Network-Affiliate Partnership 1. Dynamics of the Television Network-Affiliate Partnership: A Chronology. Christopher S. Reed

Transcription

1 Network-Affiliate Partnership 1 Dynamics of the Television Network-Affiliate Partnership: A Chronology Christopher S. Reed

2 Network-Affiliate Partnership 2 Abstract The relationship between national television networks and their affiliate stations in the United States has historically been one of mutual interdependence. The networks could not exist without affiliates to serve as a distribution pipeline for their programming and affiliates need network programming to fill their schedules. Despite the reciprocal partnership that exists between the two entities, their relationship has historically been turbulent. This article aims to chronicle the history of the relationship between the networks and affiliates, its changing nature, and how government policymakers and the marketplace have responded.

3 Network-Affiliate Partnership 3 Dynamics of the Television Network-Affiliate Partnership: A Chronology The relationship between a national television network and its affiliates is perhaps one of the most unique and dynamic in all of broadcasting. Networks effectively serve as brokers, selling airtime to advertisers in programs they buy from producers and studios, which they distribute via a web of television stations, only a handful of which they own. Described by Auletta (1992), a network is merely an office building, where executives package programs they do not own and sell them to advertisers and local stations they do not control (p. 4). While the fundamental principle of the network-affiliate partnership remains intact, over the past eighty years the industry has witnessed unprecedented change brought forth by shifting technological and social climates. The operational aspects of the television networks as they relate to their affiliates have likewise changed, resulting in a complex, sometimes tense, mutual dependence. The Rise of the Networks: 1923 to 1945 The idea of distributing programming via a network of interconnected stations originated with radio. The most primitive attempts began in 1923, when stations were connected together for the purpose of broadcasting special programming to an audience across a wide geographic region. Shortly thereafter, the first permanent station interconnection was formed when WEAF in New York acted as a program supplier for WMAF in South Dartmouth, Massachusetts (Sterling & Kittross, 2002). Three years later in 1926, the first national network was born when RCA launched the National Broadcasting Company to connect the various radio stations that it owned throughout the country. The company ultimately operated two networks based from two different

4 Network-Affiliate Partnership 4 flagship stations: NBC-Red from WEAF and NBC-Blue from WJZ, also in New York. In addition to its own stations, other independent stations would often contract with one of the two networks to receive either a continuous programming stream or in some cases, just a specific program, giving rise to the idea of a network as a mechanism for program distribution. CBS was launched a year later in 1927 with relatively meager results until early 1929 when a controlling share of the network was acquired by William S. Paley. Paley renegotiated the affiliation contracts such that the network was paying less in compensation to its affiliates. Previously, the networks paid stations to carry network programming on a flat-fee basis, irrespective of the amount of time actually programmed by the network. Under the new contracts, CBS would only pay stations for the specific time during which they were broadcasting network programs. Furthermore, the rates were adjusted to reflect the amount of commercial time made available to the local stations within network programs. Like NBC, CBS relied on its own stations to provide a constant and stable revenue stream which effectively financed the network s operations. By the late 1930s, the two networks became dominant forces in the broadcasting industry as they began to exercise more power over their affiliates, extending the length of time an affiliate was bound to the network by contract and the amount of programming that a particular station was required to accept without risking its affiliation. Affiliates tolerated these tight restrictions because of the apparent power the networks had: they possessed the financial resources to create high quality, popular programming that the local stations lacked. Moreover, the networks provided a much-needed source of programming for the local stations that they would otherwise be forced to buy from syndicators or produce

5 Network-Affiliate Partnership 5 themselves (Sterling & Kittross, 2002). This strong governing attitude the networks wielded over their affiliates would remain as they transitioned from radio to television in the 1940s. The third major network that exists today, ABC, was born in 1945 after a 1943 Supreme Court decision, National Broadcasting Co., Inc. v. United States required RCA to divest one of its networks. The company eventually sold NBC-Blue to WMCA in New York, which renamed it the American Broadcasting Company. Regulatory Scrutiny: 1941 to 1976 The network-affiliate relationship has remained virtually unchanged since the transition of the radio networks to television in the 1940s. Simultaneous with this change was the beginning of government investigation into the power that networks were exercising over their affiliates. The Federal Communications Commission became concerned with the dominating and monopolistic nature of the broadcasting industry and launched an investigation. The results of this inquiry were released in the 1941 Report on Chain Broadcasting which enacted new regulations designed to protect the local stations from overpowering networks. Sterling and Kittross (2002) identify the six most important regulatory changes as: 1. Limitation of network affiliation contract duration to one year for both parties. 2. Non-exclusive affiliation contracts, allowing stations to obtain programming from multiple sources. 3. Prohibition of networks from requiring stations to allow them the option to program certain time periods without any indication or intent of actually doing so.

6 Network-Affiliate Partnership 6 4. Affiliate retention of the right to reject any network program on the basis that it does not serve the public interest, convenience, or necessity. 5. Network prohibition from influencing affiliate advertising rates for airtime sold during non-network programs. 6. Denial of licensure to AM stations if they were affiliated with a network organization which maintains more than one network (Federal Communications Commission, 1941). The networks were understandably displeased with the findings of the report, and claimed that their implementation would irreparably harm the industry and potentially cause the demise of the broadcasting system in the United States. NBC and CBS filed suit to prevent the new regulations from going into effect. In National Broadcasting Company, Inc. v. United States, the 1943 Supreme Court case that broke up the NBC networks, the court upheld provisions called for in the Report. In 1955, as the broadcast industry evolved and television became the dominant medium, the FCC once again investigated the television networks and scrutinized the network-affiliate partnership. Just as the 1941 Report on Chain Broadcasting restricted the power of the radio networks, the result of the 1955 inquiry was a 1957 report that included a series of specific guidelines designed to mitigate the excessive power of the emerging television networks and aimed to ensure that local affiliates retained the right to serve their local public interest, convenience, and necessity. Sterling and Kittross (2002) name six key regulations promulgated by the report: 1. Restrictions on the number of stations a network could own.

7 Network-Affiliate Partnership 7 2. Prohibition of networks requiring advertisers to agree to a certain minimum lineup of stations to ensure a national network identity was maintained. 3. Requiring affiliates to file their network affiliation contracts with the FCC and including those filings in their public inspection files. 4. Network rights to offer a program rejected by a primary affiliate to another, unaffiliated station in the market. 5. Refinements to the prohibition of network optioning time 1 on affiliates. 6. Specific penalties for violations of FCC rules. Just as in 1941, the networks again complained that the implementation of such changes would bring widespread network disaster, leading to financial hardship and potential ruin. Notwithstanding the network s complaints, the suggested rules became law, most of which remain in effect today. Another major change to the networks came in 1970 when the FCC attempted to ensure diversity of the programming seen on the major networks by limiting the amount of control a network could have over the programming it distributed. Known as the Financial Interest and Syndication rules or fin/syn, they effectively prohibited the networks from taking a substantial financial interest in the production of programming and prohibited them from developing an in-house syndication business to distribute programming after its initial network broadcast (McAllister). Networks found the rules unfair, but proponents believed they ensure balance and a diversity of programming. After many challenges and rule relaxations, fin/syn was virtually eliminated in late 1995, leading to more vertical integration throughout the industry as networks became more 1 Time optioning involves a network requiring that affiliates keep certain portions of their schedule clear from long-term commitments (e.g., syndicated programming contracts) thereby giving the network the option of providing network programs during that period of time without making an express commitment.

8 Network-Affiliate Partnership 8 involved in program production and distribution. Television syndication typically takes one of two forms. First-run syndication involves the production of programming that is made exclusively for distribution via syndication. Most daytime talk shows, such as The Oprah Winfrey Show and Jerry Springer, and game shows, like Wheel of Fortune and Jeopardy are produced as first-run programs. The alternative to first-run syndication is off-network syndication, which is when a distributor offers programs previously seen on network television to stations, often for broadcast during afternoon, late-night, or weekend periods. Virtually all successful sitcoms and dramas make it to syndication after several seasons on a network schedule, many last in syndication for years after their initial network broadcasts. The Cosby Show and Seinfield are notable sitcoms that proved successful in syndication in recent years. Due to their one-hour length, dramas are typically more difficult to schedule in syndication, but programs such as The Practice have been successful on various stations throughout the country. Also in 1970 came the Prime Time Access Rule (PTAR), a regulation which called for the networks to push back the start of their prime-time programming in the top fifty markets to 8:00 P.M. in the Eastern and Pacific time zones and 7:00 P.M. in the Central and Mountain time zones. The goal of PTAR was to encourage network owned and affiliated stations to incorporate more public affairs and news programming into their schedules since network programming and even off-network syndicated programming was prohibited during this time period (Finney). While many stations do use this period for local programming, the implementation of PTAR helped spawn much of the first-run syndication market, giving rise to half-hour game shows and entertainment programs that often fill the access hour before network programming starts. PTAR applied only to

9 Network-Affiliate Partnership 9 network entertainment programs, thereby excluding news, information, and public affairs programming which a network was permitted to place anywhere on its schedule. In 1976 the FCC once again launched an investigation into network practices, this time spearheaded by an attorney and an economist (Sterling & Kittross, 2002), to investigate the effectiveness of the previously implemented restrictions on network conduct. With the development of competing programming options such as cable television, it was thought that perhaps much of the monopolistic power once garnered by the networks was no longer a threat to program diversity. Despite evidence that showed this was in fact the case, numerous producers and production related trade associations lobbied to keep the regulations in place, as they effectively served as shelters for the studios to ensure a marketplace for their programming free from the competition of the networks. Fox on the Run: 1986 Though not directly related to the state of the network-affiliate relationship, the rise of Fox Broadcasting Company as a viable network would ultimately change the landscape of the television marketplace in general and the programming distribution business specifically and thus requires a brief discussion. As described in Thomas and Litman (1991), the idea of a fourth network had been considered on several occasions, such as the well known DuMont network which came to an end in 1955 after being unable to secure enough affiliates and advertisers to make the operation economically feasible. Since DuMont, several other attempts at a fourth broadcast network have been witnessed, typically launched by broadcast station owners looking to develop programming distribution systems for which their stations would

10 Network-Affiliate Partnership 10 serve as flagship affiliates. Despite the efforts, none of these fourth network opportunities proved successful until 1986, when Fox began distributing programming to 99 stations throughout the United States. Fox had to overcome a significant number of obstacles in order to create a viable fourth television network, including the dearth of available stations without an existing network affiliation. Because the FCC, in most markets, limited the number of VHF television stations to three, there existed only three stations that had the technical capability and signal coverage to provide a sufficient audience base to make a network affiliation viable. The result was a three-network system with each network having one affiliate in each market, and conversely, each VHF station in a market being affiliated with one of the three networks. If a fourth network were to develop, it would be stuck with smaller, less powerful UHF signals. When Fox was in its infancy, however, the cable penetration rate was increasing dramatically, making the effects of the UHF handicap less pronounced (Thomas & Litman, 1991). The economics of network broadcasting were also against a fourth network. Networks are viable because they effectively take the costs and risks of program development and production and spread them out over a large number of affiliates. The result is that a network cannot operate successfully without reaching some certain number of affiliate stations, or what economists call the minimum efficient scale. A new network must typically start small, with only a handful of affiliates and then build up as its reputation becomes more established and its programming better known. During this period, the network is not operating efficiently; that is, they have an insufficient number of affiliates, and consequently an insufficient audience, to make them economically

11 Network-Affiliate Partnership 11 viable. Fox was able to counter this through its vertically integrated structure, allowing the network to obtain much of its programming from the company s other holdings such as Twenties Century Fox Studios. As Thomas and Litman (1991) write: Fox already had a committed investment in programming so it did not assume the risks associated with a high percentage of embedded costs in program development, (p. 149) demonstrating how even with fewer affiliates from the outset, Fox was able to build a network that was economically sustainable. The three major networks were prohibited from fully vertically integrating at the time due to various judicial and legislative maneuvers, including the financial interest and syndication rules, from which Fox was exempt. The New Owners: The 1980s The 1980s was a decade of major change for the three major television networks. Each changed ownership in major acquisition deals. ABC was sold to Capital Cities Communications in 1985 and in that same year Laurence Tisch of Loews Corporation began to invest in CBS, and RCA and David Sarnoff, proprietors of NBC, handed the network over to General Electric in Along with the new ownership came a new corporate cultures, as the old owners were of philosophies entrenched in broadcasting they viewed their respective networks as public trusts, in place to provide a public service and help their affiliates serve their public s interest, convenience, and necessity. The new owners, however, were more business-minded, seeing the networks as businesses that should be focused primarily on profitability (Auletta, 1991). To that end, all three of the new network owners attempted to reduce the amount of money being spent on network compensation payments the payments made to affiliates for the carriage of network programming. ABC was paying an estimated $120

12 Network-Affiliate Partnership 12 million annually in network compensation when it was acquired, and a year later attempted to cut compensation on the basis that network revenues were down and that affiliates should share the pain (Auletta, 1991, p. 134). In an effort to mitigate some of the disenfranchisement the affiliates were feeling, ABC investigated moving their nightly newscast, World News Tonight from its 7:00 PM (Eastern) time slot to 6:30 PM, allowing stations to program the entire hour with local or syndicated content, rather than just the latter half-hour. CBS had larger problems with their compensation structure as new owner Tisch rejected the notion of paying affiliate stations entirely. He was unable to see why the network should compensate stations for broadcasting programming that they provided without charge. He disregarded the fact that without the affiliate body CBS would rely solely upon their owned stations and thus would have access to only a fraction of the market. Then CBS president Tony Malara attempted to explain how the affiliates are effectively distributors, and just like any other business, CBS faced distribution costs in the form of network compensation. Tisch saw the affiliates as enemies, ungrateful for the added value that a prestigious network affiliation gives to a station, and ordered Malara to devise a plan whereby compensation costs could be trimmed by $50 million (Auletta, 1991). NBC had its share of turbulence as well, and in 1987, in an attempt to flex its muscle and demonstrate how powerful General Electric could be, acquired Miami CBS affiliate WTVJ-TV. This transaction left their previous affiliate, WSVN-TV without a network and CBS with no outlet in a major television market. The acquisition marked the first time a network had ever secured a station that was already affiliated with another

13 Network-Affiliate Partnership 13 network, and demonstrated to affiliates that they were not indispensable, suggesting that were they to reject network contract terms, the network was poised to simply take over a competing station and switch the affiliation. Perhaps the most prolific issue for networks and their affiliates during the eighties was the level of programming preemption that was permitted. Stations were finding that it was possible to generate more revenue by replacing certain network programs with syndicated content in which they were permitted to retain more advertising time and thus more opportunity for advertising revenue. This undermines the network s ability to achieve scale economies by reducing the number of stations on which a particular program or advertisement is broadcast simultaneously. Many stations would engage in outright preemption, whereas others would time-shift programming, delaying its broadcast from the network schedule time slot and placing it in a less desirable position on the affiliate schedule. It is for this reason, partially, that networks find owned and operated stations to be of much greater value. Certainly the network maintains all profits from an owned station, but additionally, owned properties will not preempt programming without network permission, leading to a far more consistent schedule and less uncertainty for network programmers. A New World for Television: 1994 to 1995 In mid-1994, the network-affiliate landscape was blindsided when Fox announced it would enter into a unique agreement with New World Communications, a production company and group owner of television stations. The deal, unprecedented in the television industry and certainly one of the largest events to impact the network-affiliate relationship, called for Fox to invest $500 million in New World making the network a

14 Network-Affiliate Partnership 14 minority partner in the company. The resulting relationship called for twelve stations under New World s control, at the time affiliated with various other networks, to become Fox affiliates, terminating agreements with their previous networks, and causing widespread pandemonium throughout the industry as the displaced networks searched for new affiliates (Miles, 1994a). Likewise, stations that were the existing Fox affiliates lost their affiliation as it was switched to the newly acquired stations. Hardest hit by the switch was CBS, which had affiliation agreements in place with a number of New World s stations, six of which were in major markets. Conversely, many stations previously affiliated with Fox were left searching for a network with which to affiliate, causing major affiliation upheavals throughout the country (Jaffe, 1995). While it seems logical that stations would simply swap affiliation in a two-way maneuver with the acquired stations effectively swapping its affiliation with the existing Fox stations, the networks explored their options within the markets largely due to technological capability of the former Fox stations. Historically, Fox affiliates had been in the UHF band, known for its technological inferiority and poor coverage areas, often leaving major parts of each market uncovered. Moreover, many stations formerly affiliated with Fox lacked news operations, a critical element for stations to build a strong local presence. The ideal affiliate for CBS, therefore, was one that was affiliated with ABC or NBC. In an attempt to preserve their strong VHF presence in as many markets as possible, CBS began negotiations with other stations in the affected cities searching for potential affiliates. Malara said U s are okay. It depends on the market. It depends on the cable penetration. It depends on the management and the programming (Miles, 1994a, para. 9). In some markets, such as Tampa/St. Petersburg, CBS had five independent

15 Network-Affiliate Partnership 15 stations to choose from, making the impact less pronounced, whereas others like Detroit had only a handful of decent VHF candidates to chose from, namely the existing network affiliated stations (Freeman, Miles, Schmuckler, & Heuton, 1994). Displaced networks searching for television stations are interested in highly rated, technologically superior, established stations with a strong local brand, a recognized news operation, and a management team willing to work with the network. Stations searching for a network affiliation seek high compensation rates, strong network programming and associated ratings, favorable network preemption policies, and a satisfactory number of local commercial availabilities. Clearly there are numerous points of contention on which the networks and affiliates can negotiate, and it serves in both parties best interest to shop around for the best deal. This search for the best possible affiliate-network agreement ultimately resulted in one of the largest spates of affiliation switches in television history, with twenty-five markets affected, the worst of which was Phoenix, where all of the major stations, except the NBC affiliate, switched networks (Miles, 1994b). The unique relationship between Fox and New World created by the 1994 agreement demonstrates the vast difference between the motives of the network and those of its affiliates. For the network, the New World agreement marked the beginning of its transition from what was often thought to be the other network to a solid player in the network television arena, as it was the first time that Fox gained affiliation in major markets on strong VHF channels as opposed to their historically weaker-signal and poorer-quality UHF affiliates. The arrangement also boosted the number of stations that Fox effectively controled without becoming entangled with ownership cap issues. While

16 Network-Affiliate Partnership 16 Fox remained a non-voting minority partner in New World, its stations effectively became owned and operated by Fox, fortifying the network s programming distribution pipeline. New World likewise gained a guaranteed distribution channel, as products of its production operations were essentially guaranteed a place on the Fox schedule. Fox affiliates throughout the country were shaken by the relative abruptness of the deal, and the maneuver in general. Though beneficial to both Fox and New World, the pact caused tension between Fox and its affiliate body, primarily remaining UHF affiliates, as they began to see themselves at risk for another New World-type acquisition which would strip them of their Fox affiliation and leave them searching for a new network or face the prospect of operating as an independent. One Fox affiliate owner, in a Mediaweek interview, predicted the new world deal would cause the network more problems gaining clearances for its programming, particularly developing series and new time periods on the network s schedule: When Fox comes to back with a new latenight vehicle, a large portion of affiliates will say, I m not running it. If they threaten us with pulling the affiliation, we can say, If you had a place to go, you d be gone already (Schmuckler, 1994, para. 12), showing the affiliate body s apprehension towards the network as a result of the New World investment. While many media industry analysts championed Fox and New World for creating a powerful strategic alliance, many at the station level saw the rabid affiliation switches as troubling. Stations that were once affiliated with top networks were being switched to what was then the least successful broadcast network, generally at the peril of their ratings and thus their profitability in a demonstration of how the motives of a network differ from those of its affiliate stations. One station owner said, Rupert

17 Network-Affiliate Partnership 17 Murdoch appears to be paying $500 million for the privilege of using New World s stations (Miles, 1994a, para. 4). It appears that the 1995 deal has not harmed the state of Fox or the affiliates that made the switch. In the aftermath of the affiliation switches that occurred throughout the year, one Fox executive said, We reaffirmed the idea of distribution and helped to strengthen the relationship (Coe, 1995, para. 3). In what would later be considered a major turning point in the way the industry thinks about the network-affiliate partnership, Fox took what used to be considered merely a network lease of affiliate airtime and transformed it into a true partnership that combines the strengths of both networks and affiliates to create an effective broadcast distribution channel. In 1997, in an attempt to solidify its reputation as a modern, competitive network, Fox began requiring affiliates to begin developing local news departments and to include local news broadcasts into their schedules. At the time, about half of the network s affiliates were engaged in local news, largely boosted by the acquisition of major market VHF signals in the New World deal (McClellan, 1997a). According to station managers, the network was willing to provide adequate support services in the form of corporate discounts on necessary equipment and news programming that the affiliates would need to fill their local newscasts. Combining their new VHF stronghold in many markets with an increasing local news presence, and it powerful and successful programming of the early 1990s such as The Simpsons and Married with Children, Fox moved from a secondary niche network to a major player on the modern commercial television landscape.

18 Network-Affiliate Partnership 18 Paradigm Shift: 1997 to 1999 Fox s transition to a more credible television outlet and reaching competitive equivalence with the big three broadcast networks was not the only change taking place during the 1997 to 1999 television seasons. Described at the 1998 NBC affiliate meeting as a paradigm shift (Littleton, 1998, para. 5) the discussions among all three networks and their respective affiliate bodies became heated at times, as the networks attempted to change the traditional network-affiliate model from one of network compensation for affiliate time, to one of joint-venture, in which networks and affiliates would hold a joint financial stake the success of the network s programming and promotional endeavors (Littleton, 1998). The most intense debate was related to the network compensation payments that traditionally flowed from the network to the affiliate as a type of lease or rental payment for the affiliate s airtime. Citing the increasing costs of programming, specifically sports licensing, the networks sought to change the compensation model, calling for the affiliates to pay a portion of the programming costs. NBC had the most drastic of plans, calling for affiliate compensation to be phased out completely over a ten year period and the creation of a formal joint-venture organization, half of which would be controlled by the affiliates, and half by the network. NBC affiliate board chairman Ken Elkins saw it as a means for NBC and its affiliates to invest together, thereby changing the traditional model into a true economic partnership (McClellan, 1997b, para. 8). Affiliates, however, were displeased with the agreement, effectively saying manage your costs, but not at our expense (McClellan, 1998b, p. 4). In return for the reduced and ultimately eliminated compensation, affiliates would receive opportunities to invest in other NBC media

19 Network-Affiliate Partnership 19 operations such as MSNBC and its affiliate satellite news service NBC News Channel (McClellan, 1998a). In essence, NBC wanted their affiliates to take on greater financial risk in exchange for greater potential rewards. The other networks proposed and in some cases implemented similar agreements around the same time. ABC sought affiliate support for its popular Monday Night Football program and other National Football League (NFL) programming, for which it paid $550 million per year. Eventually it secured affiliate support in the amount of $45 million, along with some commercial inventory trades (Beatty, 1999). CBS reached a similar deal with its affiliates seeking help with financing a four billion dollar arrangement that secured the NFL s American Football Conference games. Their arrangement was similar to that of ABC, combining both a cash component as well as the swapping of certain commercial inventory, that is, the return of certain segments of commercial time previous given to the affiliates to be sold locally (Freeman, 1998). Fox already had an established reverse-compensation plan in place under which affiliates paid a percentage of profits from Fox back to the network (Littleton, 1998). Another major issue which emerged during the period was the degree of exclusivity given to affiliates for network programming. As programming costs increased, the networks were forced to find new ways of generating revenue from existing product, and they often did so by re-broadcasting certain programs on cable networks with which they had a joint-venture or ownership relationship in a process called content repurposing. Affiliates grew concerned that if programming were available at a later time or date on another network or a different media platform entirely, fewer people would be compelled to watch the original network broadcast, thus reducing the

20 Network-Affiliate Partnership 20 economic value of their network affiliation. As a result, networks were forced to include provisions in their contracts that spell out what types of programming may be repurposed and in what time frame. ABC, for example, now gets immediate repurposing rights to daytime soap operas which it airs the same night as the original broadcast on its SoapNet cable network. In return, affiliates earn a percentage of the proceeds paid to ABC by the cable systems that carry SoapNet. Other programs, such as entertainment programming that it may want to use on its ABC Family network, for example, have different repurposing windows, requiring the network to wait longer before it may re-broadcast the content (Beatty, 1999). While the joint-venture plan proposed by NBC and discussed by its affiliates at the 1998 meetings never fully materialized, today networks and their affiliates have begun to operate and act more like strategic partners as opposed to the old direct compensation models. Whether or not such comprehensive joint-venture plans will ever come to fruition, as costs of programming acquisition and network operations rise, both networks and affiliates must continue to be innovative when structuring the terms of their affiliation relationship. The Peacock in San Francisco: 1999 to 2002 In 1999, Chronicle Publishing, owner of the San Francisco NBC affiliate KRON- TV, announced it was searching for a buyer to acquire the station. Ultimately, two potential suitors were identified: Young Broadcasting and NBC, the latter eager to secure an owned and operated station in the nation s fifth largest television market (Trigoboff, 2001b, 2001c). Though bidding wars for major market television stations are not

21 Network-Affiliate Partnership 21 particularly unusual, NBC s tactics with the KRON deal have raised eyebrows among many industry analysts and trade organizations. In September of 1999, NBC president and chief executive officer Robert Wright sent a letter to Chronicle Publishing s financial advisors stating the network s intention to evaluate all alternatives available to it, including ending its affiliate relationship with KRON-TV (Network Affiliated Stations Alliance, 2001b, Attachment D) upon the expiration of its existing affiliation agreement. Moreover, Wright stated it would be imperative that any purchaser that anticipates extending the affiliate relationship between KRON-TV and NBC negotiate a definitive affiliation agreement with NBC before the bidding process is complete (Network Affiliated Stations Alliance, 2001b, Attachment D). Effectively, the network told Chronicle, Young, and other potential bidders, that if NBC was unable to acquire the station, the new owner would be faced with unfavorable new affiliation terms or worse, non-renewal of the affiliation agreement and forced operation as an independent, thereby reducing the value of the station significantly (Trigoboff, 2001c, 2002). Though it is not atypical to find affiliation agreements with clauses that require station sales or license transfers to be approved or confirmed by the network, the NBC- KRON situation marks the first time that such have been used as essentially a threat to ward off potential competitors. Traditionally, the major concern of the networks was simply whether or not the new station owner would fulfill the existing contract, but as put by Cox Communications Andy Fisher, the networks have started to say Just a second. If you want to sell your property, we want to either have the right to buy it at discount or we want it to make the transaction subject to some additional requirements (Jessell, 2002, p.

22 Network-Affiliate Partnership 22 19). In essence, networks want more and more control over the local stations as a condition of affiliation. Young Broadcasting eventually outbid NBC for ownership of KRON-TV, paying $737 million. As promised, when affiliation agreement negotiations began, the network came back with an offer that was highly unfavorable to Young, requiring that KRON actually pay NBC up to $10 million for the right to affiliate with them (Trigoboff, 2001c). This offer placed Young in a unique position; faced with the prospects of having to replace hours of network programming with purchased syndicated fare, Young s management had to balance the cost of operating as an independent station versus the reverse-compensation costs of a continued relationship with NBC. In any event, KRON s owner would be without network compensation as a source of revenue. Displeased with the affiliation terms proposed by NBC, and unable to come to an agreement, Young decided to terminate its partnership with the network and begin to operate as an independent. Faced with the loss of a distribution outlet in the San Francisco market, NBC quickly entered into an agreement with Granite Broadcasting, owner of KNTV-TV in San Jose and several other stations, that called for Granite to pay over three hundred million dollars over ten years along with various fees for program development, sports rights acquisitions, development of digital television infrastructure and programming, and others as NBC may from time-to-time require. Should KNTV default on its payments to NBC, the network would have the immediate right to buy the station at market value, less the value of the network affiliation. Moreover, should Granite wish to sell any of its NBC affiliated stations it must give the network the right of first refusal and favorable terms in

23 Network-Affiliate Partnership 23 such an agreement. The deal also omits any specific information pertaining to commercial availabilities for KNTV, allowing NBC unfettered discretion to provide or not to provide availabilities for the stations local commercials during and adjacent to NBC programs (Network Affiliated Stations Alliance, 2001b, p. B-4). This deal did not last long, as several months later, NBC offered to buy the station outright, paying Granite $230 million (Trigoboff, 2002). After reviewing Granite s troubled financial situation, due largely to the Wall Street hit the company took after announcing the NBC reverse-compensation deal (McClellan, 2000; Larson, 2000), the network felt the likelihood of making good on the deal was slim, and acquired the station to ensure it had a viable distribution channel for its programming in such a large and influential market (Trigoboff, 2001a). While it seems like NBC eventually succeeded in obtaining an owned and operated station in the San Francisco-Oakland-San Jose designated market area (DMA), many note the fact that KNTV was, at the time of acquisition, actually located in the nearby Monterey-Salinas DMA, a considerably smaller market. As a result, NBC programming was unavailable to almost 200,000 overthe-air viewers (Trigoboff, 2002). The network claims that through deals with cable operators in the area and with the relatively high cable penetration throughout the region, along with some small signal boosts, NBC now has coverage in the market similar to what it had when affiliated with KRON. The affiliation swap occurred on January 1, 2001, giving KNTV almost immediate ratings success with powerful and successful NBC programming to serve as a lead-in for its own local news programming. KRON filled much of its day with local news and feature programming, hoping to capitalize on its existing stronghold in that

24 Network-Affiliate Partnership 24 arena and its powerful local brand image. Its afternoon and evening lineup included syndicated fare and local news designed to provide an alternative to the traditional late local news seen on network affiliates. Shortly after the switch, the station had dropped to the fifth ranked in the market, and Young Broadcasting started promoting it to potential buyers as a duopoly candidate, since it no longer operates as one of the top four in the market 2. Affiliates Ask for Help: 2001 Pushed by the egregious behavior of NBC during the KRON negotiations, in March 2001 the Network Affiliated Stations Alliance (NASA), an association comprised of the affiliate boards of ABC, CBS, and NBC, filed a petition with the FCC calling for clarification of existing regulation and a review of current network practices and their acceptability pursuant to FCC rules. The petition addressed four major areas in which the affiliates believed the networks had overstepped the boundaries of legal and ethical practice: 1. Manipulation of proposed station transactions that effectively require the affiliate and its ownership to secure permission of the network to enter into any sale or license transfer agreement, and to do so on terms favorable to the network. 2. Excessive network control over affiliate s digital spectrum which, in many cases, is not yet actually available. The affiliates charge this should be considered optioning time on the affiliates schedules, and as such, is a violation of FCC regulations. 2 A duopoly exists when an entity owns two or more stations in a particular market. FCC regulations prohibit an entity from owning two of the top four stations, however, to ensure that no one owner garners too much of the total market share.

25 Network-Affiliate Partnership Unreasonable preemption requirements that often call for financial penalties for stations that elect to not clear certain network programming, even if such preemption is due to the broadcast of programming considered to be of greater local importance. 4. Establishment of ventures and engagement in practices that undermine the economic viability of the network-affiliate relationship, such as news footage distribution networks, cable programming services, web sites and portals, and the like. (McClellan, 2001; NASA, 2001b) Manipulation of Proposed Station Transactions The effects of network involvement in a proposed station transaction are most clearly evidenced by the sale of KRON from Chronicle Publishing to Young Broadcasting as discussed in the earlier section. Despite the egregiousness of NBC s behavior, the network was unsuccessful in preventing the sale of the station to a third party. While this type of direct interference is atypical, affiliates are concerned by the increasingly restrictive provisions that networks are placing in their affiliation agreements that serve to give the networks final say over licensee transactions. For 40 years, people could sell a station, from Person A to Person B, and the only issue the network had was, will be contract be fulfilled? says Andy Fisher, past chairman of the Alliance (Jessell, 2002, p. 19), but the petition alleges that today networks employ contract language so specific that it effectively gives veto power over the sale of an affiliated station to a purchaser of the current licensee s choosing (NASA, 2001b, p. 23). The Alliance point to the recent

26 Network-Affiliate Partnership 26 change in the standard ABC affiliation agreement which used to call merely for reasonableness in determining whether a prospective buyer would successfully perform the duties called for under the contract; the standard language now allows ABC to grant or withhold permission in their sole discretion. Similar provisions exist in the other networks contracts, and the Alliance claims that all have enforced them at some point, with CBS the lone exception. In addition to the KRON fiasco, NASA analogized to a 1964 case before the FCC that led to the Commission effectively reversing a station swap agreement in which Westinghouse Broadcasting swapped stations with NBC under the threat that the network would withdraw its affiliation agreements on other Westinghouse stations. Affiliates wanted this same logic applied to their 2001 petition, and a ruling made that would prevent the networks from entering into affiliation agreements which hinder their ability to sell the station or which give the network de facto control over the station s business decisions. Interestingly, the networks do not contest that [they have] carte blanche to block affiliation assignments (NASA, 2001a, p. 50), but argue that the terms in question are merely negotiated business issues that have no place being decided or regulated by the FCC. Affiliates argue that such gratuitous terms hinder stations ability to serve the public interest by restricting their capacity to sell to a qualified buyer and thus are an FCC matter. Control over Digital Spectrum The federally mandated move from analog to digital television brings with it a wealth of opportunity for stations that will move from a single-signal environment to a digital world where their allotted portion of the spectrum can be used for one high-definition

27 Network-Affiliate Partnership 27 program, or multiple standard-definition programs, along with other program-related data content. Local stations are awash with ideas on how to leverage this technological innovation to boost their brand image, improve the quality and timeliness of their news product, and overall, to better serve the interests of their community. So too are the networks, and they want the stations to cooperate or risk losing their affiliation. One digital signal has the capability of carrying up to four conventional television signals or one high-definition picture signal. Many stations plan to offer multiple program streams during the day, adding features like 24-hour news coverage of local events, special reports and public affairs programming to their existing programming during the day, and during prime-time, offering one high-definition programming schedule. In a move claimed to be illegal by the affiliates, the networks have begun including clauses in their affiliation agreements which require stations to hold portions of their new or soon-to-be digital spectrum open for planned network content, effectively preempting any plans the local station may have had to use the new spectrum. Affiliates charge this attempt at securing digital spectrum before the networks have any programming available for it, and in some cases, before the affiliate has even rolled out its digital signal, is a violation of the FCC s regulations. Codified in 47 C.F.R (d), the option-time rule states: No license shall be granted to a television broadcast station having any contract, arrangement, or understanding, express or implied, with any network organization, which provides for the optioning of the stations time to the network organization, or which has the same restraining effect as time optioning.

28 Network-Affiliate Partnership 28 It then goes on to define time optioning as: any contract between a station and a network organization which prevents or hinders the station from scheduling programs before the network agrees to utilize the time during which such programs are scheduled, or which requires the station to clear time already scheduled when the network organization seeks to utilize the time. NASA points to Fox s contract provision which allows the network to begin providing programming and data services and requires the affiliate devote up to 100 percent of their digital capacity (NASA, 2001b, p. 15) to such services upon six months notice by Fox. As a result, stations that have developed their own digital services may be forced to preempt some or all of these digital streams so that the network services may be carried. As written in the agreement, failure on behalf of an affiliate to carry the digital programming may result in termination of both the digital and analog affiliation upon six months notice. In addition to their option-time argument, the affiliates also believe that such provisions infringe upon their duty to serve in the public interest, but requiring that they take the networks digital content without any consideration of whether it is suitable for the local community or whether locally programmed digital services may be of greater local importance. Fox countered the affiliate s position by arguing that the language is in the contract as a starting point for negotiations regarding the network s development of a digital service, and that requirements under the aforementioned provision are seldom enforced.

29 Network-Affiliate Partnership 29 Unreasonable Preemption Requirement Because affiliates serve as the distribution mechanism for network programming, it stands to reason that the networks have an interest in maximizing the number of hours of total network programming that each of its affiliates agrees to clear, and to provide incentives to make network programs appeal to the local station s schedules. Traditionally this incentive took the form of network compensation payments made to the affiliate and selected time within the network programs made available to the station for sale as local commercials. Recently, however, networks have begun making threats of punitive measures to ensure that stations carry network programming, and incorporating those threats into their affiliation agreements. The affiliates argue that current contract language oftentimes violates the Commission s right to reject rule codified in 47 C.F.R (e) that allows stations to reject any network programming it finds contrary to the public interest or that can be replaced with programming considered to be of greater local importance. To ensure prima facie compliance with this regulation, networks typically incorporate into their agreements a clause which specifies that nothing in the agreement is to be construed to hinder the affiliate s rights under law. Still, through various other contract terms, the networks attempt to limit the amount of network programming that is preempted on their affiliate stations. Fox threatens termination of the complete affiliation agreement upon a certain number of preemptions that are not approved by the network. NBC requires some affiliates to compensate the network for lost revenue due to the affiliate failing to clear a particular program a drastic change from the traditional reduction in network compensation based upon the amount of network programming not cleared on the network. ABC has