Nets Hold Upper Hand In Affiliate Relations

Fox affiliates were so alarmed by the terms dictated by Fox in a new round of affiliation renewal negotiations that they flocked to a hastily convened meeting in Dallas last summer just to talk about it.

The meeting’s organizers conveyed the impression that the situation was urgent. So 60 executives — owners, group heads and station managers from 48 companies representing 160 Fox affiliates — made time in their busy schedules to fly to Dallas for a meeting at an airport hotel on July 17 that lasted a little over four hours.

There, from 9 a.m. to 1:30 p.m. (including a 30-minute lunch), they discussed the ramifications of what they had been hearing about the affiliate-renewal negotiations that were then underway.

And unlike other meetings that are regularly scheduled several times a year between affiliates and their network counterparts, Fox network executives were not invited to this one.

“There were a lot of questions about some of those new terms and conditions and a lot of it was associated [with] the [programming] fee that Fox would be asking of affiliates going forward, and how that was being positioned by the network to the affiliates,” said Jeff Rosser, SVP of Raycom Media and chairman of the Fox affiliate board.

The apparent urgency of this meeting underscored the tension that has set in between networks and their affiliates as the networks seize the upper hand in a relationship that has long formed the backbone of the broadcast television business.

The networks are now in a position to demand increasingly stiff programming fees from their affiliates, while distributing their programming on a plethora of digital media that compete with affiliates. In other words, the networks are asking affiliates to pay more and more for less and less exclusivity.

Over the years, the balance of power in the network-affiliate relationship has shifted back and forth. Today, it has moved to the networks — perhaps permanently.

“It’s pretty hard to avoid that conclusion,” said long-time TV exec Preston Padden, a former network executive and lobbyist.

“I was president of the ABC Television Network in ’97 and ’98, and at that period, I believe that each of the networks was paying approximately $250 million a year to their affiliates,” he said. “Today, I think each of the networks is getting paid roughly $250 million by their affiliate stations.”

As Padden said, up until the early 2000s, affiliates could count on a gravy train of compensation payments from their networks — payments the TV networks had paid since the dawn of the television business in order to build their networks and then maintain their affiliate presence in local markets.

At various times, such as the late 1980s, the networks made wan attempts to chip away at the payments, but after meeting resistance from affiliates, they backed off. In the mid-’90s, network compensation payments spiked after Fox Broadcasting bought the rights to NFL football games in 1994 and then sought to upgrade its affiliations in many markets by paying millions to stations already affiliated with other networks. As a result, the other networks — ABC, NBC and CBS — were forced to pay more to their existing affiliates in order to keep them.

So not only were affiliates enjoying generous increases in compensation, they also possessed the leverage to nail down long-term affiliation contracts that would ensure the continuation of those payments for up to 10 years.

However, by the mid-2000s, that began to change as the 10-year agreements expired and stations were beginning to demand retransmission consent fees from multichannel video programming distributors (MVPDs).

With the cost of network programming on the rise — from primetime entertainment to sports rights — the networks began to move away from paying their affiliates. Instead, the networks eyed the retransmission consent fees their affiliates were getting from local cable operators and started negotiating for a share of the money under new affiliation contracts that covered shorter terms. And they got it.

Now, the networks are evolving away from a fee structure based on retransmission consent. According to some affiliates, they are asking whatever they think the market will bear.

“The Fox affiliates had a meeting because Fox was no longer [settings its price] as a percentage [of retransmission revenue],” a source with knowledge of the meeting told TVNewsCheck. “Instead, it was now just a clean programming fee as opposed to a percentage of your subs. It was, ‘You know what? You were paying us $5 million? Forget that, [now] you owe us $10 million a year in fees, in just programming fees’.”

And what happens if an affiliate does not agree to a network’s demands? Then it will be in danger of realizing its biggest fear – losing its affiliation to a cross-town independent or MyNetwork or CW affiliate eager for an affiliation upgrade and willing to pay for it. The networks can even move their affiliations to digital subchannels.

CBS demonstrated what can happen to recalcitrant affiliates last August in Indianapolis — just a month after the Fox affiliate meeting in Dallas. CBS had reached an impasse over money with WISH, an affiliate owned by LIN Media that had been a CBS affiliate for 58 years.

Instead of working through the stalemate, CBS made a new affiliation deal (effective on Jan. 1, 2015) with another station in town, WTTV, a CW affiliate owned by Tribune Broadcasting. The move sent shockwaves through the industry.

To many, it symbolized that, in the give-and-take that has always existed in the relationship between networks and their affiliates, it’s the networks that possess the most leverage today, and they won’t hesitate to use it. “It scared people,” said one long-time industry observer. “They now recognize that if [affiliates] don’t come to an agreement, then they’re going to lose their affiliation.” (For more reaction to the WISH affiliation, read the sidebar here.)

Today more than ever, affiliates feel squeezed. When their networks demand more money, affiliates have to bargain harder for retransmission-fee increases from MVPDs.

“It’s fair for me to say that broadcasters in general are concerned about reverse comp ramping up faster than the ramp-up in retrans revenue coming from MVPDs,” said Jim Conschafter, current chairman of the NBC Affiliate Advisory Board and vice president of broadcast markets for Media General, owner of nine NBC affiliates.

Industry prognosticators project that the networks’ percentage of retrans — as reflected in increased programming fees they’ll charge affiliates — will increase gradually to well north of 50%.

In October, SNL Kagan projected that payments to the networks will hit 59% of stations’ retrans revenue “over time.” Wells Fargo analyst Marci Ryvicker projected in September that the networks’ share of the retrans money could reach 65% by 2019. Some TV executives predict the networks will eventually seek up to 75% of stations’ retrans revenue.

At the same time, the analysts all agree that retransmission consent revenue will continue to rise significantly for local broadcasters — from $4.9 billion this year to $8.78 billion by 2019, according to SNL Kagan. Ryvicker’s projections go even higher — to $12 billion in 2019.

But dollars and cents are not the only issues on which networks and affiliates are clashing these days. Rapid advancements in new technologies that make it possible for network content to be made available anywhere at anytime are putting pressure on one of the key benefits of network affiliation — namely, local-market exclusivity to a network’s programming.

“Exclusivity to our business partnership is important to local stations and there are more and more opportunities these days for that exclusivity to be challenged,” said Media General’s Conschafter.

It already is under challenge. Today, affiliate “exclusivity” encompasses the first airing of a network show. After that, viewers have ample opportunities to watch network shows elsewhere — including cable on-demand, and the networks’ own websites, where shows are made available within hours after they are first broadcast, and then remain available (and free of charge, since they’re ad-supported) for anywhere from a few weeks to many months (depending on the network).

Network shows can also be seen for free on such sites as Hulu (co-owned by NBC, Fox and ABC) and Comcast’s Xfinity site — where hundreds of hours of TV shows, both recent and vintage, are available.

And of course there are subscription services such as Netflix, iTunes, Amazon Prime and Hulu Plus, where a selection of network shows (plus myriad cable series) are also available. A 2005 deal between Disney and iTunes is considered to be the first such agreement in which a television network — ABC — permitted its shows to be made available via an outside content provider on the day after the shows aired. Now the practice is commonplace.

“If [the networks] say, ‘We’re just going to send out our primetime programming,’ the biggest threat is to [the network non-duplication rules],” said one broadcaster. “We still think we have the franchise [for network programming in individual markets], but the networks are going to argue, ‘Yeah, you may have the franchise for ‘linear’ broadcast television, [but] you don’t have it for time-shifting and you don’t have it for [content delivered over the Internet]’.”

However, one of the new program-delivery initiatives — TV Everywhere — provides an example of how networks and local affiliates can both participate in new revenue streams.

Under the networks’ TV Everywhere plans, network and stations’ programming becomes available via a local affiliate’s signal on a variety of platforms after first airing on the affiliates. Because the TV Everywhere plans involve local affiliates, they also include the participation of local MVPDs, with users required to “authenticate,” or confirm, that they are local cable subscribers to get access to programs on their desktops, tablets, smartphones and TVs with connected devices.

And since the local affiliate signal is the basis for the delivery of TV Everywhere content, affiliates have begun negotiating with MVPDs for additional retrans fees to cover the new delivery method.

While this represents a potential new revenue stream for affiliates, just how big a stream it might become remains uncertain. Some sources told Executive Outlook that negotiations with local cable operators over the new fees have been tough, with MVPDs pushing back against them. In addition, the networks are also angling for a percentage — from the affiliates — of this new retrans revenue stream.

The networks’ TV Everywhere plans are at different stages of development. Fox’s service (called Fox Now) is up and running. So is ABC’s (called Watch ABC). NBC’s — announced to affiliates last April at the NAB Show — has been hit with delays reportedly due to technical issues. It was originally supposed to launch last June. NBC’s will also require authentication through local MVPDs. An NBC spokesperson told Executive Outlook that “NBC.com will launch a live linear stream of broadcast TV shows for desktop users in certain markets beginning Dec. 16, 2014. Additionally, NBC Entertainment will expand the product rollout to include the live linear stream of broadcast TV content to mobile platforms in mid-February 2015.”

CBS is taking a different approach with a plan that attracted industry-wide attention when it was announced and launched last October. The service, known as CBS All Access, bypasses MVPDs. The over-the-top service provides current (and past) CBS network programming directly to subscribers’ devices for a monthly fee of $5.99.

Since MVPDs are not involved, local CBS affiliates cannot ask MVPDs for additional fees to cover retransmission of their signals for CBS All Access. And that raises questions about how local affiliates might share in the subscription revenue from CBS All Access, especially since the network’s All Access plans call for making live-streaming of stations also available.

How CBS affiliates would be compensated is anyone’s guess, since no All Access deals have yet been made with any non-CBS-owned stations.

Still, if CBS, or any other network, feels it needs to include local affiliates’ programming in their OTT plans, then OTT could emerge as an example of how networks and their affiliates will continue to profit from their relationship, even if the networks hold most of the cards these days.

Whether stations will regain leverage in the future is far from certain, but their alliance with networks is sure to continue. “I think that if there wasn’t great value in the partnership, it wouldn’t exist today,” Media General’s Conschafter said.

Even Preston Padden agrees that both sides have good reason to maintain a strong bond. “The unique combination of high-quality network programming and the local news, weather and presence of the local affiliate is the strongest distribution platform in television. Nothing else comes close.”