Why Viacom Is Struggling on Several Fronts

The share price of Viacom Inc (NASDAQ: VIA) (VIAB) -- the company behind Paramount Studios and channels like VH1, Comedy Central, among many others -- has fallen by nearly 43% during the past two years. This is partly due to fallout from the intensifying heavy drama among its top executives, not to mention disadvantageous external factors.

In this clip from the Industry Focus: Consumer Goods podcast, Vincent Shen and Dan Kline cover several key points about both the company's fundamental challenges, and its high-profile succession issue. Find out how cord-cutting and skinny bundles are hurting Viacom's cable segment, why its film division is less than reliable, how its family drama is reaching Game of Thrones-like proportions, and more. 

A transcript follows the video.

This podcast was recorded on May 31, 2016. 

Vincent Shen: Let's look a little bit at the struggles that Viacom has actually faced. We know that filmed entertainment revenue has declined 50% since 2011, and that tracks pretty much a five-year slide in total revenue for the company over that same period. We know that a lot of this is coming from the fact that the main studio, Paramount, is struggling with these hits that ... when we spoke earlier, Dan, like, you had mentioned, Disney (DIS -0.55%) knows that its Star Wars or Marvel films will deliver at a certain level.

Dan Kline: Right. Paramount has the problem that we've moved to a franchise-based movie world. If you're going to spend $200 million to make a film, it better do a billion-two, a billion-five. You could say Transformers will do that. You can say that maybe Mission: Impossible has another couple of movies left, but the other franchises they own -- you know, SpongeBob -- it's generally not things that are sure-fire hits.

You know, a World War Z sequel, a Jack Reacher sequel, these are not things you can automatically say are going to do as well as a Marvel movie or even a Despicable Me sequel, to look at some things. They are making 15 movies a year, and maybe 11, 12 of them are a guess, and that's not really where you want to be. You know, when your slate says, Untitled Mark Wahlberg film, that doesn't give you the same confidence as when it says Thor IV.

Then on the other side, on the cable side, they own some valuable properties, but I think we've seen how quickly they can slide. I mean, if you look at something like Comedy Central, just the transition from Jon Stewart to Trevor Noah has cost them, you know, 35%-40% of their audience. They'll say, "Oh, well, the kids watch it digitally," but you don't make as much money as when they actually watch it live on television.

In the changing, cord-cutting world, they own all these properties, but they don't own distribution. If people are moving to skinny bundles or streaming, are they really going to pay for VH1 Classic, or MTV 4, or whatever some of these lesser networks are? It puts Viacom in a really difficult position.

Shen: Yeah. I'm glad you brought that up, because one of these skinny bundles, that you might call it, or these services with Sling TV, for example, I think specifically does not include a lot of these Viacom properties.

Kline: Viacom has largely been on the outside looking in. I want to say Comedy Central is on there, but I might be wrong. The challenge they have is they're not Comcast. They don't own the pipe and the channel. They could launch their own bundle, but we're at a time where MTV is not at the height of its powers. They don't have a Total Request Live, or something that's capturing the 13-to-15-year-olds where they're going to make their parents buy it. If you're picking... if I'm sitting with my kids -- and I only have one kid -- if I'm sitting with my kid and saying, "Hey, what channels do we want," I don't know that Spike, or MTV, or VH1 -- certainly even Comedy Central -- is going to come up.

Shen: Yes. Just to step back a little bit, too, if you're looking as an investor at their media networks business -- how they make money -- so as the viewership drops, it's going to immediately start impacting a lot of their advertising revenue, because the fact of the matter is, the more viewers you have, the more you can charge.

Kline: I think it goes beyond advertising revenue and it goes into carriage fees. MTV and VH1 each have three or four spinoff channels, and while the carriage might only be a nickel a month, a nickel a month times 94 million cable homes being forced to carry those is a lot of money when you have a channel that doesn't have any programming costs. As you take that away, skinny bundles are not going to have these channels, or if they do, they're not going to pay for them. When you take these stations that 60,000, 80,000 people are watching, there's no advertising revenue for that amount of people, or at least not enough that matters.

I think you're going to see Viacom take some real hits, and they don't have a way to get those channels out to people. Other than Transformers, they don't have the movie properties to go make a deal with people that own distribution to say, "Hey, look, take our whole package, take MTV plus these six movie franchises." They don't have that.

Shen: Yeah. Right now, as far as I know, I believe a lot of those carriage fees get negotiated on longer-term contracts. Might be a few years, but the sustained headwinds are hitting media networks business, and they're not able to control that, or command that same kind of viewership. The carriage fees are going to see the hits, not just in terms of what they're charging, but how many people, essentially, that base of viewers they're able to charge it on.

Kline: Yeah. I mean, it's a shrinking universe, which we'll talk about in a few minutes. I think the other thing to think about as an investor is Viacom and CBS have always made me nervous because they're 80% controlled by the Redstone family -- by, for many years, Sumner Redstone, and maybe now Shari Redstone. As an individual investor, if he controls 80%, is he managing the company for me, or is he managing it for himself? I know there's an independent board at both companies, and theoretically independent CEOs, but it's hard to see how this is a company that's looking to maximize shareholder value.

Shen: Yes. Even if you look at Philippe Dauman, who is currently the CEO of Viacom, he was previously seen as longtime protege to Sumner Redstone, and some of the reports I saw when he was still estranged from his kids -- he actually favored Dauman even more than both of them, so you can see.

Kline: Well, that's what makes this all sort of a Game of Thrones subplot, because Shari Redstone didn't speak to her dad far a long time. Now, that's not uncommon in family businesses. I have plenty of relatives I haven't spoken to because of family businesses, but now they've sort of put it back together; but does that mean he's willing to get rid of his longtime friend, or would he come up with some other solution? Maybe minimize his power, or maybe just block the Paramount sale, but not get rid of him. You really don't know who's making the decisions. I mean, look, Sumner Redstone might have moments of clarity and be making clear decisions, or Shari Redstone might just be doing what she thinks benefits her dad.