By Shalini Ramachandran And Suzanne Vranica
Storm clouds are gathering over the Weather Channel.
The TV network, known for its round-the-clock forecasts and
tracking of big weather events like hurricanes and blizzards, is
facing a major threat to its core business--the fees it collects
from pay-TV providers that carry its channel.
Verizon Communications Inc. dropped the Weather Channel last
month from its FiOS TV service, which reaches 5.6 million
households, citing customers' growing use of online sources and
apps to look up weather information. The network is scrambling to
pull every lever it can to get back on the air, including
threatening not to give the telecommunications giant an unrelated
Web traffic contract, according to people familiar with the
matter.
Meanwhile, another battle is looming with satellite provider
Dish Network Corp. The companies' carriage contract expires in
coming months and the Weather Channel's backers are preparing for
the possibility of being dropped by Dish, which has about 14
million subscribers, the people familiar with the matter said.
The financial outlook for parent company Weather Co. is
deteriorating. Moody's Investors Service on Friday downgraded the
company's debt, saying it isn't perceived by cable and satellite
companies as a "must have" channel, and could therefore be dropped
by more providers or face cuts in carriage fees.
All of this is raining on the ability of the company's owners--a
consortium that includes private-equity firms Bain Capital LLC and
Blackstone Group LP, and Comcast Corp.'s NBCUniversal--to exit the
roughly $3.5 billion investment they made when they purchased
Weather Co. in 2008. No formal sale process is under way, some
people close to the company said.
The Weather Channel's predicament is bringing into stark relief
the challenges ahead in the U.S. TV industry for independent
channels--even relatively well-known ones--that aren't part of
bigger media conglomerates.
As more consumers "cut the cord," or drop their pay-TV
subscriptions, cable and satellite providers are increasingly
looking for ways to reduce their hefty programming expenses--either
by paying less for channels or dropping those that they feel their
viewers can live without.
Media companies with bundles anchored by powerful channels--
Walt Disney Co. with ESPN and Time Warner Inc. with TNT, for
example--can negotiate in a way Weather Channel cannot. Moody's
said the environment makes it "challenging for stand-alone and
smaller cable networks to maintain their subscriber base."
In an interview, Weather Co. Chief Executive David Kenny said
the company has been aggressively diversifying into digital
advertising and business-to-business services so it isn't so
reliant on TV. Those areas combined have already eclipsed TV
revenue, he said.
"I feel really supported to finish this transition that we have
started, " he said. "We are on a very different path to become a
data and tech company."
The immediate concern, however, is getting carriage on Verizon's
FiOS service. The Weather Co. has been in talks with Verizon to
purchase "content delivery network" services--essentially
sophisticated Web traffic routing. But after its channel was
dropped last month, Weather Co. terminated those talks in hopes of
putting some pressure on Verizon, the people familiar with the
situation said. Verizon has so far been unmoved.
The efforts recall Weather Co.'s tense dealings with DirecTV
last year, where an unrelated business arrangement ultimately
played a role in the channel securing carriage on the satellite-TV
giant. DirecTV had dropped the Weather Channel for nearly three
months for many of the same reasons Verizon cited. But the
satellite provider agreed to carry the Weather Channel because of a
separate deal it was pursuing to become the "preferred" provider
for the Hilton Worldwide hotel chain, whose owners include
Blackstone, also a backer of Weather Co. Hilton wanted the Weather
Channel on its TV lineup, The Wall Street Journal reported last
year. (People close to Blackstone said at the time that the
private-equity firm didn't influence Hilton's push for the Weather
Channel.)
Mr. Kenny declined to comment on any specific negotiations, but
he said he no longer looks at distribution deals as pure TV
negotiations. "You have to look at it as an enterprise
partnership," he said.
The company's website is the leader in disseminating weather
information online, with 101.5 million unique visitors in February,
according to comScore. Its family of weather apps is also No. 1 in
its category, with 53 million unique visitors in February. Weather
Co. also sells weather information to companies in industries
ranging from airlines to retailers.
Still, the TV woes threaten to put a major dent in the company's
roughly $300 million in earnings before interest, taxes,
depreciation and amortization, people familiar with the matter say.
Already, operating profit has been slipping, a person familiar with
the company's results said.
As pay-TV distributors look to control programming costs they
are scrutinizing networks like the Weather Channel, which have
relatively low fees. Market researcher SNL Kagan estimates the
Weather Channel gets 14 cents per average subscriber a month from
pay-TV distributors, compared to $6.61 for ESPN.
Some distributors have already sought out other channels for
weather information, including WeatherNation, which is available in
30 million households. One of WeatherNation's investors is EchoStar
Corp., which is controlled by Dish Chairman Charlie Ergen, people
familiar with the situation say.
To attract new audiences, the Weather Channel moved in recent
years to expand its prime-time programming lineup to include more
reality shows. The company said 53% of its hours are dedicated to
live weather information, while 47% is dedicated to original
programming.
Nonetheless, ratings have sagged. The average number of viewers
tuning in during prime-time fell 22% between 2011 and 2014 to
225,000, according to Nielsen. Since December, however, severe
winter storms in the Northeast have helped increase the channel's
viewership.
Comcast has collected handsome management fees from its role in
Weather Co. Thus, it wouldn't need to sell at as high a price as
the private-equity owners to recoup its investment--a potential
complicating factor in any push to sell the company, a person
familiar with the matter said.
The cable giant has the right of first refusal to acquire
Weather Co., but isn't inclined to put in a bid, the person
said.
Gillian Tan and Joe Flint contributed to this article.
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com
and Suzanne Vranica at suzanne.vranica@wsj.com
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