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Cable Technology Feature Article

January 20, 2014

DirecTV Tries to Strong-arm Weather Channel in Blackout

By Tara Seals, TMCnet Contributor

The Weather Channel went dark for DirecTV’s (News - Alert) 20 million customers last week after the two couldn’t agree on carriage fees for the channel. And, it’s clear it may take a while to get past the impasse: the No. 1 satellite broadcaster has countered The Weather Channel's (TWC) proposed rate hike of a penny per sub per month (from 13 cents to 14 cents) with a demand for a 20 percent rate cut.

The implied insult—that TWC offers merely non-valuable, “commodity” content—was underscored by DirecTV’s bringing on of a replacement network—a small, independently owned network called Weather Nation, which is apparently charging a zero license fee.

It puts TWC into an awkward position—if it sticks to its guns, its unclear how long it can do so: the loss of 20 million subscribers’ worth of revenue is clearly a non-starter. But SNL’s Derek Baine points out that it stands to lose much if it caves to DirecTV’s demands. That’s because of the Most Favored Nation (MFN) clause which all of the large multichannel operators include in their carriage agreement with cable networks.

“In the case of DirecTV, if TWC were to agree to lower its rate by 20 percent, it would have to do so for any other multichannel operator which had an MFN clause with TWC,” Baine said. So, the money drain would simply spiral for the cable net.

Even if TWC is able to limit the fee decrease to DirecTV, it would of course be a hit.

“We were forecasting that TWC would generate $166 million in cash flow this year, assuming a 4 percent increase in its average license fee per subscriber,” Baine said. “However, cutting the fee by 20 percent would reduce license fees to 77 percent of the forecasted level, resulting in a loss of about $40 million per year.”

That’s not to say it would be catastrophic, however. David Kenny, CEO of TWC parent company Weather Co., told The Wall Street Journal that the rate reduction "didn't make sense, and we couldn't be the same service" if it were implemented. But, Baine said that the SNL analysis showed that the service could be the same, albeit with a huge haircut in cash flow and its margin dropping from 44.5 percent to 38.1 percent in 2014, and declining over time.

And besides, “We think that like most disputes this one will be settled,” he said. “We doubt that DirecTV wants the channel off-air permanently.”

TWC also has an ace in its pocket in the form of its thriving digital business.

“When NBCUniversal Media LLC agreed to buy the weather assets from Landmark Media Enterprises LLC in 2008 (in partnership with Bain Capital LLC and Blackstone Group LP), we estimated that less than half of the $3.4 billion purchase price was for the cable network,” Baine said.

He added, “We valued Weather.com at a slight premium to The Weather Channel and since then there has been not only significant web traffic growth, but the development of a highly used app. When we analyzed the service's mobile operations last year, it had 38 million monthly active app and mobile web users in the second quarter of 2013, with more than 100 million app downloads.”

According to comScore (News - Alert) Inc., over 52 million videos were viewed on Weather.com from desktops in December 2013, up 35.4 percent from 38.7 million in December 2012. The number of average daily unique users jumped 14 percent to 85,196 during the same period.

Edited by Cassandra Tucker

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