Fox Affiliates Agree to Big Financial Shift

In an unprecedented shift in the financial relationship between a major broadcast network and the stations that run its programming, Fox’s affiliates have agreed to pay money for advertising inventory they used to get at no charge.

The agreement was approved by Fox’s affiliate board after seven weeks of tense negotiations, but still must be agreed to by individual stations, many of which are angered by the deal. Fox expects to put the plan into effect by mid-July.

“This is a tectonic shift in affiliate-network relations,” said Larry Jacobson, president of the Fox Television Network, which is owned by Rupert Murdoch’s News Corp. “It’s the first time that affiliates have contributed any significant amount to the cost of prime-time programming.”

Sources estimate that the deal could generate $50 million to $70 million a year over a three-year term from affiliate stations not owned by Fox. While affiliates of NBC, CBS and Fox have contributed to the cost of sports rights and series programming in the last year, they have all been one-time contributions.

All the deals are part of a top-priority mission by the networks to restructure the terms of their relationship with their affiliates. Falling ratings and skyrocketing prices for sports rights and programming have eliminated profits for all the networks but NBC.

NBC, CBS and ABC are eager to eliminate or reduce the $200 million a year in compensation they each pay their stations to carry their schedules to the corners of the country. Some have threatened to take their programming to cable if affiliates don’t cooperate.

Fox pays no compensation and is still losing money.

In one of the most aggressive offensives, Fox in April sent a letter to affiliates telling them that it would reclaim 20% of the commercial time they now sell locally in prime-time if they didn’t agree to pay Fox for the inventory.

The demand sent affiliates into an uproar, causing stocks of several of the biggest Fox station owners to tumble. The inventory was estimated to be worth in the neighborhood of $100 million.

Affiliates met to consider retaliation and hired a law firm to look into filing a breach of contract lawsuit against Fox. Some affiliates contacted ABC, UPN and WB about switching networks when their contracts expired and vowed to preempt popular Fox programs such as “Ally McBeal” if Fox carried out the plan.

Fox affiliates were particularly offended because of their level of cooperation in the past with the network. They had marched on Washington on Fox’s behalf to convince regulators to let Fox bend rules that prevented other networks from producing and owning content.

They had agreed to forgo compensation fees because Fox claimed it needed that money to invest in programming. (Fox has since risen from a distant fourth to second place in key demographic ratings.)

Fox affiliates just last year agreed to chip in $50 million to help Fox pay for its $550-million-a-year football contract, even as ABC still begs for contributions from its stations.

Many said the inventory grab by Fox is a thinly veiled form of “reverse compensation” under which affiliates pay the network for the rights to run its schedule.

While networks would love to be paid by their affiliates rather than having to compensate them, ABC, NBC and CBS all signed rich contracts with their affiliates in the mid-1990s when Fox raided their ranks to secure long-term distribution. Most of them don’t expire for several more years.

Some Fox affiliates predicted the agreement Thursday could inflame the war between stations and NBC and ABC.

“Affiliates at the other networks have to be awfully scared,” said one Fox affiliate. “The other networks are going to see Fox getting paid--and wonder why they are still paying their affiliates a fortune in compensation.”

But none of the rival major networks can take as many liberties with their affiliates as Fox. While neither NBC nor ABC can reclaim advertising time from their affiliates, Fox is free to do so under its contracts.

Under the revised agreement Thursday, Fox agreed not to take back any additional inventory in prime-time or during NFL games for three years.