Why Renewal Of Its Contract With DISH Is A Big Win For Viacom?

After months of speculation, Viacom (NASDAQ:VIA)  finally announced that it had entered into a multi-year renewal contract with Dish, which will ensure that its network portfolio (including Comedy Central, Nickelodeon, BET and MTV) will remain available on the Dish Pay-TV network.  Additionally Viacom live and video-on-demand content will be available on Dish’s streaming service Sling TV. While the negotiations for renewal went through a rough patch, with Viacom warning consumers that its networks might not be available on Dish in future, it appears that both parties reached a consensus on pricing terms, leading to renewal of the contract. Viacom will now continue to provide its content to nearly 14 million Dish subscribers. Dish network has a 12% market share in terms of number of pay-TV subscribers and failure to renew the contract could have resulted in a loss of around 10% in affiliate fees to Viacom.  We believe that, in addition to ensuring revenue flows from Dish, the renewal strengthens Viacom’s position as a TV programming content provider and paves the way for contract renewal with other pay-TV networks in future. Including Viacom’s content on Sling TV also provides the company broader reach to alternative streaming media audience.

Contract Renewal Ensures Steady Revenue Growth In Future

According to our estimates, TV channels account for nearly 95% of Viacom’s valuation and our price estimate of $61.75 for Viacom (nearly 30% higher than the market price) assumed its contract renewal with DISH Network.

See our complete analysis for Viacom

The recently announced deal also provides for the transmission of Viacom’s video-on-demand content on Dish Network’s streaming service, Sling TV.  This will ensure that Viacom’s networks reach Dish’s subscribers in totality –including those on Sling TV.  As the company faces the loss of subscribers to its pay-TV network, it should be partially compensated by new subscriptions to Sling TV.

Affiliate agreements are the most important factor for Viacom to ensure steady revenue growth in future.  Thus the renewal of its contract with DISH ensures that the company will be able to drive growth by delivering engaging viewer content in future. Viacom’s networks are quite popular in the U.S. According to a report from Pivotal Research, 76% of U.S. T.V. viewers watched at least one Viacom network in February 2016. This indicates that DISH could have faced subscriber losses if it had dropped Viacom’s networks. The deal is an affirmation of Viacom’s popularity thus reducing the threat of other pay-TV operators dropping Viacom. As pay-TV networks face subscriber losses due to the cord cutting trend, they are looking to reduce programming costs through hard negotiations with content providers. Contract renewal negotiations between Viacom and DISH network also ran into rough weather as the agreement on the financial aspects of the deal were only achieved through arduous negotiation. The agreement, moreover, indicates that pay-TV networks will  continue paying high content licensing fees for TV programming, even as they face subscriber losses.

Viacom is also exploring alternative distribution channels and recently launched Plex Play a suite of applications, which makes its content available on demand on mobile devices.  (Read How Viacom Is Shielding Itself From The Cord Cutting Trend?) That said, pay-TV continues to remain the most important distribution channel for the company. Viacom would have potentially lost $ 1 billion in revenues and $ 400 million in EBITDA in 2016, according to our estimates, if the contract with DISH would not have been renewed. The impact would have been catastrophic for Viacom if other pay-TV operators had followed suit.

We believe the renewal of its contract with Dish ensures that Viacom’s advertising revenue stream remains steady in future impacting its valuation positively. Being part of Sling TV’s bundle is an added bonus, since it gives Viacom more visibility in alternative streaming media and expands its reach to the “cord nevers”.

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