(Reuters) - Shepard Smith, the 48-year-old Fox News anchor, admits that he was happy hardly anyone watched the network at first.
“We really needed the practice,” said Smith, the Holly Springs, Mississippi, native who has been with Fox News since its launch in 1996.
Practice appears to have paid off - Fox News on Tuesday marked its tenth consecutive year as the No. 1 rated cable news network. Nielsen data shows that Fox News averaged 1.9 million primetime viewers this January, up 78 percent from January 2002 when the network first laid claim to the top-rated news network crown with an average of just over 1 million viewers per night in primetime.
Not bad for a network that needed News Corp Chief Executive Rupert Murdoch to take the unusual step of paying cable and satellite distributors to carry it - distributors have historically been the ones to pay programmers like News Corp for their content, not vice versa.
But the programming acumen of Fox News Chief Executive Roger Ailes proved Murdoch’s expensive and risky bet well-placed. Fox News usurped the ratings title from established rival CNN just five short years after its launch. The ratings gap between Fox News and CNN, which is owned by Time Warner Inc and MSNBC, which is owned by Comcast Corp’s NBC Universal, has only widened since then.
“What Roger figured out very, very early on, was that there was a large portion of America that felt underserved by news,” said Bill Shine, Fox News’ executive vice president of programming, whose first job at the network was producing the original “Hannity & Colmes” show.
The early embrace from advertisers also helped Fox News, said Roger Domal, the network’s vice president of east coast sales.
“The advertisers always need a hedge against the market leader; at that time it was CNN, and they could also see the TV news market place was changing,” said Domal.
Fox News changed the TV news game by airing opinion and commentary shows in the primetime slot. The network’s perceived conservative slant also exposed its “fair and balanced” tagline to accusations of being disingenuous.
But while Fox News insiders understand the criticism leveled at some of their more right-wing colleagues, they insist that viewers can tell the difference between news and opinion shows. They uniformly argue the same point, which is that the network’s news and opinion shows are clearly delineated and because of that Fox News is no different from a newspaper with separate news and op-ed sections.
Even with that caveat, however, the network’s cadre of colorful characters spouting “fair and balanced” opinions still presents significant business risk. Case in point: Glenn Beck.
For example, according to network insiders, advertisers started pulling campaigns off Beck’s ratings-wining show in 2009 within months of his description of President Barack Obama as a “racist.” Beck left the network last year.
But the views expressed on Fox News are of little concern to News Corp investors and Wall Street. What they like is Fox News’ strong operating cash flow growth, which is driven by steady increases in the fees it charges cable and satellite companies as a result of the audience the network commands. News Corp President Chase Carey regularly tells investors Fox News still had plenty of upside 16 years after its launch.
Research firm SNL Kagan estimates distributors paid Fox News about 82 cents a month for each of the 100.7 million homes in which it is carried. By contrast, CNN and its sister channel Headline News Network (HLN) collect about 57 cents a month from each of the 100.2 million homes in which it is distributed.
Based on recent growth rates Fox News is likely to generate close to $1 billion in operating cash flow in 2012.
“Forget the content, the business model has been spectacular and filled a niche that right now is close to impregnable to any business,” said Larry Haverty, a portfolio manager at Gabelli Multimedia Funds, a long-time holder of News Corp.
Advertising on Fox News also outpaces the competition, according to SNL Kagan, generating $724 million last year, compared to $580.6 million for CNN/HLN. But given that Fox News’ ratings are nearly double CNN’s in primetime - and Fox News is ahead of CNN in nearly every key advertising metric - a 25 percent gap in ad revenue actually seems low.
Television advertising analysts note that CNN still sells advertising at a premium rate, or cost per thousand viewers, due to its better educated demographic.
“CNN has been around for twice as long as Fox, they have a great presence beyond TV so they’ve been able to maintain their share of ad dollars,” said Horizon Media analyst Brad Adgate. “The market place determines what these rates should be.”
Paul Rittenberg, Fox News’ executive vice president of sales, disputes Adgate’s assertion, however.
“It does take a number of years to catch up in premium advertising, but I would dispute the fact that we’re less expensive than them,” said Rittenberg.
He argues that comparisons with CNN on this basis are unfair because the Time Warner-owned network is sold as a package with HLN. Fox News is not sold as a package with its much smaller sister channel Fox Business Network which has about half the distribution.
One area where CNN does have an undisputed lead over Fox News is online. According to tracking firm comScore, from April-December 2011 CNN had roughly 72 million unique visitors a month on average to the CNN Network. In that same period the Fox News Digital Network had on average only around 27 million visitors.
Fox News digital chief Jeff Misenti explains the disparity by saying that while digital is a big part of the network’s future it has remained pragmatic and in tune with its traditional TV viewer.
“I think it’s a comfort level,” Misenti said. “If you force digital on the presenters it will be awkward for the viewers. We’re more interested in people engaging with Fox News fully on our sites.”
(This version corrects name to Shepard, paragraph 1)
Reporting by Yinka Adegoke in New York; Editing by Peter Lauria and Richard Chang