Viacom: Nickelodeon’s Rating Woes Continue In 2015

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Viacom‘s (NASDAQ:VIA) Nickelodeon network continues to struggle with ratings, which were down 13% in 2014 and slipped more than 34% in Q1 2015. [1] While most of the cable networks are seeing declines in ratings, the pace is higher for Nickelodeon. The decline can largely be attributed to the shift of audience to alternative platforms such as Netflix and Amazon Prime, and mobile devices. Currently, Nielsen’s ratings measurement does not include viewership on these platforms but is expected to start by mid-2015. [2]

Meanwhile, the network has announced new programming for 2015-16 season, including Make it Pop, Talia’s Kitchen and Mutt & Stuff. [3] It will be interesting to see if new programming can aid the network’s ratings in the near term. We expect the network’s revenues to see low-single-digit growth over the next few years. However, there still remains uncertainty around its ratings, which suggests room for stock price movement depending on how the ratings turn out in the next couple of years.

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See our complete analysis for Viacom

Nickelodeon Looking For A Ratings Rebound

Nickelodeon rating woes started in 2011 and peaked in 2012, when it saw a 22% drop in ratings among kids 6-11. [4] Viacom’s management blamed Nielsen’s ratings methodology stating that it did not account for alternative video platforms. While this was a fair argument, Nickelodeon had its own problems too. Both the quality of its programming and its appeal to kids were lacking in 2012. The network came back strongly the following year and posted higher ratings with focus on original programming. However, the viewership dropped again in 2014.

Overall, Nickelodeon’s attempt to rebound ad revenues has been tough so far. The network’s advertising revenues, which are directly impacted by ratings, have declined from an estimated $816 million to $660 million between 2010 and 2014.

Nevertheless, the network is maintaining its competitiveness among kids 2-11 and 6-11. It has plans to put popular character SpongeBob SquarePants in a Broadway musical and extend its Teenage Mutant Ninja Turtles franchise to attract more viewers. It plans to air more than 600 episodes of new and returning series in the 2015-16 television season. [2] Given its focus on content, the network might see a rebound in ratings, which might aid its advertising revenues north of $1 billion by the end of our forecast period. Moreover, a ratings rebound will also translate into better pricing for subscription and advertising. 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 shell out more money. Television is still the biggest medium for advertisements and, Nickelodeon, given its continued appeal, will benefit from this broad level improvement. Television currently accounts for close to 40% of all advertising and it is expected to drop to 37% by 2017, according to research by ZenithOptimedia. However, this downturn will primarily be due to a rise in ad spending at other platforms, and cable spending will continue to rise in the near term. [5]

Our Estimates And Forecasts

We currently estimate advertising revenues of $800 million and subscription revenues of $750 million for Nickelodeon U.S. An estimated EBITDA margin of 42% will translate into EBITDA of $650 million, representing more than 10% of company-wide EBITDA. The reason for our slow growth forecast is the current ratings environment for Nickelodeon. However, there is a potential upside of around 10% to our price estimate if the network revenues go north of $2.5 billion by the end of forecast period. This is possible if the network does manage to see ratings growth led by its new programming and its appeal among kids 2-11 and 6-11. Nickelodeon has relatively lesser competition compared to other mainstream channels. The only noticeable competitors are The Disney Channel and Cartoon Network. This should help it increase its subscription pricing once the ratings rebound and also improve its overall subscriber base.

Given the high demand for top-rated channels such as Nickelodeon, service providers will need to ensure access to such programming for customers. On the contrary, there could be a potential downside risk of 5% to our price estimate if the network revenue falls to $1.15 billion. This is possible if the network fails to attract more viewers. This may put pressure on subscription as well as advertisement pricing and on the network’s overall subscriber base in the U.S.

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Notes:
  1. Viacom Takes $785 Million Charge on Cable Woes, The Wall Street Journal, Apr 7, 2015 []
  2. Nielsen to Measure Netflix Viewing by Middle of This Year, Bloomberg, Mar 25, 2015 [] []
  3. Nickelodeon’s Press Release, Feb 25, 2015 []
  4. Nickelodeon Keeps the Greenlights Coming and Caters to Tech Advertisers, Ad Age, Feb 26, 2013 []
  5. Executive summary: Advertising Expenditure Forecasts December2014, ZenithOptimedia []