The way I understand it, NBC was afraid of losing both Conan and Leno to FOX or ABC. The Tonight Show job was given (as you said) to O'Brien years ago to prevent this, yet NBC was apparently far too shortsighted to realize that Leno could do the exact same thing. So this weird compromise of a 10PM show was dreamed up. For one thing, it is much cheaper to produce as opposed to a scripted series, which must be filmed on location over several days with a large staff of actors and film crews. By filling the slot with a variety show, the network saved a boatload of cash.
What they didn't count on was the fact that nobody would watch the damned thing, which pissed off affiliates that needed the 10PM hour to lead into their local newscasts, which make money through advertising rates. If no one is watching the newscast, these rates drop and the affiliate loses money. When several affiliates told NBC they'd be pre-empting Leno with their own shows, NBC caved in for fear of all of it's affiliates doing the same thing. Gigantic sums of money would be lost in the event this happened, so NBC bit the bullet.
To make matters worse, O'Brien has been hinting that he might just quit before NBC can get Leno squared away after the Winter Olympics (yet another thing NBC is expected to take a bath on). This will be interesting to watch, particularly how NBC squirms out of what has obviously become a very uncomfortable position.
What they didn't count on was the fact that nobody would watch the damned thing, which pissed off affiliates that needed the 10PM hour to lead into their local newscasts, which make money through advertising rates. If no one is watching the newscast, these rates drop and the affiliate loses money. When several affiliates told NBC they'd be pre-empting Leno with their own shows, NBC caved in for fear of all of it's affiliates doing the same thing. Gigantic sums of money would be lost in the event this happened, so NBC bit the bullet.
To make matters worse, O'Brien has been hinting that he might just quit before NBC can get Leno squared away after the Winter Olympics (yet another thing NBC is expected to take a bath on). This will be interesting to watch, particularly how NBC squirms out of what has obviously become a very uncomfortable position.
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