Sly Fox’s Win-Win Web Pact

Apr 17, 2006  •  Post A Comment

Fox Broadcasting has forged a complex agreement with its affiliates that casts the stations as business partners instead of spectators in the new media world.

The deal gives the network the freedom to spin off Fox prime-time programming into unlimited new on-demand formats and gives the affiliates a cut of the revenues that result.

CBS is seeking a similar arrangement that allows the network flexibility to create extra revenue streams from its programming and includes the affiliates in profit participation, sources familiar with the developing deal said. CBS declined to comment.

The unprecedented Fox pact was negotiated as part of the agreement under which affiliates share in the cost of the network’s six-year, $713 million-per-season National Football League contract. It extends the NFL agreement between the network and the affiliates by six years. It does not change the complicated formula determining the affiliates’ cash contributions, which is based on the value of designated advertising spots, according to sources familiar with the deal.

While staving off an increase in the percentage stations pay for the NFL or the level of local inventory in NFL programming, the new agreement enables Fox to make nice with its affiliates at a time when local broadcasters are skittish about new media deals that serve to further dilute the exclusivity of network programs. Prime-time shows were considered the sole right and major asset of local stations until the advent and growth of methods of program distribution such as broadband, podcasting and VOD.

The new Fox deal will step up the amount of programming the network can distribute via on-demand applications until the pact’s third year, when Fox will have the right to repurpose 100 percent of its prime-time lineup.

Fox until now has been allowed to repurpose four hours per broadcast week, only three of those hours from any one genre.

Per the new agreement, Fox may repurpose six hours per week with no genre limitation during the first year of the deal, according to sources familiar with the details of the deal.

In the second year, Fox can repurpose 80 percent of prime time for on-demand applications. That amount rises to 100 percent in the third year and brings in repurposing of all kinds.

The cut for affiliates is said to be 12.5 percent of what Fox takes in (minus distribution, union fees and the like) for post-broadcast on-demand repurposing and 25 percent for prepurposing or pre-broadcast on-demand (similar to NBC’s recent decision to make Dick Wolf’s new “Conviction” available on the Web before its debut).

The ire of ABC affiliates was particularly raised when they were caught by surprise by The Walt Disney Co.’s landmark deal last fall to make ABC shows available via iTunes. Disney appeared more cognizant of its affiliates last week in its announcement of an experiment to make ABC and other Disney-owned content available for free download on its Web sites. Disney’s news release said ABC is exploring ways to work with its affiliates but did not elaborate on how it would do that.

“We came up with a deal we think shows the true partnership between the affiliates and the network. You don’t see that among the other networks today,” Brian Brady, president of Northwest Broadcasting and chairman of the Fox affiliates advisory board, said last week.

Share and Share Alike

The affiliates will not have a stake in linear repurposing, which covers programming shown on a regular schedule, whether on Fox broadcast and cable properties or other cable or satellite services. An example of linear repurposing would be Fox’s decision to show same-week encores of the early seasons of “24,” a decision that caught affiliates by surprise and angered them.

The affiliates will share revenues from nonlinear repurposing, which essentially comprises content made available on-demand, whether via broadband links on Fox.com or cable, satellite or iTunes, as well as VOD options or whatever new distribution formats might develop. This deal, like previous affiliate arrangements, does not address revenues from DVD sales.

“We don’t even know what some of the other things are going to be. The way we set this agreement up, we can go out and look for these things and experiment with them,” said Jon Hookstratten, for whom this was the first affiliates negotiation since he became Fox’s executive VP of network distribution after leaving NBC Universal Domestic Distribution in June 2005. “That’s what this is about. It’s to open the door.”

Revenues from the nonlinear projects will become a regular subject of discussion at meetings with the Fox affiliates advisory board.

“We want to be working with the affiliates,” Mr. Hookstratten said. “We’re doing this in a way that’s collaborative.”

“We’re the first network to actually create a structure with our affiliate base that enables us to exploit all these new media opportunities in a way that is collaborative and synergistic and where everybody wins,” said Peter Levinsohn, president of digital media for the Fox Entertainment Group.

“All the other networks are getting complaints from their affiliate bodies about what they’re doing without (a) cutting them in or (b) even notifying them before they do it,” Mr. Levinsohn said. “That isn’t the way we’ve done here.”

“We are trying to figure out what people want. Do people want to download stuff? How do people want to view television?” the Fox affiliates advisory board’s Mr. Brady said. “This agreement helps us together explore that and find some economic ways to go forward together. “Fox is way out in front of everybody else on this stuff, and I think they truly understand the relationship with the affiliates and what the affiliates bring to the party in terms of marketing muscle and that sort of thing,” he said. “I think this deal reflects that.”

Brady Bunch

Some Fox affiliate representatives, who insisted on anonymity, praised Mr. Brady for his handling of the talks, which began in earnest in December and concluded the week of April 3 and found a cross-section of station groups united in letting the affiliates board negotiate the deal that also staved off an increase in the stations’ NFL fees. Some estimate he has saved the affiliates collectively some $3 million.

For his part, Mr. Brady said the talks are a barometer of how much healthier the network-affiliate atmosphere has become under the leadership of Fox Networks Group President and CEO Tony Vinciquerra and Fox Television Network President Ed Wilson, to whom Mr. Hookstratten and Mr. Levinsohn report.

“I’ll be the first to tell you that the relationship between the network and affiliates has not always been great, but I will tell you that in the last two years that has changed dramatically,” Mr. Brady said. Now, “Fox is way out in front of the other networks. I think they’re leading the pack here.

“It’s a brave new world out there,” he said. “With the fragmentation the way it is, this is a way to be able to reach a number of eyeballs that may not be seeing the product and give us an opportunity to let people sample a product, and hopefully they’ll like what they see and come back to the network and watch it. At the end of the day we came up with a result that I think is going to be beneficial for both the network and the affiliates.”

Still to be resolved is the distinct issue of the inventory buyback program Fox instituted in 1999 over the objections of affiliates, which pay for 105 prime-time spots per week that they then sell locally for whatever price they can command. Many local stations in problematic markets still complain they cannot make back what they paid for the time, despite or indeed because of Fox’s dramatically improved prime-time performance.

Other stations, including Fox owned-and-operated outlets, are able to maximize local time prices, so the inventory buyback is expected to continue.