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In Viacom’s Battle With DirecTV, Internet’s the Issue

7/16/2012 12:01 AM Eastern

Viacom’s carriage battle with
DirecTV reached
new heights last week,
with the content giant
dialing back access to
SpongeBob SquarePants,
Stephen Colbert and other
TV stars on its website
in an effort to turn up the
heat on the satellite giant.

Viacom pulled its 17
networks from DirecTV
on July 10, after the two
could not come to a contract
agreement. The satellite-TV provider has claimed that Viacom, which has undergone a sharp decline in ratings
at some of its top networks, is demanding an unacceptable rate increase — 30%, or about
$1 billion over the term of the agreement. Viacom counters that its request amounts to just
pennies per day for its iconic youth-oriented networks like
Nickelodeon, Comedy Central and MTV.

As of early July 13, both parties were in active negotiations,
according to DirecTV spokesman Robert Mercer.

While the dispute is nothing new to longtime observers
of distributor-programmer relations — carriage battles
have become nastier and more public over the years
— it shines a spotlight on what could be an increasingly important component of future
negotiations: the Internet.

Shortly after its networks went dark on DirecTV, Viacom shut down access to full episodes
of some of its programming, including Comedy Central’s The Daily Show With Jon
Stewart
and The Colbert Report and Nickelodeon’s SpongeBob SquarePants. Viacom said that
it continues to offer hundreds of free episodes online, but dialed back some free shows because
DirecTV had pointed to online video as an alternative during the blackout. Viacom
has said it considers its free online programming to be a marketing and promotional tool
for affiliates.

Pivotal Research Group principal and media & communications analyst Jeff Wlodarczak
said Viacom’s Internet move seemed to make the distributors’ case that free online episodes
dilute the value of linear channels, which programmers have denied.

“If the free content was not that compelling, why are they removing it?” Wlodarczak
asked.

He added that he expects one-product distributors like DirecTV to continue to resist big
rate increases, especially with those programmers like Viacom that lack a broadcast and
sports programming component.

Compared to other networks, Viacom’s affiliate fees are among the lowest in the cable
universe. According to data from SNL Kagan, Viacom’s total affiliate fees for the 17 networks
dark on DirecTV were about $2.54 per subscriber per month — nearly half the $4.76 ESPN
charges distributors for its flagship channel. According to Kagan, Viacom’s priciest network
is Nickelodeon, which charges an average of 51 cents per subscriber per month, compared
to the 94-cents average monthly fee charged by its closest rival, Disney Channel.

TAKEAWAY

The Viacom-DirecTV dispute
spotlights discord over how
free online content affects pay
TV’s value.

September