What Will Drive The Growth For Viacom’s MTV Network?

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Viacom‘s (NASDAQ:VIA) MTV network has been struggling with ratings for quite some time now. In 2014, the network saw a 5% drop in average primetime viewership in 18-49 demographic. [1] However, MTV is not alone to witness such declines. Most of the media networks struggled in ratings in 2013 as well as in 2014. This can be attributed to the rise of alternative video platforms and streaming services, which are currently not accounted in Nielsen ratings. Viacom’s management has been vocal about Nielsen’s rating mechanism and said that it is “outdated”. [2] Meanwhile, lower ratings continue  to weigh on the advertising for media networks such as MTV, which saw a 3% decline in advertising revenues in 2014.

MTV in the recent past has been focused on bringing in more programming and trying to widen its audience base with shows such as Eye Candy and Finding Carter. We believe that the new programming, coupled with a better advertisement marketplace, will drive the network’s advertising revenues higher in the coming years and subscription revenues will also see a steady growth. However, much of the growth will be dependant on licensing revenues from alternative video platforms.

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MTV’s Subscription And Advertising Revenues Likely To Grow In The Coming Years

We estimate that MTV U.S. contributes close to 10% to Viacom’s value. However, the contribution will be much higher if we account for its international operations. The network has high penetration of over 90% of the U.S. pay-TV households market and it charges an estimated $0.41 monthly subscriber fees from the pay-TV operators, translating into subscription revenues of $475 million in 2014. Subscription fees have been growing steadily over the past few years. It has increased from a little over $0.30 in 2007 to an estimated $0.42 currently. Looking at the network’s advertising revenues, they have declined over the past few years amid lower viewership and ratings. The advertising revenues were $504 million in 2014 as compared to $678 million in 2008. We expect the subscription revenue growth to continue in the coming years and monthly subscription fee to be around $0.50 by the end of our forecast period. This will translate into subscription revenues of around $550 million. The growth in subscription pricing will primarily be led by the annual price increases. Historical dollar increases in fees per subscriber are strong predictors of future growth. Contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. These contracts are long-term, spanning across several years. Also, MTV still has a strong appeal to many viewers especially in the coveted 18-34 demographic. Even though the network has seen ratings decline in the recent past, it was more or less with all the cable networks across various media houses.

We also expect the advertising revenues to grow moderately in the coming years. Ad pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to spend more on advertisements. Television still remains the biggest medium for advertisements and thus media networks such as MTV should benefit from this broad level improvement. Moreover, MTV has a younger audience with median age of 21 years and around 87% of MTV viewers are in 18-49 demographic. [3] This is likely to appeal more to the advertisers. Also, the network is trying to improve its content by brining new programming and it has also been successful with some of its new shows such as Finding Carter, which saw a 0.5 rating in the 18-49 demographic with 1.14 million total viewers during the first season. [4] Accordingly, we believe advertising revenues will grow to $625 million by the end of our forecast period. This will take segment revenues north of $1.15 billion and an estimated EBITDA margin of 42% for Viacom’s media networks will translate into EBITDA of close to $500 million, representing 9% of the company wide EBITDA.

Streaming To Blame For The Decline In Television Ratings

The decline in media networks ratings can largely be attributed to the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), Amazon‘s (NASDAQ:AMZN) Amazon Prime and Hulu. With more options available for streaming, traditional television is seeing a decline in viewership. In January 2015, total live TV ratings fell 13% as compared to the prior year period. Viacom’s overall media networks ratings were down by more than 20% in January this year. [5] There has been a rise in video streaming in the recent past. Americans increased streaming Web video to nearly 11 hours a month during the third quarter of 2014 as compared to 7 hours a year earlier. The data will be even higher if one accounts for Roku, gaming consoles and smartphones. [6] Nielsen will soon begin to account for ratings on streaming services as well. This will primarily help the media networks negotiate higher licensing fees for the shows that are popular on the streaming services. While it is difficult to assess if the growth in licensing revenues can offset the declines in television revenues, inclusion of the alternative video platform in Nielsen’s ratings will be the right step in favor of the content companies.

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Notes:
  1. ESPN No. 1 in Cable Ratings for 2014, Variety, Jan 2, 2015 []
  2. The Chief of Viacom Says Nielsen Is Outdated, The New York Times, Nov 13, 2014 []
  3. MTV Demographics, New York Interconnect []
  4. Finding Carter: Season One Ratings, TVSeriesFinale, Sep 17, 2014 []
  5. Streaming to blame as decline in U.S. live TV viewership accelerates, Tech Hive, Feb 6, 2015 []
  6. TV Viewing Slips as Streaming Booms, Nielsen Report Shows, The Wall Street Journal, Dec 3, 2014 []