Viacom’s Digital Licensing Fees Contribute More To Earnings

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The affiliate fee income earned by Viacom (NASDAQ:VIA) from its media networks has been growing at a healthy pace for the past few years due to continued growth in fee per subscriber and total number subscribers for its key networks such as MTV, Nickelodeon, and VH1. However, a notable portion of this growth can be attributed to the growth in digital licensing fee.

The growth in video streaming has prompted media companies to license their content to distributors such as Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Hulu and others. This has helped them better monetize their existing content, thereby improving their margins. Digital licensing fee, though relatively small compared to the other revenue streams, will be a key ingredient in Viacom’s growth. To facilitate this growth, the company has been signing various deals with the latest one between Nickelodeon and Hulu Plus. [1]

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See our complete analysis for Viacom

While Viacom’s total revenue from media networks grew by 14% between 2007 and 2011, the affiliate fee component increased by 56% during the same period. [2] Advertising revenue hasn’t been able to keep up with the growth in affiliate fee due to the economic turmoil of 2008-09, as well as due to the fact that affiliate fee is aided by the growth in digital licensing revenue. As a result, the revenue contribution of affiliate fee to Viacom’s media networks has increased from 29% in 2007 to close to 44% in 2012. [2] According to paidcontent.org, Viacom’s total digital revenue stood at around $1 billion in 2011, double of what it was in 2007. [3] However, this figure includes revenue from all its digital properties and not just streaming licenses.

Affiliate fee is exceedingly important for Viacom, and digital licensing is a vital part of it. How Viacom performs in the future will largely depend upon how it balances its content between pay-TV and streaming platforms so as to ensure that one doesn’t cannibalize the other.

Our price estimate for Viacom stands at $67, implying a premium of about 20% to the market price.

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Notes:
  1. Hulu, Viacom Expand Content Partnership; SpongeBob (And Nickelodeon Friends) Join Hulu Plus, TechCrunch, Oct 9 2012 []
  2. Viacom’s SEC Filings [] []
  3. paidContent 50: The world’s most successful digital media companies, paidContent, July 31 2012 []