Stalemate in ad revenue dispute

by Dave Lindorff

   Fox Broadcasting and its affiliates have broken off negotiations in a dispute over advertising revenues. The breakdown follows rejection by the affiliates of a May 6 deadline Fox had set for accepting its offer of a chance to buy back some network ad time at reduced rates.
   "Nobody went for that deal," says Murray Green, vice president of Raycom Media Inc., a 25-station holding company and member of the board of the Fox affiliate group. "We're all sticking together."
   What Fox was offering was a choice: affiliates could have their local spots in prime time cut to 70 30-second spots from the current 90 or they could opt to buy back the lost 20 spots at "below market" rates, in which case Fox would give them 15 "bonus spots" on which the revenue split would be 75 percent for the affiliate and 25 percent for Fox.
   The affiliates say the threatened cut in ad spots by Fox Network, a unit of Rupert Murdoch's News Group, would cost them 22 percent of their primetime revenues. All the networks, struggling to improve their finances in the face of growing competition from the cable industry, are trying to revise their relationships with affiliates, but Fox's proposal is reportedly the toughest deal on the table.
   Green says the affiliates group offered Fox a guarantee of $40 million from the sale of primetime spots. "That amount is unacceptable to them," he says, "and anything more than that is totally unacceptable to us."
   Green says the affiliates group is considering several options. One is to seek an injunction against the network to prevent it from implementing its new plan on primetime spots. He declined to discuss other options under consideration, saying a decision on what to do next would be reached in the next 10 days. But one option would clearly be for stations to drop their affiliation with the Fox Network. There would be an irony in such a move: Fox, in its early days in the 1980s, picked up a number of key affiliates that bolted from CBS in a similar ad-revenue dispute.
   Some analysts believe that an affiliate exodus from Fox is unlikely. "Some stations could go independent and buy their programming elsewhere," says one analyst with a major Wall Street brokerage, "but in the end the affiliates need the networks and the networks need the affiliates." Goldman Sachs analyst Richard Simon warns that the network can't afford to be too confrontational. "Fox doesn't want to become a cable network, so they must emphasize that the stations and the network will grow together."
   As the dispute between network and affiliates continues to rage, Fox's market share has continued to grow apace, rising to 19.4 this year from 18.3 last year. The network is now first among adults 18-34 and second to NBC in the 18-49 age group.
   While the affiliate dispute is over ad revenues, the issue of who controls the revenue from primetime spots is unlikely to have much impact on advertising pricing, analysts say. While removing the networks from the picture could theoretically allow an independent station to offer slightly lower rates, the networks are able to offer volume discounts.
   Fox Broadcasting says it has no comment on the dispute with the network's affiliates, but a Fox spokesperson confirmed that talks had broken off and that the network had rejected the affiliate group's offer of a $40 million ad-revenue guarantee.
   Fox's position has been that it has a contractual right to change the incentives split on ad spots for affiliates, while the affiliates are claiming the proposed change would be a breach of contract. The network, which is operating at break-even, according to a source close to the company, argues that it needs a bigger share of primetime ad revenue from its flush affiliates in order to finance more program development.