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As the host of NBC's "Late Night," David Letterman usually poses the questions, but last Wednesday guest Steve Martin turned the tables. "Can I ask you a question?" he began, innocently enough. "When you drive to work, does NBC pay or do you have to drive yourself?" Letterman, uneasy, deadpanned: "It's something that perhaps could be negotiated." Then Martin asked to try out the host's chair and eased into it. "The reason I'm asking is, I happen to be friendly with NBC," he said. Retorted Letterman: "You'd be the only one."

It was an inside joke shared by nearly all of Letterman's 5 million viewers. Two days earlier, after months of rumors, the comedian's representative, the powerful Creative Artists Agency, gave NBC the bad news: Letterman was prepared to break off his decadelong association with the network and accept a deal with CBS to star in an 11:30 talk show opposite "The Tonight Show" starring Jay Leno. The fruit of a yearlong campaign by CBS Broadcast president Howard Stringer, the agreement gives Letterman a reported $16 million salary, ownership of the show and the right to produce a second late-night program at 12:30. It also sets up a potentially bruising ratings war between Leno and Letterman, whose relations have been strained since the network chose Leno over Letterman to replace Johnny Carson as host of "The Tonight Show" last year. "This [will be] a battle between hip, highbrow and warm, cuddly, middlebrow humor," says one top TV executive. "It [will be] a battle between the coasts and Middle America."

NBC was already reeling from a run of bad news. The same day, the producers of "Cheers" announced they would terminate the highly profitable comedy at the end of the season; that followed a pay-per-view Summer Olympics debacle that lost as much as $100 million and NBC's tumble from the top to the bottom of the Nielsen ratings. But Letterman's imminent defection was the biggest blow, raising questions about NBC's management: how could president Robert Wright and entertainment chief Warren Littlefield have allowed one of their most treasured franchises to slip from their grasp?

NBC still has a slim chance of retaining Letterman, whose "Late Night" brings the network an estimated $55 million in revenue a year. Under the terms of the contract, NBC has 30 days in which to make a counterbid and could argue that CBS's offer has its downside: up to 40 percent of CBS's affiliates are already committed to running other programming, including "Arsenio Hall" and "Love Connection," in the 11:30 time slot. They include television stations in such major markets as Dallas, Cleveland and Boston. Even now, Stringer puts the deal at just 70 percent certain.

The standard industry line assumes that Letterman soured on NBC over the "Tonight Show" snub. But his disaffection dates back farther. Letterman never warmed up to Littlefield, who took over NBC's entertainment division from Brandon Tartikoff in 1991. "Littlefield stepped in as a stranger," says one source close to Letterman. "And he had too many problems to focus on, especially prime-time programming." Letterman also squabbled with NBC's head of productions John Agoglia for months over the network's attempt to rent his studio to Paramount's "The Maury Povich Show" in the daytime. (NBC ultimately backed down.) Letterman regularly lampoons NBC executives on air as "pinheads," "boneheads" and "programming geniuses"; mocks the bean-counting obsessions of NBC parent company General Electric ("Top-10 sign that your bank is failing: free giveaway toaster is made by GE") and joked last week that one GE executive got so drunk at the Christmas party that "he fired himself." When NBC licensed his reruns to the Arts & Entertainment cable network without consulting him, he was incensed. "It was a rinky-dink deal," says a source. "And he didn't want his old shows saturating the airwaves."

Then, in May 1991, Wright and Littlefield had to decide on Carson's successor. The arguments for Leno were powerful: he had already served four years as Carson's permanent guest host with no drop in the ratings. Leno enjoyed the support of NBC affiliates, which he'd cultivated with the ingratiating schmooze of a candidate for senior-class president. (The irascible Letterman was incapable of lobbying and never told NBC that he wanted "Tonight.") Leno's amiable personality offered a sense of continuity after Carson. So did the tone of his monologue, which had become increasingly cautious and politically balanced since he assumed the guest-host job in 1987. Letterman, by contrast, oozed irony and hostility. Besides, Letterman still had two years to go on his contract; Leno, they feared, might jump immediately to CBS. The NBC executives chose Leno (who had built his career as a guest on "Late Night"). They bet Letterman would remain loyal to the network-and content with his 12:30 time slot.

They bet wrong. Letterman had grown unhappy with that hour ("too many prisoners and college students," he told an interviewer), and he was furious at the way NBC chose to deliver the bad news. Instead of walking across NBC's New York headquarters to tell Letterman, Wright ordered Littlefield and Agoglia in from Los Angeles to do his dirty work. Letterman felt slighted. After the network named Leno, Littlefield and other top NBC executives made a greater effort to pamper Letterman, often publicly referring to him as "brilliant." But the small-mindedness never disappeared completely. They asked him to tone down certain topical references, begged him not to joke on air about Sinead O'Connor's controversial appearance on the network's "Saturday Night Live," even bickered with his staff over the use of editing facilities.

Executives from rival networks and TV syndicators, sensing an opportunity, began making overtures. By contractual obligation, Letterman and his representatives never negotiated with anyone. But Fox Broadcasting sent Letterman a batting cage for his birthday in April and dangled the promise of an 11 o'clock talk show. Others, including King World (syndicator of "Wheel of Fortune" and "The Oprah Winfrey Show"), Paramount and ABC, also expressed interest (though ABC's "Nightline," which runs at 11:30 on most affiliates, hamstrung the network). The most aggressive suitor was Howard Stringer, 50, the charismatic president of CBS Broadcast, who had helped restore the network to profitability since taking over in 1988. Last year Stringer delicately sounded out NBC sources to see just how disaffected Letterman had become. The answer: far worse than reported. In the Hamptons, in Los Angeles and Manhattan restaurants, Stringer cozied up to Letterman intimates such as line producer and longtime buddy Bob Morton and coexecutive producer Peter Lassally. Stringer also had casual, get-acquainted chats with Letterman. "It was Howard's job to humanize CBS," says a source. "He's from the same generation. He appreciates irreverence. He basically told him, 'I'm your biggest fan. I live to watch your show'."

Last May Letterman and his personal manager of 12 years, Jack Rollins, parted ways, and Letterman approached the Creative Artists Agency to represent him. Rollins says he retired; other sources say Letterman wanted a stronger negotiator. Under CAA pressure, NBC agreed to throw out a one-year "no compete" clause in Letterman's contract and free him to seek other offers; in return, Letterman agreed to extend his deal through the May 1993 sweeps. In early November, CAA head Michael Ovitz and Lee Gabler, who runs the agency's TV department, opened the bidding. Letterman wanted six critical points addressed: salary, the 11:30 time slot, access to a nationwide audience, a multiyear commitment, ownership of his program and a percentage of the profits from whatever show followed Letterman's. Viacom, a syndicator which also owns MTV and Nickelodeon, offered an estimated $25 million a year. Letterman liked the company's youthful identity and the money. But Viacom couldn't guarantee the audience. (Viacom proposed a partnership with CBS to air Letterman on major CBS-owned stations and affiliates, but Stringer wasn't interested.) In the end, Letterman was open to CBS's offer, attracted by the terms-and his budding relationship with Stringer. If NBC doesn't present a more attractive bid in 30 days, Letterman will sign with CBS.

Can NBC still keep Letterman? The struggling network can ill afford to offer more than CBS's reported $16 million a year. And NBC will find it nearly impossible to give Letterman the 11:30 time slot he demands. (It would have to bounce Leno or flip him to "Late Night," generating a sure public-relations fiasco and a reported $10 million payout to Leno.) In the end, the loss of "Late Night" seems a tale of bungled relationships and missed opportunities, another sad example of the Golden Peacock's decline. On last Wednesday's "Late Night," Steve Martin had a little fun at the beleaguered company's expense, mockingly making a play for Letterman's job. "I love the guys at GE. I find them funny," Martin told the host. These days, few people at the network or its parent company are laughing.

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