Viacom network, which owns popular channels like MTV, Nickelodeon and Comedy Central, has decided to increase its programming fees for DIRECTV users by more than 30%. Such a hefty increase in programming fees will likely increase DIRECTV’s operating expenses, hence affecting its bottom line by a significant margin.
At present, DIRECTV is paying nearly $500 million annually to Viacom for its service. So, another 30% hike will not only increase its content cost but will also lure other TV network companies to hike their rates, thus resulting in further increase in cost going forward.
So in order to counter the mounting expenses, DIRECTV will need to pass on the expenses to its subscribers, which in turn may increase its churn rate.
So the best possible way to resolve the issue is through proper negotiation as most DIRECTV subscribers pay for a complete package of channels from Viacom, including many lesser known channels. So by removing those channels from its list may reduce cost for the company.
We believe that such instances will always appear between pay-TV and Network service providers at the time of renewal of service terms.
We maintain our long-term Neutral recommendation on DIRECTV. Currently, DIRECTV has a Zacks#3 Rank, implying a short-term Hold rating on the stock.
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