After Sinclair Scuffle, Dish Now Faces Viacom

Analysts Expect a Spring Renewal Deadline
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In the never-ending battles between distributors and programmers, Dish Network dodged a bullet when it avoided prolonging what it called the largest broadcast blackout in history by signing a last-minute deal with Sinclair Broadcast Group.

But the satellite giant may be in the crosshairs of another programming scuffle, this time with troubled kids’ and teens programmer Viacom.

Dish and Sinclair reached their agreement on Aug. 26, a day after the broadcaster darkened 129 stations in 79 markets across the country and mere hours after Federal Communications Commission chairman Tom Wheeler called for an emergency meeting to work out a solution. At that meeting, Wheeler gave the parties a midnight deadline to hammer out a deal. The agreement in principle was reached later that same day.

While FCC intervention in retrans spats is nothing new — former chairman Julius Genachowski did it on several occasions during his tenure — Wheeler made no bones about his desire to get his agency deep into the mix when it comes to service disruptions.

In a statement, Wheeler said the commission would not “stand idly by while millions of consumers in 79 markets across the country are being denied access to local programming.”

“The commission will always act within the scope of its authority if it emerges that improper conduct is preventing a commercial resolution of the dispute,” Wheeler added.

While the uproar has centered on retransmission-consent blackouts, service disruptions of all kinds are beginning to attract attention as consumers, distributors and content providers jockey for position. And the next biggest test could be Dish’s upcoming renewal of Viacom’s 14 networks.

Dish and Viacom still have plenty of time to reach a deal. While neither side has said when their carriage agreement expires, Deutsche Bank media analyst Bryan Kraft estimated the two parties could reach an agreement in spring 2016. That’s at least six months away, but early-stage talks have taken place already, a common practice in major deals like this.

So far, neither side has taken part in the usual posturing that typically precedes such negotiations. Dish chairman and CEO Charlie Ergen has said publicly that the satellite giant has had cordial negotiations with Viacom in the past, while hinting that networks that have ratings troubles and are available over different platforms sometimes lose value.

Viacom CEO Philippe Dauman also hasn’t mentioned Dish by name, but said earlier in the month — on an earnings conference call after it had reached deals with Mediacom Communications and Charter Communications — that Viacom looks “forward to renewing other affiliate agreements going forward.” Later he added that Viacom still intends to deliver high single-digit percentage affiliate fee increases for the year.

And though Viacom is still believed to be at a disadvantage in negotiations with Dish and other carriers, it appears the momentum that seemed to be squarely in Dish’s camp just a few months ago is eroding. That could be significant, especially since several analysts have called the Dish renewal “critical” for Viacom. If Dish decides to drop Viacom’s networks, other large distributors could also decide to take the plunge, which would be a devastating loss for the programmer.

But shedding the networks, which include such iconic brands as MTV, Nickelodeon, Comedy Central and Spike, could result in subscriber losses for the satellite giant as well. And at this stage, Dish may not be so keen on losing more customers.

Dish officially lost a total of 81,000 net subscribers in the second quarter, about twice the 44,000 it lost in the same period in 2014. But those results are a bit skewed because they also included subscribers to Dish’s over-the-top service, Sling TV. Factor out the estimated 106,000 subscribers Sling TV probably gained in the quarter, and the losses at the satellite-TV unit could have reached 187,000, a level MoffettNathanson principal and senior analyst Craig Moffett characterized as “horrific.”

Given the declines and other setbacks in August, like the FCC’s decision to disallow $3.3 billion in discounts Dish received from its participation with so-called “designated entities” in the recent AWS-3 spectrum auction and DirecTV’s recently completed merger with AT&T — which gives Dish’s largest competitor a major broadband product — the satellite giant may want to take a lower profile in negotiations.

“Dish does seem to have less leverage than the cable/telco players as they don’t have a high-margin data pipe to fall back on, but the rating/programming weakness at Viacom and the fact they don’t control a national [distribution] network seems to put Viacom in a relatively tough position,” Pivotal Research CEO and senior media & communications analyst Jeff Wlodarczak said. “In the end, the signs point to a deal that neither player is probably too happy about.”

Wlodarczak added that the threat of Dish dropping the channels — and the domino effect it could have on other deals — could force Viacom to be more amenable to a compromise on rates. Other analysts have estimated that if Dish dropped the networks, other distributors would follow.

Others have dropped the Viacom channels, with mixed success. Cable One, the Phoenix-based smallmarket cable operator, started the ball rolling more than a year ago, and its video-subscriber rolls have fallen by about 20%. Cable One has made a conscious effort to de-emphasize video in favor of broadband — it currently has 487,401 residential broadband subscribers and 385,136 residential video customers. But the loss of those video customers has cut into the bottom line. In the second quarter, Cable One saw revenue fall 1.2% to $202.7 million and adjusted cash flow dip 2.4% to $77.8 million.

Suddenlink Communications, another midsized operator, dropped Viacom’s channels in September 2014 and has shed about 5.8% of its basic-video subscribers in the past 12 months. It lost about 29,000 video customers in the second quarter, about 10,000 more than in the prior year, but explained the losses by claiming that seasonality and a late-quarter rate increase skewed results. Its financial metrics were strong, with revenue up 4.7% and cash flow growth of 8.2% before one-time items.

Said Deutsche Bank’s Kraft, “A look at Suddenlink’s and Cable One’s subscriber trends since they dropped Viacom suggests that any MVPD that is committed to the video business needs to think twice about dropping Viacom.”  

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