Earlier this month, DISH Network (NASDAQ:DISH) blacked out the Fox News and Fox Business channels after the two were unable to reach an agreement for a long-term contract . Fox News -- a subsidiary of 21st Century Fox (NASDAQ:FOXA) -- followed a long-established pattern in disputing channels: It took the dispute public by airing ominous chyrons and creating a website urging viewers to call the provider and "demand" Fox stations return.
On the surface, Fox has a strong case: Fox News is the most-watched cable news channels -- for the last 13 years -- and is the fourth most watched basic cable channel in prime-time audience behind heavyweights ESPN, USA, and TNT. And Fox News viewers are fiercely loyal to the brand, with many refusing to follow other news outlets. In short, these are the kind of viewers a provider should pay top dollar for.
Instead, DISH rejected the deal Fox proposed. And if DISH founder Charlie Ergen's version of events is correct, his company made the right call.
Dish's side of the dispute
DISH also set up its own website, DishStandsForYou.com, to air its version of the events. In what appears to be a contrite explanation, Ergen outlined DISH's issue with Fox's proposed deal [emphasis added]:
While we got close to an agreement negotiations stalled and our contract expired. Dish offered to extend the contract while we completed the deal but Fox refused and pulled the channel from our viewers. ... But in this dispute, Fox was demanding a large increase in rates that would have doubled the amount Dish pays for the channel. Now these new rates were somewhat justified because Fox News continues to be a leading satellite news channel.
Both sides came very close to an agreement on new rates. However, during the negotiations, Fox demanded a surcharge that would have tripled the rates on an unrelated, less popular channel. To make matters worse, Dish already had a contract for that channel which doesn't expire for some time. The result of this Fox tactic is that Fox News became hostage to an unrelated channel where the price increase was not justified by our existing contract or its viewership.
It's important to reiterate this is only Dish's version of events, but Fox hasn't addressed these specifics and rarely has a pay-TV provider been so upfront about the sausage-making of negotiations with programmers.
Ergen: Fox would decry this deal anywhere else
Ergen argued that Fox would normally decry this type of deal. He's right: If DISH paid three times more than than necessary for content, it would be cited on Fox Business as a poor steward of shareholder value. If this happened in government, Fox News would report this as wasteful spending on undeserving companies that peddle influence rather than letting true capitalism reign.
However, the real issue here is that the business model of pay TV is simply unsustainable. Consumers no longer want to pay large cable bills for channels they'll never watch. Fox essentially using its highly trafficked Fox News station as a hostage to triple fees on one of its less-successful channels is a case study on why more people are abandoning the format altogether. Should DISH capitulate, all of its subscribers would be stuck with a higher bill, whether they watch Fox News, this unidentified channel, or neither.
Ultimately, I don't blame Fox for attempting to make more money from its channels, but the media giant should not attempt to use Fox News to bail out this mystery channel. It should negotiate on the channels that are not under contract (Fox News and Fox Business) and deal with the other one independently as its contract expires. Considering that content increases are exploding, waiting until the contract expires could be in Fox's favor.
Editor's Note: This content has been edited to reflect Fox News Channel's status as the number one cable news channel. Previously, it was described as "one of the most watched cable news channels."
Jamal Carnette has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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