NBC to Challenge Traditional System of Payment to Its Network Affiliates

In a reflection of the deteriorating health of network television, NBC will unveil a landmark proposal this week to affiliates gathered in Los Angeles to phase out nearly $200 million paid to TV stations annually to carry its programs under a system dating back to the early days of radio.

The plan, in the works for nearly a year, would be the most radical restructuring of the economic model governing broadcasting and affiliates. The plan is to be formally introduced to affiliates from around the nation gathered at the Century Plaza starting Tuesday.

Although top-ranked NBC has the most clout among networks, many broadcasting experts still doubt the plan will fly in its current form. They expect vigorous opposition, particularly from small stations that say the compensation keeps them alive.

But many see the plan as the first step in assuring the long-term health of the nation’s traditional networks--and for narrowing the profitability gap between networks and large affiliates that make piles of money televising their programming.

“The current economic model has outlived its usefulness,” said Leslie Moonves, chief executive of CBS Television. “It no longer makes sense.”

While NBC’s proposal is the most aggressive challenge yet to the traditional structure, it is but the latest development in recent months that foreshadows the coming battles with affiliates as networks seek ways to remedy the financial strains of rising programming costs and a loss of viewers to cable TV and the Internet.

For the first time ever, the traditional networks are pressing their affiliates to help shoulder costs for top prime-time programs and for sports. While ABC and CBS asked for help with professional football, NBC is eager for assistance with the renewal of “ER.”

Analysts estimate that ABC, CBS and Fox could lose up to $100 million or more on each of their record eight-year pacts with the National Football League. That would wipe out profits of $75 million at ABC, and pile onto the losses of $149 million and $50 million at CBS and Fox, respectively, last year before one-time accounting benefits at each of the networks.

Analysts say NBC’s outlay for “ER” could cut $200 million a year from the network’s profits, which totaled $500 million last year, while the loss of “Seinfeld” and new contracts for the Olympics and professional basketball will also exact a toll.

Fox affiliates, which do not collect compensation from the network, have agreed to pitch in about $40 million for football. But ABC, NBC and CBS affiliates have refused, claiming that such contributions are not required under long-term affiliate contracts that begin to expire next year.

Yet sources say CBS is now considering such hardball tactics as offering football to other stations in markets where its affiliates have “waived” exclusive rights by refusing to pay up.

This summer, ABC plans to launch a soap opera cable channel in Chicago in a trial with Tele-Communications Inc. that could reignite a battle between the network and its affiliates over program exclusivity. This will be the broadest attempt by a network to expand its viewership by airing the same program once on free television and at “time-shifted” intervals on cable.

Affiliates have opposed time-shifting or repackaging of network programming for use on cable, worried about cannibalizing their ratings.

NBC’s new plan arises from protests from affiliates over the launch of the MSNBC news joint venture with Microsoft Corp., which stations complained took resources such as Tom Brokaw previously exclusive to the network and shared them with cable and the Internet.

ABC backed off of a soap-channel launch two years ago because of affiliate protests, but it is hoping that tests in Chicago, where it owns the local station, will provide data on changing viewership patterns that will help fashion a deal with affiliates.

Though ABC has been known for its accommodating stance toward affiliates, Robert Iger, president of Walt Disney Co.-owned ABC Inc., had an almost threatening tone in his keynote speech at the broadcasters’ annual convention in Las Vegas last month.

“Nothing should be sacrosanct,” said Iger, who is under pressure to turn ABC around as Disney’s stock suffers in part because of concerns about its broadcasting. “Networks need to increase returns on their program investments. . . . The notion of our programs only running on our networks is an anachronism, and it is now clear that repurposing expensive product is an imperative. We need to find a way to reach an agreement with our affiliates quickly.”

Networks including ABC are in discussions with TCI about putting their coming high-definition channels on a special pay tier and splitting the revenues. The talks symbolize the networks’ realization that cable may be the only way for them to recoup heavy investments in digital technology, which offers better pictures and sound and could help them win back viewers.

Still, affiliates have their own ideas about how to use their additional spectrum for localized news and weather, and they could fight any attempt by the networks to reuse or time-shift programming.

ABC, along with Fox, is counting on slicing its digital spectrum into more than one new channel to offset the erosion of its audience. One idea is to time-shift programs, which ABC hopes to make more palatable to affiliates by selling them commercial time that would fetch higher prices at the local level.

“The world is changing,” said Preston Padden, president of ABC Television. “Digital gives us a once-in-a-lifetime opportunity to reinvent ourselves, our relationships and the scope of our partnership with affiliates.”

While NBC has more leverage over its affiliates than either CBS or ABC, it is proceeding cautiously, with plans to hold discussions on the matter through the summer. CBS, the last network to recommend slashing compensation, paid the price when key stations defected to Fox in 1994, forcing all the networks to increase compensation to lock in affiliates long-term.

In fact, many affiliates see the recent attempts by the networks as betrayals of those commitments. They say the fees paid to them are justified because they sacrifice the right to choose what goes on the air as well as the advertising inventory to the networks.

They are also dubious of the value of the assets NBC proposes giving them in lieu of compensation. Under NBC’s proposal, the network would reduce affiliate compensation by 10% every year and contribute the money to a joint venture with affiliates that could pursue new revenue sources.

“We are in business to make a profit,” said Neil Braun, president of NBC Television and architect of the plan. “We are not a program-buying coop for our affiliates.”

The new partnership, called NBC Affiliate Growth Opportunity Venture, could invest in programming, such as sports, that has become prohibitively expensive. NBC , for instance, recently lost pro football after a 30-year run to CBS because it could not justify increases of more than 100%.