The affiliate fee income earned by Viacom (NASDAQ:VIAB) 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 of subscribers for its key networks such as MTV, Nickelodeon, and VH1. However, a notable portion of this growth can be attributed to 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. However, Bernstein analyst Todd Juenger has suggested that making kids-focused shows available on the Internet (such as via Netflix) might actually be a bad decision for Viacom as more people will prefer to watch shows on the Internet instead of on TV.  The data provided by the analyst shows a higher decline in Nickelodeon’s ratings among Netflix households as compared to the other kids’ networks. 
Does this necessarily mean that Viacom is doing wrong? Perhaps not!
We believe that relying on this data can deviate investors from the big picture and the long-term fundamental shift that media companies have to be a part of. Ultimately, it is the customers who will drive the shift in the pay-TV industry, and they want more flexibility in viewing videos. What Viacom might be losing out on due to lower ratings (lower ad revenues), it will try to make up by charging higher content licensing fee from online streaming service providers.
Right now, the data provided focuses just on Netflix, but ignores the fact that a lot of big streaming players are expanding their services or entering the market. These include Dish Network (NASDAQ:DISH), Amazon, Verizon (NYSE:VZ), Hulu and Comcast (NASDAQ:CMCSA). All of them have deep pockets, and more competition will bid up the prices. Viacom and other media companies may turn out to be the winners here. What’s critical right now is to adapt to the consumer shift towards connected devices and create a competitive advantage that can help Viacom in the long term.
Our price estimate for Viacom stands at $67, implying a premium of about 10% to the market price.Notes: