News Articles

Feeling the Network's Pain

2/29/2004 07:00:00 PM Eastern

Essential to an ABC comeback is mending fences with angry affiliates. But it seems the network is building barriers instead.

Affiliate displeasure with ABC goes back to 2001, when the network killed Who Wants To Be a Millionaire
by showing it four times a week. When America got tired of Regis Philbin's game-show schtick and ratings took a nosedive, affiliates lost hundreds of millions of dollars.

Now, ABC wants even more from its stations, while it continues to give them less in return. Sources say the network's latest gambit is to try to take back most of the ad time on Good Morning America
that the stations get to sell.

There is no GMA
proposal at present. But ABC Television Network President Alex Wallau confirms that it would make sense to include one in talks on renewing the agreement under which affiliates help pay for the network's NFL rights.

He says affiliates have suggested that "an inventory swap would be a better way to go" than paying cash toward football. If that's the case, "then the place where we have the biggest disparity in inventory versus our competition is Good Morning America."

He won't talk details, but says swapping for GMA
spots would help the network more than it would hurt affiliates.

Station executives don't see it that way. "How many times do they beat up their affiliates for their own economic insufficiencies?" asks one irate station executive. "The frustration is they make one bad decision after another, and then come to us for relief. That's why the relationship between ABC and its affiliates is so horrible."

And ABC affiliates are in no mood for yet another shakedown.

Remember, they were up in arms when ABC began promoting its cable networks, especially ESPN, on the network itself. They protested when ABC cut affiliates' compensation by more than half over the past five years. And they hollered when ABC demanded cash from them to help pay for the rights to pro football.

What did affiliates get in return? When this season is over, ABC will likely be fourth in the key 18-49 demo—for the second year in a row.

Some blame ABC parent Walt Disney Co. for what seems like years of abuse.

"Clearly, the Disney leadership of ABC has not been working. The ratings are proof of that," says Alan Frank, president of Post-Newsweek Stations. "Their misfortunes have cost us a tremendous amount of money for each and every ABC station across the country."

On a conference call last week, Hearst-Argyle CEO David Barrett told analysts and investors the company was "hugely disappointed" with ABC.

On average, the station broadcast cash-flow margins are eight percentage points better at the NBC stations in the Hearst-Argyle group, says Barrett, whose company owns more than a dozen ABC affiliates. Just a few years ago, he notes, they were close to parity.

Even the 10 stations ABC owns and operates are hurting, relatively at least. Walter Liss, president of the station division, boasts that, in the top five markets, ABC is No. 1 sign-on to sign-off and those stations have averaged a 46% profit margin over the past five years. But one industry analyst notes that, a decade ago, the figure was closer to 60%.

And in some of the largest markets, like New York, Philadelphia, and Los Angeles, where ABC stations dominated in overall ratings and local news, its stations face fiercer fights.

"Compared to where they used to be, they are getting murdered in late news," says one competing station executive.

According to a recent Morgan Stanley report, operating cash flow at the ABC station group fell in 2003 to $450 million, down a whopping $150 million since 2000.

For the affiliates, the GMA
proposal is just the latest blow. Currently, they retain 50% of the inventory. Still, that's generous compared with a handful of spots and adjacencies retained by CBS and NBC affiliates for their networks' morning shows. What ABC is angling for, sources say, is essentially parity with NBC's Today. (Last year, Today
took in $497 million to GMA's $357 million—a gap of $140 million.)

Affiliates understand that networks go through cycles. What irks many ABC stations is the perception that ABC wasn't ready for Millionaire's
inevitable fade and still isn't fixing it. The network has had trouble finding its next generation of hits.

"Obviously, it is a very difficult business balancing act to decide how much to invest in new programming to turn the network around," says Cox Broadcasting President Andrew Fisher, whose group owns three ABC affiliates. But Fisher believes the network needs to invest more in program development.

However, even in these tough times, there's little consensus on whether Comcast or some other media giant taking over Disney's ABC would make things better. Though some affiliate execs think new management could only help ABC, Post-Newsweek's Frank says a Comcast acquisition of Disney would be a "disaster" and the MSO would have an "absolute monopoly" in 27 local TV markets.

"Everyone likes Steve Burke," says Frank of the senior Comcast official who ran ABC before joining Comcast. "But when you look at the total package, I think it would take a long put to make this work for broadcasters."

In hard times, it's sometimes better to live with the devil you know.

March