Last month, the Fox News and Fox Business channels went black on DISH Network (NASDAQ:DISH) when the satellite service provider could not reach an agreement on carriage rates in contract negotiations with 21st Century Fox (NASDAQ:FOXA). As usual in carrier-programmer disputes, both sides blamed each other for the impasse while customers suffered.
This dispute could be a game-changer for pay TV in 2015. For years, analysts have debated the pay-TV industry in terms of content versus delivery power -- and most consider content to be king due to the emergence of new "pipes" for releasing material, mainly the Internet and streaming services. Until now this has mostly been hypothetical, but the Fox-DISH dustup might become the test case in the content versus delivery wars, with many projecting a protracted fight.
A mea culpa of sorts
Earlier, I wrote an article outlining my opinions on the matter. As it always seems to happen in articles that merely broach the subject of politics, strong feelings from both sides were expressed. In the article, I was accused of having a political agenda. Let me be clear: this is a business dispute between DISH and Fox and should treated as such. Inserting politics into this debate only muddies a clear contract dispute.
For the record, neither Fox nor DISH have raised the subject of bias. In the end, DISH doesn't care about the political makeup of Fox's viewer base -- it should be mentioned advertisers do care, but more on that later. Only the audience size, hours viewed, and other viewing metrics matter to DISH Network.
That said, I did agree that DISH did the right thing, as I interpreted it, in rejecting Fox's contract offer. On a pop-up website, DISH founder Charlie Ergen explained Fox wanted to raise the amount his company pays for an unrelated channel that is still under contract, in addition to Fox News and Fox Business. Multiple websites have reported this assertion, but recently Fox EVP Tim Carry has pushed back on this claim by stating, "the negotiations broke down over core issues to Fox News Channel and Fox Business Network."
In any case, exploding content costs will eventually be passed through to the end consumer -- you and I.
How DISH could lose
Many analysts, myself included, believe content -- in this case, the Fox channels -- will eventually win this battle. It's easy to understand why: There are numerous pay-TV providers (DIRECTV, Comcast, Verizon, Time Warner Cable) that would gladly air Fox News and Fox Business and take advantage of this dispute to profit. In fact, Mr. Carry estimates that DISH lost 90,000 subscribers as a result of the ban. Eventually, DISH Network could be forced to capitulate and pay the higher rates.
It isn't as if Fox does not deserve an increase in these affiliate fees. After all, Fox News is the most-watched cable news channel, many times attracting a larger total audience than CNN and MSNBC combined. Overall, the station is the fourth-most-watched basic cable channel in overall prime-time audience. According to Ergen, DISH was prepared to double Fox's fees to compensate the company for these subscribers.
As far as DISH is concerned, acquiescing to Fox’s demands now would be akin to throwing chum into shark-infested waters. First, it emboldens future stations to follow the same tactic. And in the event a channel's contract is renegotiated before its expiration, even though it doesn't have the viewership to support the higher fees, the floodgates could open for programmers wanting to break existing contracts at unreasonable rates. Applying a Kantian view, imagining every programmer follows this playbook, your pay-TV bills would explode.
How Fox could lose
Fox News also stands to lose in this dispute. After enduring years of rising cable bills, a large part of that due to exploding channel costs, many consumers see less value in pay-TV altogether. As pay-TV providers push back against content increases to placate angry customers, the former symbiotic relationship between channels and providers has become more strained than ever before.
Fox makes money from two distinct programming avenues: fees paid by the carriers (the reason for the dispute) and advertising revenue from corporations that consider the size, age, and political affiliation of a viewing audience, among other metrics, in deciding where to place their ads. So for Fox, being pulled from DISH is a double whammy -- not only is the company operating without those affiliate fees, but at some point advertisers will pay less money for advertising that reaches fewer viewers.
For a numerical representation, in the week ended Dec. 28, Fox News averaged 939,000 prime-time viewers, down 12% from the same week last year. That makes sense, considering DISH Network has roughly the same percentage of pay-TV customers as Fox's viewership drop.
Finally, taste is highly subjective, but the presence of another conservative programmer could hurt Fox News as well. Former Fox personality Glenn Beck's station has replaced Fox News on DISH. As time goes on, Fox could find former viewers defecting to this channel over the long term, even after Fox News (presumably) returns.
In fact, Beck could be classified as the true winner from this impasse. Ironically enough, advertisers fleeing Beck's former show on Fox due to his on-air antics was a reason a Fox spokesperson gave for the company parting ways with the conservative firebrand.
A la carte would solve this issue, but hurt both in the long run
Many have argued a la carte would solve this issue. Fox could charge subscribers what the market would bear and DISH would attach a profit margin and provide delivery. However, that would cause both entities to lose money.
For example, in its last annual report, Fox News stated it was in 96 million U.S. households. So, regardless of whether you watch it or not, roughly 90% of pay-TV subcribers pay for the channel. Fox last year averaged 1.8 million viewers in prime time and 1.1 million in daytime. Assuming these are the Fox viewers that would pay for the a la carte option, and assuming a daytime viewer is not also a prime-time viewer (which renders a favorable calculation for Fox), each would have to pay 33 times the current cost for Fox News to mirror its current profits.
Considering SNL Kagan estimates top cable providers pay Fox News roughly $1 per subscriber per month, this scenario points to a la carte pricing at $33 per month. In addition, DISH would have to accept less profit as more individuals chose fewer shows or abandon pay-TV altogether once per-channel prices increase, considering DISH merely attaches a profit margin to each station's cost as well.
In the end, the current pay-TV model is an outdated, socialistic, semi-third-party billing arrangement that has enriched programmers and deliverers at the expense of customers. I think people from both political persuasions can agree the model is in need of positive disruption.
Jamal Carnette owns shares of Verizon Communications. The Motley Fool recommends Verizon Communications. 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.