Analysts: DirecTV/Viacom battle will come down to digital rights

Now entering its second week, the big carriage battle between DirecTV (s DTV) and Viacom (s VIAB) will ultimately be decided, but not for some time. And look for streaming rights to be the lynchpin when a deal does get made.
Those predictions come courtesy of Bernstein Research senior analysts Todd Juenger and Craig Moffett, who on Monday published a report outlining how they see this rather landmark carriage impasse unfolding.
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For now, these analysts believe, the rift is wide. And they’ve published some of the best speculative data on the subject yet to illustrate the point.
There are few publicly confirmed data points in this rift, but Juenger and Moffett speculate that under the just expired carriage deal, DirecTV paid about $500 million in affiliate fees to Viacom, or around $2.08 per its 20 million subscribers — a good deal, considering Viacom averages around $2.50 per subscriber for the rest of its affiliate deals.
They believe Viacom is asking for a one-time fee increase of 30 percent in the first year of a new five-year arrangement, plus annual increases of 8 percent over the remaining four years. This would result in a compound annual growth rate of 12 percent and increase its per-DirecTV-subscriber carriage rate by $1.60 to $3.68. The total revenue increases adds up to around $1 billion.
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DirecTV’s bid, they believe, is for a first-year bump-up of around 12 percent and annual “inflators” of around 4 percent, bringing the per-subscriber nut to around $2.83.
As is typical in carriage disputes, Moffett and Juenger write, the two sides will inevitably settle, on terms closer to Viacom’s than DirecTV’s, with the satellite programmer in the tougher position of having to replace unique programming like Comedy Central’s Daily Show With Jon Stewart.
“This dispute is more than run of the mill for a variety of reasons, however. And may go on a long time,” they add.
For one, the analysts note, there is no natural programming catalyst, like the sudden emergence last winter of soon-to-be former New York Knicks star Jeremy Lin, who almost single-handedly pushed an entrenched carriage dispute between regional sports network MSG and Time Warner Cable in the programmer’s favor, resulting in a deal.
In fact, evidenced by DirecTV’s carriage acquisition last week of Disney Jr., which caters to the same kids 2-5 demographic that Viacom’s Nickelodeon does, the satellite carrier seems to be digging in.
“DirecTV has singled out Viacom as the target for the inevitable battle over affiliate fees that one of the big [multi-channel video program distributors] had to take on at some point.”
However, with Viacom’s 26 channels supplying around 20 percent of DirecTV’s viewing,  it will have to make a deal at some point.
Moffett and Juenger believe that, by Viacom curtailing some of the programming it offers to over-the-top channels — or even crafting exclusive digital deals with DirecTV — a solution could be achieved. DirecTV could save face and claim victory, even though it had to capitulate on fee increases, by saying it’s getting more value out of its investment.
In fact, the key to the deal could rest in Viacom’s decision last week to pull its its in-season programming off streaming channels.

“Perhaps Viacom’s decision to pull its content off the web, while initially a negotiating tactic, will be a catalyst to motivate Viacom to keep that content off permanently,” they wrote. “Surely they don’t want to continually pull it up/down every time they are negotiating a distribution agreement. And surely DirecTV would not be satisfied to have signed an agreement, paying a significant increase for the right to distribute Viacom’s content, only to have Viacom return to making much of that same content freely available to anyone with a high-speed Internet connection (whether they subscribe to a pay-tv service or not).”