Fox, affiliates reach impasse on revenue sharing


It is no secret that the big broadcast networks want a share in the retransmission fees local broadcast stations collect from MVPDs. But negotiations between Fox Broadcasting Company and its affiliates’ organization have broken down.

In response to an RBR-TVBR query, Fox said, “Fox’s negotiations with our affiliates are a private business matter and as such these discussions are confidential.”

The chair of the affiliates group, Brian Brady of Northwest Broadcasting, told RBR-TVBR, “It’s my hope and expectation that Fox and the affiliates will work together to reach a resolution to this issue.”

Brady’s remarks in a letter to affiliates were not so optimistic, however. He has charged that Fox is not negotiating in good faith. “Your Negotiating Committee has made several proposals to FOX over the last year which FOX summarily rejected, even refusing to sit down and discuss their reasons for doing so,” said Brady in the letter. “Instead they are now attempting to negotiate with each station or group directly, even though their proposal to us is substantially worse than those currently offered to affiliates of the other three networks and…would cause severe damage to affiliates.”

Fox has indicated it is willing to pull the network away from stations that fail to come into agreement with it, and seek “other distribution channels.” Rather than deal with the affiliates’ organization, it proposed to deal with each affiliate on an individual basis.

One group that will not be involved in that process is Sinclair, which owns the largest group of Fox affiliates. Asked about the current issue during Sinclair’s quarterly conference call early Wednesday 2/9/11, CEO David Smith said, “It has no impact on us. This is nothing more than a contractual issue between the affiliates and the networks, whether it’s Fox or ABC or NBC or CBS or anybody else. These are issues people gotta work out. But we’re not affected by it. We’re done.”
Sinclair extended its Fox affiliations just last month though the end of 2012.

In his letter, Brady said that Fox is pursuing a “divide and conquer” strategy. He suggested that the network may soon make examples of stations that do not meet its demands in order to intimidate others. “They are prepared to destroy someone’s business to make their point and to strike fear in the hearts of their affiliates…I have no doubt that they believe, if they take someone’s  affiliation away, the rest of us will fall into line.”

Fox agrees that negotiations with the affiliates were unproductive, but denies that it was the source of the trouble, and asserted that it was bargaining in good faith.

In its own letter to affiliates, it said it was providing top-quality programming to and needed to find a sustainable business model going forward to continue that practice.

In a letter from the network to affiliates, Fox’s Mike Hopkins expressed regret for Brady’s rhetoric and said that the network is not pursuing a “divide and conquer” plan. “Our position would be the same whether dealing with a single station or the entire affiliate body,” he wrote. “This is about recognizing fair value for the long-time number one network. We didn’t achieve that success by following others, and we cannot continue to lose hundreds of millions of dollars with a flawed, out of date network model. We need to find a way to receive a fair value for every home that receives FOX.” He said stations would be contacted shortly on the matter.

The retransmission wars have been a hot topic over the past few years, and although most negotiations are resolved peacefully, Fox has had an interesting history in the retransmission story of late. It has its own group of owned broadcast stations, and pulled them away from Cablevision during testy retransmission negotiations last fall.

Then, while Sinclair was going through the same process with Time Warner Cable, it turned out that Fox had an agreement in place with TWC that allowed the MVPD to acquire Fox network programming directly, bypassing the local Sinclair affiliate and undercutting one of Sinclair’s most effective negotiating tools.

One thing we do not expect is a position paper on this matter from the National Association of Broadcasters. NAB’s role is to represent the broadcasting industry as a whole. This is essentially a matter within that family, and as such, we expect NAB to stay firmly on the sidelines.

RBR-TVBR observation: If you only take one thing away from this, it is that Fox loves to play hardball. It plays hardball in its own dealings with MVPDs, now its playing hardball with its affiliates, and it cut a deal with at least one MVPD that undercuts the ability of Fox affiliates to play hardball on their own.

The bottom line is that as much as the affiliates rely on the network, the network needs its local broadcast partners, with local brands and identities, or else it cannot help but be marginalized in the world of HD2 or somewhere in the forest of the general MVPD channel lineup. Maybe affiliates need to give Fox a helping hand, but Fox needs to do the same for them, because the bottom line is strong affiliates are necessary for Fox to achieve its own profitability goals.

A danger here is putting stations between a network rock of increasing demands, and an MVPD hard place of a refusal to pay, remembering all the while that the retransmission controversy is fresh in the minds of members of the FCC and Congress. Also, it’s important to keep in mind that MVPDs know where Congress is, and they also know that the members there are very fond of those engravings of dead presidents on heavy-duty green rectangular stock and tend to be generous with them during even-numbered years.

In short, the sooner the network and affiliates get back to being partners in the ultimate goal of extracting fair value for the must-have programming each contributes to MVPDs, the better for both.