SpongeBob, Snooki, Jon Stewart go missing from DirecTV

SUN VALLEY, Idaho Thu Jul 12, 2012 3:27am IST

The SpongeBob SquarePants balloon floats down Central Park West during the 85th Macy's Thanksgiving day parade in New York November 24, 2011. REUTERS/Gary Hershorn/Files

The SpongeBob SquarePants balloon floats down Central Park West during the 85th Macy's Thanksgiving day parade in New York November 24, 2011.

Credit: Reuters/Gary Hershorn/Files

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SUN VALLEY, Idaho (Reuters) - The latest and most high-profile dispute between pay-TV distributors and content owners over the cost of programming pits DirecTV (DTV.O) and Viacom Inc (VIAB.O) against each other.

The two companies failed to reach a new contract before a midnight Tuesday deadline, and as a result Viacom asked DirecTV to black out Nickelodeon, MTV, Comedy Central and 14 other Viacom channels for its roughly 20 million subscribers.

The two companies had been in talks over a new contract - the previous one had been in place for the last seven years - but could not agree on terms before the Tuesday deadline.

Both DirecTV Chief Executive Mike White and Viacom CEO Philippe Dauman addressed the standoff with reporters at Allen & Co's media and technology conference in Sun Valley, Idaho, on Wednesday. They offered vastly different views of why negotiations broke down.

"In the last seven years since we did the last DirecTV deal, we have successfully and peacefully concluded affiliate agreements with every major distributor in the U.S. We are prepared to move forward. It's unfortunate consumers for the first time are not able to enjoy our channels," said Dauman, adding, "I don't want to negotiate in public."

White, too, expressed sympathy for DirecTV's subscribers, but he laid the blame for the blackout at Viacom's feet.

"All we are trying to get is a fair deal for our customers and I'm sorry our customers are being forced into the middle of this," White said. "We just think we pay a half a billion dollars a year and a billion dollar increase over five years, over 30 percent, is not justified by the marketplace or fair relative to our largest competitors or by their ratings."

White added that he spoke with Dauman at the conference on Wednesday.

For its part, Viacom has said that its stable of networks account for about 20 percent of all viewing on DirecTV but currently less than 5 percent of its programming costs.

The dispute sent shares of both companies lower on Wednesday. DirecTV shares ended down 1.1 percent, or 54 cents, at $48.15. Viacom's stock fell 0.3 percent, or 13 cents, to $46.73.

UNBUNDLING CHANNELS

The standoff is the latest between media companies and cable and satellite TV providers over the cost of content. These providers pay a fee to media companies that allows them to carry channels such as MTV.

On July 1, AMC Networks (AMCX.O), the company behind shows such as "Breaking Bad," "The Walking Dead" and "Mad Men," was removed from the Dish Network (DISH.O) after the two companies failed to reach a new contract.

Similar blackouts have taken place in recent years between Cablevision (CVC.N) and Walt Disney Co's (DIS.N) ABC; News Corp (NWSA.O) and Cablevision; and News Corp and Dish. In those cases and most others, a new contract was reached and the networks were restored within days.

The purchase of television programs is the single biggest cost for distributors, who have fought back in recent years against what they consider unreasonable "carriage fee" increases by content producers like Viacom.

Companies such as Viacom tend to bundle their networks together, forcing distributors to carry lower-rated networks, such as Nick Jr., along with more popular channels such as MTV.

This practice has triggered a debate in the industry about unbundling networks, which would allow customers to choose only the channels that they want to watch, a practice known in industry parlance as "a la carte."

"We've made it clear we would be happy to do an a la carte deal; I don't think that's likely, that decision is in the hands of Viacom," White said. "A lot of customers ask for a la carte absolutely, a lot of customers would really prefer to buy the channels they watch and not the others, but the contracts we are subject to by the media companies typically tie content together."

The possibility of DirecTV dropping Viacom's networks was raised in a mid-June note by Bernstein Research analyst Todd Juenger.

Citing falling ratings at Nickelodeon and other Viacom networks, Juenger wrote, "We believe it is no longer inconceivable that a distributor would drop Viacom, or at least engage in a public battle with them over price increases."

Despite declining ratings, Nickelodeon still ranks as the top-rated cable network in the country, based on total day viewers.

Viacom took several aggressive steps to put pressure on DirecTV to reach a new deal. The company blocked access to its programming online so that DirecTV subscribers would not be able to view its programming on alternate platforms. It also created two videos that mocked DirecTV's position and its recent marketing campaign.

This is not the first time a distributor has blacked out Viacom's channels due to a contract dispute. In 2004, Dish dropped some Viacom networks after the two sides failed to reach agreement on a new distribution deal. That blackout was short-lived, lasting less than 48 hours.

(Reporting by Sakthi Prasad in Bangalore and Lisa Richwine in Sun Valley; Writing by Peter Lauria; Editing by Daniel Magnowski, Bernadette Baum, and Peter Lauria)

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