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Advertising and affiliate revenues thrust the Viacom business forward

An investor's guide to Viacom (Part 2 of 5)

(Continued from Part 1)

The media networks (known as MTV Networks until 2011) segment accounted for 69% of Viacom’s total revenue for 2013. The segment generates revenues in three categories (2010 in the graph below reflects January 1 to September 30, 2010, data due to change in fiscal year):

  • The sale of advertising related to Viacom’s content and marketing services that is dependent on the number of viewers and viewership demographics,

  • Affiliate fees from multichannel television service providers, including cable television operators, direct-to-home satellite television operators and telecommunications operators, subscription and advertising supported video-on-demand services, and other distributors of programming and program services, and

  • Ancillary revenues, which include consumer products licensing, brand licensing, home entertainment sales and licensing of programming, television syndication, and casual gaming.

In 1Q14, media networks revenues rose 6% to $2.54 billion, driven by increases in affiliate fees and advertising revenues. Domestic advertising revenues increased 3%, but were lower than the “mid single digit growth” forecasted in November. The management said on the earnings call that the budget crisis in Washington led to uncertainty but that the “demand is back to normal.” International advertising revenues increased 16% reflecting new channels and European market improvements. Affiliate revenues grew 10% on a domestic and worldwide basis, primarily due to rate increases.

The company said on its earnings call that Nickelodeon reclaimed the top spot among kids’ networks in 1Q14 with preschool new series “PAW Patrol” performing well. Animation performed well with SpongeBob SquarePants, Sanjay & Craig, and Teenage Mutant Ninja Turtles pulling in big audiences. The Ninja Turtles’ consumer products line also saw growth ending 2013 as the #1 boys action property in the U.S. toy industry according to NPD. Comedy Central saw its highest rated quarter and SPIKE, VH1, and CMT delivered strong double-digit year-over-year ratings growth in the December quarter. However, the ratings at MTV were tampered due to a softer marketplace in November.

Growing revenue via content and partnerships

After combating ratings declines across its networks earlier last year, especially at Nickelodeon, Viacom’s cable networks business revamped its programming and content, and posted strong advertising growth in 4Q13. Viacom’s aggressive investment in content, operational execution, and fiscal discipline helped the company to increase profits. The company said in 4Q13 that domestic advertising revenue gains continued to accelerate media networks segment, as new, original programming drove improving ratings momentum. Viacom also expanded partnerships with traditional cable operators and new digital distributors to deliver solid affiliate revenue gains.

Viacom earlier had a streaming deal with Netflix which expired in April last year as Netflix said it looked to “focus on exclusive and curated content.” Amazon took advantage of this and announced an expanded multiyear, multinational digital video licensing agreement with Viacom to bring hundreds of TV shows and thousands of TV episodes from Viacom to Amazon Prime. In December, Viacom and Time Warner Cable announced a multiyear renewal of their distribution agreement.

Cable networks have been driving profits at media conglomerates over the past few years because they generate revenue from advertising, which is mostly dependent on economic conditions, and affiliate fees, which are more predictable due to multiyear agreements with pay-TV providers, and these agreements ensure a carriage fee.

Viacom reportedly reached a deal with Sony last year to make its popular cable TV channels available on a paid internet TV service. According to the unconfirmed reports, the service will bring cable channels like Nickelodeon and Comedy Central to the PlayStation and to Sony TVs. Sony said last month at a Consumer Electronics Show in Las Vegas that it would start testing a “cloud-based TV service” later this year. Viacom CEO Philippe Dauman had said in a conference last year he saw a “very strong chance” that a “virtual” pay-TV provider will launch in 2014, but did not elaborate further.

The traditional pay-TV business model is transitioning with Apple (AAPL), Google (GOOG), and Amazon (AMZN) planning to make the Internet-based pay TV a reality. Intel (INTC) had planned to revolutionize pay TV with its OnCue Cloud TV technology for streaming television shows online. However, Intel recently sold the unit to Verizon after seeing resistance from TV content providers on content licensing. Verizon is expected to bundle its FiOS cable TV service with Intel Media’s OnCue Cloud TV technology for streaming television shows online.

The Wall Street Journal reported last month that Viacom plans to launch a customized channel for kids called “My Nickelodeon Junior” available initially for customers of Verizon Communications’ FiOS TV service, and later rolled out to other U.S. pay-TV operators. The channel will combine both scheduled programming and on-demand options like Netflix and Pandora. The report said the initiative will support Viacom to compete with streaming-video services.

The company last month launched Viacom Velocity, a new full-service group offering insights-driven integrated marketing and creative content solutions. Viacom Velocity merges the company’s existing music and entertainment integrated marketing teams with a new creative team, and was built to utilize the company’s unique relationship with audiences and drive value for marketers through consumer insights, strategic collaboration, and creative excellence.

In terms of outlook, the company expects to see sequential improvement in domestic ad sales growth despite the headwind of the shift of Easter to the June quarter this year. For the full year, Viacom expects that the growth rate for media networks programming expense will be in the mid-to-high single digits.

Continue to Part 3

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