Things have gotten downright testy between Fox and its local affiliates - or at least between the network and the Fox affiliate board. At issue is the network requiring affiliates pay a programming fee as broadcasters are beginning to get retrans cash from cable and satellite operators.
The issue became public recently when letters from both the board and the network to stations leaked to Bloomberg.
In his letter (click here to read it), board chairman Brian Brady (president and CEO of Northwest Broadcasting) wrote that Fox "appear[s] to have no regard for the value your station brings to the network" and says the network is trying to divide and conquer the stations.
Since the letter leaked, when contacted by B&C, Brady said only, "We hope and expect to find an equitable and reasonable way to resolve our differences."
But one affiliate source, speaking on the condition of anonymity, tells B&C that the network "has declared open warfare."
In his letter to stations (click here to read it), Fox Networks president of affiliate sales and marketing Mike Hopkins wrote that he was no longer working with the affiliate board on potential deals but rather directly with affiliates, and if the network's proposals don't work for every company, "Fox will pursue different distribution channels ... we don't want that to sound like a threat, but it is a fact."
To discuss exactly what his strategy is, Hopkins sat down exclusively with B&C executive editor Melissa Grego in the Fox offices in Los Angeles. Following is an edited transcript of that conversation.
Let's start by talking about these letters that have been issued. Brady's letter to affiliates on the 28th called for affiliates to stand together. Your letter to affiliates dated the 4th says you're dealing with them individually now. Where does this stand, have you cut off all negotiations with the affiliate board? Are you just dealing strictly with stations individually now?
Yeah. A little bit of background on the affiliate board: it's effectively an advisory committee to begin with. And they can't bind anybody. They have nominations and elections and they have positions, but they're no real position of authority. It's not like Congress and they can legislate a law for all the affiliates. So it was always a little bit of a loose thing anyway. They came to us and said, "You know, would you like to negotiate a template deal and then we can get all the affiliates to agree to, and does that make sense?" And from the beginning we thought it would make sense and said we'll certainly have conversations. And you know, it didn't happen. It didn't work out. And so now we're having these individual private negotiations with these station groups or stations depending on the case.
You were working on that for a while. You guys were then talking about this template deal for more than a year right?
Nine months or so. We had been talking to the affiliates for awhile before then about trying to get them ready because with any change you need to prepare people for it. You can't just come out of the blue and say ‘Aha! We're charging you this amount of money.' So they had plenty of notice we talked to them well before I got involved in this part of the business about the problems we were having at the network and the economics of that and why we need their help. And we think that we're valuable. We actually think we bring more value to a station than we've been getting compensated for.
So when did this discussion exactly break down between Fox and the affiliate board?
I wouldn't call it a breakdown, it was more we tried to do something and it never really worked. A breakdown would indicate that it was working at some point and that it wasn't broken.
But you were trying.
We were trying, we were having conversations; we just never got in the same ballpark. I guess a month ago, three weeks ago, I said, "Look, we really need to have our own discussions." And we started to. Sinclair announced that they have a new affiliation agreement with us, so we did a deal with them, we're talking to others and I think we'll find that almost like any other private negotiation, whether it's on the cable or satellite side or on the broadcast side, 90 plus percent of them will get done and no one will even know. There may be a few that have more public fallout but I think that generally speaking we're going to get most of these done, because I don't think we're asking for anything that's really out of line.
Traditionally I know the relationship between networks and affiliates-there are moments where things get contentious, but in your letter you said that some of Brady's letter was offensive. I've heard from at least one affiliate that "open warfare" was used to describe what's going on. How would you characterize the relationship?
I wouldn't call it open warfare, I think that's extreme. I think that's not the case with the vast majority of our affiliates. This is not about whether they're going to pay us. It's about how much. And so this is not unlike any other of these disputes that have happened. And I wouldn't even call it a dispute; these are negotiations that have happened where people have a disagreement on price. Unfortunately, this got public. We didn't release any of these letters to the press. They did. We didn't want this to get out in the open. Having said that I don't think it's open warfare. I think we're having good, productive negotiations with lots of affiliates right now. Some of them may just not have businesses that are doing very well for other reasons other than these costs. And these costs may end up being the thing that tips it over, which is why we have to go case by case there's no one-size-fits all solution for these guys. Why should an affiliate in San Francisco that's doing very well in a big market pay the same as a guy in market 197? They just have completely different business and totally different situations. So we need to be able to tailor our deals. Like we do with every negotiation.
There are 200-some markets. Obviously there are companies that own multiple Fox affiliates - but how many deals does that mean you have to make?
You know I don't have the number off the top of my head. It's definitely not 200. They're not all up at one time, so from our perspective it's a manageable number every year that we'll have to do.
Now the board, though, they call this divide and conquer. And I see them making the point that if you have nondisclosure agreements in all of these different cases - as opposed to if you have a template deal and everybody sees it -- there is an element of dividing the affiliates from each other if they can't share that information. Can you respond to that, can you say why it's not divide and conquer if you're not letting them share that information?
Let me respond with a question: So if I am Pepsi, should I have to go public with ‘Here's my deal with Costco, here's my deal with Ralphs, here's my deal with Vons, here's my deal with Joe's Corner Liquor. Here's my template deal everybody,'? That's not the way business is done. You don't go out and say ‘here's my wholesale price' to everyone. No business is done that way. Divide and conquer? It's: how do we start making progress and getting deals done with people? That's how I would look at it. On the cable side, when we have cable channels, we're not going out and going ‘Hey! FX! It's a dollar a subscriber for everybody!'
You refer in your letter to a "flawed, out of date network model." What exactly are the primary flaws and what do you think needs to happen to address them?
That's a good question. Historically, initially broadcasters were paying affiliates to carry programming. Then it got into more equilibrium and there was no charge or modest amounts of money flowing. And that just doesn't work anymore, and that's what I'm talking about. On the broadcast side you have that, on the cable, satellite, MVPD side you have in the last few years what we have tried to change as well. The compensation worked for both parties at the time, which was trading cable channels.
They needed programming to add to their tiers, they would take the cost of the cable channel and add it to the bill and mark it up and everything was all happy and everything worked. Well, there really aren't any new cable channels, and they don't want any more cable channels, but the broadcast business needs to get paid. So we transitioned to that. So on that side of the business I think we're on track to fixing what was becoming a flawed model there. And on this side I think it's the same thing. We really need to figure out a way to have a dual revenue stream on the broadcast business.
We don't sell Fox directly to cable in 65% of the country. It's only about 35% of the country where we have the TV stations. So there's multiple ways you can figure that out. The road we're going down is to say look, we know there are private negotiations between our affiliates and the cable companies and satellite companies on retransmission consent and other things, there's private negotiations on advertising deals and all sorts of things going on out there. We can't get involved in that, legally or otherwise. So the only way we can change the model for us there is to have an economic relationship with the stations that's different. The flaw right now is that we don't get any compensation.
Is there one program fee that you're asking per sub?
I'm not sure that I want to get into all the details of it.
But it's a fee as opposed to a percentage?
Yes.
What I've heard is that it's 25 cents a sub and that escalates to 50 cents by the fourth year.
I can't get into that.
You did mention and made a good point that every station is different depending on the market, depending on market position. Do you think that it's fair to ask the same thing of each station?
Certain stations are in similar circumstances so it's fair to deal with them similarly and others are different. Going station group by group helps you do that actually, it's hard to do that in one negotiation where everyone wants to be the corner case in a multi-lateral deal.
Some affiliates feel like you are putting them into the fire, asking them to ramp up their retrans fees - while not having the bundle that the O&Os have of the cable networks, the leverage of being News Corp. Meantime with TWC, your insurance policy with them that you'll put the network on the air if their retrans deal falls apart, "takes their best quiver" in the fight, they say. So are you setting them up to succeed?
Let me take that in two parts. So the arrow and the quiver issue, we think we've calibrated what our asks are with all of that in mind. We aren't saying we got x and you should get x. It's x minus a big number is what we're seeking. And so the other issue, we had it out there for well over a year now. We think it's actually probably contributed to getting favorable deals done in the marketplace so far.
Is that because it's at so high a price to initiation that for Time Warner Cable, that they wouldn't want to pay that?
I guess I'd say we think that the deal with Time Warner is more helpful than harmful to the affiliates and we think that has been proven out in the last couple months.
Because they have not yet initiated that insurance policy?
Right.
Is that because the threshold is so much higher, essentially, in your estimation? It would just cost that much more for Time Warner to pull that lever than what you want your affiliates asking in retransmission consent?
I'm not sure I know the answer as to why they haven't. We're in a position where we have it out there, we're disengaged from it, we're not involved and once deals are done no one tells us what they are. I would be totally speculating as to why either side did what they did or didn't do.
Let's put it this way: Is it designed to function that way, to sort of motivate the distributor to make the deal with the affiliate rather than pay a much higher rate for the insurance feed?
Yeah. We call it a cooling off feed. It's designed to cool everybody off and get deals done.
On the topic of alternate distribution, which that essentially is, you said in your letter that you're willing to use alternate distribution. What are those alternate distribution means?
It could be other stations in the market. It could be, we used to have a wide area feed. It was called FoxNet. In certain markets of the country if the economics of broadcasting aren't able to support the broadcast network we may have to make a determination that we might be better off not being broadcasters in that market and be a cable channel. Or something akin to a cable channel where it's more affiliating with MVPDs in that market.
It's a last resort and we prefer not to do that but that's what's on the table because as I said we've got a business where we think certainly when X Factor comes out in the fall by far and away we'll be the number one network for a very long time if it does what we think we will do. It's nonsensical that the number one network in America can't make a profit. It doesn't make sense. And there's a lot of reasons why and we're not the only broadcast network that's not profitable and we're not the only broadcast network that's been number one and that hasn't been profitable.
So it may end up being that we have to make decisions, tough decisions, in certain markets that just have to go a different way. Because maybe that model in that market is more supportive of our content. It's not the fault of anyone or that a certain station isn't doing a good job, they're doing the best job they can, it's just that the economics of it may not work anymore.
There are some affiliates and observers alike that think that this push for this program fee might be too much for some small and medium market stations to hack. They won't survive. What do you think? Do you think that that's the case and how does that factor into your plan?
A lot of these are privately held companies we don't see their P&Ls. We happen to have a lot of stations in lots of different sizes of markets so we think we have a pretty good idea of how a TV station is run, how to make money there and what the relative profitability should be and that's why we want to have private negotiations, so we can figure out what's the right model there. And what's the right number that can be supportive of their business and our business and make it all make sense for everyone. If a market is too small or doesn't make sense over the air and we can't make it work we'll have to find other alternatives. And that is a tough call, we don't want to do that but we've got to pursue that. Push down the path and see where we end up.
Do those cooling off deals with MVPDs come into play?
We only have one. The only deal we have like that is with Time Warner. That's a little bit different than what I'm talking about. That's a very limited duration. It could be stations it could be feeds. It doesn't have to be a satellite feed. If you think about how we distribute Fox now to different TV stations, we've got Fox in different time zones up in the satellite today. It wouldn't take a lot to make one or all of those feeds be 24 hours. And deliver a full network to them. There are all kinds of models you can go with. You can put other programming there and make it look like an affiliate. We'll explore all those different things and see what works best for whoever our partners are going to be in those markets.
What do you say to affiliates who say ‘Hey, we're shouldering all the risk here because we're going to have to pay this increased fee even if Fox loses football. And then we're still paying more even though we've lost more of these franchises.' What do you think?
Well I think that's a fair thing to say. What I say back is, talking about risk, you can count in the hundreds and hundreds of millions of lost dollars-that's risk, right? We sort of pre-paid our risk here. Yeah, all of us in business, that's what we do. We take risks. We take bets. We try to make smart ones. When we pay what we pay for the NFL, we green light a new show, those are taking bets and taking on risks. We do that every day. If we launch a big new show, with a lot of money spent on marketing, and doesn't work, I don't have affiliates calling up saying hey we want to help you subsidize that loss. This is what we do every day in the media business.
Let's go back to the letters for a moment. You said that that letter was offensive. What was offensive about it? What offended you?
I prefer not to get into the details of that.
Elsewhere, you have another big distribution deal coming up with DirecTV. That deal is expiring at the end of this year.
We are always negotiating with our distribution partners. We have a great relationship with DirecTV and most of the distributors, in fact probably all of them now, and we work through these things all the time.
Michael Malone contributed to this report.
