The blackout of Viacom’s (NASDAQ:VIA) channels on DirecTV’s (NASDAQ:DTV) pay-TV subscriber network has finally ended with Viacom reportedly compromising on its initial demand for carriage fees.  Finding a middle path was something that we expected and it appears that Viacom took the initiative to tone down its demands. Perhaps the reason was that although the situation was bad for both the companies, Viacom was facing the brunt of the face-off as it was losing ad dollars due to fewer viewers. In fact, in the first week of the dispute, the ratings for Viacom’s channels declined by 27%.  Although the movie entertainment business constitutes close to 40% of Viacom’s revenues, the margins are extremely low, and so Viacom’s value is heavily dependent on its TV channels (close to 80%).
DirecTV has close to 20% of the U.S. pay-TV market. With Viacom’s 80% value coming from TV channels, about 15% of the company value was at risk due to the on-going dispute. Although the short-term disruption in revenues will hardly affect Viacom, the dispute is a wake-up call for the industry and has two contradictory messages.
First, it shows that the big media companies are not shying away from pulling out a whole bunch of channels if their demands are not met, not just one or two. This reinforces that content is king. Media companies are also getting some leverage due to increasing competition, a proliferation of online platforms and consumer demand for content.
Second, that Viacom had to compromise on its initial demand shows that pay-TV service providers such as DirecTV have become stronger. In the future, such disputes could even push the pay-TV companies to venture into their own content business in order to reduce the risk of such blackouts.
Our price estimate for Viacom stands at $64, implying a premium of about 30% to the market price.Notes:
- Viacom, DirecTV, And The Future Of TV Blackouts, TechCrunch, Jul 21 2012 [↩]
- Viacom Ratings Nosedive In First Week Of Dispute With DirecTV, deadline.com, July 18 2012 [↩]