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Why Viacom Is Buying Pluto TV

Stephen Lovely, The Motley Fool

Viacom (NASDAQ: VIA) (NASDAQ: VIAB) recently announced that it would be acquiring streaming service Pluto TV. Viacom is plunking down $340 million in cash to get its hands on the entire operation, which will be an independent subsidiary and retain its current leadership. Pluto TV is an ad-supported, internet-based TV service that streams more than 100 channels and "thousands of on-demand movies."

But for Viacom, the real value of Pluto TV may not have much to do with its current streaming business model. The more important thing about Pluto TV is its underlying streaming infrastructure and its broad availability on platforms, which will help Viacom catch up to its many streaming-savvy media rivals.

Scissors cut a cord in front of cash

Image source: Getty Images.

What is Pluto TV?

Pluto TV isn't a whole lot like any other streaming service on the market. It's a free ad-supported service, like Tubi TV or Sony's (NYSE: SNE) Sony Crackle, but it is not structured as an on-demand service. Pluto TV is a multichannel service that offers continuous feeds that users can jump between. At the same time -- and in contrast to cable-lookalike multichannel streaming services like AT&T's (NYSE: T) DirecTV Now and Dish's (NASDAQ: DISH) Sling TV -- Pluto TV doesn't have much in the way of familiar cable networks like ESPN, HGTV, or TNT. Instead, Pluto TV creates its own original channels. It builds the "live" programming for those channels out of a combination of licensed content and videos that are already available for free on the web.

It's a unique strategy, but it works. Pluto TV shares ad revenue with its partners in licensing deals, and Digiday reported that three partners with 24-hour channels on Pluto TV said they were on track for annual revenue of "mid six figures."

Why Viacom needs a streaming strategy

Viacom is a media giant: It owns popular networks like Comedy Central and MTV and it owns film and television studios like Paramount Pictures. Viacom makes content and airs it on its own networks. But after that, Viacom has to turn to other companies to get its content streaming on major services and earning royalties.

Other media giants -- most notably Disney (NYSE: DIS) -- have found this inefficient. Disney will make more money if it owns the streaming services as well as the content (and the television channels), which is a huge part of why Disney made its blockbuster deal to acquire the bulk of 21st Century Fox's media assets.

Streaming services, too, have seen the benefits of this kind of integration. Netflix (NASDAQ: NFLX) has increasingly focused on its original series as a way to create content it doesn't have to pay other parties -- like Viacom -- for. Original series help Netflix avoid temporary streaming deals and bidding wars with rivals. The more it keeps in-house, the more money Netflix makes.

The more companies follow this strategy, with streaming giants developing content and media companies developing streaming services, the more Viacom is being left out in the cold. Viacom does not want to get stuck in a position where it is selling Comedy Central reruns to Netflix or Disney even as those companies become less and less interested in bidding on that sort of outside content. Viacom would be better off getting its own streaming service.

And now it has one.

Pluto TV's real appeal

Pluto TV is not Netflix -- it's not a subscription service, it's not nearly as popular, and it does not currently operate as an on-demand service. But it is an established streaming service. It has apps for the major streaming platforms: Viewers can watch Pluto TV on Roku devices, Amazon (NASDAQ: AMZN) Fire TV devices, Apple (NASDAQ: AAPL) TV devices, and others using established apps. Pluto TV has existing streaming infrastructure and apps, and that will save Viacom a lot of time relative to developing its own streaming service. That's pivotal right now, with Disney's Disney+ among the multiple major streaming services set to hit the market in 2019 and beyond.

It doesn't hurt that Pluto TV claims 12 million active monthly users -- though that's a number that we should probably take with a grain of salt, given that it's hard to measure user numbers accurately on services that allow viewers to watch without logging into accounts. But however many users Pluto TV has, it's a start. Along with Pluto TV's content licensing deals, it could help Viacom catch up to the pack in media streaming.

Playing catch-up

Viacom has some catching up to do, but its acquisition of Pluto TV gives it options. While Pluto TV is operating as an independent subsidiary for now, it's easy to imagine Viacom choosing to alter the Pluto TV business model and focus on on-demand content (Pluto TV already has a catalog of on-demand content in addition to its live channels). Viacom could even seek to incorporate a la carte subscriptions in the way that Roku has with its Roku Channel, a free service that now also serves as a hub for paid premium subscriptions. Most important of all, Viacom can now control and monetize its content from start to finish, creating that content in its own studios, airing that content on its own channels, and streaming that content on its wholly owned streaming service.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Amazon, Apple, AT&T, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.