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Investment Overview for Viacom (NYSE:VIA)
Viacom makes money primarily through its owned TV channels and through production and distribution of movies.
The company charges pay-TV service providers a subscription fee for carrying its channels. Some of Viacom's high rated channels include Nickelodeon, MTV and VH1. Viacom also sells advertising spots on its channels to advertisers such as Coca-Cola, Ford and Proctor & Gamble.
When it comes to movie business, the company makes money from DVD & electronic sales, box office receipts and TV licensing associated with films made by its Paramount studios. In 2015, Viacom was approached by several investors for a stake sale in Paramount. It appears that the company will soon sell a stake in the underperforming studio to unlock its potential value and use the proceeds on projects that can garner future growth. Alibaba and Amazon are learnt to be front runners to pull a stake in Paramount.
Viacom's ratings have been on a decline since 2014. Viacom's stock fell to four-year-lows in August 2015 amid renewed concerns of cord cutting and continuous fall in cable ratings. For the full year 2015, it lost over 40% of its market capitalization. This can also be attributed to investors concerns over its carriage renewal with Dish Network. If Dish decides to drop Viacom networks from its bundles, it will be a significant loss for Viacom as the satellite operator has a subscriber base of over 10 million. However, we expect Viacom to strike a deal with Dish. It should be noted that such decision to drop the networks would harm both the companies, at least in the near term. Despite near term challenges and ratings concerns, Viacom's networks, such as Nickelodeon, have huge demand and subscribers would like to have it on their bundle. Accordingly, our price estimate does not factor for such event. In case, if Dish does drop Viacom, we would revise our price estimate to adjust the 10 million subscriber loss.
Apart from carriage renewal deal with Dish Network, there are other key drivers of Viacom's value that present opportunities for upside or downside to the current Trefis price estimate for Viacom:
Cable Networks Ratings Decline
Continued Decline In Ratings: Viacom has been looking for a rebound in ratings, but its recent programming slate hasn’t seen the expected success. The ratings woes began in 2011, peaked in 2012 and saw a slight rebound in 2013 before it plunged again in 2014 and 2015. While the decline in ratings was widespread due to a change in viewing habits with the rise of alternative video platforms, the pace was higher for Viacom’s networks due to lack of appeal of its programming slate. Also, networks such as MTV or VH1 primarily target the younger generation, which is rapidly shifting to digital platforms. Overall domestic advertising revenues for MTV, Nickelodeon and VH1 declined from $1.6 billion in 2011 to $1.4 billion in 2015, according to our estimates while overall advertising revenues have remained flat at $4.96 billion during the same period, reflecting the benefits of international advertising. If the ratings continue to decline and overall advertising revenues drop to levels below $4 billion, it will result in a 10% downside to our current price estimate for Viacom.
Having said this, it is possible that we are underestimating Viacom’s competitiveness in key demographics. The company is now focused on bringing in more programming and new shows to attract more viewers. MTV is trying to widen its audience base with shows such as Eye Candy and Finding Carter. Nickelodeon has announced new programming for 2015-16 season, including Make it Pop, Talia’s Kitchen and Mutt & Stuff. It also plans to put popular character SpongeBob SquarePants in a Broadway musical and to extend its Teenage Mutant Ninja Turtles franchise to attract more viewers. If there is a rebound in ratings and Viacom’s media networks could add incremental advertising revenues of close to $1 billion over the next few years, it would result in an upside of 10% to our price estimate for Viacom
International Subscription & Advertising: Viacom has been expanding internationally and currently reaches more than 700 million households in 180 countries. The company has been investing in international markets to consolidate its media networks. In 2013, it acquired a 51% stake in MTV Italia from Telecom Italia Media. Similarly, it also moved MTV Brazil and MTV Russia to owned-and-operated models. In Brazil, MTV moved from the 30th to 16th spot in its core demographic within six months of re-launch. In 2014, Viacom acquired Channel 5 in the U.K. for $757 million. Channel 5 is the only public service broadcaster in the U.K. to post viewership growth in recent years. International expansion has helped Viacom over the past few years. Other subscription revenue, which includes Viacom’s international subscription revenues and Viacom’s other cable networks such as Comedy Central and SPIKE, grew from $2 billion to an estimated $3.5 billion between 2010 and 2014. There is an upside potential of 10% to our price estimate for Viacom if the international and other subscription revenues grow in high-single-digits to $6 billion by 2022. However, owing to an expected increase in competition in the media industry and growth of alternative video platforms, if the revenues stay rangebound $3 billion, it will result in a 10% downside to our price estimate for Viacom.
For additional details, select a driver above or select a division from the interactive Trefis split for Viacom at the top of the page.
TV Channels are the primary source of Viacom's value due a large number of channels owned by Viacom and high margins for that segment. Within TV Channels, Nickelodeon is the largest channel due to high viewership and high fee per subscriber.
High number of channels & viewers
Viacom's flagship channels such as Nickelodeon, MTV and VH1 have close to 90 million subscribers each in the U.S. Apart from this, the company has numerous other channels in the U.S. with healthy viewer base. The international presence is huge and MTV alone reaches close to 400 million subscribers globally across 178 countries via its several MTV branded channels. Similarly, Nickelodeon reaches over 450 million households globally across 170 countries.
High margins for TV channels
There is a huge difference between profits of TV channels and those of movies. Even though movies generate a substantial amount of revenues for Viacom, their margins are quite low. Movies have 1% EBITDA margins while Viacom's TV channels boast close to 40% EBITDA margins.
Increasing pay-TV competition
Increasing competition among pay-TV providers such as Comcast, Time Warner, DirecTV, AT&T and Verizon is favorable for media companies. In such a scenario, Viacom can gain negotiating power in discussions regarding the pricing of subscription fees for its programming content.
Increasing disputes with pay-TV service providers
Even though competition among pay-TV companies is increasing, they cannot continue bidding up subscription prices for channels. In order to protect consumers, pay-TV providers are increasingly taking a stand against media companies which has led to frequent channel blackouts.
With growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. This is helping them recoup some of the lost revenues from declining DVD sales. However, this has also led to a decline in traditional television ratings, which in turn, has resulted in lower advertising revenues.
Trefis Forecast Rationale for US Ticket Prices
This is the average price that a moviegoer would pay to watch a movie.
Historically, prices have increased at a steady rate of between 3% to 5%
We expect ticket prices to continue to go up.
Factors affecting ticket pricing are
- Overall inflation
- Increasing production budget of movies
Production budgets of movies are constantly increasing with increasing costs of production, the fees of stars, and other miscellaneous costs driving the ticket price up.
- 3D movies are driving ticket prices higher
- 3D movies are gaining popularity and tickets for such movies are priced at a premium. As more people watch these movies, average ticket prices will go up
- Concessional sales
Theaters are experiencing a decline in concessional sales and will want to increase the prices to compensate for the decline in the sales.
- Expected success of movies
Historically, most movies have had the same average price at the theatres; however, recent trends indicate at theaters and production studios are trying to cash in on the popularity of a movie by differentially pricing across films.
However, movies are still more expensive than DVDs and VODs
Back to Company Overview
The overall sentiment among the movie audience is that moviegoing is an expensive proposition now-a-days compared to renting a DVD, or internet TV on demand. Hence, the theaters do not have that much leeway in ticket prices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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