What Happens If Dish Decides To Drop Viacom?

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Viacom’s (NASDAQ:VIA) stock has plunged around 25% so far in August. This can partly be attributed to June quarter earnings and more recently to the concerns over carriage renewal with Dish Network (NASDAQ:DISH). Viacom has been aggressive on investing in original programming, especially after the massive ratings decline that the company has seen in the recent quarters. However, losing Dish could have a significant impact on Viacom and result in more than 10% downside to our current price estimate. There is a fair probability of Dish dropping Viacom networks from its pay-TV bundle. Here is why.

See our complete analysis for Viacom

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Why Dish May Choose To Drop Viacom?

Before we get to the Dish’s carriage renewal issue, let us consider few important notes on Viacom. The company is far less diversified than its other media peers. For instance, Disney (NYSE:DIS) and Comcast’s (NASDAQ:CMCSA) NBCUniversal have cable networks, theme parks and massive studio businesses. CBS (NYSE:CBS) has the most watched broadcasting network with NFL coverage while Time Warner (NYSE:TWX) has HBO, some sports programming and a giant studio with both TV and movie production. On the contrary, Viacom does not have any sports programming, a premium cable network or a broadcasting network. It does have a handful of popular cable networks such as Nickelodeon and MTV and a comparatively smaller studio (Paramount). But the question arises, is this enough?

Looking at Dish, the company has been vocal on making its subscription affordable and is likely to focus on carrying the programming which is not available elsewhere. A lot of kids programming is available on digital platforms such as Netflix, Hulu Plus and Amazon Prime. Viacom itself entered into a multi year programming deal with Amazon in 2013. Moreover, since there is no sports programming with Viacom, the live viewing is not an important parameter. For Dish it may make sense to drop Viacom and reduce the bundle pricing. Dish could argue that if someone is interested in Nickelodeon or MTV they can have access to their programming via digital platforms and pay for a skinned pay-TV bundle for the networks that are difficult to access on digital platforms, such as ESPN, broadcasting networks and popular cable networks (including Fox News, TNT and TBS among others). While this would lead to Dish losing some subscribers in the near term, it will make it an attractive pay-TV provider from pricing perspective. Moreover, around 60 smaller cable operators already dropped Viacom’s networks last year and the impact on their respective subscriber base was very low (2% in case of Suddenlink Communications, largest of the lot). [1]

What Happens If Dish Drops Viacom?

If Dish decides to terminate its carriage deal with Viacom this year, it will have an immediate impact on Viacom as Dish has close to 14 million pay-TV subscribers. Viacom will lose around $1 billion in revenues and $400 million in EBITDA in 2016, according to our estimates. This will lead to more than 10% downside impact on our price estimate and also hurt the EBITDA margins for the company.

If this were to happen, it might not stop with Dish. This question will come to other larger pay-TV operators (i.e., Comcast and Time Warner Cable), once these contracts stand for renewal few years down the line.  And if they were to choose the same course, it would be catastrophic for Viacom.

Having said that, we would also like to highlight that Viacom’s stock is extremely oversold and our price estimate is much higher at $72 but still in line with the street estimates, as complied by The Wall Street Journal. (see – The Steep Fall In Viacom’s Stock Post Earnings Is Unwarranted). Our forecast currently assumes renewal of carriage with Dish in 2015.

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Notes:
  1. Dropping Viacom Costs Suddenlink Few Subscribers, The Wall Street Journal, Fed 24, 2015 []