NEW YORK — NBC has asked its affiliates to accept a gradual elimination of its $200 million annual affiliate compensation payments and instead use that money to fund a network/affiliate joint venture that would invest in digital broadcast facilities, Internet companies, MSNBC and other businesses, according to a proposal sent out May 8 to station group owners.
Written by NBC network president Neil Braun, the 25-page proposal featured a business model under which NBC affils would contribute 10% of their affiliate compensation the first year and add 10% in each successive year, so that after 10 years, NBC would no longer pay affiliate compensation.
Looking for an out
Although the broadcast networks are locked into long-term contracts with their affiliates, the webs have been looking for a way to get out of paying affiliate compensation. Because of increased programming costs — such as the $18 billion the nets agreed to pay the NFL for an eight-year contract this year — the networks now have a challenge to break even. In contrast, local station profits margins exceed 40% in many cases.
In the last year, affiliates have complained that practices by the networks hurt their station businesses. For example, NBC stations have protested the network’s strategy of promoting programming that appears on its cable networks CNBC and MSNBC on the NBC network feed. Affiliates are also concerned that their exclusive window on network programming is becoming increas-ingly short as the network repurposes “Dateline NBC” news reports, for example, on MSNBC.
Aims to solve problems
Braun’s proposal aims to solve many of these problems while at the same time phasing out affiliate compensation payments.
In exchange for giving up affiliate compensation, affiliate stations would own a piece of the NBC Affiliate Growth Opportunity Venture. As stated in Braun’s document, the venture’s primary purview is to develop and make investments “that will grow and compliment the Members’ core competencies and will realize the advantages of the network system.”
The five areas the venture intends to pursue are: business opportunities arising from the widescale conversion from analog to digital broadcasting; additional uses for digital broadcast facilities and equipment; investments in Internet companies and other new media enterprises; opportunities in cable television and other media, including a possible equity investment in MSNBC; and other core business activities such as program acquisitions and financing, and possible station acquisitions.
“NBC is saying that it’s committed to the affiliate broadcast system, and we have to invest in our future together,” Braun said. “We want to take the compensation money that we’ve been arguing about and make it an investment pool.”
Braun will elaborate on NBC’s proposal during NBC’s affiliate conference May 19-21 in Los Angeles. He emphasized that NBC will be flexible in changing the proposal to address affiliates’ concerns.
“The document has already achieved what it set out to do, which is to become a catalyst for discussion,” Braun said. “Until you make something concrete, people don’t take it seriously. We have open minds about this.”
Station group owners who have read NBC’s proposal generally praised Braun for putting all the major affiliate/network issues on the table, but they said NBC will have an uphill battle gaining widespread acceptance.
“It’s a work of art in that he did a helluva job pinpointing all the issues,” said Bill Ryan, president, Post-Newsweek Stations. “Making it a reality with over 200 affiliates is not going to be easy. He’s climbing Mount Everest, but he might make it.”
Braun said that two types of stations will be more resistant to his proposal than the average NBC affiliate: small-market stations that depend on their compensation to make a profit, and highly leveraged stations who don’t have the luxury to invest cash flow. Braun said that NBC “will try to come up with a way to make this work.”
While NBC has presented its proposal as optional to affiliates, the network does have teeth behind its negotiating posture.
“If we waited until the end of the affiliate agreements, we could have the war then,” Braun said. “That’s a terrible idea. Rather than having a war about how much of this $200 million pool gets shifted back, why don’t we just share it in a 50/50 joint venture.”
The real battle
Several NBC affiliate sources who declined to speak for attribution said NBC’s main battle would be convincing affiliates that they are really getting something worthwhile in exchange for giving up their compensation.
“Many people feel that it’s no more than a smokescreen to eliminate compensation,” one NBC affiliate said.
Asked another, “Is this just a different way of NBC controlling this thing and having us pay for it?”
Braun said he tried to structure the venture so the network and the affiliates would have equal control in the decision-making. The venture’s five-member Commitment Committee, which has sole authority to approve all uses of the venture’s funds, will comprise three affiliate representatives and two network reps.
Braun did not disclose how many affiliates would need to sign onto the joint venture in order to greenlight it. Affiliates have until the end of 1998 to join the venture.
Both Braun and several NBC station group affiliates said that the two main issues that will make or break the venture are exclusivity and how the venture is governed.
Braun’s proposal included a page of suggested exclusivity periods. According to the document, primetime sitcoms and dramas will have an exclusivity period of six months or the remainder of the broadcast season (whichever is longer); talkshows will have 30 days; soap operas will have the longer of (a) six months or (b) the remainder of the current broadcast season, unless another major broadcast network provides its affiliates with a shorter exclusivity period, in which case, for the shorter period; award shows will be exclusive until the following weekend; MOWs and miniseries will have 30 days; and newsmagazine programs will be exclusive with respect to program titles only (e.g. “Dateline”) with all other segments immediately reusable.
The option for the venture to purchase a 10% equity stake in the NBC-Microsoft cable channel MSNBC will remain open until the end of June 1999.