Market Watch

Fox Network Wrangles with Affiliates

February 14, 2011

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Year-long negotiations over broadcast signal licensing fees between Fox Network and the Fox Affiliate Board (a representative body of independent stations affiliated with the Fox Network), seem to have reached a stalemate. News of the standoff surfaced when memos from both Fox and the board addressed to local affiliates leaked to the press, announcing the failure of these negotiations to accomplish their stated objective to reach a template deal.

In these memos, the board accused the network of refusing to negotiate in good faith, while Fox lamented that its negotiations with the board were going nowhere and that it intends to negotiate with the affiliates directly. The network also made it clear to affiliates that failure to reach individual agreements with stations may result in revoking those stations' affiliation.

Separately, Dunia Shive CEO of Belo Corp. revealed last week during a conference call that the company has been paying ABC and CBS for their programming since early 2010.

News of the flare-up between Fox Network and the Fox Affiliate Board came on the heels of the network's broadcast of the Super Bowl, which was the most watched event in US TV history. The timing of these developments appears to be purely coincidental, but the two issues are undoubtedly connected. As broadcast television continues to shed viewers and advertising revenue to subscription networks, sports programming has become the main pull factor for this medium. However, the costs of licensing this content have been growing substantially over the past decade

Fox currently pays upwards of $1.3bn to the NFL, MLB and NASCAR for the rights to broadcast their programming. The contracts with these leagues are due to expire in 2013. It is very likely that the rights owners will demand higher fees in the next round of negotiations due to the eminence of sports programming and the emergence of new bidders for those rights. The expected increases could drive Fox Network further into the red. Other broadcast networks remain cash flow positive, but these rises in costs will put a strain on their profitability.

Yet at the same time that the networks started feeling the pinch from rising sports costs, their local affiliates were able to leverage this 'must-have' programming to extract retransmission fees from subscription television providers. And while station groups would certainly prefer to keep all of this revenue to offset declines in their advertising revenues, there has been a growing acceptance among them of the need to share some of it with the networks to cover the costs of network programming. Belo's recent revelation that it has agreed to pay such fees to ABC and CBS is only the latest confirmation of this practice. Before them, Sinclair and many other public broadcasters announced similar arrangements covering all four broadcast networks. In short, there is an agreement in principle between local stations and the networks about the necessity of trickling up a share of this new revenue stream.

This agreement in principle, however, has proved difficult to translate into a mutually-acceptable framework. The conflict between Fox and its affiliate board is only the latest to spill into the public domain. Other networks have had similar tussles with their own affiliates before. At the heart of the conflict is finding a revenue-sharing formula that works for both sides. Currently, there are two models floating around: the first entitles the network to a percentage of retransmission revenue, while the second gives the network a flat fee independent of the station's actual revenue haul. Fox has opted for the latter according to the network's President of Affiliate Sales and Marketing, who declined to disclose the dollar amount of this fee. The Chairman of the Affiliate Board has reportedly said that Fox is asking for 25, 35, 42 and 50 cents over the next four years.

A flat program fee places the onus of securing large retransmission fees on the station owners. This arrangement may be problematic for local affiliates in smaller markets, many of which are not receiving retransmission revenue at all according to IHS Screen Digest research. In these instances, program fees will have to come out of those stations' advertising revenues until they successfully negotiate retransmission fees from MVPDs carrying its signal. This task may not be easy for stations that are owned by smaller groups which do not have enough leverage to force the hand of their often-larger MVPD counterparts.

In his letter to Fox affiliates, the chair of the affiliate board ominously warned: 'This is a fight for our survival, we can either stand and fight together, or we may die apart.' This statement may be intentionally hyperbolic, but it carries some truth in it. Not all local affiliates are going to 'die', but some are going to feel squeezed between large operators and even larger network owners. Those that fail to walk this tightrope are likely to end up being swallowed by larger station groups that are more effective at negotiating higher retransmission fees from the operators and lower program fees from networks. In the long run, this dynamic would level the playing field for all three players - operator, network and station group. However, it would come at a high price tag for the consumer, who would foot most of the bill.

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