Fox, Affils Need To Chill And Make A Deal

Ugly, ugly, ugly.

I am referring to the two letters that found their way into my e-mail this week that exposed in unusually strong language the disintegration of the retrans sharing talks between the Fox network and its affiliates.

In one, to all affiliate managers and owners, Fox’s Mike Hopkins says that the network will no longer work with the board in trying to come up with a blanket agreement on sharing. From here on out, he says, the network will deal only with individual affiliates.

He goes on to say that Fox will dump any affiliate that refuses to meet its demands for programming fees or reverse compensation or whatever you want to call it. “Fox will have to pursue different distribution channels,” he warns.

He says that is not meant to be taken as a threat. At least he has a sense of humor.

In the second letter, to the same folks, Affiliate Board Chairman Brian Brady says that Fox is out to get all it can from the affiliates and doesn’t care if it runs some stations into the ground. In fact, he says, Fox intends to destroy some stations as an example to others that would balk at its demands.

“This is a fight for survival; we can either stand and fight together or we may die apart.”

Whoa! Let’s take it down a notch.

Brady is right. The affiliates are in a fight for survival. But the fight is not with Fox, it’s with the cable and satellite operators. They’re the ones sitting on a $30 billion programming fund and refusing to give broadcasters their fair share of it.

From the operators, broadcasters should be getting three or four times what they are now getting, which is only about a $1 billion or so a year. If they don’t increase their take considerably, they will wither away. The best programming will migrate to cable and the audiences will follow.

When I say broadcasters here, I mean the networks and the affiliates. The network O&Os should go for every penny. And whatever the affiliates get, they should share with the networks, which are, in essence, the affiliates’ agents in procuring primetime programming and major sports.

Affiliates may not want to admit it, but it’s the network programming that allows them to squeeze as much as they do out of the operators. Local news and syndication help, but it’s American Idol, Glee, House and the NFL that finally cause operators to cave in retrans standoffs. The loss of such programming is what makes subscribers howl.

I tend to side with the affiliates in this kind of stuff, but Fox is not the bad guy.

I’m told that Fox is looking for four-year deals in which the affiliates in the top 125 markets would pay it 25 cents in year one, 35 cents in year two, 42 cents in year three and 50 cents in year four. The clock starts at the beginning of this year.

That’s a lot, considering that your average station today is getting only about 26 cents, according to SNL Kagan. Brady’s letter claims — and I believe him — that Fox’s ask is more than most affiliates are now getting in retrans.

But from what I hear, under their most recent retrans deal with Time Warner and Cablevision, the Fox O&Os will be getting 65 cents, escalating to $1 over the next several years. So, what Fox is asking of its affiliates is not impossible, even if it is true, as Brady also points out, that Fox has the kind of leverage with operators that no affiliates can hope to have.

I understand Fox’s demand for flat fees from the affiliates rather than a percentage. It’s too easy for affiliates to accept non-monetary compensation like advertising commitments in exchange for retrans rights — an arrangement that would cheat Fox if it accepts a percentage.

What’s more, the flat fee gives affiliates a powerful incentive to be as aggressive as they can in negotiations with the operators. If they go in knowing they are going to have to give X cents to Fox, they are going to start the negotiation at 2 X or, if they’re smart, 2.5 X. (I knew my algebra would come in handy one day.)

And they just might get it. Broadcasters were getting zip from retrans until six years ago when Nexstar’s Perry Sook simply wouldn’t take no for an answer and showed that he was willing to absorb temporary ad revenue losses to tap long-term retrans revenue.

No broadcaster has really tested the limits of what they can get in retrans for a long time.

As a Fox executive pointed out to me, there is an awful lot of posturing in the two inflammatory letters. After all, this is a negotiation.

But things have gone terribly awry and it’s important to set them straight again. The network and affiliates have to settle their differences so they can focus on dealing with the operators — maximizing the top line.

Since I think Fox has most (all?) of the leverage in these negotiations, whether they’re with the board or with individual affiliates, I think it needs to take the lead in patching things up.

It starts with a letter from News Corp. COO Chase Carey to all Fox owners and managers (with a copy to TVNewsCheck) apologizing for threatening to dump recalcitrant affiliates (“Hey, the new guy got carried away”).

With that out of the way and civility restored, Carey should then say, you know what, we were leaning on you guys a little too hard. What we are going to do is stretch out the deal to five years so the ramp-up to the heavy payments can be more gradual. We will cut the fees on the front end, but make it up with stiffer ones on the back end.

And since we will now be negotiating with each of you individually, we will work with you so that you don’t have to pay us until you’ve had a chance to negotiate a better deal with your cable and satellite operators. We will sync up with your retrans cycle.

Carey should also promise that the fees he gets from affiliates will be used for programming, for the ultimate benefit of the affiliates. Perhaps some mechanism could be worked out to show that the money isn’t being diverted elsewhere within the vast News Corp. empire.

Carey could also offer guarantees that Fox will not be coming back to the affiliates with additional demands to pay for football or mobile DTV rights.

And finally, Carey should make a point of saying Fox will fight shoulder to shoulder with NAB in Washington to insure that the FCC doesn’t do anything to undermine of the retrans rights or leverage of broadcasters. (The FCC is opening a proceeding to review its retrans rules next month, in case you didn’t know.)

I believe that Fox believes in the broadcast network business. Last December, Carey told an audience of Wall Streeters that Fox was News Corp.’s most important network and “should be the most profitable.”

But Carey knows, and I know and every thinking broadcaster knows, that it is not a sustainable business without a substantial stream of retrans dollars flowing back from the O&Os and every last affiliate.

Despite its talk of “different distribution channels,” I don’t think Fox really wants to disrupt its distribution to 65% of the country. It’s made its point. Now, it’s time to give a little so that affiliates can more easily absorb what amounts to a hefty new cost, one that many really weren’t figuring on.

The second revenue is vital to the future of the Fox network, but so are solid affiliate partnerships.

There is an amount less than 25 cents and other contract terms upon which Fox and its affiliates can agree. They just have to cool the rhetoric and find them.

That would be beautiful.

P.S. That was a bad job by Sinclair. By making a separate peace with Fox, it undercut its fellow Fox affiliates in their effort to secure a blanket deal that would have benefitted all. I’m told they sold out for a few cents in a short-term deal.

I get it. Like all businesses, Sinclair has to look out for itself and its owners. But still ….

Harry A. Jessell is editor of TVNewsCheck. He can be reached at 973-701-1067 or mailto:[email protected]. You can read his other columns here.