Viacom’s Deal with Hulu Makes Sense

February 28th, 2011 by Trefis Team
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Viacom (NYSE:VIA) competes with other media and broadcasting companies like Time Warner (NYSE:TWX), News Corp (NASDAQ:NWS), CBS (NYSE:CBS) and Disney (NYSE:DIS) in the media and entertainment business. Our price estimate for Viacom’s stock stands at $58.36, which is a roughly 15% premium to market price.

The company recently signed a deal with Hulu to make more of its TV content available on the subscription/ad-supported portal. In its press release Viacom stated that:

“Hulu and Viacom Inc. (NYSE: VIA and VIA.B) today announced a new content partnership that will return “The Daily Show with Jon Stewart” and “The Colbert Report” to Hulu.com and bring many popular TV shows from Viacom’s media networks, including Comedy Central, MTV, BET, VH1, Spike TV, and TV Land to the Hulu Plus subscription service.” [1]

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Thus, new TV show content will be available to Hulu’s free ad supported site as well its subscription service that was launched last year. So why does it makes sense for Viacom to go with Hulu for such a deal, rather than Netflix?

Viacom and Hulu Both Emphasize TV Shows

Viacom is a heavily TV content focused company. We estimate that about 79% of Viacom’s value can be attributed to its TV channels like Nickelodeon, MTV, Comedy Central, VH1, BET Networks and Spike TV, while only 14% of its value comes from its filmed entertainment business. Hulu, being specialized in offering TV shows, makes an apt platform for Viacom to get additional revenues.

See our full analysis and $58.36 price estimate for Viacom

So why not Netflix? One could argue that given the popularity of Netflix, Viacom might make more money by striking deals with the movie rental company. However, Viacom could be hesitant to get tied-up with Netflix. Should additional content companies strike these kinds of deals with Hulu, the platform should become stronger and pose a greater threat to Netflix. This scenario would ultimately prove to be an advantage for content companies like Viacom that will then have greater negotiating power and better revenue generation opportunities outside of the traditional pay-TV business.

Viacom Views this as Complementary to its Business

Although Viacom’s deal has created a sense of discontent in the pay-TV industry, Viacom maintains that there is incremental opportunity to earn revenues with platforms like Hulu. According to the company, such deals are only complementary to its existing distribution arrangements. Still, some pay-TV executives believe otherwise and think that such deals hamper their business. [2]

In the fast evolving industry, conflicts between content owners, pay-TV service providers and alternative distribution platforms like Netflix and Hulu are arising everyday. Consumer habits are shifting, technology is evolving and one can not blame companies like Viacom for adapting to these changes by seeking new revenue streams.

Notes:
  1. Hulu and Viacom Announce Content Partnership, Viacom Press Release, Feb 2 2011 [↩]
  2. Viacom’s Hulu Deal Stirs Discontent In Cable Industry, The Wall Street Journal, Feb 4 2011 [↩]