Fox Eyes Saturday Morning Windfall

Fox television network stands to make $25 million or more a year by auctioning off its Saturday morning time periods to outside production companies.

Industry observers worry that this is a dangerous precedent that could lead to a deterioration in program quality, especially if cash-strapped networks lease other poorly performing time periods to the highest bidder.

Some worry that News Corp.-owned Fox’s financial success could prompt other networks to become landlords, with the next auction candidate being Saturday night, when prime-time viewership is at its lowest.

Animation companies DIC Entertainment and 4 Kids Entertainment are locked in a bidding war for Fox’s four-hour Saturday morning time period, according to several sources close to the negotiations.

The winner could be announced next week, sources say.

The Fox bids are three times higher than the $8 million a year that Discovery Communications Corp. agreed to pay NBC last month for its three-hour Saturday morning block.

With such a high fee, television executives say DIC or 4 Kids will have difficulty making money. The two firms have been willing to outbid Nickelodeon, Warner Bros. and other well-heeled rivals because of the opportunity to sell truckloads of toys to young viewers. They otherwise risk being locked out of a contracting business dominated by giants such as Walt Disney Co., Viacom Inc. and AOL Time Warner Inc. that own cable channels and animation factories.

None of the companies involved in the bidding would comment.

For the networks, Saturday morning has been the most distressed time period in their portfolios. Since the mid-’90s, cable channels led by Nickelodeon and Cartoon Network have lured viewers away from all networks except for the kid-centric WB. This has left most of the major networks with mounting losses as they struggled to fulfill federal educational requirements.

The Federal Communications Commission requires broadcast stations to air three hours a week of educational programming for children, despite protests from the industry that kids aren’t interested in these shows.

NBC sources say it could have gotten more money for its Saturday morning sale but bidders were required to fulfill the three-hour educational requirement. Fox requires that only one hour of its Saturday morning block be educational, allowing the other three to be commercial programming.

“This jacks up the obligation on the FCC to enforce the rules,” said Reed Hundt, a former FCC chairman who is now at McKinsey & Co. Hundt said the FCC has implied that it will not enforce the rules.

Both DIC and 4 Kids are known for toy-driven programs. Though 4 Kids is best known for Pokemon, the hit on the WB network, the publicly traded company also represents Nintendo and Hot Rod Monster Jam. DIC has produced such hits as “Inspector Gadget” and “Super Mario Bros.”

DIC and 4 Kids appear to have knocked out of the running Viacom’s Nickelodeon, the leader of the children’s television business. Nickelodeon now provides programs for Viacom’s CBS on Saturday mornings and was looking to expand its broadcast reach.

Sources close to Nickelodeon said the network could not justify paying more than $15 million for Fox’s block.

Like all the networks, Fox is suffering from declining profit as programming costs rise and viewers grow more loyal to cable. The problems have been masked in part by a steady growth in advertising that ended last year.

“This is part of the brave new world we are in,” said Rick Rosen, a partner at the Endeavor talent agency. “The advertising world is upside down.”

In response, networks have cut costs, produced cheaper programming and are searching for new revenue streams.

To staunch Saturday morning losses, CBS turned nearly two years ago to Nickelodeon, while ABC has relied on parent Disney for several years.

The trend has left fewer and fewer time periods for independents such as DIC and 4 Arts.

Fox was one of the last Saturday morning holdouts. But after the sale to Disney in November of its children’s programming arm, Fox moved to exit the business by auctioning off the Saturday time slots.