By Jessica Toonkel and Malathi Nayak
(Reuters) - Viacom Inc <VIAB.O> on Tuesday began alerting Dish Network Corp's <DISH.O> satellite TV subscribers that they might soon lose its networks, including Comedy Central, Nickelodeon and MTV, as an agreement between the companies is set to expire Wednesday night.
The threat of losing Dish hit Viacom's shares, which dropped as much as 9 percent. The companies have been in talks for several months over whether Dish would continue to carry Viacom's networks, and at what price. The lack of a new contract could lead to a blackout of Viacom programming on Dish's network of about 14 million subscribers.
Viacom has been struggling to turn around sagging ratings and many investors and analysts see the Dish contract as a major indicator of the company's progress. If Dish walks away from Viacom for good, other distributors may follow suit, analysts said.
Wall Street has been viewing the talks with Dish as the first test for Viacom Chief Executive Philippe Dauman, an attorney known for his negotiating prowess, since he replaced Sumner Redstone as executive chair in February.
Dauman has said the negotiations had been extended and that he expected an agreement with Dish next quarter.
A blackout with Dish could result in a 15 percent hit to the media company's affiliate revenue, analyst Brian Wieser of Pivotal Research Group estimated. Similarly, ad revenue for Viacom's networks could shrink by 15 percent if Dish walks away from Viacom altogether, he said.
Viacom went public with the potential blackout at midday Tuesday, stating it was "extremely disappointed that Dish has not engaged in a serious way to reach an agreement." The New York-based media company started running a crawl across the screen on all of its networks alerting Dish customers of the potential blackout.
Dish, whose shares rose 1.9 percent, fired back at Viacom.
"We regret that Viacom has chosen to involve customers in a business negotiation when time remains to reach an agreement," Dish said in a statement.
"Viacom unilaterally elected to terminate an indefinite contract extension tomorrow night despite meaningful progress on a new agreement that confronts a rapidly evolving pay-TV environment."
If Dish walks away from Viacom, it would join smaller cable operators Suddenlink Communications [CQUELS.UL] and Cable One Inc <CABO.N>, which dropped Viacom last year.
Dish CEO Charlie Ergen, a former professional poker player, has locked horns with big networks such as CBS Corp <CBS.N> and Time Warner Inc's <TWX.N> Turner Broadcasting on distribution deals, even as his satellite-TV company tackles subscriber losses. Ergen, in recent earnings calls, has pointed out Viacom's waning viewership and said viewers could find alternatives to the network's kids content on YouTube and Netflix <NFLX.O>.
Analysts said they believed a deal would ultimately get done. Often carriage agreements are signed at the last minute.
"I think Viacom can't really afford not to do the deal with Dish and Dish knows this and is negotiating aggressively," said Doug Creutz, an analyst with Cowen and Co. "But at the end of the day I am not sure Dish can afford to be without Viacom either because while their ratings are down, they are still a very watched group of networks."
Seventy-six percent of U.S. viewers watched at least one Viacom network in February, Wieser of Pivotal Research said.
Dish is scheduled to report quarterly earnings on Wednesday.
(Reporting by Jessica Toonkel and Malathi Nayak in New York; Writing by Bernard Orr; Editing by Richard Chang)