Viacom (NASDAQ:VIAB) has reportedly reached a preliminary deal with Sony (NYSE:SNE) to allow the latter to distribute its TV content over an Internet television service.  If the deal goes through, it could well be the beginning of a new era of Internet TV. Apart from Sony, companies such as Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), Amazon (NASDAQ:AMZN) and Samsung have also been challenging traditional pay-TV operators.
Sony is also holding discussions over content rights with other media companies such as Disney (NYSE:DIS), Time Warner (NYSE:TWX), and CBS (NYSE:CBS). To its advantage, Sony has its own content assets that it can offer to the subscribers. If this deal goes through, it will be a welcome move for Viacom as it will boost its affiliate fee revenues.
Content Deal With Sony
Sony is planning on starting an Internet TV service to stream cable channels and on-demand programming. The new service will offer customers another alternative to video-on-demand services such as Netflix (NASDAQ:NFLX) and Amazon. The consumer electronics giant will offer Viacom’s popular TV channels such as MTV, Nickelodeon and Comedy Central on Sony devices such as the PlayStation gaming console and Sony TV set. The growing popularity of video-on-demand service is already aiding growth of content owners such as Viacom, and a pact with Sony will further boost the company’s overall revenues. Viacom saw a 13% jump in overall revenues in Q3 2013 led by a 26% surge in affiliate fees as it signed a content deal with Amazon (See – Better Ratings And Higher Affiliate Fees Drive Viacom’s Q3 Earnings).  TV channels Nickelodeon and MTV have been focusing on original programming and have seen improved ratings in 2013. (Read – Nickelodeon’s Better Ratings Lift Viacom’s Stock) This will ensure that the demand for Viacom’s content remains intact in the near term and that the company continues to benefit from the content deals.
Demand For Original Content
There is strong demand for online streaming and content owners are cashing in on it. However, streaming service providers including Netflix realize the importance of original content and have started investing in it. (Read – Original Content Remains The Key Factor To Netflix’s Value) In fact, Netflix saw a big surge in the number of subscribers with the success of its original series – House of Cards. Interestingly, a couple of months back, the company did not renew its streaming deal with Viacom, reflecting its focus on limited amount of sourced content. (See – Netflix Loses An Important Deal To Amazon) Currently, the content is primarily streamed in the U.S. and as streaming providers move to international markets, content owners will gain more. While we believe that Viacom and other media companies will continue to benefit from increased streaming, Internet TV could well emerge as a new revenue stream in the long run.
Our price estimate for Viacom stands at $73, roughly at 5% discount to the current market price.Notes: