Fox playing hardball with its affiliates in dispute over money

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A fight is brewing between Fox and the local television stations -- known as affiliates -- that carry the network’s programming.

The issue dividing the network and its affiliates is, of course, money. This time it has to do with Fox wanting a big cut of the cash the local stations get from cable and satellite operators who carry their signals.

Fox already gets so-called retransmission consent fees from pay-TV distributors such as Time Warner Cable and Cablevision in return for carrying TV stations the network owns, including WNYW-TV New York and KTTV-TV Los Angeles.

Neither side is talking about how much money is in play here, but people familiar with the matter said the network wants a four-year deal with the affiliates. For stations in the top 125 markets, the fees would start at 25 cents per subscriber, per month, and rise to 50 cents over the run of the contract. Stations in markets smaller than that would have fees starting at 15 cents per subscriber, per month, and hitting 25 cents in year four. For example, if an affiliate was carried by cable systems reaching 1 million homes, every month it would send Fox a check for $250,000 a month in the first year.

In interviews, several owners of Fox affiliates said the issue is not paying Fox a percentage of the retransmission consent fees, but the amount the network is seeking and the length of the contracts. There are approximately 30 Fox affiliates that do not at this moment have a long-term deal with the network. Another 80 stations will see their agreements expire by the end of the year.

Fox said in a letter it sent earlier this week to its affiliates that it realizes that ‘our proposal may not work for every company’ and ‘if that should be the case, Fox will pursue different distribution channels ... we don’t want that to sound like a threat, but it is a fact.’ The network has already been talking to other outlets in various markets in anticipation of having to find a new home for its programming.

Currently, most TV stations on average get around 20 to 25 cents per subscriber, per month from distributors, so the Fox request is seen as particularly aggressive because it would require affiliates to either get substantially more from distributors or reach into their own pockets. Fox counters that it provides the bulk of the programming and thus the bulk of the value to their affiliates.

‘They appear to have no regard for the value your station brings to the network.... They are prepared to destroy someone’s business to make their point,’ wrote Brian Brady, president and chief executive of Northwest Broadcasting and chairman of the Fox affiliate board, in a letter to other Fox stations.

Fox argued that it needs the fees to continue to provide its comedies, dramas and sports, and that without a new revenue stream, its own future will be cloudy.

Brady wants the affiliates to band together and negotiate as a unit so that it will have more leverage against Fox. Unfortunately for the affiliates, one of the biggest owners of Fox stations -- Sinclair Broadcast Group -- already signed a deal with the network.

That pact, according to several industry executives, was only for two years. Sinclair executives were not immediately available to discuss the terms, but it is believed to be for 25 cents the first year and 35 cents in year two. In a release about the arrangment, Sinclair said say it had struck an ‘overall programming licensing agreement’ with Fox, which was seen as code for cash payment.

Fox doesn’t want the affiliates to team up. Mike Hopkins, president of affiliate sales for Fox, told the stations in a letter that the network thinks it is ‘imperative’ to negotiate with stations individually and ‘not arrive at a one-size-fits-all decision.’

One concern of Fox affiliates is that they do not have the leverage to negotiate big enough fees from cable operators to cover Fox’s demands. Fox has been successful in getting money from distributors such as Time Warner Cable and Cablevision because besides its own TV stations, it also owns several big cable networks, including FX. Fox, Brady noted in his letter, has ‘substantial leverage ... which we affiliates do not have.’ (Tribune Co., the parent of the Los Angeles Times, owns eight Fox affiliates.)

Some affiliates think if Fox wants so much from them then the network should negotiate on their behalf with the distributors. There is a precedent for this. In the early 1990s when Congress first gave TV stations the right to negotiate for carriage fees, Fox affiliates gave the network a proxy to cut deals. Fox used that proxy to launch the cable network FX. The way it worked was that cable operators paid Fox a fee, and in return the network provided access to FX and its local TV stations. The affiliates were supposed to get a cut of that fee, but Fox ended up keeping it to help pay for programming. This time around, Fox is not interested in pursuing such a scenario for, among other reasons, concerns that such a move would raise eyebrows in Washington, D.C. Lawmakers and regulators have been increasingly concerned about retransmission consent and its impact on consumers.

Fox affiliates already pay the network in return for programming in the form of advertising inventory. Besides giving up commercials for the network to sell, it also buys back some inventory to keep for itself. Affiliates also help cover the costs of big-ticket items such as NFL programming.

The affiliates fear that giving in will mean less money to spend on news programming as well as on the talk shows and reruns of comedies and dramas that fill much of a local station’s schedule. Fox’s Hopkins has the same fears for the network if it doesn’t get new revenue.

‘We cannot continue to lose hundreds of millions of dollars with a flawed, out-of-date network model,’ he told affiliates.

Fox is taking a bit of a risk by being so aggressive. If it does drop stations, it will have to find new outlets for its programming and, at least initially, could experience a decline in ratings.

News Corp.’s Fox is not alone in going after these fees. CBS, ABC and NBC are also eyeballing getting a chunk of retransmission consent money from their affiliates. However, there is a consensus that Fox is being the most aggressive of the networks.

-- Joe Flint

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