Viacom’s (NASDAQ:VIA) channels were blacked out on DirecTV’s (NASDAQ:DTV) pay-TV subscriber network last night due to disagreement over the carriage fee.  While Viacom maintains that DirecTV is paying below the current industry standards, DirecTV feels that Viacom’s demand for a 30% increment in carriage fee is unreasonable.  This is not something new and, in fact, such disputes have become a trend. In the recent past, cable and satellite companies have been involved in several disputes against media conglomerates like Disney (NYSE:DIS), News Corp (NASDQ:NWS) and others. These incidents do not bode well for either parties and a middle ground need to be sought.
DirecTV is trying to protect its subscribers from price increases which directly result from carriage fee increases. However, it faces the risk of subscriber backlash and dissatisfaction if the blackout continues for long. The company has close to 20 million subscribers, which implies that the additional fee increment could be huge, especially because Viacom’s main channels have deep penetration. Furthermore, such a large base implies that DirecTV cannot afford a prolonged blackout of Viacom channels.
On the other hand, Viacom is trying to compensate for the rise in programming costs and recoup the decline in DVD sales that has affected its filmed entertainment business. During the blackout, Viacom faces lost subscription as well as ad revenues. Its biggest channels such as Nickelodeon, MTV and Comedy Central constitute close to 35% to its value, by our analysis. The company is heavily dependent on its cable networks, and the blackout will cost it dearly.
An agreement has to be made sooner or later. It is likely that the period price rises will continue even though the industry has been quite competitive, and subscribers will have to face the burden of rising costs.
Our price estimate for Viacom stands at $64, implying a premium of about 30% to the market price.Notes: