Potential Improvement in Ad Business May Ease Off Investor Concerns Regarding Viacom

Advertising business constitutes nearly 40% of Viacom’s (NASDAQ:VIA) revenue. There is evidence that some of the big corporations are increasing their TV ad budgets. This, coupled with slight improvement in VH1’s ratings, could lend moderate support to Viacom’s revenue growth as the company reports its first quarter results on April 28, 2016. Moreover, the agreement between Viacom and Dish has been renewed, which was a reason for worry among Viacom investor’s for several months ^[1]. However, still there are meaningful concerns around Viacom’s business regarding the uncertainty around the sale of minority stake in the movie business. The movie business accounts for less than 1% of Viacom’s stock price. We think that a rebound in the advertisement business could help ease off investor concerns.

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Changing Advertising Trends And Ratings Could Help

TV advertisements accounted for 38% of the total advertising sales in the U.S. in 2015 ^[2] . This represented a decline of 0.6% over 2014. However TV ad sales could rise by a measly 0.5% this year due to material increase in the ad pricing.  Several U.S. companies have increased their television ad budgets including P&G (NYSE:PG), which hiked its TV ad spending by 13% in January 2016 as compared to the same period last year ^[3]. This may be the beginning of a trend which will continue to grow only if television media companies could sustain it. This may not be easy considering that U.S. pay-TV subscribers declined by 0.3% in 2015.

Advertising revenues are determined by viewership ratings. Though the ratings of most of Viacom’s networks have been falling in recent quarters, there has been a significant rise in the daily ratings of VH1, which has been given the top spot due to its flagship show “Love and Hip Hop”, especially popular with adults of age group 18-49. This show has remained among the top few during the quarter ((VH1 Garners Highest Ratings In 6 Years, Leads The Top 25 Cable Networks In Growth, VH1 news, March 30,2016)). VH1 accounts for 5% of the total advertising revenue and 15% of the total viewership of Viacom’s TV channels.

Expect More Clarity On Paramount Issue

The conglomerate’s chairman Mr. Philippe Dauman invited bids from investors for a minority stake in Paramount Pictures, which forms a significant part of its ailing movie business. However, the deal was stopped recently by Mr. Sumner Redstone (controlling shareholder) who previously agreed according to people familiar with the matter ^[4]. The management problems have created confusion regarding Paramount’s sale. We believe selling the stake may be in the best interest of Viacom. The filmed entertainment business accounts for 20% of Viacom’s revenue but less than 1% of its EBITDA. Paramount Pictures released four movies in the first quarter of 2016.  ‘Zoolander 2’ turned out to be a big failure as it grossed just $28 million ((Box Office Mojo, April 20,2016)) in the U.S. which is far lower than the earnings of the first part of the movie. It has been already subjected to significant cost cutting due to a strategic decision by Viacom ((Viacom in talks to sell stake in Paramount Pictures, Financial Times, February 24,2016)). The average critics rating of the four movies released by Paramount was below par which could not turn the table for the suffering studio. Looking at the history, and recent releases, we believe that there is little incentive for Viacom to continue with its movie business in its current state. If the deal does not go through it would be unfavorable to the investors. Sale of minority stake to a strategic partner would not only bring cash, but also expertise which could help revive Paramount’s business.

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1. Viacom, Dish Network Agree on Carriage Contract, The Wall Street Journal, April 21,2016 [↩]
2. Digital Ad Spending to Surpass TV Next Year, emarketer, March 8,2016 [↩]
3. Television-Ad Spending Shows Signs of Revival, The Wall Street Journal, April 17,2016 [↩]
4. The Relationship That Helped Sumner Redstone Build Viacom Now Adds to Its Problems, The Wall Street Journal, April 11,2016 [↩]