Murdoch's Ongoing Feud With Sinclair EscalatesBy and
Relationship dates back to 1986, with other tense moments
Deal would switch Fox’s Sinclair affiliates to Ion Media
The three-decade relationship between Rupert Murdoch’s 21st Century Fox Inc. and David Smith’s Sinclair Broadcast Group Inc. was once so fraught that the companies would only communicate by fax through lawyers, according to a Variety report from 1996.
Now, tensions between the two TV companies are escalating again. Concerned about Sinclair’s control over stations affiliated with Fox, Murdoch, 86, is seeking to outflank the broadcasting partner it relies on so much to reach viewers in much of the U.S.
Sinclair owns 54 Fox affiliates -- stations like Pittsburgh’s WPGH and Oklahoma City’s KOKH that carry local news and weather segments along with Fox shows such as “The Simpsons” and football games. Cable and satellite companies pay Sinclair for the rights to distribute those stations to their customers, and Sinclair splits those fees with Fox.
Sinclair’s $3.9 billion deal to acquire Tribune Media Co., while still awaiting regulatory approval, would give the local broadcaster 14 more Fox stations, strengthening its hand in negotiations over how to split the distributor fees.
That vexes Fox so much that it tried unsuccessfully to outbid Sinclair for Tribune. Now Fox is threatening to yank its affiliation from Sinclair altogether and switch to independent broadcaster Ion Media Networks Inc., as Bloomberg reported this week.
Affiliation changes rarely happen in the industry, given the cost. Fox stations are set to collect $1.8 billion in fees from distributors in 2016, making them significantly more profitable than independent stations, according to Bloomberg Intelligence.
The potential breakup of the partners caused Sinclair shares to fall 8.6 percent Thursday after Bloomberg’s report on Fox’s early-stage talks for a joint venture with Ion. Tribune shares fell 3.6 percent that day.
While Sinclair produces conservative commentary for its stations’ news broadcasts, creating a budding rivalry with Fox News, the companies’ dispute is related to affiliations and not to competition for viewers, people familiar with the matter said.
Sinclair and Fox started working together in 1986, when Murdoch launched Fox, an upstart broadcast network, aiming to snap a towel at incumbents ABC, NBC and CBS. Sinclair soon signed on with the renegade network, converting several of its independent stations into Fox affiliates.
By the mid-’90s, Fox executives were looking to expand the network’s programming lineup beyond prime time with new shows in late night and daytime. To do so, they needed the cooperation of Fox’s affiliate stations around the country. From the outset, however, Sinclair executives balked, informing Fox that they preferred to stick with their current slate of programming, which they believed would be more lucrative.
Tensions escalated. In early 1996, Fox announced it would be dropping Sinclair stations as affiliates in Raleigh, North Carolina, and Norfolk, Virginia -- and threatened to drop Sinclair in other markets as well, if Fox could find replacement stations. The lawyers and their fax machines took over from there, Variety reported at the time.
Despite the saber-rattling, both companies were hell-bent on expansion -- making it increasingly difficult to avoid one another completely. In April 1996, Sinclair acquired River City Broadcasting for $1.2 billion. As part of the deal, Sinclair added more than 20 stations to its portfolio, including several Fox affiliates.
The deal, and others that followed, made any simple dissolution impossible. In the years to come, as Sinclair kept snapping up stations and Fox’s network programming grew increasingly popular, Murdoch’s and Smith’s media empires went on to work together profitably, if also somewhat begrudgingly.
That’s why analysts who have followed both companies for a long time downplayed Fox’s talks with Ion as a ploy to pressure Sinclair. Sinclair also believes Fox is using the move as a negotiating tactic, as Fox’s new Ion affiliates would face high costs developing local programming, according to a person familiar with the matter.
While Fox has switched affiliates before, a change for Fox on this scale would be a complicated process and there would be technological challenges, another person familiar with the matter said, who asked not to be identified because the talks are private. Fox’s place in the cable programming grid would change -- potentially leading to a loss of viewers. Fox has to consider whether those risks are outweighed by the economic challenge of negotiating with a stronger partner.
“Switching affiliations is a big deal and is rarely done because it causes a lot of viewer confusion and lower ratings,”said Paul Sweeney, analyst for Bloomberg Intelligence.
Ion doesn’t have local news, sales and engineering infrastructure, which could be costly to build, Leo Kulp of RBC Capital Markets, said in a note. “Second, the loss of local news and lead-in programming could have a meaningfully negative impact on Fox prime-time ratings,” Kulp said.
Fox is considering a plan to switch Sinclair affiliates to Ion when those deals are up for renewal, and to change Tribune stations when the Sinclair acquisition takes effect, according to a person familiar with the matter. Sinclair has 54 Fox affiliates in 36 markets where agreements will expire through the end of 2019, according to its annual report.
A switch by Fox to Ion would put threaten $524 million in annual revenue Sinclair gets through Fox affiliates, analysts at Bloomberg Intelligence estimated. Tribune’s Fox affiliations produced $653 million in revenue in 2016, they said.
If Fox did switch its affiliation to Ion from Sinclair and Tribune, Sinclair might need to renegotiate its acquisition of Tribune, John Janedis, an analyst at Jefferies, said in a note. “The implications could be far-reaching,” he said.