Report warns that underperforming channels may be vulnerable

The battle’s on between cable programmers and cable operators. At least one Wall Streeter is thinking the unthinkable: Operators may consider dropping channels once thought untouchable, with Viacom in the crosshairs unless Nickelodeon ratings improve.

“Inconceivable has been changed to improbable — a significant difference,” said Bernstein Research media analyst Todd Juenger in a controversial report issued Tuesday.

Viacom CEO Philippe Dauman said at a recent conference that the company has “brands that resonate” and that “bring a lot to the table.”  

Ratings are down significantly at networks repping 71% of Viacom’s affiliate fees, or 89% of its ad revenue, Juenger said, coupled with the desperation of cable and satellite providers to confront rising costs, and “undroppable is no longer assured.”

“We don’t know if a distribution conflict will happen next week, or in three years, or never,” he noted. But he believes market reaction to a public distribution dispute would be “swift and severe.”

Viacom shares closed up 21¢, or 0.4%, at $52.40 on Tuesday. They’ve had a strong run this year, well above their 52-week low of about $44.

Juenger’s report acknowledges that its highly unlikely the networks would be dropped for a combination of reasons, including the possibility of improvement in Nick ratings that Viacom is banking on. But his report addresses an industry in which every network group says it deserves significant rates increases. The topic is obsessing everyone, not least Wall Street. At two separate conferences in late May, Juenger and analyst Michael Nathanson of Nomura grilled showbiz execs on how they see the conflict over rates evolving.

“If we have to go dark, we are going to go dark…We will do what it takes,” said DirecTV chairman Michael White at Sanford’s Strategic Decisions conference. “I’m just not sure (programming costs) are sustainable for consumers and their wallets.”

On May 4, Dish announced plans to drop AMC Networks, home to some of cable’s biggest-name shows like “Mad Men” and “The Walking Dead.” AMC shares have fallen about 15% since. They closed up 21¢ Tuesday at $37.89.

Disney chief Robert Iger criticized cable and satellite providers for their vocal laments. “It’s an odd business,” he said. “Usually a distributor will be extolling the virtues of their product, not complaining about how much it costs them to buy it.”

Dauman told investors at the Nomura media conference that the company is “part of our audience’s lives, whether it’s BET or Comedy Central or Nickelodeon or MTV. So everyone acknowledges that we have very important brands. These are long-term relationships, and there is no single asset. Obviously, when we go to the table, we want more money, and the distributor wants to pay us as little money as possible, and then we talk (and) say, ‘Well this is what we can do for you.'”

According to Nathanson, affiliate fee revenue rose 8% in 2011 and is expected to increase another 8% over the next two years. But “all networks are not created equal,” he said. He thinks ESPN parent Disney is best positioned to capture additional fees, followed closely by News Corp., Viacom and Scripps Networks.

“We would hope ratings drive affiliate increases,” said Scripps exec VP of finance Lori Hickok. “But in the end you get two parties and it will be, can you get to a mutually acceptable deal…It’s not always rational.”

Follow @Variety on Twitter for breaking news, reviews and more