Cablevision recently sued Viacom (NASDAQ:VIAB) stating that the media company is forcing it to pay for low-rated cable networks in order to get access to higher rated networks such as Nickelodeon and MTV.  Some analysts have stated that this is likely to be a long battle, and Viacom has been a relatively easier target for pay-TV companies due to its declining ratings. While that may be true, the outcome of this legal battle could have a significant impact on the pay-TV and media industries.
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Cablevision is not the only one concerned about low rated networks. The second largest cable company in the U.S., Time Warner Cable (NYSE:TWC), has also been trimming its packages and shedding networks that didn’t make economic sense. One such example is dropping the Ovation channel. The company states that its value to customers didn’t justify its expenses. That might be true given that Time Warner Cable was paying close to 7 cents per subscriber per month to Ovation, implying close to $10 million in annual payments given its subscriber base of close to 12 million. The company has stated that only 1% of its customers watch the channel at any given day. This implies that close to 120,000 customers watch Ovation. This doesn’t make economic sense if we compare it to Time Warner Cable’s overall packages and costs.
Ultimately, the customer could turn out to be the winner if the pay-TV industry moves towards more personalized programming packages and flexibility of dropping unwanted networks. The cable bills will be lower and customer satisfaction will be higher. Pay-TV companies will be able to better manage their costs if they focused on spending money only on the networks that are in demand. On the other hand, media companies that tend to bundle their networks together, might lose out.
Our price estimate for Viacom stands at $67, implying a discount of more than 10% to the market price.Notes:
- Cablevision sues Viacom over fees for low-rated networks, Reuters, Feb 26 2013 [↩]