Prix Foxe: The $850 Million Gift to Fox News That You Don’t Know About

Broadcast | Accountability

Every cable network has a contract with cable carriers, not viewers, and thus it caught little attention outside the trade press that last October, Fox renewed its contract with Cablevision, the nation's fifth* largest cable system, tripling its carriage fee from 25 cents a month per subscriber to 75 cents. A similar deal was signed with Time Warner in January, also estimated in the same range. That is $9/year per subscriber, adding up to $850 million dollars across 94 million Americans who get the network through standard cable. It also represents an increase in $141 million dollars a quarter over the previous year, and the News Corporation's last quarterly report shows that it accounts for the bulk of the $161 million rise in quarterly revenue for the cable television division. It also represents 25% of the growth across all the divisions.

The riches may well be a due reward for the News Corporation, which took such a big gamble with the launch of Fox News in 1996 that they had to pay cable systems up front to even carry the network. It took five years to become profitable, but since 2001 the network has earned $1 billion, and now expects to bring in another $3.4 billion additional in revenue from the subscriber fees alone. For those of you scoring at home, that alone is four-fifths of the way towards covering the $5.6 billion purchase of the Dow Jones Company. While newspapers lose subscribers and cut costs to stay afloat, Fox News has their subscribers locked in, and is able to raise prices with impunity.

Hundreds of millions of dollars go indirectly from viewers to Fox News every year without many viewers being cognizant of it. One could make a headline out of the fact that, by the same extrapolations of carriage fees, cable subscribers also send $500 million and $165 million to the supposedly left-leaning CNN and MSNBC, respectively. There are accusations, and evidence, of political bias and sloppiness on both sides, but the singular problem of Fox News is its periodic scorn for the practice of journalism itself.

Fox Holes

I could cite Robert Greenwald's scathing documentary on Fox News, Outfoxed: Rupert Murdoch's War on Journalism; but I haven't seen it. There is one indictment that is incontrovertible. The most important news story over the last five years has been the war in Iraq, and Fox News, while championing it the most, has covered it the least, according to a study of news content in the first quarter of 2007 by the Project for Excellence in Journalism. No response came from CEO Roger Ailes; Fox did not present any internal numbers to refute the PEJ numbers. Instead, popular host Bill O'Reilly rationalized their coverage choices, in his own paranoid way, flouting even the gung-ho attitude of yellow journalism set a century ago: “There's little news value in broadcasting daily bombings. By the way, FOX News continues to crush CNN and MSNBC in the ratings, as the folks know news when they see it.”

O'Reilly also saw fit to impugn Mark Jurkowitz, the associate director of the PEJ, by spelling his name “Jerkowitz” and adding: “He hates FOX News and is a committed leftist.” (Emily Rooney, of WGBH in Boston, told Howard Kurtz her defense of O'Reilly: “He doesn't really believe what he said there… I honestly believe he did that to provoke the response that he actually got.” If that's the case, what is to be believed?) Ailes has set the set the tone for trashing any outside studies; in 2005, he jeered the Pew Project for Excellence in Journalism as a “liberal lobbying group.” If Ailes had been moved to humility by the study and said, “You're right; we had profits of 33% last year, a net income $236 million, and it is un-American of us to not cover the war , and we shall from this point further,” I would have been moved not to write this four thousand word essay. I would have even considered subscribing to the Fox News Channel. But he didn't.

There is consistency in Fox News and the conservative philosophy: there's only one thing that matters, and it's the bottom line. The former Fox News host Tony Snow, upon announcing his retirement from public service as White House Press Secretary, said that his retirement wasn't about his health concerns; it was about the money (those were his actual words, and according to Daniel Gross of Slate, he really needs the money). And so it is with Fox News. Covering a war is expensive.

Who is even Fox's Baghdad Bureau Chief? When USC's Orville Schell went to Baghdad in 2006 to report on the reporting, he identified him as Zoran Kusovac (as does his LinkedIn profile). There's just no mention of him on The only original reports out of Iraq I could find on their website come from Michael Yon, a former Special Forces soldier and now independent reporter-blogger since 2005. While Fox News and its amen chorus refrain from sending very many reporters into Iraq just so they can bash the alleged anti-Americanism of the actually reporters there, Michael Yon has laid more blame on the Pentagon for preferring raw public relations over enabling journalists. In reflecting on the media war in the Weekly Standard in October 2006 he wrote:

The media are far from perfect. War reporters, like everyone else, get things wrong. Some of them, unsympathetic to the war aims, undoubtedly try to twist the news. But no coverage at all is even worse. It does a disservice to American soldiers. It is cruel to their families. It leaves the American public in the dark. If we lose the media war, we will lose Iraq, Afghanistan, and the entire "war on terror."

(We could go on. Michael Yon on Memorial Day 2007: “Long-time readers know that I deliver bad news with the good. I was first to write that parts of Iraq were in civil war back in February 2005, well over a year before mainstream outlets started reporting the same.” Here's Yon's February 2005 post. Bill O'Reilly, on November 29, 2006: “NBC News has declared that there is indeed a civil war in Iraq. Now that's not shocking, because NBC is the most aggressive anti-Bush network these days, as they have made a calculated effort to woo left-wing viewers.” After summarizing what he saw as the situation in Iraq, from his studio in New York: “Add all that up and you have violent, out-of-control chaos — not civil war.” To spell it out, Bill O'Reilly is uninterested in the field reports from a brave American reporter risking his life in Iraq; he is more passionate about his war with NBC, perhaps he feels that NBC is a greater danger to his viewers than what's happening in Iraq),

As for the rest of Fox News, bureaus and bureau chiefs are obscured to the persistent searcher. CNN has two dozen international new bureaus outside the United States. Fox News doesn't list any. (The page for Special Report with Brit Hume lists eleven stateside correspondents). A Google search on fox news bureau chief finds one such person identified, Scott Norvell as its London Bureau Chief. Ailes told an interviewer: “We have never missed a major story, nor have we ever not done a major story because of costs. But we also don’t believe that a bureau needs to be 10,000 square feet of cement and a [staff of people] waiting for news to happen.”

[I welcome a representative of Fox News to contact me with any clarifications, or better yet, fill out their website.]

Opening Sources

Often, discussions about the funding of media bring up the government's role in funding public broadcasting. The federal government gives $400-$500 million through the CPB to PBS (10% of their income) and NPR (1% of their income) and as block grants to individual stations. This is often a sore point to groups who feel disenfranchised (historically, conservatives, from Richard Nixon to Newt Gingrich to George W. Bush). The difference is that that the debates over public broadcasting all happen in public, in Congressional hearings, on C-SPAN. Invariably, in 1995, 2005, 2006, and 2007, a Republican offers to severely cut funding for public broadcasting, and, following that, thousands of people across the country write their representatives, and Congress does not cut funding. (As with federal government funding, the net transfer of government revenues goes from the coastal states with cash-rich cities into the heartland.)

By comparison, the largess handed to Fox News (and any other cable network) is never discussed, never voted upon, let alone heard of. The deals are made secretly and are at most reported in the trade press courtesy of an “executive familiar with the negotiations.” While advertising rates are adjusted seasonally to reflect the size and demographics of the viewing audience, the subscriber fees, by contrast, are locked in on the multiyear contracts. Just like professional ballplayers, a cable network will draw in money over many yearsm irrespective of year-to-year performance. With the 50-cent/month increase, Fox News will be seeing an increased income of $570 million this year. That's more than they got in advertising in 2006, which means that, in theory, they don't even have to advertise in the next year.

As Variety reported, cable systems aren't in great position to negotiate against the News Corporation; Fox can take its multiple channels elsewhere and leave the cable system in the lurch with its customers. It's seemingly easier for the cable system to grovel in front of various state regulatory agencies to seek a monthly increase of a few dollar increases. License fees are generally invisible to the American public; the most cable/satellite bills merely break down the applicable taxes, but provide no hint of what individual channels cost. (It's not like McDonald's breaks down its component costs either, but most consumers understand that the beef is the most expensive part of a Big Mac)

Only when a channel is split off or absorbed into the standard cable package (often the case with regional sports networks) does the public get a sense of the true costs. New England Sports Network (NESN), now wholly owned by the Boston Red Sox and the Boston Bruins, used to be available for $10-$12 a month extra. In 2001 NESN was able to convince AT&T Cable to fold it into the standard cable bill, spreading the costs to $1.40/subscriber. It's a low enough number that complaints were minimal. But these little fees add up. In the ten years following the Telecom Act of 1996, cable rates have climbed 59%, three times the rate of inflation.

The Fox News Tax is now around $9/year, hardly busting the budget of your average liberal activist. But far more virtual pens have been sharpened for far less pressing causes. Numerous bloggers have lobbied over the last year for network neutrality without even pausing to think how much they are being robbed by Fox News. The concept of network neutrality is simple: people should be able to communicate over the Internet over any connecting network without fear that their traffic will be slowed, or blocked. In response, what the telcos have asserted is that they'd like to have the right to charge users at different rates in order to to ensure quality of service (this issue is vastly more complex; I tend to trust veteran network engineer Richard Bennett's sense of it best). But the cable network, which is still vastly more influential in national affairs, is hardly neutral at all, or if, it can be called neutral, it's neutral in a perverse way. Your cable company sends you content you don't want and bills you for it.

Sheldon Drobny, a co-founder of Air America radio network, raised this point in a blog post provocatively titled Liberals are Supporting Fox News Channel on the Huffington Post in June 2006. As with too many blog posts written by otherwise smart and accomplished people, this failed the journalistic test of just providing the facts. He observed that “the only news show on MSNBC that is worth watching is Keith Oberman.” (quite agreeable, except that he dropped two letters from Olbermann's name) and then explained that “MSNBC, CNN, and FOX get a fixed dollar amount per subscriber from the cable carrier.” A certified public accountant and chairman of a venture capital firm, Drobny passed over supplying that fixed dollar amount. (He later threw out the numbers $3/year and 30 million subscribers, but these are now both off by a factor of three.) Drobny deftly pointed out the problems, but failed to explore the extent of what could be done, suggesting merely that readers could “contact your cable/satellite carrier and complain about channels that you do not want.” The Huffington Post readership, regularly distracted by the website's scattershot editorial focus, couldn't latch on to this story any with sufficient critical mass.

So let's explain further.

Sharing the Wealth

The economics of cable television are funny. People don't choose channels; cable providers do, and there's a minimum of controls from the FCC on the matter. The cable system is a form of income redistribution. Most of America, save for some extreme libertarians, have bought into the concepts of the graduated income tax, universal K-12 education, social security, and universal health care, at least for the elderly and the poor. But when we talk about income redistribution in business, we call it corporate welfare. It may make sense in certain capacities, if you want to encourage investment in certain distressed economic zones. It makes less sense in cable, where most networks are part of international media conglomerates. One has to remind these titans of capitalism that the basic premise of a free market economy is that people's buying decisions directly affect how resources are allocated. Otherwise, the market ends up subsidizing the non-performers.

It is also true that there is a tradition in the United States of subsidizing the distribution costs of news. The Stamp Act, which placed a tax on pamphlets in the colonies, led to the American Revolution. The Post Office Act of 1792 set discounts for newspaper delivery. In 1885, Congress cut the second class rate to from 3 cents to 1 cent a pound, at a time when magazine rates had fallen to a dime. Publishing rates soared: the number of magazines with a circulation over 100,000 went up over the next twenty years by a factor of eight (see Paul Starr, The Creation of the Media). The two centuries of public policy were seemingly undermined by the adoption of a new pricing scheme in 2007, wherein Time Warner suggested to the Postal Rate Commission that shifts more costs to smaller publishers who can't bundle their distributions.

That's not to say that a market efficiency in cable delivery should justify the same in mail delivery. There's a huge difference in scale here. A magazine like The Nation has revenues of $10 million, much of it coming from the subscriptions (and donations) of 185,000 subscribers; one could peg their USPS subsidy at around $500,000 (that's the amount the Nation says it will costs under the new pricing scheme goes into effect). Fox News, on the other hand, has something like 3 million regular viewers, yet 94 million cable subscribers are now supplying a majority of their income through the hidden subscriber fees. It's hard to figure that the News Corporation is now more deserving of an industry subsidy than its competitors.

Granted, the cable industry has always worked this way, through these back-scratching, cross-network subsidies. What helps keeps Fox News afloat also helps properties like Comedy Central, The Discovery Channel, and ESPN (which is the Worldwide Leader in carriage fees, also, at around $2.96/month/subscriber). But that's not to say it ought to continue into perpetuity. The Consumer Union has been lobbying for several years now to rein in cable fees and allow consumers greater choice. In 2003, the General Accounting Office authored a report on cable competition, and suggested that the more consideration ought to be given to à la carte pricing. In design, à la carte, would enable viewers to pay directly for channels.

In response, the Cato Institute defended the status quo. I found this quite unusual coming from the leading libertarian thinktank. Normally a libertarian prefers that the invisible hand of the market reap away the under-performers, but in this instance Cato showed some sympathy for the little guys: “à la carte regulation would likely curtail the overall amount of niche or specialty programming on cable networks.”

Certainly a switch wouldn't be easy, and it's likely that some cable networks would merge or morph or fold. The rise of Internet video, of course, provides a place for these niche programs to flourish. Derek Baine of Kagan Research expects that the prices would increase to $4-$6/month per channel. The cable industry also insists that such reform would end up costing consumers overall. “It takes a special kind of temerity for an unregulated industry that has fattened itself up at the expense of consumers to inveigh against the rate-hiking evils of an à la carte system,” wrote Elbert Ventura in the New Republic in 2005.

Strange Bedfellows

The irony is that the current push for à la carte has largely been the cause of cultural conservatives. The Parents Television Council, an activist group founded by conservative media agitator L. Brent Bozell III in 1995, has inveighed against declining tastes on broadcast and cable television, and has sought à la carte as a remedy. Their cause reached its apogee after the 2004 Super Bowl halftime show, where the celeb-skin upstaged the pigskin (the infamous “wardrobe malfunction”: enough said on that). The FCC logged 200,000 complaints within a week, and the final tally turned out to be 540,000, the most ever. It was hardly expected that viewers would begin to boycott the NFL or CBS, which aired the game, but they might have wanted the choice to drop a subscription to MTV, which had produced the halftime show.

In the ensuing congressional hearing, CEO Mel Karmazin repeated his apology on behalf of Viacom (the corporate parent of CBS and MTV). He added, as the NewsHour reported, “I think the parent has the ultimate ability to take any channel that somebody finds objectionable and just say, I don't want it in my home. All you need to do, is to tell your cable company or satellite provider, I don't want that channel.”

Would if it were so. Karmazin left the network in May 2004; the next year CBS was split off from Viacom after having been merged for six years. In 2005, Kevin Martin became FCC Commissioner in 2005 and has taken pushed the à la carte cause insistently, picking up where Karmazin's testimony left off: “I think we should go even further and I think not only should it be transparent to the consumer how much you have to pay for each channel, but I think consumers should be able to say, ‘I don’t want that channel and I don’t want to have to pay for it.’”

Martin's motions still seem to rattle the libertine Internet users. The Techdirt blog opined in January: “We know Martin loves the idea of a la carte so he can eradicate the chance of indecent programming coming into the homes of the easily offended (and those without remote controls)…” But what if the indecent programming is one that is masquerading as a news channel and taking in close to a billion dollars from the unsuspecting public?

Congress has stepped it up as well. This past June, Representative William Lipinski of Chicago, a socially conservative Democrat, introduced the Family and Consumer Choice Act of 2007 (H.R. 2738) to the House, it has been referred to committee. Still, as the cable carriers oppose a la carte, and the cable networks do as well (Karmazin's frank 2004 testimony nonwithstanding), it is difficult to see legislative efforts succeed. If history is any guide, effective reform would only happen through the courts.

Full Court Press

Remember the “golden age” of Hollywood? There were classic films made, all courtesy of the studio system. The studios controlled all parts of motion picture production, even to the extent of controlling what was shown in theaters through the practice of “block booking”: they forced theaters to buy a block of films, A-movies and B-movies. After years of lawsuits, the Supreme Court ruled in United States vs. Paramount (1948) that it was an illegal restraint of trade, and forced the studios to divest all holdings in theaters. The era of independent production would be stalled further by the decade of blacklisting which followed, but by the 1960's the studio system was effectively dead. The Hays Production Code, which had censored movie content since 1934, was no longer enforced, yielding to the 1968 film rating system still in use today.

A separate line of precedents have dealt recently with compelled speech of individuals paying fees into collective pools, disbursed to causes which they disagree with. In Abood v. Detroit Board of Ed. (1977) and Keller vs. State Bar of California (1990), the Court held that compulsory union dues and bar association dues could not fund political activities. In Southworth v. the Univ. of Wisconsin (2000), several law students charged that their mandatory fees were used to fund student activities that they disagreed with. Their appeal was rejected by a unanimous court. Justice Kennedy, in delivering the court's opinion, highlighted the difference by respecting the educational mission of the university: “If it is difficult to define germane speech with ease or precision where a union or bar association is the party, the standard becomes all the more unmanageable in the public university setting, particularly where the State undertakes to stimulate the whole universe of speech and ideas.”

(Incidentally, the lead plaintiff, Scott Southworth, joined the Wisconsin National Guard, served honorably in Iraq, and was awarded the Army's General MacArthur Leadership award. He grew attached an 11-year old boy with cerebral palsy in an Iraqi orphanage, and brought him to the United States for medical treatment and adoption. His story was featured on CNN's American Morning and on Fox News's DaySide. Southworth was elected District Attorney of Juneau County, Wisconsin in 2004.)

I suspect that an advocacy group could file a class-action suit in a federal court. The discovery process should bring the information to the light which FCC Commissioner has asked for: how much each channel costs. I myself can't be the test case since my cable package (still unadvertised by Comcast) comprises digital cable on top of basic analog cable without the standard analog channels, so Fox News and CNN remain scrambled. MSNBC is unscrambled (for some odd reason, perhaps out of desperation for viewers) I enjoy watching Keith Olbermann, whose nightly “Worst Person in the World” segment often highlights the Fox and CNN personalities who are embarrassments to journalism. (I could use more in-depth reporting than I get from Olbermann's steady supply of yes-men, but that's where NPR fills in.)

Would the high court hold that cable fees earmarked for Fox News represents a compelled funding of political speech, bearing in mind the anti-competitive nature of cable pricing? Or would they hold that a cable provider is akin to a university? Anything is possible; just as on a campus one might step over graffito written in student-government funded chalk that says “Your Grandmother Might Be Gay” or encounter flyers from anti-abortion protesters on student-government funded copies, so, too, could television could be seen as the great educator, providing diverse opinions from the left and the right as one scans the channels (though needn't wander any further from C-SPAN to hear a diverse range).

But this is the real world, and this is real money, and we're playing for keeps now. Fox News Channel has signed a new contract with America, not with us, but with our proxies, the cable providers, which will transfer $850 million into their coffers every year. One must take offense not because they are politically conservative, or because they let their opinions be known on air. They simply show no interest in being a serious news station; it is not worth it for them cover the war in Iraq, or even defend their coverage, champions as they are of the war effort. As long as they have a gravy train of carriage fees coming in, they don't need to do a damned thing.

If there was ever a time to test the new media hypothesis that the viewers are now in control, this would be it.

*Correction: This originally stated that Cablevision was the largest cable system. I was mistaken.