Dish Networks vs AMC: The never-ending cable battle

July 30, 2012, 4:06 PM UTC

FORTUNE — Disputes between TV providers and the programmers that sell them content are like heavyweight title bouts. Companies may beat their chests and make outlandish claims in the months before a fight, but despite their bravado, they always finish their business close to the final bell.

Yet a month after the clock ran out on Dish and AMC Networks’ carriage agreement — which laid out the price that Dish will pay AMC for content — neither company has stepped into the ring. The impasse proves that Dish’s AMC blackout has little to do the cost of programming, and almost everything to do with an ongoing legal battle between the two companies.

Advertising revenue is unpredictable, and networks like AMC look to affiliate fees — paid by providers like Dish — as a steadier source of income. In negotiations, networks vie for a larger cut of lucrative subscriber fees. Dish Network’s decision to stop carrying AMC Networks’ suite of channels, which includes AMC, IFC, and WE TV, is financially motivated, but for different reasons. The move is a ploy to gain leverage over AMC in a $2.5 billion breach of contract lawsuit — heading to trial this fall — that Dish is unlikely to win.

The two companies have waged a legal war for over four years. In 2008, AMC Networks and its then-parent company, Cablevision, sued Dish (DISH) for $2.5 billion for breaching its 2005 carriage contract with Voom HD, a suite of channels created by a Cablevision (CVC) subsidiary. The dispute centers on whether Dish violated the contract when it dropped Voom because, Dish claims, Voom didn’t spend enough money on programming. A trial is set for September 18th in the New York Supreme Court.

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The timing of Dish’s decision to drop AMC seems retaliatory. Dish first threatened to drop AMC in May, a week after it lost an appeal in the Voom lawsuit. On July 1, when the AMC-Dish contract ended, Dish dropped the network. Dish’s 14 million subscribers haven’t had access to AMC Networks since then, and likely won’t be able to watch the channels until August at the earliest.

“This is a litigation strategy. By not renewing [AMC Networks], Dish gained leverage in the underlying lawsuit,” says Thomas Claps, an analyst at Susquehanna Group. “It highlights the fact that Dish faces significant headwinds in the [Voom] trial.”

Dish did not comment on the legal battle, but a Dish spokesperson dismisses the AMC blackout as a typical ratings dispute, spurred by declining ratings, easily accessible online content, and high renewals costs. That position makes sense, says Alfred Fried & Company media analyst Richard Tullo, because Dish can pay the same amount— and attract even more subscribers— by carrying networks such as A&E.

Not so, says AMC’s COO Ed Carroll. “The Walking Dead is a juggernaut not seen since The Sopranos. To anyone remotely paying attention, Dish’s claim is absurd.”

According to Nielsen, in the last six months The Walking Dead had the highest rating in the key 18-49 demographic among Dish’s basic cable subscribers. The network also has popular shows like Mad Men and Breaking Bad.

Any Dish blackout of AMC, regardless of its motivations, hurts AMC significantly more than it does Dish. Without access to Dish’s 14 million subscribers, AMC ratings and ad revenue will drop, weakening a company already struggling with net debt of over $2 billion.

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AMC’s value to Dish is less obvious. AMC doesn’t have the same influence as larger TV programmers like Disney or Viacom, says Credit Suisse TV analyst Stefan Anninger, and subscribers won’t flee just because they can no longer watch Breaking Bad.

Analysts expect AMC to win big in the Voom trial. The court already barred Dish’s key expert witness from testifying, due to questionable last-minute changes to the expert’s report. It also sanctioned the satellite provider for destroying critical evidence. Dish failed to preserve employee emails from 2005 and 2006, records that Voom says would have supported its position.

Both companies are wooing disenfranchised customers in preparation for a protracted blackout. On its website, AMC is offering Dish subscribers a free online stream of the Breaking Bad premiere. Dish has been sending free Roku boxes— which stream the Internet onto TV— to unhappy subscribers.

Dish says that it has dropped AMC permanently, but most analysts predict an August pre-trial settlement or a September agreement— right before October’s Walking Dead premiere. Because the success of The Walking Dead plays so heavily into AMC’s bottom line, and is the one AMC show with enough ratings power to spur mass defections from Dish, both companies will want to reach an agreement before the season premiere.