Fox News sends shockwaves across TV spectrum

A correction was made to this article on March 17, 2005.

From the outset, the Fox News Channel has generated waves of anguish. Not just among liberals. And not just at CNN. Now the ferocious phalanxes led by Roger Ailes are taking on a whole new category of adversary.

The unstoppable juggernaut is about to sock it to cable operators for the biggest carriage-renewal increase in a decade.

And, in so doing, Ailes & company may ironically wreak havoc on sister cable networks like FX, Speed, National Geo and even Fox’s 14 regional sports networks. These siblings may get caught in the undertow and have to settle for lower rates.

A pumped-up Fox News sales force has begun making visits to selected cable operators, whose FNC contracts come up for renewal starting next year.

“These could be the bloodiest negotiations since 1997, when ESPN forced cable operators to sign six-year contracts calling for 20% increases each year,” says Matt Polka, president of the American Cable Assn., which represents more than 1,000 cable systems, mostly in small towns, reaching 8 million subscribers.

Cable operators were so angry at letting themselves get hosed down by ESPN that they took out their hostility on some of ESPN’s sister networks, like Disney Channel and ABC Family, refusing to grant them the dollar boosts they wanted when the old contracts expired.

In these negotiations, Fox holds all the cards.

Cable subscribers would revolt if Fox News were removed from their lineup. Even more unsettling for cablers is the fact that Rupert Murdoch’s News Corp. owns DirecTV, which could flaunt its carriage of the channel — potentially causing massive defections from cable to satellite.

One cable-op exec says that at a recent affiliate meeting, Fox Newsies did not discuss terms, but it was easy to discern their attitude toward negotiations. “They were polite about it,” says the exec. “But the undertone was clear: Bend over, we’re coming.”

Cabler ops would have a hard time refusing Fox News’ terms, but they could retaliate in other ways.

ESPN’s past could serve as prologue to what eventually happens with FNC’s cable negotiations. If FNC leaves operators groaning with rate hikes that feel like bare-knuckled bruises, the ops will be gunning for Fox’s other cable networks, whose sales staffs are totally separate from those of FNC.

And it won’t be just FX that’ll get flayed like the patients on “Nip/Tuck,” the network’s hit series about Miami plastic surgeons.

“I’ll go after CNN and MSNBC,” says one operator, who gets acid reflux every time he thinks about the pounds of flesh Fox News is planning to extract. “If I have to pay more because Fox News is getting more viewers, then I’m sure as hell going to pay less for the lousy ratings of CNN and MSNBC.”

Cable operators are getting wind of an FNC rate-card reset that could end up doubling their monthly license fees over a multi-year term from the current average of 25¢ a subscriber.

FNC regards that 25¢ as nothing less than insulting, particularly since the network had to pony up hundreds of millions of dollars to the operators to buy its way onto cable systems back in 1996.

But for FNC, it was well worth it.

Kagan Research projects that FNC will generate a gaudy $248 million in cash flow in 2005, down slightly from last year because its gross ad revenues are off somewhat — a projected $264 million — due to a dip following a powerhouse 2004.

FNC’s programming costs have also risen, from $180 million last year to a projected $220 million in 2005.

CNN, Fox News’ No. 1 rival, which is way behind FNC in the ratings, didn’t have to pay to get on when it launched in 1980, and — paired with its CNN Headline News sibling — pockets a monthly average of 44 cents a subscriber.

“I don’t blame Fox for wanting to get more money than CNN, which it’s thoroughly trouncing,” says Larry Gerbrandt, media analyst for AlixPartners. “But the only other network ever to pull off a rate increase like that was ESPN.”

One cable operator exec who caught a recent presentation from FNC’s affiliate sales people well in advance of the late-2006 contract renewal date says they stayed away from talking about a specific license fee.

Instead, they banged away at the theme of “We’re America’s most valuable cable network” like a monotonous drum.

What galls the operators is that they know they have almost no choice: Dropping FNC from their cable systems would cause masses of their subscribers to charge out into the night with torches and pitchforks, livid over the disappearance of Bill O’Reilly, Sean Hannity and the Fox News stable of forceful personalities.

And there’s another big reason that ops would hesitate to touch FNC — namely, the considerable leverage that News Corp. has as the owner of cable’s chief competitor, the DirecTV satellite operation.

DirecTV, which serves 14- million households, could target any cable systems that scuttled FNC by urging their customers to cancel cable and switch to satellite dishes.

As one media analyst puts it, “In one sense, News Corp. would like nothing better than to have Comcast fail to reach an agreement and cancel Fox News.” News Corp. could then engineer a full-court press on Comcast’s subscribers, confident that the cable operator giant would eventually cry uncle and cave in to FNC’s demands.

But, under that scenario, Comcast could run to the FCC, charging that News Corp. is using quasi-monopolistic power with DirecTV to put cable at a disadvantage.

FNC’s push to jack up its monthly license fees could also be the opening gambit for the much-talked-about Fox-produced business news network.

FNC could modify its monthly 50¢-a-sub demands in exchange for clearance of the new business newsie on the cable ops’ most widely circulated analog tier, although the new web might not kick off for a year or two. It’ll take a while for Fox to put together the staff and try to sign a familiar name or two to host primetime shows.

The biz channel would need more analog than digital clearances if it wants to make a dent in CNBC, which reaches 87 million households. Despite finishing near the bottom of the basic cable rankings (51st out of 59 in February, yielding an average of only 120,000 total viewers), CNBC spun off cash flow of $328 million in 2004, according to Kagan Research.

The problem with getting analog real estate for the biz channel right off the bat is that “we don’t have any analog space,” says Italia Winand, a top official with Mediacom, the tenth largest U.S. cable operator.

“We’d have to drop an existing analog network,” she continues, “and right now all of them are under contract with us. Would Fox News want us to drop one of the Fox Sports channels?”

For cable systems upgraded to digital, the bandwidth it takes to house one analog channel could accommodate up to 12 digital channels; giving that amount of territory to one network like a biz channel could be so painful to a cable operator that it might go for the bigger FNC tariff.

If two or three of the top cable operators rejected analog clearance for a projected biz network, Fox would probably scrap it entirely and go for King Kong-size increases in the rate of FNC.

The bottom line for one cable operator who is dreading the negotiations: “Fox News is gonna win. That’s a given. The only question is: How in the hell do I mitigate the damage?”

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