Fox Affiliates Agree to Major Financial Shift

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

The agreement, which was approved by Fox’s affiliate board after seven weeks of tense negotiations, still must be agreed to by individual stations, but is expected to be put 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.”

As a result of falling ratings and skyrocketing prices for sports rights and programming, none of the broadcast networks are turning a profit but NBC. Although stations are operating under long-term contracts that do not expire for a few more years, NBC, CBS and ABC would like 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.

The reluctance of the stations to restructure their relationship with the networks has erupted into a standoff, with the networks threatening to take programming to cable and some, like ABC and NBC, announcing plans to squeeze more value from their shows by playing them immediately on cable.

In one of the most aggressive offensives, Fox in April sent a letter to affiliates telling them 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 about $100 million.

Affiliates called secret meetings to figure out a plan to retaliate 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. Affiliates were particularly offended because of their level of cooperation in the past with the network.

Fox affiliates just last year agreed to chip in $50 million to help Fox pay for its hefty National Football League contract, even as ABC is still begging for contributions from its stations.

Under the revised agreement Thursday, Fox agreed not to take back any additional inventory in prime time or during NFL games for three years. Affiliates, which receive 90 30-second spots in prime time, will pay Fox for 20 of them. Fox then will sell the affiliates an additional 15 spots.