If Fox and Univision go to cable, what happens to their stations?

Yesterday, both Fox's Chase Carey and Univision's Haim Saban said that they would move their networks from over-the-air broadcast to subscription cable distribution if Aereo is allowed to use their content without paying for retransmission rights. Both of these statements are empty threats, because the economic damage from going cable-only would be much greater than the loss of retransmission fees. Here's why:

• Fox owns 27 television stations, 17 of which are Fox affiliates. The 10 non-Fox stations are MyNetworkTV affiliates. If Fox goes cable-only, what happens to the 17 stations? Will Fox make them MyNetworkTV affiliates? Not likely, since it already owns MyNetworkTV affiliates in a number of the same markets. Will it sell them off? Perhaps, but not at the price it would like, since they'd be independents. (See Young Broadcasting's fiasco with San Francisco's KRON.)
• Univision owns 23 television stations, all of which carry the Univision network. They've got the same problems and issues as Fox--what will it program the stations with if they don't carry Univision, and who will it sell them to?
• In both cases, can the networks afford to lose viewers who can't afford or don't want to pay for a cable, satellite or IPTV video subscription?
• Finally, if either Fox or Univision goes cable-only, their affiliates will immediately go to the FCC and Congress to block the move. Just as with the networks themselves, the economic value of their stations would be dramatically reduced by losing their network affiliations.

There are several other reasons why a shift to cable is unlikely, especially for Fox. In any event, Carey's and Saban's threats are nothing more than that. If they can't stop Aereo in the courts, broadcasters will use their enormous clout to get legislation from Congress banning or greatly limiting Aereo. Lobbying, campaign contributions and Fox News' bully pulpit, not taking the broadcast networks to cable, will be the tools used to minimize or eliminate the threat from Aereo.

A look at "The X Factor" Chicago auditions (Updated)

(Updated 2 June 2011 to include comments on the dismissal of show judge Cheryl Cole). I attended a taping of auditions for "The X Factor" last Thursday at the Sears Centre Arena, located in Hoffman Estates, IL, just outside Chicago. The auditions were for the U.S. version of "The X Factor", which will premiere on Fox in September. I won't give any spoilers; instead, I'll focus on some of the technical and production aspects of the show.

The Sears Centre Arena is one of several sports and concert arenas in the Chicago area, and it was well-suited for the taping. The producers effectively cut the arena in half with a floor-to-ceiling cloth partition that formed the backdrop for the performance stage. The arena was made to look and sound like a concert, with the usual lighting, speakers and amps, albeit with lower sound levels. According to Simon Cowell, there were more than 3,000 people watching the taping.

The producers used seven cameras in the arena. Two were positioned in the audience and equipped with long zoom lenses for covering the performers. Three were positioned stage left for shooting the four judges (Simon Cowell, Paula Abdul, Cheryl Cole and L.A. Reid). A crane-mounted camera was used for overhead shots of performers, the judges and audience, and a seventh camera was used for audience reaction shots. Additional cameras (not visible from the arena) were used backstage for interviews with show hosts Nicole Scherzinger and Steve Jones, the performers and their families. There were two multiviewers positioned stage left to show the outputs of the various cameras on a single screen, but it appeared that they were being used by producers, not the show's director.

Prior to the start of taping, production teams shot interviews and raw footage of some of the performers and their families outside the arena. The editors on the show are going to have a lot of work, simply due to the volume of footage produced by all those cameras in the course of a 3 1/2 hour taping. (Keep in mind that this was only one of four tapings scheduled for Chicago. Multiple tapings were held earlier in the month in Los Angeles, and four more tapings will be done in June in each of four locations: New Jersey, Miami, Dallas and Seattle.)

From the taping that I saw, it's not clear how much "The X Factor" differs from the format of "American Idol" (I haven't seen the U.K. version of the show). As mentioned above, there are four judges, and three of them have to say "yes" in order for an individual singer or group to pass through to the next round in Los Angeles. Given the number of individuals and groups that went through from the taping I attended, there are going to be many performers going to L.A. by the time the auditions end next month.

Since I originally wrote this post, judge Cheryl Cole has been dropped from "The X Factor". There's been no official statement from either the show's producers or the Fox network as to why she's been dropped, but there are a number of rumors:  Her Geordie dialect might be too difficult for U.S. audiences to understand, her weight, and a lack of chemistry with the other judges. I had no trouble whatsoever understanding her, and although I was in the "cheap seats", I couldn't see anything that would indicate that she has a weight problem. However, I and other people sitting around me commented on a lack of chemistry.

Simon and Paula came out and immediately continued where they had left off on "American Idol". Their playful (and sometimes not so playful) friction was exactly what the audience expected. Early in the taping, it seems like there were two panels--Simon and Paula, and Cheryl and L.A. Reid. As the night went on, L.A. Reid synced up with Simon and Paula, and his personality started to come alive, but Cheryl seemed to be left out.

Fox executives probably got a chance to see rough edits of the footage from the four Chicago tapings, and saw the same thing that we saw in the audience. The vast majority of the U.S. audience neither knows nor cares who Cheryl Cole is--I'm not saying that as an insult, it's simply reality--and host Steve Jones pointed out that no one in the audience in Chicago probably knew who he was. "The X Factor" is too important to Fox and its producers for them to take any chance with the show's popularity. In addition, they had a short break before taping 16 more auditions in four more cities throughout the month of June. If they were to make any on-screen personnel changes, they needed to make them quickly, before the June tapings began.

Unintended consequences of the Cablevision/Fox standoff

The Cablevision/Fox retransmission rights standoff is now more than a week old. Neither the New York Yankees nor the Philadelphia Phillies made it into the World Series, so there's going to be much less demand for Fox in those cities come Wednesday. However, Dish Networks is the next service provider to be threatened with losing Fox's over-the-air stations, and its subscribers in Texas and the San Francisco Bay Area would lose access to the World Series if Fox pulls the plug on November 1st.

I wrote previously about the likelihood that these retransmission battles would result in binding arbitration being imposed, either by the FCC or the U.S. Congress. There might be a different outcome, however. You may recall ivi tv, the Seattle company that's retransmitting over-the-air signals from stations in New York City and Seattle to subscribers across the U.S. over the Internet. Ivi has been sued by just about every broadcast network and programming supplier, but the company is relying on a statute that's been on the books for decades that requires broadcasters to make their signal available to any cable operator, in return for fees paid by cable operators to the U.S. Copyright Office. These fees are then distributed to the broadcasters. In most cases, these statutory license fees are a tiny fraction of what broadcasters are asking for, and getting, from service providers for their retransmission rights.

If enough political pressure is applied, the Congress could repeal the statute that gives broadcasters the right to deny permission for retransmission and the right to ask for compensation. In that case, the law would fall back to the statutory license procedure that's still on the books. It would put local broadcasters that have been relying on retransmission fees for an ever-increasing portion of their income in a world of hurt.

The service providers would love to go back to statutory licenses, even if the license fee was raised substantially. Broadcasters will fight the change with every breath in their bodies. Both sides need to be very careful, because they could end up losing control of the negotiating process.

Is binding arbitration coming in cable retransmission deals?

As of today, Fox's local television stations and cable channels have been unavailable to Cablevision subscribers for five days. Dish Network's retransmission deal with Fox runs out at the end of October, and the Fox channels may go dark on Dish as well. Cablevision has offered to enter into binding arbitration, but Fox appears to be afraid that it won't get what it wants from arbitration.

It's looking more and more like the U.S. Congress or Federal Communications Commission may step in and impose rules for retransmission negotiations. One line of thought is that broadcasters would be prohibited from withdrawing their over-the-air programming from cable, satellite and IPTV service providers while negotiations are underway. Cable networks would be exempt from this rule, but the problem is that service providers could simply stretch out negotiations indefinitely.

Here's where I think this will go: Broadcasters will be required to supply their programming to service providers for a limited time after the expiration of a retransmission contract (perhaps 30 to 60 days) to allow the parties to negotiate a new deal themselves. After that, binding arbitration would be imposed. This would only apply to over-the-air programming--Fox would be free to pull down its cable networks as soon as its contracts expire, as would NBC Universal or Disney.

Any such rules would be tied up in court challenges, potentially for years, but as retransmission standoffs escalate and more service provider customers lose access to channels they want to watch, there's simply going to be too much pressure on the U.S. Government to ignore. 

The media powers "have this Internet thing all figured out"

Earlier today, at the Cable Show in Los Angeles, former FCC Chairman Michael Powell chaired a panel of media bigwigs (plus Marc Andreessen) to discuss content on the Internet. The other panelists were Brian Roberts of Comcast, Tom Rothman of Fox, Les Moonves of CBS and Jeffrey Bewkes of Time Warner. The consensus of the media executives is that they've got this Internet thing all figured out. Their content will be on whatever devices consumers want to use, so long as they (the content providers and distributors) get paid for it. By and large, it sounded like a bunch of guys sitting around using buzzwords that they've heard but don't quite understand.

The executives clearly want to maintain the status quo, just on a larger variety of delivery platforms. They still want release windows so that they can maximize revenues from each platform. They see new technology simply as an extension of their old technology. For example, Brian Roberts demonstrated an application that turns a $600 iPad into a glorified remote control for your ten-year-old cable box. It can show program schedules, allow you to browse VOD content and even invite your friends to watch, but you watch the content on your TV screen through your set-top box, not on the iPad that you have in front of you.

What disappointed but didn't surprise me about the panel is that there was really no "outside the box" thinking from anyone, even Andreessen. He pitched integrating Facebook and Twitter with the services that the big media companies already have in place, and talked about Zygna's model of free games with in-game transactions, but didn't really explain how the media companies could take advantage of that model. Comcast's Roberts pitched using an iPad as a peripheral to its set-top boxes, not as a legitimate delivery platform. Thar was about as far as the envelope got stretched.

The incumbent content and service providers will never fundamentally change the economics of content production, distribution and purchase. It runs counter to their business interests. It's up to a new generation of content producers and distributors to convince a critical mass of consumer/producers to get on board.

Fox vs. Time Warner Cable: A Portent of the Future?

Fox and Time Warner Cable played a game of "Chicken" with Time Warner's subscribers over the last few days, with Fox threatening to discontinue availability of its broadcast channel on Time Warner's systems unless TW pays $1 per subscriber per month in retransmission fees. TW has been said to have offered $0.25-0.35 per subscriber. Fox agreed to extend negotiations late last night so that TW subscribers could watch Fox's football games today.

Retransmission fees are nothing new--cable operators have been obligated by Federal law to pay them for years. Nor is brinkmanship, either by a programmer or cable operator, a new tactic. What is new, however, is for broadcast networks to demand their own retransmission fees. Cable operators are required by law to pay affiliates for retransmission rights, not the networks. The networks have historically played the game by allowing cable operators to pay reduced fees to carry their Owned & Operated (O&O) stations, or waived the fees altogether, if the cable operators carried their cable networks. (Cable operators pay separately for the rights to carry cable networks.)

The negotiations going on between Fox and Time Warner Cable centered on Fox's O&O stations; if Fox hadn't agreed to the extension, it would have knocked Fox stations off of Time Warner systems in New York City, Los Angeles, suburbs of Boston and other major markets. Fox would have had no right to withdraw its programming in TW markets where it doesn't own the local Fox affiliate. 

What Fox and the other broadcast networks are now saying is that they should be compensated in addition to what their affiliates get paid for retransmission. Here's an example: In San Francisco and Oakland, CA, the Fox affiliate, KTVU, is owned by Cox Broadcasting, not Fox. The local cable and IPTV operators are Comcast and AT&T respectively. Comcast and AT&T pay Cox for the right to retransmit KTVU's signal. Fox itself gets nothing. However, Fox also wants to get paid by Comcast and AT&T for its programming, in addition to whatever they pay to Cox.

The fight between Fox and Time Warner Cable is only the opening salvo in what promises to be a much longer war. Viewers should prepare for more brinkmanship as ABC, CBS and NBC pursue similar tactics.