The El Segundo-based company is the latest major TV distributor to refuse to pay the hefty rate increase for ABC Family demanded by the channel's owner, Walt Disney Co. According to top industry executives, the channel's modest popularity doesn't warrant the 35% hike, given its rather tiny group of loyal viewers.
In fact, DirecTV said that after it began running a message "crawl" Thursday alerting viewers that a contract dispute could force it to scrap the channel, only five of its 12 million subscribers nationwide called to complain.
"Dropping a channel is not something we do often or do lightly," said Michael Thornton, senior vice president of programming acquisition at DirecTV. "It's a last resort. But our big issue as a company and as an industry is controlling the steep rise in programming costs. We can't saddle our subscribers with these cost increases."
Disney said an increase in ABC Family's ratings since Disney bought the channel in late 2000 justified the higher rate.
"We are surprised and disappointed that DirecTV has chosen to threaten their viewers with the loss of ABC Family," said Eric Hollreiser, a spokesman for Disney's ABC Cable Networks Group.
Disney sources accused DirecTV of issuing the threat to apply pressure ahead of a contract negotiating session scheduled for next week. DirecTV said it simply wanted to give subscribers fair warning of what might happen. The disagreement could be resolved before the contract expires at the end of the month, preventing any disruption in service.
The conflict is the most recent of several between pay TV distributors and their program suppliers that is increasingly disrupting viewers' habits.
Time Warner Cable subscribers in Florida and Minnesota, for example, have been unable to watch hometown teams' games on Fox Sports Network channels since the beginning of the year. Fox pulled that programming after Time Warner refused to pay rate increases ranging from 60% to 100%.
Cable and satellite distributors have drawn a line in the sand this year in an attempt to rein in runaway programming costs that are eroding their profit margins -- and forcing them to raise prices far faster than the pace of inflation.
DirecTV, for instance, said it would boost its prices by an average of 3% in two weeks, its first increase since May 2000. Its programming costs are rising by more than 10% each year.
Several other major cable operators, including Time Warner Cable and Cox Communications Corp., have refused to pay more for ABC Family and also have threatened to remove it from their lineups.
DirecTV pays Disney 15 cents to 20 cents a month per subscription, or as much as $30 million a year, for the channel. If DirecTV were to give Disney what it wants, the annual bill would be as much as $39 million.
According to cable executives, Disney is pressuring distributors for more money because it overpaid for ABC Family by spending $5.2 billion.
Industry executives said they were surprised that DirecTV was taking such a hard line against Disney. DirecTV parent Hughes Electronics Corp., which has been on the auction block for more than two years, isn't known for picking fights. If DirecTV follows through on its threat, it will mark the first time it has dropped a channel in nearly a decade.
Disney is the supplier cable and satellite operators most love to hate thanks to the popular but expensive ESPN sports channel. Rather than risk a consumer uprising, cable operators have been paying 20% annual increases for the last several years for ESPN. The channel costs DirecTV more than $2 per month per subscription, or more than $288 million a year.
Said DirecTV spokesman Robert Marsocci about ABC Family, "This is no ESPN."