
On Demand: 

The Smithsonian Board of Regents, which governs and administers the 
Smithsonian Institution, is guided in its decisions by the mission 
described by James Smithson in his will - "for the increase and 
diffusion of knowledge." Since its inception, the Institution has 
sought ways to further this mission by bringing attention to its 
research and collections and by giving Americans every opportunity to 
share in this wealth of knowledge. For decades, we have attempted to 
pursue this goal by expanding our outreach initiatives into television 
and beyond into new technologies. However, due to lack of funding and 
expertise, this goal was never fully realized and as a result the 
Smithsonian's research and collections have been the focus of only the 
occasional television program or documentary film. 

Expanding Smithsonian Outreach Into Television Was Long Overdue: 

In the last few years, the Board of Regents determined that the 
Institution's significant foray into television was long overdue. They 
also realized that the only way to secure the investment and expertise 
necessary to establish a meaningful media presence was to partner with 
a large, established multimedia corporation. Given these requirements, 
only a limited number of media companies in the world were suitable for 
this kind of partnership. The process, which was overseen by the 
Smithsonian Board of Regents and the Board of Smithsonian Business 
Ventures, was fair and transparent. Only after much research and 
deliberation, and adherence to standard commercial business practices, 
was Showtime selected as the partner for this groundbreaking venture. 
In partnering with Showtime to create Smithsonian Networks, the Board 
of Regents created a significant opportunity to further the mission of 
the Institution. This opportunity is being realized in a number of 
ways. 

Benefits of the Smithsonian/Showtime Agreement: 

First, the agreement already is generating an exponential growth in 
filming projects featuring Smithsonian content that ultimately will be 
available to millions of people via the venture's networks, the first 
of which is expected to be Smithsonian On Demand. Right now many of our 
museums are assisting in the production of dozens of new films 
featuring Smithsonian objects, Smithsonian curators, and Smithsonian 
buildings. Examples of these films are: 

* America's Hangar. The story of the National Air and Space Museum, 
home to the largest collection of aircraft and spacecraft in the world. 

* Saving Stuff. The Smithsonian's leading preservation expert and best- 
selling author Don Williams explains how to preserve family histories 
and heirlooms. 

This current filming activity far exceeds anything we have seen in the 
past and is providing an unprecedented opportunity to share Smithsonian 
research and collections with a television audience. Also, this filming 
activity is already generating millions of dollars of work for many 
filmmakers, offering them the opportunity to produce and distribute new 
or existing films through Smithsonian Networks. 

Second, due to Showtime's significant investment of capital, the 
agreement allows the Smithsonian to participate in the creation of 
television programming about the Institution in a way never possible 
before. The contract requires Smithsonian Networks to produce annually 
as many as 15 programs based on ideas proposed by the Smithsonian. 
These programs will feature areas of research and of the collections of 
the Smithsonian that the Institution especially wants to be presented 
to the public. Examples of these programs are: 

* Smithsonian Treasures: A look at 150 unique objects in the 
Institution's collections that have defined American culture over the 
last 200 years. The film will tell the story behind objects such as 
Jackie Kennedy's inaugural gown, Muhammad All's boxing gloves, and 
Lewis and Clark's compass. 

* Ghost Cat: Saving the Clouded Leopard: This film will spotlight the 
work of Smithsonian National Zoo veterinarian Dr. JoGayle Howard and 
her extraordinary reproductive research on the elusive Clouded Leopard. 
The film draws attention to the Smithsonian's role as a leading 
scientific institution that is pioneering procedures to save endangered 
species. 

Third, the contract specifies that the Smithsonian has the right to 
review all programming to be aired by Smithsonian Networks and approve 
each program for factual accuracy and consistency with the reputation 
and integrity of the Smithsonian name. To facilitate these 
responsibilities, the Smithsonian has chosen to create a pan- 
Institutional committee made up of Smithsonian scientists and curators 
which is reviewing the rough and final cut of films for factual 
accuracy and consistency with the Institution's reputation. The 
committee also solicits and recommends ideas from around the 
Institution for the programs that the Smithsonian submits to the 
venture each year. In sum, the partnership with Showtime is enabling 
the Smithsonian to participate significantly in the creation of 
substantial amounts of television programming about the Institution for 
the first time in its history. 

Fourth, the agreement provides substantial financial benefits for the 
Institution. As GAO confirmed, the agreement requires Showtime to make 
all of the financial investments in Smithsonian Networks and 
Smithsonian On Demand. Given the Institution's budget situation, it 
would have been impossible for the Smithsonian to expand its outreach 
into television and new technologies without this commitment. Only with 
Showtime's major investment of capital, and their accompanying 
technical and business expertise, will we be able to realize this goal. 
Furthermore, the contract's required licensing and royalty payments to 
the Institution are projected to generate millions in unrestricted 
trust revenue for the Institution, enabling it to better fulfill its 
mission by enabling improved and expanded research, exhibitions, and 
outreach programs. 

Access To Smithsonian Collections Is Not Affected; Restrictions On Use 
of Smithsonian Collections Are Minimal And Rare: 

The substantial benefits provided by the establishment of Smithsonian 
Networks and Smithsonian On Demand far outweigh the cost of agreeing 
not to undertake certain activities. We understand that this 
contractual commitment has caused great concern for many researchers 
and filmmakers who have worked with the Institution in the past and 
hope to work with us in the future. We value these relationships and 
want these individuals and groups to know that, as in the past, they 
are always welcome to request access to our collections and they can 
continue to rely on the Smithsonian for our expertise and participation 
in their research or filming projects. 

As is our responsibility, and has always been the case, the Institution 
maintains the right to restrict access to and use of our collections 
for many reasons (for example, if it would cause damage to an item in 
our collections, if it would interfere with the Institution's intended 
use for its collections, if it would be beyond the Institution's 
administrative or staffing resources, or if it would cause harm to the 
Institution's reputation). These usual restrictions aside, the 
arrangement with Showtime has no impact on "access" to our collections 
and staff, while "use" of our collections and staff by commercial 
filmmakers is only minimally affected. (In this context, "access" is 
the ability to view, research, read, or interview, while "use" refers 
to the ability to photograph or film with the intent to distribute 
commercially.) 

Ultimately it is in our best interest to encourage production of good 
films about the Smithsonian, which is why we approve dozens of filming 
requests across the Institution each year. When we decline filming 
requests, we almost always do so because of issues that have nothing to 
do with the Showtime contract (for example, the topic suggested is not 
within our expertise, the object sought is not in our collections, or 
the curator sought is not available at that time). As GAO's report 
confirms, the vast majority of requests to film at the Institution are 
being evaluated and approved as always: Requests from news and public 
affairs programs, requests for the production of academic, scholarly or 
curriculum-based programs, and requests relating to the production of 
programs that will not be distributed commercially are outside the 
scope of this contract and are thus unaffected; commercial television 
and film projects which intend to use Smithsonian content in a way that 
is only "incidental" to the overall program are not affected either. 

The only programming which could be affected by the "non-compete" 
provision in the contract is certain types of programs which contain 
"more than incidental use" of Smithsonian content. Thus far, as we 
expected based on past experience, the number of programs that fall 
within this narrow category of competitive programs is tiny: as of 
November 30, 2006, only two out of 130 filming requests have been 
denied on these grounds. In addition, for those filmmakers who seek to 
feature a substantial amount of Smithsonian content in a program to be 
exhibited by a commercial distributor, there are several options: 
First, the filmmaker may decide after consulting with the Smithsonian 
to reduce the amount of Smithsonian content so that it is "incidental" 
to the overall film. Second, the filmmaker may choose to (but is not 
required to) contact Smithsonian Networks to see if it would be 
interested in working on and airing the film. Third, the Smithsonian 
may choose to allow the program as one of its annual "one-offs" (a 
program that is permitted under the contract even though it may compete 
with the venture but which the Smithsonian deems an important project 
and wants to allow). Thus far, we have selected a total of four 
programs as "one-offs" which will be counted against our allotments in 
the years in which these programs are expected to air. Based on our 
predictions, and supported by the actual requests we have received this 
year, it appears that the annual one-off allotment is sufficient to 
meet the demand for outside commercial projects featuring "more than 
incidental" Smithsonian content. 

Only if these three outcomes are not viable - which occurs in only a 
very small number of cases as the data above support - would a filming 
proposal be rejected for reasons related to the contract. However, 
given these many options, we are confident that filmmakers will 
continue to work successfully with the Smithsonian for many years to 
come. 

In sum, the contract with Showtime enables the Smithsonian to further 
its mission via the creation and distribution of hundreds of hours of 
quality television programming while approving each program's factual 
accuracy and consistency with the Institution's reputation, incurring 
no financial risk, generating millions in revenue, permitting 
traditional access to Smithsonian collections, and only rarely 
restricting the use of Smithsonian collections in competing filming 
projects. The Smithsonian Board of Regents weighed the advantages and 
constraints of the new partnership and concluded it was overwhelmingly 
more likely to allow the Institution to "increase and diffuse 
knowledge" and provide significantly increased benefits to the millions 
of Americans whom we inform, educate and enlighten each year. 

Responses to Issues Raised by GAO: 

1. Current Data Supports Expectations Based On Historical Review of 
Smithsonian Filming Requests: 

GAO contends in its report that the Smithsonian's historical review 
(2000-2005) of filming contracts was unreliable and not a good 
indicator of how the Showtime agreement will impact future filming 
requests. Specifically, GAO states that the true number of programs 
potentially affected during this period was not 17, as the Smithsonian 
contended in its initial statements, but was actually closer to 30. 

The purpose of this historical analysis initially was to inform the 
Smithsonian's contract negotiations with Showtime, and later to provide 
some estimated figures for how future filming requests might be 
affected by the contract's "non-compete" provisions. We acknowledge 
that the statistics gleaned from this analysis were not perfect. One 
reason for the discrepancies noted by GAO is that in the past the 
process for filming requests was decentralized and unit-specific, an 
obstacle that no longer exists under the newly established central 
oversight for this process. (Beginning earlier this year, the 
Smithsonian created a pan-Institutional committee, overseen by the 
Smithsonian Office of Public Affairs and reporting to the Deputy 
Secretary, to track written filming requests at all of our museums and 
research centers and to review filming requests for compliance with the 
contract. This new centralized process, which was not in place during 
the period of this historical review, is enabling us to track more 
accurately and respond more consistently to requests to film at the 
Smithsonian.) In addition, the historical analysis was imperfect 
because it was based only on paper records of filming requests. In many 
cases the information missing from these paper records would have been 
available by talking with a filmmaker. Those personal interactions were 
not possible for this historical analysis, but are routine when a 
Smithsonian public information officer evaluates an actual filming 
request. 

These explanations notwithstanding, it is important to note that 
whether this historical analysis yielded 17 or 30 potentially affected 
programs, the fact remains that the contract's potential impact on 
filming projects was minimal and that its actual impact to date, which 
is supported by the data cited above and by GAO, is minimal as well. It 
bears repeating that since the contract has been in place, only two 
projects have been denied as a result of the non-compete provisions. 
Even if, as GAO surmises, the demand for filming at the Institution 
increases, there is no reason to suspect that these requests will not 
mirror the type of requests we have received in the past and thus will 
be able to be accommodated as allowed by the contract. In fact we hope 
and expect that the number of filming requests will grow and that the 
increased exposure for our collections and research will outweigh the 
rare need to decline a request because it would compete with the 
venture. Therefore, although the specific number of potentially 
affected programs drawn from the historical analysis may have been 
imprecise, the conclusions drawn from this number are reliable and are 
supported by the current data. 

2. Delayed Contract Announcement and Implementation Was Inevitable: 

GAO contends that the Smithsonian's delay in announcing the formation 
of the contract and in explaining and implementing new filming policies 
caused undue public confusion. 

The public announcement of the Showtime contracts, and the explanation 
and implementation of new policies based on the contracts, was delayed 
after the contracts were signed in late December 2005. Part of the 
reason for this delay was the need to make initial decisions about the 
hiring of key staff. To announce the agreement and the formation of the 
venture before these basic elements were in place would have been 
premature. In addition, the unique and complicated nature of this deal 
made it difficult for the Smithsonian to anticipate the kinds of 
revisions to its policies and procedures that would be needed to 
implement this pan-Institutional contract. Without prior experience in 
television production on this scale, it took some time for the 
Institution to decide how best to implement these new procedures and 
explain them to internal and external audiences. 

These explanations notwithstanding, we may not have done enough 
initially to inform others about how the contract would affect existing 
Smithsonian policies and procedures. We have since addressed most of 
these misunderstandings with the groups most affected by the agreement 
(researchers and scientists, filmmakers, television networks, and 
Smithsonian staff) through numerous meetings, conversations and written 
correspondence. Nonetheless, we accept GAO's criticism here and will 
strive to be more informative and inclusive in the future as we seek 
input from and provide information to Congress, Smithsonian staff, the 
academic community and filmmakers. 

3. Smithsonian Will Enhance Information Provided to Filmmakers and 
Other Interested Parties: 

GAO contends that the Smithsonian is not providing enough information 
to filmmakers and other interested parties about the contract's 
requirements and the rationale for filming request decisions. 

Although the Smithsonian is not a federal agency, we strive for 
transparency and rationality in our policies and decisionmaking. 
Therefore we agree with GAO's "Recommendations for Executive Action" 
that we should enhance the information about the contract available on 
our website to filmmakers and others, and should commence a more 
detailed recording of the rationale for decisions on filming requests. 

As to GAO's first recommendation, we are now documenting in more detail 
our decisions on filming applications. These decisions will help 
illustrate, among other things, how the term "incidental use" of 
Smithsonian content is being applied with respect to actual filming 
requests, and what kinds of programming proposals are being approved as 
oneoffs. 

As to GAO's second recommendation, we have begun to update our websites 
to provide filmmakers and other interested parties with more 
information about what the contract means for filmmakers. This updated 
information - which will be available on both our public website 
(www.smithsonian.org) and our press website (newsdesk.si.edu) - will 
include a revised and enhanced "Fact Sheet" about Smithsonian On Demand 
and descriptions of the kind of programming that will be shown on 
Smithsonian On Demand. In addition, we plan to add new "Frequently 
Asked Questions" specifically focused on the issues of how the contract 
operates and what impact it may have on filming requests. Lastly, we 
are crafting a short document that would describe the criteria the 
Institution may consider when evaluating whether a filming request 
would require "more than incidental use" of Smithsonian content. As 
additional questions and issues arise, we will continue to update and 
enhance the materials on our website so that they are current, useful, 
and informative. 

Smithsonian Retains Flexibility to Evaluate Filming Requests on Case- 
by-Case Basis: 

In support of both of these recommendations, GAO expressed concern that 
filmmakers do not currently understand what constitutes "incidental 
use" of Smithsonian content as described by the contract. Throughout 
contract negotiations with Showtime, we indicated our preference to not 
adopt a rigid formula to define the term "incidental use," and have 
resisted attaching a specific run-time percentage to this assessment. 
We continue to believe that having a flexible standard which can be 
assessed on a case-by-case basis will enable a more thorough and 
tailored application of this requirement, ultimately benefiting both 
the Smithsonian and outside filmmakers. 

As for how filmmakers will navigate this standard, it is important to 
note that the consideration of filming requests often takes the form of 
a dialogue between Smithsonian's Public Information Officers (PIOs) and 
filmmakers. During these discussions, a PIO can ask detailed questions 
about the filming request and may offer, among other things, advice as 
to how a particular request might be amended to increase the chances 
that it will comply with the contract's provisions. It is often easier 
for filmmakers to discuss the details of their specific project with a 
PIO rather than try to discern our likely response solely by reviewing 
written materials. We believe these conversations, combined with the 
enhanced information that GAO has recommended we add to our websites, 
will provide filmmakers with the information they need to adequately 
inform their requests for filming at the Smithsonian. 

Thank you again for your detailed and balanced review of the issues 
surrounding this process. We hope that you found our responses 
forthcoming and we welcome the opportunity to work with you again in 
the future. 

All the best, 

Signed by: 

Lawrence M. Small: 
Secretary: 

[End of section] 

Appendix IV: Comments from Showtime Networks Inc. 

Matthew C. Blank: 
Chairman and Chief Executive Officer: 

Showtime Networks Inc. 
A CBS Company:
1633 Broadway: 
New York, NY 10019: 
212.708.1324: 
212.708.1790 Fax: 

December 1, 2006: 

Robin M. Nazzaro: 
Director, Natural Resources and Environment: 
U.S. Government Accountability Office: 
441 G Street N.W. 
Washington, D.C. 20548: 

Re: GAO Report - Smithsonian's Contract with Showtime: 

Dear Ms. Nazzaro: 

Showtime Networks Inc. (Showtime) would like to express its 
appreciation to the U.S. Government Accountability Office (GAO) for 
taking the time to talk with several of us and to thoughtfully analyze 
the various agreements relating to our venture with the Smithsonian 
Institution, SNI/SI Networks LLC (also referred to in this letter as 
Smithsonian Networks or the venture). 

We know that the agreements are dense and complicated and that the 
concerns expressed by some filmmakers, historians, members of Congress 
and others about the venture are genuinely felt. Some of these concerns 
relate solely to the Smithsonian Institution, and some relate to the 
effect the venture may have on third parties. Given the difficult task 
assigned to GAO, we believe that it has done a thorough job of 
identifying these concerns and explaining the contractual provisions 
that pertain to these concerns. As the GAO report indicates, the 
Smithsonian Institution agreed to refrain from certain activities 
deemed competitive with the venture, but it did so in order to receive 
the numerous benefits afforded by the venture. These benefits include 
an unprecedented opportunity to fulfill its mission to "increase and 
[diffuse] knowledge" by obtaining national television exposure for 
Smithsonian research, scholars and collections, extending the 
recognition of its brand, and receiving substantial direct financial 
returns from the venture, which in turn can be used to fund the myriad 
other activities of the Institution. We trust that GAO's considered and 
dispassionate report will be helpful in connection with any future 
public dialogue about the venture. 

Several of the concerns cited in the GAO report relate specifically to 
policies and practices of the Smithsonian Institution, and we believe 
those topics are best addressed by the Institution itself. Accordingly, 
our partner, the Smithsonian Institution, is today submitting to GAO a 
response covering these points. As partners in this new venture, 
however, we will gladly do our part in providing the Institution with 
any assistance it may desire as it implements the GAO recommendations 
discussed in its response. 

As managing partner of Smithsonian Networks, we look forward to 
devoting our time and energy to the exciting tasks of creating dynamic 
programs, designing our new channels, and securing distribution 
agreements for these channels so that millions of Americans will, for 
the first time, be able to see hundreds of hours of great programs 
about the Smithsonian and other family-appropriate, high-quality 
programs on historical, scientific, and cultural subjects. 

Thank you again for soliciting our views and for so carefully 
considering the various venture agreements. 

Sincerely, 

Signed by: 

Matthew C. Blank: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Robin M. Nazzaro, (202) 512-3841, nazzaror@gao.gov: 

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. 

FOOTNOTES 

[1] The creation and operation of the new venture is memorialized 
primarily in four separate agreements: (1) an agreement between the 
Smithsonian and Showtime to create a limited liability company that 
will, among other things, create a new digital on-demand television 
channel called Smithsonian on Demand; (2) a licensing agreement from 
the Smithsonian to the new venture for the use of Smithsonian content 
and Smithsonian trademarks; (3) an agreement between the Smithsonian 
and the new venture that governs the new venture's access to 
Smithsonian content; and (4) a management agreement between Showtime 
and the new venture for the management of the new venture. We will 
refer to these four separate agreements collectively as the contract 
for purposes of this report. In the contract, the legal name of the new 
venture is SNI/SI Networks L.L.C. 

[2] Act of August 10, 1846, ch. 178, 9 Stat. 102 (1846) (codified at 20 
U.S.C. §41). A trust is a property interest held by one entity for the 
benefit of another. 

[3] The board is composed of the Chief Justice of the United States, 
the Vice President, three senators appointed by the President of the 
Senate, three representatives appointed by the Speaker of the House, 
and nine citizens appointed by Joint Resolution of Congress--two from 
the District of Columbia and seven from the states. 

[4] The Smithsonian manages two different types of funds--federal funds 
and trust funds, which are nonfederal funds arising from donations, 
revenue-generating activities, interest on investments, and other 
sources. The Smithsonian has elected to follow the FAR provisions for 
contracts involving the expenditure of federal funds. For business 
contracts that involve neither the expenditure nor receipt of federal 
funds and for which the FAR is inapplicable, such as the contract with 
Showtime, the Smithsonian has elected to follow commercial business 
practices. 

[5] Scholarly programs are defined in the contract as programs that are 
(1) developed in conjunction with a scholar, academic, or expert who is 
employed by the Smithsonian or otherwise formally associated with the 
Smithsonian; (2) derived from the scholar's, academic's, or expert's 
work in association with the Smithsonian; and (3) developed for 
educational purposes and that would, to a reasonable person, appear to 
be of interest primarily to scholarly and academic viewers. 

[6] Smithsonian content includes Smithsonian collections, exhibitions, 
archival materials, research materials, publications, audiovisual 
works, Web site content, and other works of authorship; Smithsonian 
personnel; Smithsonian events; and Smithsonian buildings and grounds. 

[7] A proposed use is excepted from these rules when it is for an 
academic, curriculum-based, scholarly, or news program, or a program 
that will not be distributed by a commercial distributor. In these 
cases, more than incidental use of Smithsonian content is permitted. 

[8] Smithsonian Directive SD-600: Collections Management defines 
collections to include objects, natural specimens, artifacts, and other 
items that are acquired, preserved, and maintained for public 
exhibition, education, and study. 

[9] Act of August 10, 1846, ch. 178, §3, 9 Stat. 103 (1846) (codified 
at 20 U.S.C. §42). 

[10] Pub. L. No. 109-171, title III, § 3002(b), 120 Stat. 21 (2006). 

[11] GAO, Digital Broadcast Television Transition: Estimated Cost of 
Supporting Set-Top Boxes to Help Advance the DTV Transition, GAO-05-
258T (Washington, D.C.: Feb. 17, 2005). 

[12] Should the Smithsonian submit fewer than 30 program treatments, 
the new venture's obligations are reduced proportionately. 

[13] GAO, Smithsonian Institution: Facilities Management Reorganization 
Is Progressing, but Funding Remains a Challenge, GAO-05-369 
(Washington, D.C.: Apr. 25, 2005). 

[14] Smithsonian Directive SD-103: Smithsonian Institution Standards of 
Conduct, dated March 3, 1993, was in effect during the Smithsonian's 
contract negotiations with Showtime. A more current version, dated 
February 13, 2006, is now in effect. 

[15] 18 U.S.C. § 208. 

[16] According to Smithsonian officials, this content is being moved 
elsewhere on Smithsonian Web sites but in a nonaggregated format, which 
does not compete with the look and feel of an on-demand channel. 

[17] All dollar values in this report are undiscounted and not adjusted 
for inflation, except when otherwise noted. 

[18] A 4.55 percent discount rate was used to calculate the present 
value of the stream of minimum annual payments the Smithsonian will 
receive under the contract. The source for this discount rate is the 
nominal (not inflation-adjusted) yield (interest rate) on a U.S. 
Treasury 30-year bill at the time the contract was signed. See the 
table "Treasury Bonds, Notes and Bills, January 3, 2006," The Wall 
Street Journal, Jan. 4, 2006, p. C11. 

[19] The New York Times, "Smithsonian-Showtime TV Deal Raises 
Concerns," by Edward Wyatt (Mar. 31, 2006); and The Washington Post, 
"Smithsonian Deal With Showtime Restricts Access By Filmmakers," by 
Jacqueline Trescott (Apr. 4, 2006). 

[20] A Smithsonian official stated that branded programs generally use 
the Smithsonian's name in the title of the program, such as 
"Smithsonian's National Zoo" or "Smithsonian Presents…," or in its main 
credits. 

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