Last week Viacom (NASDAQ:VIA) reported its Q2 fiscal 2012 earnings and several metrics were in line with our expectations. We recently wrote how Viacom’s filmed entertainment was not performing as well as it did last year and that the reduction in ratings of its key cable networks would affect advertising revenues (see Viacom Earnings Will Show Impact Of Better Ad Spending But Lower Ratings). As it turned out, the filmed entertainment revenues declined by 5% and advertising revenues at Viacom’s media networks grew by just 1% in the U.S. and remained flat internationally.
The reduced ratings offset the increased ad pricing driven by demand from advertisers. However, the positive aspect was that the subscription fee revenues helped the media networks revenues grow by 5% compared to Q2 of fiscal 2011 and alongside give a boost to margins. Media networks account for almost 80% of Viacom’s value and competes with cable and broadcasting networks of other media giants such as Time Warner (NYSE:TWC), Disney (NYSE:DIS) and News Corp (NASDAQ:NWS).
Viacom’s subscription and digital distribution fees increased by 15%. The benefit of having a subscription business and multiple opportunities to monetize the content is clearly visible. In line with the industry trends, Viacom also benefited from its subscription rate increases. It appears that despite the competition and springing up of alternative video platforms, the cable network rates will continue to increase as media companies will seek the compensation for high programming expenses resulting from competitive factors, and potential loss of ad sales due to ratings declines. As multiple platforms emerge, the share of TV-viewing time is going to get fragmented, thus affecting ratings.
Our current price estimate for Viacom stands at $64.29, implying a premium of about 25% to the market price. We are in process of reviewing our price estimate in light of recent earnings.