Fifteen years ago this month, Rupert Murdoch launched Fox News. At the time, cable industry executives were skeptical of the idea—News Corp. had to buy its way on to cable, paying system operators an estimated $300 million just to get them to carry the new network. Those taking Murdoch’s money thought they were getting a sweetheart deal.
“If you were a cable operator and you looked at it in cynical terms, you’d say, ‘They won’t succeed, I won’t have to carry them for more than four years, and I get the $10 [per subscriber] up front,’” says Tim Carry, Fox News’ executive vice president of affiliate sales, who has been with Fox since the beginning. “The positive way to view it is, ‘I’m going to be able to carry this service with no risk and see if it works.’”
Today, some are singing a different tune. Fox News may be a lightning rod, but even its most ardent detractors admit that the network is one of cable television’s most successful franchises. After paying its way into the cable club, Fox changed the business. Now, the network has cable operators by the short hairs.
“It was smart on their part . . . It was very dumb of us to take the money, because once you get them on and once they grow in popularity, you can’t get rid of them,” says Joseph E. Young, cable operator Mediacom’s general counsel. “The cable industry really screwed up . . . We’re more than paying [it] back to them now.”
Last month, Fox News threw a massive party for its employees to celebrate its anniversary. Nearly all of the network’s New York staff reportedly turned out for the open bar event at Chelsea Piers. Fox News President Roger Ailes used his time at the lectern to gloat a little, beginning his talk by holding up a copy of a story that ran in USA Today back in 1996, when the network was starting up. The piece cast a skeptical eye on Fox’s efforts to build a cable news channel from scratch, describing Murdoch’s hopes of achieving profitability within five years as “optimistic.” “[The story] pointed out that we had less money than NBC, ABC or CBS, or CNN, and it pointed out that I couldn’t afford to fail because my career would be over,” Ailes told the crowd. “We faced some long odds fifteen years ago.”
When Murdoch hired Ailes away from CNBC to start his own 24-hour news network, CNN had been up and running for years, and NBC was already in the final stages of putting together its partnership with Microsoft for what would soon become MSNBC.
“The reaction among the [cable operators] was: ‘Why do I need another news service?’” says Fox’s Carry. “It was a hard sell convincing them that someone other than CNN needed space on their system. They said, ‘If I’m already committed to NBC and I have CNN, why on Earth would I do a deal with Fox?’”
Under normal circumstances, once cable operators are convinced to pick up a network, they enter into what’s called a carriage agreement wherein the cable provider—Time Warner Cable, say, or Cablevision—agrees to pay the network a certain amount per subscriber for its programming. This accounts for a large chunk of a cable network’s revenue. (The median rate is around 25 cents per subscriber per month; CNN gets 51 cents and MSNBC pulls in an average of 17 cents.) Murdoch and Ailes settled on a different approach. In order to get off the ground, Fox needed viewers, so Ailes and Carry met with cable chiefs from across the country—from New York to Kentucky and California—and offered to pay them around $10 per subscriber to carry Fox News. It was a huge sum. But the bet paid off—a decade and a half later, many of those contracts are due for renewal, and News Corp. isn’t the party that’s paying anymore.
“In making the decision to pay for distribution, they changed the paradigm forever,” says Current TV co-founder and CEO Joel Hyatt. “Once Rupert was willing to pay for carriage, it ended the era of anybody being able to go in and launch a network de novo for which license fees were available.”
Paying for carriage had been tried before. Broadcast networks did it when they first started negotiating carriage with cable operators in the early 1980s. What was different about Fox’s outlay was its size. As the USA Today piece pointed out at the time, Viacom offered cable operators cash to carry TV Land, but paid $1.20 per subscriber.
“Investing in carriage wasn’t a new concept,” says Fox’s Carry. “There was a time when even broadcast affiliates were paid by networks. What made our situation so unique was that the price was so high. What we did at the time was we told the competition, ‘This is where it starts if you want to get into the cable news business.’”