Murdoch's Biggest Score

By Richard Zoglin

It started out as a routine encounter between two broadcast bigwigs. On Tuesday afternoon, May 10, Rupert Murdoch welcomed a visitor to his office on the 20th Century Fox lot in Los Angeles: William Bevins, chief executive of Ronald Perelman's New World Communications Group. Murdoch and Bevins talked about each other's company, and the conversation inevitably got around to football. Eight local CBS affiliates owned by New World were about to lose their Sunday-afternoon N.F.L. games thanks to Murdoch, who last December paid $1.58 billion to take them away from CBS and bring them to the Fox network.

"We chatted for an hour or two," Murdoch recalled in an interview with TIME. "I told him that a lot of his stations would lose N.F.L. football and get hurt, and wouldn't it be better if they became affiliates of Fox? I asked if perhaps we could do things together, and gradually over the course of a conversation a big idea developed."

That big idea now has the TV world rocking. After less than two weeks of negotiations, Fox and New World brought about the most sweeping affiliation shake-up in network-television history. In return for an investment of $500 million from Fox, New World agreed to align 12 of its stations -- in such major markets as Detroit, Dallas, Atlanta and Phoenix, Arizona -- with Murdoch's scrappy young network. In each city, Fox will switch from a UHF station (one of those occupying the channel numbers above 13, which historically have had weaker signals and lower viewership) to a stronger VHF outlet (2 through 13 on the dial). It was the boldest move yet in Fox's seven- year effort to achieve parity with ABC, CBS and NBC.

And there may be more to come. Fox expects to pick up 15 other affiliates over the next year, reportedly including the NBC station in San Francisco. "A number of other stations see the operational advantages of moving to Fox," says Preston Padden, head of Fox affiliate relations, "but they had trouble getting over the emotional hurdle of leaving their traditional network. This announcement should help several of them get over that hurdle."

The deal was consummated with startling swiftness and, in the gossipy TV world, unusual secrecy. The negotiations took place while Fox executives were in the midst of putting together their fall programming lineup. "We were running from room to room for about three days, going into meetings and then immediately into screenings, trying to come up with a fall schedule," says Fox Broadcasting chairman Lucie Salhany. "There was food in every conference room. We had pizzas brought in and more deli than you can believe." To that scene was added, in the final days, a cadre of briefcase-toting lawyers who invaded the Fox lot. In the end, Murdoch agreed to pump $500 million into New World in exchange for nonvoting convertible preferred stock and other redeemable securities representing potentially a 20% share of Perelman's company.

When CBS executives learned of the deal, they were flabbergasted. "What are you doing?" cried affiliate chief Anthony Malara when Bevins broke the news on the phone. Malara's dismay was justified: CBS will lose important affiliates in eight cities and will have to scramble to find new stations to replace them. The options aren't very appealing. In each market, CBS could simply team up with the newly discarded Fox station. But that would mean being relegated to a UHF channel, a humiliating comedown for the No. 1-rated network. Or CBS could try to wrest away a current ABC or NBC affiliate. But that would probably trigger a bidding war that could wind up costing the network plenty.

Some network spinmeisters argued that Murdoch's deal represented a vote of confidence in network broadcasting. (After all, he could have put his half a billion into cable or other technology associated with the infohighway.) In reality, it is likely to set off a game of affiliate musical chairs that will further erode traditional network viewing patterns. "The once sacrosanct relationship between networks and affiliates has started to come unglued," says Bishop Cheen, a senior analyst for Paul Kagan Associates, a media research firm, "and I don't know if it can ever be put back together."

This breakdown is clear in the reasons New World executives gave for jumping over to Fox: it was the network's limited schedule -- the fact that Fox is only a part-time network -- that made it attractive. Fox offers just 15 hours of prime-time shows a week (in contrast to 22 for the Big Three); it has no morning programming, no afternoon soap operas and no evening newscast. Today many stations see this not as a drawback but as an opportunity to program more of their schedule themselves, both with locally produced shows and with syndicated fare. These shows give stations a chance to earn more ad revenue because they make available more local advertising spots than do network programs. And as ratings for network shows have declined, stations are finding a growing supply of alternative fare on the market, from daytime talk shows to action hours like Baywatch and The Untouchables. By early next year, moreover, there will be two more aspiring networks offering limited prime-time schedules, from Warner Bros. and Paramount.

Both are being modeled on the success of Fox. Against all odds and most conventional wisdom, Murdoch, the Australian-born media baron, launched Fox's prime-time schedule in 1987 with one night of programming that included Married . . . With Children and The Tracey Ullman Show. The network expanded gradually, targeting its shows to a younger audience and developing a roster of trend-setting hits such as The Simpsons and Beverly Hills, 90210. Still, it has remained a distant No. 4 in the ratings.

Enter Ronald Perelman, 51, the multibillionaire Revlon chief. A friend of such Hollywood power brokers as Barry Diller and Michael Ovitz, Perelman began to build an entertainment empire in 1989 when he bought New World, a small producer of movies and TV shows (Crime Story, The Wonder Years). Last year he started acquiring TV stations, first buying seven local outlets owned by then bankrupt SCI Television and later picking up eight more from two other station groups, in deals that are in various states of completion.

For Murdoch, the New World stations were a tempting target, especially since many were CBS affiliates still smarting over the loss of N.F.L. football. On Perelman's side, an alliance with Fox provided an opportunity to create a "vertically integrated" media company that would offer a wider distribution system for New World shows. "We now have the opportunity, with the Fox slots that we got, to really crank up our own programming, in size and number and quality of projects," says Perelman.

The deal appears to be safe from any regulatory roadblocks. The Federal Communications Commission prohibits any company from owning more than 12 TV stations. Even though Fox will have a stake in 20, its share in the New World stations is not likely to be regarded as a controlling interest.

Though Murdoch has spent lavishly to obtain the rights to N.F.L. football and beef up his station lineup, few on Wall Street last week were expressing doubts about the wisdom of his latest investments. When all the New World stations join Fox (half of them could be on board by this fall, the rest in 1995), the network's VHF coverage will jump from 25% to 40% of the country. That will probably boost ratings and ad revenue. "If you take the increase in viewership in just these 12 stations and apply it across our ((advertising)) rate card," claims Murdoch, "there's $50 million a year in cash flow that goes straight to the bottom line. As we get up to equal distribution, and the equal credibility of being distributed on VHF, there's a very big payoff."

CBS executives were doing their best last week to minimize the shock of the Murdoch heist. At a Thursday press conference, CBS Broadcast Group president Howard Stringer pointed out that the affiliation switches affect only 8% of the network's audience and predicted that the ratings loss would amount to no more than two-tenths of a Nielsen point. (CBS was No. 1 in the Nielsens for the 1993-94 season with a 14.0 rating, 1.6 points higher than No. 2 ABC and 6.8 points better than Fox.)

But the network's stock has dropped 11% since the Fox announcement, and the affiliation shake-up could have more depressing ramifications. Ratings for the CBS Evening News, for example, already in the doldrums, could be further hurt if the network is forced to align itself with former Fox stations that, typically, do not have an early-evening newscast as a lead-in. In any case, the inevitable scramble for affiliates promises to be a no-win game for all three networks. "There's going to be a lot of churn at the networks," says Stringer. "Loyalty just went out the window. That isn't really good for broadcasting."

Loyalty of viewers will be tested as well. In Kansas City, WDAF-TV, which % has been an NBC affiliate since 1949, recently launched a promotion campaign highlighting the station's history -- "Then and now, covering news like never before." Now, however, it will be covering the news as a Fox station. Many former Fox affiliates, too, are not happy at being dumped by the network they stuck with during bad times and good. "A tough pill to swallow? More like trying to swallow a football," griped Dennis Thatcher, general manager of Cleveland's WOIO-TV in the Hollywood Reporter. Murdoch's response: "We sympathize with ((the abandoned Fox stations)). But they've all done very well. Their UHF stations were built up into real assets, and a lot of them will now become network affiliates. And that's something more than they could have ever hoped for before we came along."

What they will miss, if Murdoch has his way, is Fox's arrival as a fully competitive network. Next, he promises, will come "an active news department, and there's a two- to three-year timetable for that." Fox and New World, meanwhile, are planning to develop programming for their stations, including a two-hour daytime block and a late-night show. This is the kind of producer- broadcaster alliance that could become more common as networks shift away from their traditional role of providing morning-to-evening entertainment and move toward Fox's more limited model. "All four ((of the networks)) will survive and do very well," says Murdoch. "We'll be the most economic way for mass marketers to reach the American public, and that will remain so for a very long time." The question is whether they will still be networks as we know them.

With reporting by Massimo Calabresi and William Tynan/New York and Jeffrey Ressner/Los Angeles