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Not the Best Time for a Viacom Carriage War

With ratings down at several of its key networks, this might not be the best time for Viacom to be in a carriage battle with a big distributor like DirecTV, analysts say.

After news broke this morning that MTV, Comedy Central, Nickelodeon and other Viacom channels could go dark on DirecTV at midnight, Sanford C. Bernstein analyst Todd Juenger pointed out that only a few weeks ago, he’d written a report that anticipated the situation.

“It has been inconceivable that any distributor could drop Viacom’s networks, mostly because of Nickelodeon,” Juenger said in his June 12 report. “But ratings are down, often significantly, at networks representing 71% of Viacom affiliate fees (89% of ad revenue). Coupled with the desperation of the MVPDs to confront rising affiliate fees, we believe ‘inconceivable’ has been changed to ‘improbable’ a significant difference. Even if the networks don’t get (permanently) dropped, a public pricing war could be costly.”

Juenger added that “we believe uncertainty on affiliate fee persistence will weigh down expected growth rates and terminal value” and that “without high-single-digit affiliate fees, the Viacom story would unravel…If/when a distribution dispute emerges with Viacom, we believe the market reaction will be swift and severe.”

In mid-day trading, Viacom shares were down 1.49% and DirecTV’s were down 0.73%, among the larger declines in a market where nearly all of the media stocks were lower.

But other analysts felt that despite recent ratings issue, Viacom was still playing a strong hand.

“We believe that this negotiation between Viacom and DirecTV will turn negative very quickly if there is no deal reached by the deadline tonight,” said Michael Nathanson of Nomura Securities.

Nathanson noted that Viacom ultimately largely received the increases it was seeking during the company’s Time Warner Cable affiliate fee negotiations on New Year’s Eve, Dec. 31, 2008.

“We expect Viacom to ultimately receive affiliate fee step-ups of at least high single digits with DTV over the life of the deal, consistent with prior guidance,” Nathanson said.  “We do not believe Viacom is worried about the short-term quarterly impact, and although companies try to avoid public negotiations, we believe Viacom should be able to use this spotlight to prove its affiliate fee worth, despite any short-term ratings issues.”

And Rich Greenfield BTIG Research warned that it is DirecTV that might be playing with fire.

“While Viacom’s ratings have definitely softened from where they were 12-18 months ago (MTV’s Jersey Shore highs along with Nick’s share loss to Disney Channel), we believe a multichannel video programming distributor (MVPD) would be making a serious mistake to not carry the Viacom suite of channels,” Greenfield said in a new blog post. “While the demographics of Viacom’s cable network viewers may be the most exposed to finding IP-based alternatives, the viewership of online programming is still dwarfed by the size and scale of Viacom’s content.”

Greenfield noted that Dish Network dropped Viacom’s cable networks in 2004 during a carriage dispute. Dish caved in to Viacom’s demands within 46 hours because Viacom’s kids channels were so vital to subscribers-particularly young ones.

“It will be interesting to see whether DirecTV’s Mike White wants to go to war with Viacom and make the same mistake Charlie

Ergen made 8 years ago,” Greenfield says. “Hard to imagine DirecTV without Nick and Nick Jr.”