Viacom Channels Go Dark on DirecTV after Fee Impasse
07/11/2012| 01:10am US/Eastern
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-- Viacom channels went dark for DirecTV subscribers
-- DirecTV criticizes Viacom's proposed rate increase, bundling practices
-- Viacom says DirecTV rate is "ancient" by current-day standards
(Adds analyst comments and background throughout.)
By William Launder
Viacom Inc. (VIA, VIAB) channels--including Nickelodeon, MTV and Comedy Central--went dark Wednesday for DirecTV Group Inc. (>> DIRECTV) subscribers after the two sides failed to come to an agreement on programming fees.
DirecTV confirmed the news in a press release after midnight on the U.S. East Coast. The dispute highlights intensifying friction between content companies and pay-TV distributors over costs of programming, as cheap online-video offerings like Netflix Inc. (>> Netflix, Inc.) provide alternatives to traditional pay-TV packages.
The blackout also comes as Viacom has seen its ratings fall off in recent months for top shows like Nickelodeon's "SpongeBob SquarePants" and MTV's "Jersey Shore."
Viacom is seeking an increase of 30%, or more than $1 billion, in carriage fees, DirecTV said in a statement on its website Tuesday. DirecTV is the country's second-largest pay-television operator, reaching about 20 million households in the U.S.
In a separate blog post, Viacom said DirecTV benefited from "way below market rates" in its 7-year-old deal with the content company, a contract that is "ancient by the standards of the ever-evolving media industry." According to Viacom, DirecTV has offered a rate that is lower than Viacom receives from any other TV distributor.
Both parties have publicly criticized the other in a tactic that's common practice during such standoffs.
Industry executives and analysts have in recent months predicted that Viacom would encounter challenging negotiations like this because of ratings softness.
"We anticipated such an event, although we said we didn't know if it would happen in weeks, months or years," said Todd Juenger, an analyst with Bernstein Research.
The dropoff has been particularly acute at Nickelodeon's longtime ratings hit "SpongeBob," which accounted for up to 40% of the network's airtime late last year. According to Nielson, the average number of viewers ages 2 to 11 watching SpongeBob at any given time dropped 29% in the first quarter, from a year earlier.
Observers also have voiced worries that Viacom is cannibalizing its potential ratings by making its content available online and through Netflix--a suggestion refuted by Viacom Chief Executive Philippe Dauman.
Disputes over rate increases and resulting blackouts are commonplace in the TV industry, where distributors argue that their profit margins are getting squeezed by continually rising programming costs. In a smaller example, AMC Networks Inc.'s (>> AMC Networks Inc) channels recently went dark for Dish Network Corp.'s (>> DISH Network Corp.) approximately 14 million subscribers.
While distributors across the industry complain that higher programming fees squeeze their profit margins, they are a particular sticking point for satellite TV companies like DirecTV, which don't have other big businesses like telephone or broadband service to support their earnings.
"The biggest fights you are going to see are likely with the satellite operators, because they are one trick ponies and it's more material for them to fight," said Vijay Jayant, an analyst with ISI Research.
DirecTV also has taken aim at Viacom's bundling of popular channels with less-watched ones, something that regulators have begun to examine for signs of anti-competitive practices.
"Programmers like Viacom typically won't allow anyone to buy their channels individually, but we hope to change that," DirecTV said in its statement.
-Write to William Launder at william.launder@dowjones.com
--Shalini Ramachandran contributed to this report.
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