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Viacom Channels Go Dark on DirecTV

Viacom Inc. (VIA, VIAB) channels--including Nickelodeon, MTV and Comedy Central--went dark for DirecTV Group Inc. (DTV) subscribers overnight after the two sides failed to come to an agreement on programming fees. The dispute highlights intensifying friction between content companies and pay-TV distributors over costs of programming, as cheap online-video offerings like Netflix Inc. (NFLX) provide alternatives to traditional pay-TV packages. The blackout also comes as Viacom has seen its ratings decline recently for top shows like Nickelodeon's "SpongeBob SquarePants" and MTV's "Jersey Shore." While fee disputes are common in the pay-TV industry, this one is significant because it pits one of the nation's largest cable operators against the country's second-largest pay-television operator, with about 20 million subscribers. In a blog post late Tuesday, Viacom said it had offered DirecTV a "fair deal" on rate increases, amounting "to an increase of only a couple pennies per day, per subscriber." DirectTV, meanwhile, said in its own statement that it had been "very willing to get a deal done" but criticized what it described as a 30% rate increase--equal to around $1 billion--demanded by Viacom. DirecTV also noted that Viacom was seeking the increase at a time when ratings at many of its top networks are sinking and as it gives away much of its content online. Viacom, meanwhile, has said DirecTV benefited from "way below market rates" in its seven-year-old deal with the content company, a contract that is "ancient by the standards of the ever-evolving media industry." According to Viacom, DirecTV has offered a rate that is lower than Viacom receives from any other TV distributor. Signs of the dispute emerged publicly Monday night as both parties attacked each other in blog posts and on affiliated websites, a common tactic in such disputes. Industry executives and analysts have in recent months predicted that Viacom would encounter challenging negotiations like this because of ratings softness. Viacom also has been accused of cannibalizing its own ratings by making shows available via Netflix, a suggestion refuted by the cable-network operator. Blackouts are becoming increasingly common as distributors balk at the high rates charged by content companies, which they face at a time when their business faces challenges from a soft economy and new forms of competition like online TV. In a smaller recent example, AMC Networks Inc.'s (AMCX) channels recently went dark for Dish Network Corp.'s (DISH) approximately 14 million subscribers. Satellite TV companies like DirecTV are particularly vulnerable to higher programming fees because they don't have other big businesses like telephone or broadband service to support their earnings. "The biggest fights you are going to see are likely with the satellite operators, because they are one-trick ponies and it's more material for them to fight," said Vijay Jayant, an analyst with ISI Research. DirecTV also has taken aim at Viacom's bundling of popular channels with less-watched ones, something that regulators have begun to examine for signs of anticompetitive practices. "Programmers like Viacom typically won't allow anyone to buy their channels individually, but we hope to change that," DirecTV has said. --Shalini Ramachandran contributed to this report. Write to William Launder at 07-11-12 0800ET Copyright (c) 2012 Dow Jones & Company, Inc.

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