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 AJR  Columns :    THE BUSINESS OF BROADCASTING    

From AJR,   September 1992  issue

Networks, Affiliates Dueling For Dollars   

Is the compensation system outmoded?


By Lou Prato
Lou Prato is a former radio and television news director and a broadcast journalism professor at Penn State University.     

Relations between the three television networks and their affiliate stations always have been sensitive and unstable. Nowadays they're more volatile than ever.

They still need each other for entertainment and news, but for how long? At times, they seem to compete more than cooperate.

NBC, with CNBC, and ABC, with ESPN, own cable operations that contend for segments of the same audiences sought by their local affiliate stations. Both networks also have irritated their affiliates with forays into pay-per-view sports. The networks, in turn, are upset that many affiliates air local news instead of network cartoon shows on Saturday morning.

But it is the continuing struggle over "compensation" that is most indicative of the delicate and mercurial nature of the network-affiliate relationship.

Since their inception, the networks have supplied stations with programs. In return for airing those programs, the stations receive money officially called compensation from the networks. They also are allotted time during the programs to sell local commercials.

It's been a profitable venture for both parties. But in recent years competition from cable and independent stations has made the television business more financially challenging.

During the past few years, the networks have been reducing the compensation paid to the stations. The affiliates have howled but have reluctantly agreed to cuts because they've had little choice. For numerous reasons, changing affiliation usually is not feasible and wouldn't help much when every network is slashing compensation.

So, in retaliation, the locals are airing fewer low-rated network programs. The stations replace network shows with syndicated entertainment programs, movies or news specials and keep all the money from commercials. The network gets nothing. For many affiliates, particularly those in smaller markets, compensation is crucial to their economic well-being.

Privately, network officials have called the compensation system antiquated. However, both network and station executives agree that compensation is the backbone of the network structure.

"Compensation is the glue that makes the network-affiliate relationship unique in the television business," says Wayne Godsey, vice president and general manager of KOAT, the ABC affiliate in Albuquerque. "Network TV is still the single most effective mass advertising buy in television. Without the stations, there is no network."

If compensation were completely eliminated, a network would not be different from any other program supplier. Stations would be free to negotiate the best deal. Instead of airing a Peter Jennings newscast, a station might have its choice of a half dozen national newscasts offered by other networks or some new entrepreneur such as the Associated Press.

In May, CBS shocked its affiliates by announcing a radical plan that would continue compensation but would make the stations pay outright for airing network programs. The higher the national ratings of the program, the more the stations would pay, depending on their market size.

In effect, CBS wanted to give with one hand and take away with another. Its affiliates, however, didn't go for it. The network quickly backed off but immediately instituted another cut in compensation, a percentage that matched what each station would have been charged in the earlier plan.

Angry CBS affiliates have been meeting to discuss their options. They've even considered buying programs from syndicators to replace CBS fare, including newscasts. ABC and NBC station executives are warily monitoring the CBS squabble because they know the outcome could affect them, too.

"ABC made a couple of adjustments earlier and CBS is now bringing its total compensation roughly in line to the total that ABC is paying," says KOAT's Godsey. "But what disturbs many of us is that the networks are moving unilaterally. Reasonable and honest dialogue is not taking place."

Some affiliates sympathize with the networks and are willing to try something new as long as neither side is hurt. But some wonder if preemptions might accelerate if the networks continue to tinker with the present compensation system.

"I think you'd see a good surge in local programming," says Tom Bier, news director at WISC, the CBS affiliate in Madison, Wisconsin. "You wouldn't be as apprehensive about bumping a low-rated network show for a local news or information program that would help your community image and make money, too. Any good news department is going to take advantage of this."

The network-affiliate relationship works best when it is an equal partnership. For years, the networks had the upper hand. In the 1980s, satellite technology helped to equalize the payoffs. Now, the compensation battle threatens to dissolve the partnership.

"We seem to be playing a game of chicken with each other," says Godsey. "If we don't watch out, we're going to kill the golden goose."