The past year at Viacom, Inc. (VIAB) has been characterized by write-downs, restructuring, and employee layoffs. Weak ratings and a subsequent drop in advertising revenue has forced the mass media conglomerate to take a hard look at its prospects, as streaming and on-demand alternatives continue to pull viewers away from traditional television broadcasts. Thus, the company is focused on building out its digital media platforms in an effort to leverage its content from its family of cable brands, including MTV, Nickelodeon, and Comedy Central. Viacom, which is controlled by Sumner Redstone’s National Amusements, has seen its stock fall roughly 39% in market value since late April. While we appreciate its efforts made to address the ongoing digital migration in the entertainment sector, time will tell if more aggressive actions will be needed. So, will the digital integration spur a renewed age of profit growth at the company? What should investors do at this juncture? Does the decreased price tag guarantee wide returns over the long haul? In this article, we aim to address these questions head-on by looking at the company’s business and performing an easy-to-follow SWOT Analysis, evaluating Viacom’s Strengths, Weaknesses, Opportunities, and Threats.
The history of Viacom, Inc. can be traced back to the 1950s, when CBS Corp. (CBS) established the division to manage the syndication of its television programs. The current incarnation of the company was created in 2005 as a spin-off from CBS, and is comprised of Viacom Media Networks, BET Networks, and Paramount Pictures. Through these holdings, Viacom reaches roughly 700 million subscribers across 160 countries. Sumner Redstone possesses majority control of Viacom and CBS through his National Amusements, Inc. The company reports results via two major operating units: Media Networks and Filmed Entertainment. The former group comprised 73% of companywide revenues in fiscal 2014 (years end on September 30th), while the latter delivered the balance through theatrical, home theater, and television licensing business.
Viacom boasts a wide array of network and film titles that cater to a variety of demographics. MTV and Comedy Central seem tailor-made for today’s social media-integrated digital media world, while Nickelodeon and BET are two longstanding brands with high loyalty amongst their target audiences. While it has struggled to market and capitalize its content amidst shifting consumer preferences, it has a leg up on upstarts trying to become the next mass media conglomerate. Thus, we believe Viacom is only a few moves away from returning to prominence. Take Disney (DIS - Free Disney Stock Report), for instance, which was reeling a little over a decade ago, unable to replicate its early-90s streak of box office success. So, amidst rumors of a takeover, the company bet heavily on acquiring content producers. The addition of Pixar, Marvel Studios, and Lucasfilm has not only reinvigorated the top line at the House of Mouse, but also positioned it atop the mass media market.
Cable Television Reliance
Like many of its industry counterparts, Viacom has been confronted with challenges in its cable programming segment. Viewers, especially in younger demographics, are migrating to cost-effective options like Netflix (NFLX) and Hulu to get their programming fix, while new media platforms like YouTube, owned by Google (GOOG), continue to pressure the old guard media companies to adjust their strategies. Disney recently announced layoffs at its ESPN imprint to cope with surprisingly soft ratings, while 21st Century Fox (FOXA) is working hard to establish digital platforms for its cable assets to grow viewer engagement. But Viacom, whose Media Networks business makes up for an outsized portion of companywide business, appears to be the hardest hit in recent months. It announced a $785 million write-down associated with weak ratings for many of its syndicated programs, including “Entourage” and “CSI”, which led to unspecified employee layoffs, the consolidation of its three media units into two, and the delay of its $20 billion share repurchase authorization. Simultaneously, Comedy Central lost its two most-recognized non-cartoon faces when both Jon Stewart and Stephen Colbert left their stalwart late night television programs.
Viacom has struggled to create new television franchises since the ouster of former CEO and MTV-founder Tom Freston in 2006. Mr. Freston, who was responsible for the approval of The Real World, South Park, and SpongeBob Squarepants was succeeded by current chief Philippe Dauman. Aside from the Jersey Shore and a few one-off successes, its networks have failed to create another major entertainment franchise or ratings juggernaut. This is one of the great ironies of Viacom’s recent plight. That is, while MTV was the first outfit to aggressively target the 18-34 demographic, it has fallen significantly behind other media destinations in growing its viewership. Mr. Dauman, for his part, has criticized the measuring methods of Nielsen, citing their outdated emphasis on traditional television viewing and inability to take mobile and on-demand engagement into account as major shortcomings. Still, until advertisers join the Viacom chief in his contentions, the company will need to rejuvenate ratings through new, popular, and original content. Elsewhere, in its Filmed Entertainment unit, Viacom has fared slightly better, relying on the always-dependable Mission: Impossible and Transformers franchises to support Paramount’s box office haul. Revealingly, one of the company’s biggest hits this year was the animated feature The SpongeBob Movie: Sponge Out of Water, based on the eponymous title character that debuted on Nickelodeon back in 1999.
As the domestic pay-TV landscape continues to be upended by technology, major growth potential exists in international markets. Viacom management has reiterated its belief that an increased global presence will support top-line growth for years. While the burgeoning media markets of India and Africa have been identified as target long-term growth opportunities, the United Kingdom is the ostensible centerpiece of the company’s international expansion. Last year, it purchased broadcaster Channel 5, hoping to use it as a foundation to build its business overseas. Over the past several years, American corporations have been purchasing media assets of all sizes to boost their foothold in foreign regions. AMC Networks (AMCX) acquired Chellomedia for roughly $1 billion in early 2014, hoping to leverage its coffer of popular networks and original series in more countries. Next year, after the impact of the $785 million write-offs are settled, we expect Viacom to try and make a splash on the merger and acquisition market.
Viacom has vowed to aggressively develop its digital media offerings to catch up with viewing trends. In line with its platform-agnostic approach, the company has enlisted help from a number of non-Nielsen data companies. These researchers, such as Rentrak, collect and sell data from a wider variety of platforms, and should subsequently help Viacom more precisely match advertisers with viewers, auguring well for the prospects of its digital media destinations. The company has also explored the acquisition of multichannel networks like College Humor and Funny or Die, two brands whose online presence dwarf the 4.4 million boasted by Comedy Central’s YouTube page. But while it appears to have its eyes set on making a fast-tracked splash in the digital marketplace, Viacom is at risk of again falling behind the industry trends. Both Disney and 21st Century Fox have already made leaps into the digital media sector; the former with YouTube brand Maker Studios and the latter with its investments into Hulu and Vice. Viacom, for its part, launched Noggin, a monthly-subscription streaming app aimed at preschoolers in 2013. However, many in the industry wondered whether or not keeping Nickelodeon programming on Netflix would have supported stronger program loyalty, given the unmatched global subscription base boasted by the streaming pioneer.
The End of the Cable Bundle
In 2015, companies on all sides of the pay-TV market have been forced to grapple with poor ratings. The beginning of the year saw many executives in the industry reiterating their belief that any widespread migration remained years away. But, following a series of disappointing earnings reports, most of those in the industry were compelled to reconsider this stance. Time Warner (TWC) is the earliest success story in this nascent arena, having boldly released its HBO Now platform to non-subscribers in the spring. CBS and 21st Century Fox are both developing digital on-demand services for its subscribers, which will support flexibility should either decide to take a similar track. But, while every television programmer is working tirelessly to leverage its content onto new media platforms, Viacom appears to be the most-challenged conglomerate. Not only does it rely heavily on advertising and affiliate fees, but its ratings are also among the weakest of the old guard. Each of the company’s four biggest networks have experienced troubling ratings decreases among their target demographics this year. The drop at MTV being the most glaring so far this year, as the network’s ratings fell 25% from year-ago levels. As cable providers look to lean out their own operating structures, the importance of Viacom’s networks has never been so uncertain. Thus, the company faces a multifaceted problem as it needs to maintain its cable bundle participation rate, while also figuring out how to find its footing on digital platforms.
Sumner Redstone maintains voting power at Viacom, as well as CBS. Corp. Recently, at the advanced age of 92, he has been noticeably absent from the public eye. Once among the industry’s most vocal advocates and defenders, Mr. Redstone’s absence from the spotlight has only served to stir up increased uncertainty regarding the aging magnate’s succession plan. Reports and speculation on who will inherit control of National Amusements have run rampant since the summer, with family members, business allies, and personal acquaintances all likely to play major roles in the company’s future via a family trust.
In all, the next few years will likely bring some change at Viacom. The long-term earnings picture will hinge on the company’s ability to adjust its operations to better fit into the digital media landscape. While it has made strides in recent months, such a transformation takes several years and millions of dollars to execute. Additionally, flourishing up-and-comers like Netflix and services from the tech sector, like Amazon’s (AMZN) streaming service, will continue to put pressure on the company as it vies to grow its subscriber base across several platforms.