Musical Chairs May Be The Hot New Tv Game

Laurence A. Tisch has never much cared for the cozy relationship between networks and their affiliated stations. When he took over CBS Inc. in 1986, the tough-as-nails chairman played hardball with his affiliates, dickering over their compensation and winning few points for charm. The stations groused, but few thought about dropping CBS, since its ratings were up and switching networks was thought to be fraught with risk.

No longer. On May 23, New World Communications Group Inc., controlled by financier Ronald O. Perelman, shocked the broadcast industry when it dumped all 12 of its network affiliations--eight of them with CBS--and instead signed on with Rupert Murdoch's much-smaller Fox Broadcasting Co. network. In exchange, Murdoch agreed to invest $500 million for a minority stake in New World, which is trying to become a television programming powerhouse as well as a station owner. The deal, clinched in about 10 days of supersecret negotiations, marks a coming of age for Fox, which Murdoch acknowledges had been "physically handicapped by our quality of distribution." Murdoch remedied that by inviting New World CEO William Bevins to his Los Angeles office in early May. The casual talk soon escalated into a major deal that was "financially compelling to both parties," Bevins says.

POACHING? Murdoch's midnight raid forces CBS into a mad scramble for affiliates in the crucial markets of Dallas, Detroit, Atlanta, Cleveland, Tampa, Phoenix, Milwaukee, and Austin. Even more unsettling, CBS will likely end up poaching affiliates of NBC and ABC, sparking a chain reaction of network-hopping that would leave viewers, advertisers, and network brass in a daze. "It is a tremendous body blow," notes Alan Bell, president of Freedom Communications' broadcasting group, which owns four CBS affiliates. "This will be one of the most fascinating games of musical chairs in broadcasting history."

In fact, Fox's move may signal something even more profound: the unraveling of the network-affiliate relationship that undergirds the industry. Historically, affiliates served mainly as conduits for the networks, turning over the bulk of their airtime to network news, sports, and entertainment. With three predominant networks, they had few options in deciding whom to link up with. Suddenly, though, Fox has become a viable alternative. What's more, affiliates are buying more programming from syndicators--and, in the case of New World, even producing it themselves.

It was this ambition that drove New World to break with CBS in favor of Fox. Murdoch's network produces only 15 hours of prime-time programming a week, while CBS and its rivals each produce 22 hours. The difference frees up time for such New World productions as a sequel to Jacqueline Susann's Valley of the Dolls, which Perelman plans to air late at night. On CBS affiliates, the show would have conflicted with David Letterman. Fox, though, produces no late-night programming. So New World can now air the program when it wants and on stronger stations, giving it wid-er distribution.

In this way, too, the deal allows New World stations to produce more local programming, which generates a higher profit, since the affiliates get to keep all the ad revenue from those shows. "The switch allows us more local flexibility," says C. David Whitaker, general manager of WTVT, a 39-year CBS affiliate that is switching to Fox as part of the New World deal.

BOLDER. Such new independence poses thorny problems for CBS and its rivals. In the short term, Tisch may have to pay more to lure NBC or ABC affiliates. Otherwise, the Tiffany network will be left with weaker UHF stations. In the long term, all three networks will have to contend with affiliates who have more options and may be emboldened to jump ship if they aren't satisfied. Not surprisingly, Wall Street pummeled the stock of CBS, which was hit hardest by the Fox deal. CBS tumbled 12%, to 2671/4.

CBS executives are struggling to find a silver lining. Anthony C. Malara, president of affiliate relations, says the network may do deals with station owners to steal away NBC or ABC affiliates in several of the affected markets. "We're going to have to be very creative and clever to get it back," says Malara, who admits he was "in shock" for 20 minutes after learning of the defections. CBS research chief David F. Poltrack says the loss of VHF stations in those markets would only cost the network 1.5% of its prime-time audience. In addition, Poltrack claims that several of the New World stations fall short of CBS's average ratings.

But the loss will hurt the network in other ways. The CBS Evening News With Dan Rather & Connie Chung, for example, could lose 5% of its audience, since the UHF stations in New World's markets don't have local news shows to build audience for the national news. CBS will also sell less advertising for next season, though media buyers aren't sure how much. And if CBS has to pay more to lure new affiliates, it could eventually pay existing affiliates less. "Every CBS affiliate in the country is diminished by some degree by what happened," says Peter B. Desnoes, managing general partner of Burnham Broadcasting Co., which owns five NBC and ABC affiliates.

Murdoch, on the other hand, emerges a big winner. His deal caps a costly strategy to vault Fox into the same league as the Big Three--mostly at the expense of CBS. Last December, Fox bid $1.6 billion for the NFL's National Football Conference games for the next four years, easily beating out incumbent CBS. Preston Padden, Fox's executive vice-president for affiliate relations, predicts, "these will not be the last strong VHS stations coming to Fox."

SEISMIC SHIFT. With CBS and Murdoch both prowling for affiliates, ABC and NBC are in for a battle royal. Although CBS is tops in overall viewership, ABC leads in key demographic groups, and its smoother handling of affiliates over the years may help protect its franchise. Last-place NBC is more vulnerable. "We're not sitting here with our head in the sand," says outgoing NBC Television Network President Pierson G. Mapes.

If Mapes and his colleagues take the long view, though, they'll have to accept this as another seismic shift in their business. With the relaxation of government regulations, NBC and its rivals were already becoming entertainment programmers as well as distributors. Now, with the networks' distribution systems under siege, film studios and other programmers may think it a propitious time to seek out alliances with Tisch and his peers--perhaps even acquisitions.

Michael N. Garin, a media banker at Furman Selz & Co., points out that CBS is still a choice strategic asset--even after losing $561 million in market value since May 23. But with Rupert Murdoch taking a seat at the networks' table, it may not stay choice for long. Larry Tisch may want to start listening to any offers.

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