Analyst: DirecTV-Viacom Spat Could Lead to Industry Consolidation

Non-conglomerate cable network groups or distributors may feel the need to merge, says Evercore's Bryan Kraft.


The continuing network carriage dispute between Viacom and DirecTV could lead to mergers and acquisitions - no matter which party prevails, according to one industry analyst.

He said the extended programming blackout in homes of the satellite TV firm could play into future deal activity as could the continuing carriage showdown between Dish Network and AMC Networks.

"Either outcome could have implications for potential industry consolidation," Evercore Partners analyst Bryan Kraf tsaid in a report Thursday. "If Viacom and AMC prevail against DirecTV and Dish, respectively, we believe it will increase the probability of [satellite TV] consolidation and encourage cable operator consolidation."

On the other hand, if the satellite TV providers come out of the programming stand-offs strengthened, "it should encourage cable network consolidation, but potentially only after [stock market] multiples contract," Kraft said.

The analyst expressed surprise that no agreement has been reached yet. "We never thought a cable network with the scale of Viacom would be off the air for even a week," he said. "We will likely look back on this dispute and the outcome of the Dish-AMC dispute and conclude that the large distributors have more leverage than originally perceived when up against all but the largest programmers."

Kraft called the big four broadcast networks, Walt Disney's ESPN and News Corp.'s Fox News "Gorilla networks, meaning that they have disproportionate negotiating leverage and, practically speaking, almost unlimited pricing power with distributors." He argued that This leaves their owners News Corp., Disney and CBS Corp. "very well positioned."

However, it raises questions about the pricing power, "and potentially the sustainability of the higher multiples" at Discovery Communications, AMC and Scripps Networks, he said. "It also leaves Viacom and Time Warner in an OK position given their broad content portfolios and lower multiples."

Viacom and DirecTV had said late Wednesday that they have reached a stalemate as they engaged in the latest round of a war of words.

Kraft said he sees four key sticking points in the carriage talks. First, Viacom wants a 30 percent rate increase in year one of the new contract to bring DirecTV in line with other distributors, "while DirecTV effectively contends that other distributors are overpaying because they happened to sign their contracts with Viacom before ratings declined sharply," he said.

Second, Viacom wants DirecTV to carry Epix on a bundled basis, while DirecTV only wants to carry Epix a la carte. Third, Viacom wants broader distribution of its networks across programming tiers, while DirecTV wants to be able to offer smaller packages.

Finally, "DirecTV wants in and out-of-home streaming rights included in the new deal," Kraft suggested. "Viacom wants compensation for these rights."

Kraft argued that the companies need to reach a new deal "given the profits that Viacom would lose without DirecTV carriage, and DTV wants to offer the programming as long as DirecTV can procure it at a fair price."

He estimated the DirecTV subscriber loss breakeven point at 1.15 million subscribers. He also estimated that the loss of DirecTV as a distributor is costing Viacom about $14 million per week.

Twitter: @georgszalai