Broadband Cable Association of Pennsylvania

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July 12, 2012

The disappearance of Nickelodeon, MTV and Comedy Central from the TV sets of 20 million American homes on Wednesday marked a line in the sand drawn by one of the biggest pay-TV distributors in a dispute over programming fees with a major entertainment company. What might once have been a run-of-the-mill spat has taken on heightened importance because it occurs at a pivotal time in the TV industry. Low-price or free online video outlets like Netflix Inc., Amazon.com Inc. and Google Inc.'s YouTube are emerging as serious competitors to traditional cable-TV services, putting the spotlight on the relatively pricey nature of cable TV.

That issue is particularly acute in this dispute, where Viacom Inc. is seeking an increase in the fees it is paid by DirecTV to carry its channels. Viacom licenses many of its shows to outlets like Netflix and Amazon, prompting industry executives to worry about cannibalizing traditional TV. Several top Viacom channels, particularly Nickelodeon, have recently seen ratings declines. Viacom executives have previously said online availability of content has minimal impact on traditional ratings. "There are probably more people exposed to our programming than ever before, but the ratings industry has not kept up" in measuring online viewing, said a Viacom spokesman. "Viacom has shifted a lot of their viewing to online outlets," said Derek Chang, executive vice president of content strategy and development of DirecTV, in an interview. He said that "undermines to some degree" Viacom's argument for higher rates for its cable-TV programming.

DirecTV has said Viacom is asking for a 30% increase in fees; Viacom says it is asking for a fair deal. The entertainment company says it has been paid below-market rates for its programming under a contract negotiated seven years ago with the satellite provider. DirecTV said the lack of an agreement forced it to stop carrying Viacom channels late Tuesday, just before midnight. As of Wednesday evening, with social-media outlets like Twitter and Facebook ablaze with complaints about the dispute, Viacom and DirecTV executives had restarted negotiations.

The dispute blew up as media moguls, including the CEOs of both Viacom and DirecTV, gathered in Sun Valley, Idaho, for Allen & Co.'s annual media and technology conference. In the relaxed setting, Viacom CEO Philippe Dauman, wearing large aviator sunglasses, a blue plaid shirt, jeans and a black belt with a silver buckle, told reporters it was "unfortunate" consumers are now "unable to enjoy our channels." "We've done deals with every single U.S. distributor since the last DirecTV deal," he said. Asked if he and DirecTV CEO Mike White were talking, he said, "You'll find out when it happens." "We've always said that we will pay a fair price consistent with the size and scale of DirecTV relative to the largest competitors," said DirecTV's Mr. White, clad in khakis and a gray shirt. "If we can have assurances in that regard, then we can come to a fair agreement."

It isn't uncommon for popular channels, including broadcast networks, to be blacked out of satellite or cable systems in fee disputes. But tensions between the two sides have intensified in the past couple of years. More than 90% of U.S. homes now subscribe to some form of pay TV, including from phone companies or satellite firms, forcing distributors to fight harder just to retain market share. At the same time, cable rates are rising far above inflation: up 7.2% to nearly $80 a month on average over the past year, according to a recent study by Leichtman Research Group Inc.

Rising fees are sparking worries consumers will disconnect their pay-TV services, particularly given that services like Netflix are available. Among nonsubscribers to cable TV, 41% cite cost as the primary reason, according to the Leichtman study. "I think there has been cord cutting due to economic reasons," said DirecTV's Mr. Chang. "The price of this stuff is getting too high for people." Similar comments have been made by Charlie Ergen, chairman of Dish Network Corp., the third-biggest pay-TV distributor, with about 14 million subscribers. Last month, Dish dropped channels owned by AMC Networks, including AMC itself, complaining about demands for higher fees. Mr. Ergen also said AMC had "devalued" its programming by licensing older seasons of shows like "The Walking Dead" to outlets including Netflix. AMC has blamed a long-standing unrelated lawsuit with Dish for the channels being dropped. The AMC channels remain off the Dish service.

On Tuesday, DirecTV put up a website directing viewers to alternate venues online to watch Viacom shows. Meanwhile, Viacom took down several full episodes of its shows that had been available on its websites, including those from "The Daily Show," "The Colbert Report" and "Jersey Shore." Viacom said it has "temporarily slimmed down our offerings as DirecTV markets them as an alternative to having our networks." Full episodes remain on Netflix, Amazon Prime and Hulu.

Consumers often blame the distributor, regardless of the causes of the blackout. On Wednesday, Laura Curran Ragone, a 41-year-old mother of two from Pawling, N.Y., took to Facebook to express anger at DirecTV, posting that her young son was home sick and couldn't watch his favorite channel. "Not Liking DirecTV right now!!!" she wrote. Some Wall Street analysts say DirecTV might have more leverage than usual in this case because Viacom's best-known channels have seen ratings declines and the media company doesn't have the advantage of a sports or broadcast network to bolster its negotiations. Viacom points out Nickelodeon remains one of the most-watched channels on the dial. Many other Viacom channels, though, are much less-watched, according to Nielsen.

On Wednesday, Viacom TV personalities were tweeting their hopes for a quick resolution of the dispute. "Let's all pray this Viacom/DirecTV beef gets squashed by next week," tweeted Daniel Tosh of "Tosh.O," a show on Comedy Central.Nicole "Snooki" Polizzi, a reality-TV personality on "Jersey Shore," tweeted a sad face emoticon and "Wah" as she quoted a fan's tweet lamenting the loss of MTV on DirecTV. Wall Street Journal

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