The Tragic Loss Of Spongebob Squarepants And What It Can Tell Us About Corporate Profits

Jul.19.12 | About: AT&T Inc. (T)

Last week, DIRECTV (DTV) and Viacom Inc. (NASDAQ:VIA) failed to reach a new fee agreement, and over 20 million DirecTV subscribers abruptly lost access to 17 Viacom stations and their high-def counterparts.

The first I heard of this disagreement was when my son's best friend started complaining that he could no longer watch Spongebob Squarepants on his TV at home. I thought why would his mother forbid something as innocuous as Spongebob? And then he explained that they don't get the channel any longer.

Being a cable household, this wasn't a problem at my home. But I am actually quite distressed on behalf of the DirecTV families, because Nickelodeon and Comedy Central are a huge part of our TV-viewing activity, probably on the order of 25%-30%. I can't imagine not being able to watch Spongebob or any of the other Viacom shows that my family loves—like The Daily Show and The Colbert Report.

DirecTV argues that the new agreement, replacing the previous seven-year agreement, raises the rates for Viacom programming by over 30%. In this climate of fracturing television choices, with so many alternatives available to the viewing public, such an increase does seem a bit extreme. Viacom's ratings have been deteriorating for many of its stations, as noted recently by UBS entertainment analyst John Janedis.

Viacom, on the other hand, claims that the increase comes only to "pennies per day per subscriber," and that it was willing to negotiate up until the midnight deadline. It is urging customers to switch programming providers, stating that the fees they are requesting are in line with what other providers are paying. They are also supplying DirecTV profit figures to the public, claiming, "All of this money in DirecTV's bank means that they can afford to pay a couple of pennies a day for these channels and that they don't need to pass these costs on to you."

DirecTV's new website, directvpromise.com, indicates today that negotiations are still ongoing and that an agreement will eventually be reached. The company apologizes for the disruption and offers information about some of the Viacom programming that can be found online.

Viacom's tactics seem more heavy-handed and clumsy. It is blaming the entire situation on DirecTV, and running an advertising campaign urging customers to switch to another programming provider. Many parents are feeling that Viacom is using their children to threaten DirecTV, and they are quite irate about the whole situation. Viacom ordered the removal of the stations during the remainder of negotiations, although it is portraying it as a decision that DirecTV willingly made.

I admire DirecTV for taking the high road here, and not stooping to name calling and dirty tricks. Viacom's ads with Jon Stewart and Steven Colbert touting "freedom" are not resonating with the audience as expected. People are smarter than companies often give them credit for, and they can tell who is stretching the truth in this situation. I believe an agreement will be reached, sooner or later, and I believe that Viacom will come out of this looking like a bully. DirecTV looks like the hero.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.