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.’”
Fox had set such a high bar, in fact, that ABC, which was also toying with the idea of a 24-hour news network, backed out.
Fox’s official launch came in October 1996. A year later, according to Carry, the network had 40 percent of the cable operators in the country lined up to air the channel.
The Monica Lewinsky scandal and Bill Clinton’s impeachment trial in 1998 gave Fox its first bit of news meat, and its viewers a taste of how the network’s editorial bent differed from its competitors. By the time of the Florida election recount in December 2000, Fox was getting record ratings, and occasionally beating its chief competitor, CNN, in total prime-time household viewers.
By 2006, Fox had reached a turning point. Carry was taking meetings with the top cable operators in the country and, for the first time, driving a hard bargain. By now, the cable operators were paying Fox News a carriage fee as they did other networks, but News Corp. executives thought their network was undervalued. The operators had to pay more. “As far as we were concerned we were the most valuable name in cable television,” says Carry. The pitch more or less worked. Carry went into the meetings asking around a dollar per subscriber. After negotiations, he walked out with around 70 cents, according to data provided by analytics firm SNL Kagan. If the Kagan numbers are accurate, it was a 120 percent markup from what Fox had been charging previously (sources close to the matter say that Kagan’s figures underestimate how much Fox is getting, and that it’s closer to $1 per viewer). “The way we resonate with our viewers is unique,” says Carry. “We took the cable operators through that.”
This year, those contracts are up for renegotiation. News Corp. COO Chase Carey has publicly indicated that Fox intends to renegotiate its subscription fees way up as it enters contract talks with cable providers this year. Carey implied that Fox considers itself roughly in league with networks like ESPN—which commands a whopping $4 per subscriber. Carry won’t divulge a target figure for Fox’s subscription negotiations, but he says, “We’re pretty confident we’re going to get additional value.”
The problem for cable operators is that, at this point, they simply cannot live without Fox News. The network’s audience is like no other—it is loyal to Fox News in a way that few audiences are loyal to anything, more like the fan base for a sports team than a cable channel. And, like sports fans, if one company doesn’t offer Fox News, viewers will simply find an alternative.
“In the case of Fox News, the viewers are completely convinced that it is the one thing that stands between our tenuous grip on democracy and total chaos and dictatorship on the left,” says a source who has worked for both Fox and competing cable news networks. “They feel it’s the only option, the only oracle, the only source of real news.”
Paul Rittenberg, executive vice president of ad sales at Fox News, echoes that point. “Our audience watches much longer and they’re much more committed to our programming,” he says. “That’s the unique selling proposition. . . . We’re the home team for people who watch a lot of Fox News.”
In public comments, Carey has turned this advantage into a threat to cable operators. Referring to ESPN, and implicitly tying it to his own network, he reportedly said, “A lot of customers [would] move if it weren’t there.”
As Fox enters negotiations, its executives are keenly aware of the power they now wield. “People may love CNN,” says the source who’s worked at Fox and its competitors. “But if a cable provider dropped CNN . . . how many people would actually stop subscribing to cable? Maybe some. If you dropped Fox News, a third of your subscribers [would leave].”