Viacom’s Studio Operations Are Likely To Remain Rangebound Amid Stiff Competition In The Movie Business

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Viacom’s (NASDAQ:VIA) box-office revenues have been hovering around $1 billion for the past few years. The studio is smaller in size, compared to other media groups such as 21st Century Fox (NASDAQ:FOX), Disney (NYSE:DIS) and Time Warner (NYSE:TWX),  and it comes up with fewer titles. Viacom’s studio – Paramount – released only six movies so far this year and only two of them (SpongeBob Movie and Mission Impossible) were well-received by the audience. Looking at Paramount’s other revenue streams – DVDs & Blu-Rays and movie licensing – both have seen revenue declines in the past few years due to fewer titles. And they are expected to continue this trajectory. Furthermore, unlike other studios, Paramount does not have many popular characters, such as DC Comics for Warner and Marvel for Disney. Accordingly, there are not many popular titles or sequels that are much anticipated for the studio. Also, the studio will compete against sequels to Star Wars and Avatar, which are likely to perform well at the box-office in the coming years. Given these factors, the studio is unlikely to see any significant growth in the medium term. Having said that, we note that the performance of a studio can be erratic as it largely depends on the audience and box office response, which can be fickle and hard to anticipate. Now even higher-than-expected growth in studio revenues would not impact Viacom’s stock price, due to its low value contribution to the company, in our view.

See our complete analysis for Viacom

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Viacom Has Lost Market Share In Past Few Years

The overall studio business contributes merely 3% to Viacom’s value, according to our estimates. This is due to the lower EBITDA margins of around 6% associated with this business, which are the result of high production and distribution costs. Besides, not all movies perform well at the box-office. Paramount’s global box-office revenues have been hovering around $1 billion in the last three years. Looking at the global box-office market share, it has declined from over 10% in 2009 to around 5% in 2014. During this period, the studio sold rights to some of its popular titles to other studios. However, this is just the box-office business. Viacom’s studio also generates revenues from electronic and DVD sales and the licensing of its movies.

The studio distributed many successful titles such as Mission Impossible and the SpongeBob series, among others, but it wasn’t enough to spur segment growth. In fact, Viacom sold its distribution rights to some of the key Marvel movies such as Captain America and Thor to Disney. It must be noted that Viacom’s studio business did much better when it had rights to those Marvel movies and the box-office revenues were north of $2 billion in 2011, the same year when it released Thor as well as Captain America. While the studio is trying to revive some its old hits, including Terminator, it has so far not seen any big success. Paramount currently commands 7% market share with around $560 million grossing at the U.S. box-office for 2015. [1] However, the grosses, including international markets, currently stand around $1.50 billion, led by Mission Impossible: Rogue Nation and The SpongeBob Movie: Sponge Out of Water.

While Some of The Upcoming Titles Look Promising, There Is Lot Of Heat In The Movie Business Amid Stiff Competition

Looking at 2016 and 2017, the studio will come up with sequels to some of earlier hits, such as Star Trek, World War Z, Terminator and Teenage Mutant Ninja Turtles. However, it will face the heat from sequels to Star Wars and Avatar, along with other Marvel and DC Comics’ movies lined up for next few years. It must be noted that Avatar and Star Wars have a massive fan base with millions of followers on social platforms. Given such following, the upcoming movies in these series are likely to do well at the box-office, thereby making it difficult for Viacom’s titles to leave their mark there as well (Also see – Sequels To Avatar Will Boost Fox’s Market Share Of The Global Box-Office).

Owing to the above factors, we estimate Viacom’s box-office revenues will remain under $1.5 billion, and an estimated EBITDA margin of 8% for Viacom’s studio business will translate into EBITDA of a mere $115 million, representing around 2% of the company’s overall EBITDA by the end of our forecast period (towards 2022). However, if we account for studio’s electronic and physical sales, along with the movie licensing business, revenues will be close to $3 billion and EBITDA will be north of $225 million. Given such low value contribution of the segment, even if the movies do well at the box-office and the topline grows at a higher than expected rate, it will not have any meaningful impact on Viacom’s stock price (Also see – How Viacom’s Share Repurchase Strategy Fell Flat).

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Notes:
  1. Studio Market Share, Box Office Mojo []