How Are Viacom’s Smaller Networks And International Expansion Trending Amid A Changing Media Landscape?

Viacom’s (NASDAQ:VIA) cable networks have seen phenomenal growth in the international markets over the past few years, primarily driven by the success of its programming at Nickelodeon and MTV. The division we label as Spike, BET and Other includes several international networks as well as a number of smaller domestic channels. These networks generate revenue primarily from advertising and subscription fees. The segment contributed 50% of Viacom’s overall revenues and 65% of its EBITDA in 2014. We believe that the company’s focus on international expansion and bringing more original programming will drive the cable networks business in the coming years. On that note, below we discuss the trends in Viacom’s international cable networks division and our forecasts and estimates.

We estimate revenues of about $14.2 billion for Viacom in 2015, with EPS of $5.83, which is in line with the market consensus. We currently have a $80 price estimate for Viacom, which is around 20% ahead of the current market price.

See our complete analysis for Viacom

How Is Spike, Bet & Other Division Trending For Viacom?

The Spike, Bet & Other division in our model includes Viacom’s international media networks and a number of smaller domestic networks or sub-networks, including Spike TV, MTV2, CMT, TV Land, VH1 Classic, BET, Centric and Logo. Viacom has also been expanding some of its popular media networks such as MTV, Nickelodeon and Comedy Central in international markets. The smaller domestic networks and international expansion have been the driving force for Viacom in the past few years. The segment’s subscription revenues grew from a little over $2 billion in 2010 to $3.4 billion in 2014. Similarly, advertising revenues also grew from a little under $3 billion in 2010 to $3.6 billion in 2014, according to our estimates. Viacom’s reach also expanded from around 600 million households to 700 million households globally during the same period. ^[1].

The company has been investing in international markets to consolidate its media networks. In 2013, it acquired a 51% stake in MTV Italia from Telecom Italia Media. Similarly, it also moved MTV Brazil and MTV Russia to owned-and-operated models. In Brazil, MTV moved from the 30th to 16th spot in its core demographic within six months of re-launch. Last year, Viacom acquired Channel 5 in the U.K. for $757 million. It must be noted that Channel 5 is the only public service broadcaster in the U.K. to post viewership growth in recent years.

The Change In Media Landscape And Its Impact On Viacom

The U.S. media landscape is changing, with the rapid growth of alternative video platforms such as Netflix (NASDAQ:NFLX) and a decline in traditional television viewership, which has caused massive ratings declines for many networks. Viacom’s cable networks were hit hard, and MTV saw a 5% drop in average primetime viewership in the 18-49 demographic in 2014 while Nickelodeon’s ratings plunged 13% in key demos. ^[2]

Networks such as MTV and VH1 primarily target the younger generation, which is rapidly shifting to digital platforms. However, the infrastructure for services such as Netflix is not currently available in all markets. Moreover, television continues to dominate globally, with close to a 40% share in advertising despite the rapid growth seen in digital media. ^[3] Viacom should therefore continue to see steady growth in international markets in the coming years. Accordingly, we estimate segment subscription revenues to be north of $4.5 billion and advertising revenues to be over $4 billion by the end of our forecast period. An estimated EBITDA margin of 42% will translate into EBITDA of over $3.7 billion, representing 65% of the company-wide EBITDA. However, there could be a potential upside of 10% to our price estimate if the segment’s subscription revenues are north of $5.50 billion and advertising revenues are over $4.50 billion by the end of our forecast period. Given the demographics Viacom’s media networks target, the international expansion may continue at the same pace and its revenues could improve. However, there is a downside risk of 10% if the networks are unable to maintain the viewership growth and subscription and advertising revenues remain subdued under $4 billion throughout the forecast period.

In the long run, the industry may look different, even on the international front. We maintain our view that there is a place for both streaming and traditional television to co-exist. A shift in audience from traditional television to digital platforms does result in lower ratings, which in turn weighs on advertising revenues, but if there are more avenues to stream the content, media companies will be able to generate more revenues in the form of content licensing fees. Also, Nielsen will soon start measuring ratings of various shows on Netflix and Amazon Prime, based on which the networks can negotiate licensing fees. Eventually the viewership across various platforms will be measured, and any decline on the traditional television front should be offset by the growth in other avenues such as content licensing. For media networks, it is of immense importance that they focus on original programming that can attract more viewers, because licensing to digital platforms is often based on individual shows rather than a complete network bundle.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Viacom’s SEC Filings [↩]
2. The Ever-Updated TV Upfront Chart, AdAge, Mar 10, 2015 [↩]
3. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Media Brands, Dec 8, 2014 [↩]