Saturday, March 12, 2016

(TV) Media: Pity The Conglomerate - Why Viacom's Future Looks Uncertain

If strategy is the long term direction of an organization, Viacom up to this point hasn't had one as it finds itself on the wrong side of one of the biggest shift in the balance of power between networks and pay TV distributors. 

Viacom, a media conglomerate, have made money for decades leveraging their popular networks such as MTV and Comedy Central to force pay TV operators such as Comcast to take less popular channels into their bundles giving pay TV operators no choice but to cough up large retransmission fees  for all  of Viacom's networks just to get the networks their subscribers actually want to watch. 

However, the last five years have seen a grand reversal of this business model as pay TV customers had gotten sick of paying increasing TV bills for channels they don't watch and have opted to explore cheaper, non-linear, and content rich digital options such as Netflix and Hulu. 

Worst still, a segment of the market called "cord nevers" have opted for digital options such as Netflix and Hulu before even considering a cable or satellite TV package which represents their future market of subscribers. This reverse is having a real effect on Viacom on virtually every front as consumers are moving away from the traditional linear TV model offered by networks which explains why Viacom's prized linear networks are experiencing a significant decline in ratings. 

This decline is a big problem for Viacom as it affects the company's two most lucrative sources of income, TV and advertising. Because of this decline in their prized network's ratings, Viacom now have less leverage over pay TV operators who are also feeling the violent shift in consumer preferance and are under serious pressure to meet the demand from consumers to offer smaller bundles or provide an a la carte model where consumers get to choose what channels they pay for. 

This is bad news for Viacom as smaller bundles give pay TV operators leverage to negotiate lower retransmission fees or even opt not to include Viacom's networks in their bundles altogether.

The biggest sign of the reverse is Viacom's negotiations with satellite TV provider Dish Network. While Viacom and Dish have always had a good business relationship and Dish's CEO Charlie Ergen has expressed that he wants to keep Viacom's networks in Dish's pay TV offering, Ergen has pointed out the fragility of Viacom's networks and his intention to insist any deal the two parties hammer out should reflect the decline in Viacom's network value as Ergen said "programmers come in for a renewal and say they want a double digit increase, and we say you should get a double digit decline"1.

Ergen also pointed to the increasing availability of Viacom's network content on a number of online services for cheaper than it is on Dish as another reason why Dish are taking a more muscular stance against rising transmission rates as Ergen insists that his customers "shouldn't have to pay twice" for the same content2. 

However the most revealing reason why Dish are digging their heels in negotiations with programmers like Viacom is because satellite TV, according to Ergen, is a “mature to declining business,” which means that Dish aren't willing to invest as much they would of in the past on content3.  

Dish are feeling the power shift just as bad as Viacom is as unlike cable TV operators like Comcast, Dish don't have a broadband business to fall back on as their pay TV offering continues to decline. However, unlike Viacom, Dish has Sling TV, an OTT service that offers a slimmed down TV bundle online which might possibly be why Viacom's negotiations with Dish are so contentious as Dish are likely to offer low transmission fees for Viacom's network content for Sling TV which explains why Viacom are so reluctant to enter online "skinny bundles". 

Dish would be well within their rights to offer significantly lower fees for Viacom content as there are no slimmed down bundles available online in Sling TV's position which means Viacom may have no choice but to take what Dish gives them as SVOD services want Viacom's content rather than Viacom's networks There's even a possibility that Dish won't offer Viacom given their content is distributed by Sling TV's OTT competitors such as Netflix. 

In any case, should Dish offer lower satellite and/or OTT transmission fees, it's bad news for Viacom either way. 

The news that keeps Viacom executives up at night is the decline in their networks rating means for their advertising business as lower ratings mean lower ad revenue which is why Viacom stock takes a hit every quarter their ad rev dips. Last month, Viacom saw a 15% drop in its stock after it reported less than encouraging earnings results with their U.S. ad revenue dropping 4% as Viacom cited decline in viewership of their networks as the cause for the dip 4. It's international advertising operation didn't escape the decline with Viacom's international operation experiencing a 2% drop 5. 

However, what really should keep Viacom executives up at night is how the company has exhibited a serious lack of strategy that has defined the company for a decade. Viacom should have at least invested in or started their own VOD service at least five years back given just how dependent the company is on traditional TV and advertising revenue to hedge their bets but instead the company has spent a whopping 21 billion on share buybacks since 2006 which speaks to just how blind the company has been to trends in their own market.  

Much of the blame has been rightly placed at Viacom CEO Phillippe Dauman's feet who has focused on increasing shareholder value which worked for a while but not of late given Viacom's stock has dropped an eye-watering 44.13% since last March 6. This steep decline in Viacom's price is responsible for the company losing billions as Bloomberg reported last year that the company lost $3.8 billion thanks to dauman's buyback scheme going south 7. While it is part of Dauman's role to provide value to Viacom shareholders, it's also Dauman's job to invest and grow the Viacom which hasn't happened much under his reign and the company is in a poor position to compete in the marketplace because of it.

In sum, Viacom have no one to blame but themselves for their current predicament as their lack of strategy or any semblance of long term thinking has left the company vulnerable just exactly at time when it shouldn't be. 


1 D. Lieberman, 2016, Dish Network CEO Hints at Hard Line in Viacom Renewal Talks, Calls Extension a "Positive", 
2 Ibid
3 Ibid
4W. Friedman, 2016, Viacom's ad rev dip; slower SVOD results,
5 Ibid
6Google Finance, 2016, Viacom, Inc. (NASDAQ: VIAB),
7 C. Palmeri and L.Shaw, 2015, Viacom CEO Dauman loses 3.4 billion betting on his own company, 

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