Conspiracy Theory

The lawsuit by X-Files star David Duchovny is a window into Rupert Murdoch’s masterly vertical integration strategy.

AS FBI AGENT MULDER ON Fox’s hit television series The X-Files, moody actor David Duchovny investigates far-fetched conspiracies and creepy aliens. Now, in a high-profile case, Duchovny is charging the parent of the show’s producer, Fox Entertainment Group, with a dark conspiracy to stiff him on the profits.

Whatever the merits of Duchovny’s claim, his lawsuit is doing a great job of illuminating Rupert Murdoch’s media empire. (Fox is an 83% -owned subsidiary of Murdoch’s News Corp.; see story, p. 120.) As a strategist of vertical integration, Murdoch has few peers. The lawsuit is a direct attack on such integration strategies.

The X-Files, from which the Fox network could haul in $1 billion in advertising profits through this season, is a classic example of how the theory is supposed to work. The show touches nearly all the corners of Murdoch’s global holdings, thus enhancing the value of the larger enterprise (see chart).

“This model of vertical integration, of which we’re in the forefront, is the model of the industry,” crows Peter Chernin, president of both Fox Entertainment Group and News Corp. and Murdoch’s No. 2 executive. “Disney buying ABC or Viacom buying CBS are attempts to duplicate what we have.”

But with vertical integration come lawsuits from actors and producers claiming that they were shortchanged on profit-sharing deals when the broadcasting appendage of a media empire bought a show on the cheap from the producing part. Duchovny’s trial attorney, Stanton (Larry) Stein of Los Angeles, has become a one-man cottage industry of the suits, having represented M*A*S*H star Alan Alda and the producers of Home Improvement in similar cases.

In this case, Stein and Duchovny’s other lawyer, Peter Nelson, prepared a complaint that reads like a paranoid script from the X-Files itself. Fox is accused of “corporate greed” and “avarice” in allegedly peddling the show for a lowball price to its television and cable units. Fox’s vertical integration strategy is a “corporate scheme.” The studio is in a “conspiracy” with the show’s creator, Chris Carter, to pay Carter “millions of dollars in ‘hush’ money” to cover up Fox’s “self-dealing with its affiliated entities.” (Carter himself chose Murdoch’s New York Post to rail against Fox for pulling the plug on his latest show. Conspirators make strange bedfellows.)

Chernin denies that the company underpays for the show. But Murdoch has never been bashful about what he is up to. The public offering last year of Fox Entertainment Group, a repository of domestic film, sports and broadcast properties, touted the X-Files as “vertical integration at work.” The show is produced by Twentieth Century Fox Television, premieres on the Fox network, is syndicated by Twentieth Television to the FX cable channel and Fox network affiliates that include 22 Fox-owned stations, and is sold to such Murdoch holdings as British Sky Broadcasting and STAR TV. Twentieth Century Fox Licensing and Merchandising staged a ten-city X-Files Expo road show. A movie based on the series was produced and financed by Fox’s Twentieth Century Fox Film studios. Dozens of X-Files books are published by News’ HarperCollins Publishers. Fox Interactive produces X-Files videogames.

Chernin declines to venture a dollar figure for the value created by X-Files since its debut in 1993. “We’re talking about soft dollars and soft values in so many places,” he says. But Duchovny lawyer Nelson, who helped negotiate the actor’s profit participation deal in 1995, charges that reruns of the show have propped up the value of Fox’s fledgling cable channel, FX, as well as the company’s 22 local television stations.

Duchovny’s specific beef has to do with the amount of money that flows back to the production company portion of the empire in license fees ( $2 million per first-run episode), where he’s entitled to an undisclosed share of the profits.

Suspicious of the lack of reported profits, Nelson hired well-known Hollywood accounting sleuth Philip Hacker to audit Fox’s books. Finding debatable expenses such as an instance in which Fox paid a $300,000 commission to sell publishing rights to the British unit of its own HarperCollins, they concluded that Fox’s distribution arms were paying lowball license fees for the show.

Because of the show’s success as a leading prime-time ad-revenue generator, the lawyers argue that Fox should pay a price comparable to the legal extortion that Warner Brothers extracted from NBC for ER ($13 million per episode). But not being held hostage by your suppliers is the whole point, Chernin says. “That was a phenomenal event for Warner Brothers and devastating for NBC,” he says. “Those events are neutral for us. All it does is shift value from one side of the company to another.”

Accountant Hacker, who’s been involved in many of the celebrity profit-sharing cases, recalls how the late Walt Disney used to deal with the issue: He didn’t give cuts to actors, period. When Hacker was working for Disney in the 1960s, crooner Bing Crosby demanded profit-sharing to star in the studio’s 1967 flick, The Happiest Millionaire. Fred MacMurray got the part.

 
 
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