Viacom To Benefit As Strong Ratings Growth At VH1 Drives Network Revenue Near Term

VH1 is Viacom‘s (NASDAQ:VIA) popular music channel, which also features music themed shows and lifestyle-based programming. The network saw 16% growth in primetime ratings for the second quarter, benefiting from the success of its shows such as Love & Hip Hop: Atlanta. ^[1] VH1 earns revenues primarily from two sources, subscription and advertising. Higher ratings translate into higher advertising revenues for the content owners such as Viacom. We estimate that VH1’s U.S. operations account for close to 5% of Viacom’s stock value. The contribution is much higher if we account for its global operations. We estimate steady growth at VH1 network in the coming years, driven by the high demand for the network. It must be noted that VH1 has similar penetration levels as ESPN.

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Subscription Revenues Continue To Grow

VH1’s subscription revenues have been growing steadily over the past few years. The network’s penetration in U.S. TV households is over 95%, translating into 98 million subscribers in 2013. ^[2] Monthly fees for the network have also increased from $0.14 in 2007 to an estimated $0.18 in 2013, translating into subscription revenues of $211 million in 2013. Going forward, we expect the monthly fee to continue to grow and be around $0.25 by the end of our forecast period, translating into revenues of close to $300 million by the end of the decade. Large content owners such as Viacom have negotiating power over pay-TV service providers. Given the high demand of top rated channels such as VH1, service providers will need to ensure access to such programming for customers. Moreover, the pay-TV companies sign multi-year agreements with content owners with pre-defined price increments each year. These factors will continue to drive subscription growth for VH1 in the coming years.

Positive Trends In Ratings And Advertisement For 2014

Advertising revenues are largely dependent on the network ratings and the overall advertising marketplace. VH1’s ratings have been trending well in 2014. During the second quarter, it was ranked as the top cable network among the women 18-34 and 18-49 demographic on Monday nights. It also posted 104% increase in Wednesday primetime impressions. Overall, for the quarter, total viewer primetime impressions were also up 20% as compared to the prior year period. The network is benefiting from record viewership at some of its popular shows including Love & Hip Hop: Atlanta, Hit The Floor and Hollywood Exes. VH1 is also seeing growth in its digital operations, with a 148% jump in mobile visitors over the prior year. ^[1] We are eager to see how the third quarter ratings trend for VH1. The network has come up with new shows including Dating Naked, Candidly Nicole and LeAnn & Eddie. However, overall advertising trends in 2014 have not been great so far and Magna Global has cut its forecast for 2014 ad growth (excluding the impact of political campaigns and the Olympics) to 3.5% this year, down from the 4.4% it forecast in 2013. ^[3] This may impact the advertising revenues of media networks such as VH1.

Looking at VH1’s advertising revenues, the trend has been uneven over time.  Revenues declined from $313 million in 2010 to $257 million in 2011. They have since recovered, amounting to $238 million in 2013,  driven by higher viewership and better advertising marketplace. Going forward, we don’t expect them to see any significant growth and we forecast it to be around $280 million by the end of our forecast period.

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1. VH1 Primetime Ratings Rise 16% in Adult 18-49 Demographic in the Second Quarter of 2014, Zap2it, June 30, 2014 [↩] [↩]
2. Viacom’s SEC Filings [↩]
3. Magna Global Cuts 2014 U.S. Ad Growth Forecast, Digital to Drive 2015 Growth, The Wall Street Journal, Aug 26, 2014 [↩]