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Viacom May Face Unfavorable Ruling for Channel Bundling

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Viacom Inc. (VIAB - Free Report) is likely to face an unfavorable ruling by the U.S. district court as leading U.S. cable company, Cablevision Systems Corporation , has filed an antitrust lawsuit against the media giant.

In Dec, 2012, Cablevision and Viacom entered into a long-term agreement, under which the former had purchased Viacom’s channel package for an undisclosed amount.

However, in Feb, 2013, Cablevision filed the lawsuit against Viacom for compelling the former to purchase an entire TV channel package in order to obtain rights to the popular channels, MTV, Nickleodeon and Comedy Central. The bundled TV package includes the lesser known networks like CMT, MTV Hits, Nick Jr, Nicktoons, Palladia and VH1 Classic.

The inclusion of the surplus channels in Cablevision’s list had unnecessarily reduced bandwidth and increased programming costs.

However, Viacom believes that failure to strike a better bargain had forced Cablevision to take legal action against the former. Viacom also states that it is offering the less popular networks at an extremely low rate. Generally, media companies earn revenues through fees received from pay-TV operators or through ads during TV shows. Thus, exclusion of those networks from Cablevision’s channel list will hurt Viacom’s advertising revenues.

Generally, media companies bundle their low-rate channels with popular ones, thereby raising channel package rates. Such practices have not only increased programming expenses of cable and satellite TV operators but have also affected margins significantly. Moreover, the number of channel blackouts has increased over the last year, resulting from disagreements between media partners and cable and satellite operators.

In 2012, a demand for higher fees had forced Time Warner Cable Inc. to drop Ovation network while Dish Network Corp. (DISH - Free Report) dropped AMC Network channels from its program list.

Thus, we believe that an unfavorable ruling against Viacom may raise questions over the business model followed by media companies.

Currently, Viacom has a Zacks Rank #3 (Hold).

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