Fox’s Hulu Deal Sets Disturbing Precedent

Fox deserves another entry in the annals of broadcasting. This year, it became the first network to bypass its affiliates via an alternate distribution system.

According to the Wall Street Journal, Fox has created a national feed of Fox programming that Hulu is now substituting for local Fox affiliates until Fox and its affiliates settle their differences over divvying up the carriage fees Hulu pays.

For years, I have suspected that one of the networks would trigger the bypass option. They have been using the threat for years. I recall that NBC Chairman Bob Wright floated the idea at a nadir in affiliate relations in the early 2000s.

And I am not surprised that it was Fox that was first to pull the trigger.

From the moment the networks first set eyes on their affiliates’ pot of retrans gold, Fox has been most aggressive in trying to dip into it. (CBS has been a close second.)

Hulu represents a new distribution channel — the virtual MVPD, the broadband equivalent of cable and satellite. The vMVPDs want the local stations, be they O&Os or affiliates, and they are willing to pay for them.

But Fox apparently wants to make sure as it steps into this new world that it sets the lowest possible benchmarks for compensating affiliates, even though they bring much to the Fox channel with their local news and popular syndicated shows.

I’ve heard second-hand that Fox was offering some affiliates as little as 50 cents per Hulu sub, far less than they are getting in net retrans (retrans minus reverse comp).

I went to S&P Global’s annual Radio & TV Finance Summit in New York yesterday, and expected to hear come blowback from representatives of the two big Fox affiliate groups — Sinclair and Nexstar.

I was disappointed.

Instead of protests, Nexstar’s Tim Busch and Sinclair’s Steve Pruett gave little speeches about the how vital and mutually beneficial the network-affiliate relationship has been over the years.

The implication was: relax, the terms of vMVPDs distribution will sort themselves out and network and affiliates will continue to prosper together.

Busch said there will always be “bumps along the road as any relationship … but there is no better model in terms of distribution.”

He said: “They want to see us win; they want to see us succeed. “Otherwise, their model becomes flawed.”

There was more of the same from Pruett. “Don’t confuse negotiation over value with an attitude problem,” he said.

The networks can’t get along without the affiliates, he said. “It’s easily demonstrated. There is a massive difference in monetization, ratings and everything else when you have a stronger local content base.”

I can only speculate as to why the two didn’t scold Fox for its strong-arm tactics. Perhaps it’s because, as larger affiliates, they know they will ultimately get the same kind of money (or close to it) as they get from net retrans. In other works, they know that they are not among the 50-centers.

Another possibility is that they are among those who don’t see vMVPDs as that big a deal. Perhaps this is a fuss over a few millions cord-cutters and cord-nevers and won’t ever have a material impact on the networks or the affiliates.

Kevin Latek of Gray Television, who appeared yesterday on the same panel as Busch and Pruett, is in this camp.

The thousands of hours that broadcasters have spent over the last 15 months trying to come up with vMVPD distribution deals have been mostly a waste of time, he said. “There are not that many people out there who are going to switch to an over-the-top provider.”

Yet another panelist, Michael Nathanson, a securities analyst who covers Fox and the other big multimedia companies, suggested that Fox should be excused for bypassing its affiliates.

“It’s a sign that Fox really wants to get this launched ahead of the fall season and they’re really frustrated that they can’t market nationally a product they believe in that they put a lot of their energy behind.”

I get the frustration, but the Fox affiliates would eagerly climb aboard if they thought that Fox’s proposed splits were fair. They obviously do not.

CBS has been steadily adding affiliates into its OTT service, CBS All Access, because the promised share of the subscriber revenue was right. According to S&P Global, 153 affiliates are now participating.

Unlike Latek and others, I think the vMVPD platform is an important new platform, providing an alternative that is not only cheaper than cable and satellite, but also optimized for smartphones and tablets.

Over the next five or 10 years, there could be a huge migration from the thick bundles of the conventional MVPDs to skinny bundles of the vMVPDs.

Today, the vMVPD market is crowded and getting more crowded. Everybody wants in — Sony, DirecTV, Dish, YouTube, Apple and others.

Fox and its partners (Hulu is co-owned by Disney, Comcast and Time Warner) have a chance to quickly grab share and insure Hulu is one of the survivors in the eventual shakeout by getting to market as quickly as they can with the best possible service.

The best possible service includes real stations in every market with the local news, sports, traffic and weather.

As Busch pointed out, nothing beats that. When it comes to local service, he said, “We can out-Google Google and out-Yahoo Yahoo.”

Rather than bypassing affiliates with an inferior product, Fox should be encouraging their enthusiastic participation with a piece of the action commensurate with their true value.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here. You can read earlier columns here.