NBC Threatens to Replace Affiliate

Underscoring the eroding economics of network television and the rising tensions between the networks and their station affiliates, NBC said Wednesday that it is considering replacing its broadcast affiliate in San Francisco, KRON, with an alternative distributor.

The development came in response to an announcement Wednesday by KRON’s owner, Young Broadcasting Inc., that it will severe ties with NBC in San Francisco when its affiliation agreement expires Dec. 31, 2001, because of the network’s unacceptable demands. Vincent Young, chairman of Young Broadcasting, said NBC demands it pay $10 million a year for network programming, reversing the current arrangement under which NBC pays KRON $7.8 million a year.

NBC said it had received competitive offers from other bidders as part of a process that ends Friday. “The level of interest we’ve received includes a broad spectrum of different distribution platforms,” NBC said in a statement.

Analysts said the network is hinting at a deal with a local cable operator. NBC President Bob Wright has long threatened to resort to cable if affiliates don’t agree to reduce the compensation fees they receive from NBC.

Each of the networks is trying to reduce these fees to cut expenses as programming costs rise and profit sinks. ABC and CBS have both succeeded in renewing several groups and NBC is about to strike a similar deal with its biggest affiliate, Gannett Broadcasting.

On Wall Street, Young Broadcasting Class A shares fell $8.19 to close at $35 on Nasdaq.

While Young, which owns KCAL in Los Angeles, maintains that its cash flow would not be affected by the loss of NBC, analysts projected losses of $10 million a year or more. Industry sources said Young would have difficulty buying programming without paying dearly, and would almost surely lose money on its recent purchase of the station.

“Network affiliated stations are generally more valuable and profitable than independents,” said James Marsh, an analyst at Prudential Securities.

Wall Street was also disappointed by a 25% decline in Young’s fourth-quarter profit Wednesday, which the company blamed on a lack of political advertising and higher rights fees for professional basketball.

The development is part of a tense negotiation between Young and NBC that still could be resolved. Young beat out NBC in a nasty bidding war for KRON in September, in which NBC threatened to pull its affiliation if the seller, Chronicle Broadcasting, refused to sell the station to NBC for $650 million. Young paid $823 million, one of the highest prices for a station.

Sources say NBC is trying to make an example of Young to rein in the rest of its affiliates and could buy another station in the market to replace KRON. Sources say NBC and AT&T; have also discussed a deal under which the cable operator would pay NBC for exclusive rights to carry the NBC signal to its 2.5 million subscribers in San Francisco. The cable operator reaches nearly 80% of the city’s households.

Industry analysts are skeptical of such an arrangement because of the loss in advertising revenue from moving from broadcast to cable and the dangerous precedent for cable in paying for programming.