The Fox TV network, looking for new sources of revenue, is demanding that its affiliates hand over a percentage of the money they receive from local cable operators that retransmit their signals.
And if they don't hand over the cash, Fox is threatening to yank the local station's network affiliation and find another outlet in the market.
That, in a nutshell, is the situation now unfolding between Fox and local TV stations around the country that carry the network's programming. It also points to the complicated and often conflicting relationships among media companies — local TV stations, broadcast networks and cable systems — as they jostle one another for a cut of the money pouring into local cable and satellite companies from customers.
At issue is the money — called retransmission fees — local Fox stations get from cable and satellite operators to carry their signals. Fox, which already gets retransmission fees for TV stations the network owns including KTTV-TV Channel 11 in Los Angeles, is pressuring its non-owned affiliates for a big cut of the revenue.
Broadcasters used to be content with the money they took in from advertisers, which supported "free" over-the-air television. But in recent years as broadcasters have lost viewers to cable and advertisers are shifting to the Internet, stations have been seeking new sources of revenue by demanding payment from cable and satellite companies for the right to retransmit their programming.
News Corp.'s Fox is not the only network seeking a slice of its affiliates' retransmission fees. CBS, ABC and NBC are also negotiating for a percentage. However, there is a consensus that Fox is being the most aggressive of the networks. None of the Big Three has yet threatened to drop its local affiliate if it doesn't get the money.
While the corporate skirmishing is waged far above the heads of TV viewers, it is likely to have a real-world effect on households that pay for cable or satellite service — about 90% of all TV-watching homes in the country — in the form of higher monthly rates as local providers look to make up the difference.
Neither Fox nor its affiliates would talk about how much money the network is seeking. But people familiar with specifics said the rates start at 15 cents and peak at 50 cents per local cable subscriber over the course of the contract depending on various factors including the size of a station's market.
In a letter it sent to stations this week, Fox Affiliate Sales President Mike Hopkins said the network recognized that its "proposal may not work for every company" and "if that should be the case, Fox will pursue different distribution channels ... we don't want that to sound like a threat, but it is a fact."
Fox station owners said they understood the financial pressures networks face in a media world where viewers now have myriad choices, and said they were comfortable with sharing their retransmission revenue with the network. Affiliates already pay the network for programming through a swap of advertising inventory.
However, Fox's current demands are seen by affiliates as highly aggressive because it requires them to wrangle more in retransmission fees out of cable and satellite companies — and if they fail, reach into their own pockets to make up the difference.
About 30 Fox affiliates do not have a long-term deal with the network. An additional 80 stations will see their agreements expire by the end of the year.
"They appear to have no regard for the value your station brings to the network.... They are prepared to destroy someone's business to make their point," wrote Brian Brady, president and chief executive of Northwest Broadcasting and chairman of the Fox affiliate board, in a letter to other Fox stations.
Fox counters that it provides the bulk of the programming and thus the bulk of the value to its affiliates, arguing that it needs to capture some of their retransmission revenue to continue paying for the costly comedy, drama and sports programming that stations and viewers expect.
One concern among local affiliates is that they do not have the leverage to negotiate big enough fees from cable operators to cover Fox's demands.
As a result, some local stations think that if Fox so badly wants a slice of affiliates' retransmission revenue, then the network should negotiate on its stations' behalf directly with cable and satellite operators.
There is a precedent. In the 1990s, when Congress first gave TV stations the right to negotiate for retransmission fees, Fox affiliates handed the network a proxy to cut deals. Fox used that proxy to bargain in lieu of cash for channel space on cable TV systems to launch the cable network FX.
This time around, however, Fox is not interested in pursuing such a scenario out of concerns that such a move would raise eyebrows in Washington, people close to the network said.
Lawmakers and regulators are becoming increasingly angry about contract disputes played out in public over retransmission consent that lead to channels going dark, leaving viewers fuming. And the last thing Fox wants now is to give Washington another reason to scrutinize it more closely.