Viacom (NASDAQ:VIA) (NASDAQ:VIAB) has experienced a tremendous amount of corporate upheaval at the hands of the Redstone family, who own a controlling stake in the company. In the past year, investors have seen Shari Redstone force out longtime CEO Philippe Dauman before ousting his replacement Tom Dooley as well.
Now, Bob Bakish is in the CEO office, and he has laid out a plan for the struggling company. In this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel Kline to discuss whether the turnaround is too little, too late. They also discuss the bleak prospects for its Paramount movie studio.
A full transcript follows the video.
This video was recorded on April 11, 2017.
Vincent Shen: Dan, have you had a chance to make it to theaters yet to see Ghost in the Shell?
Dan Kline: [laughs] I have not seen Ghost in the Shell, although I actually want to. But this is one of those movies that, the second you start to get the kind of negative publicity that they got, unless the film is excellent, which reviews suggest it is not, you're in real trouble.
Shen: Yeah, absolutely. Ghost in the Shell is Paramount Picture's biggest release of 2017 so far, and the box office performance, at least domestically, has been disappointing, to say the least. With the production budget estimated at well over $100 million, the film was largely overshadowed during its opening weekend by more family friendly titles, including Beauty and the Beast, which is well on its way to a billion dollars worldwide gross, and Boss Baby from DreamWorks Animation. Ghost in the Shell's box office underperformance is quite indicative of how films from Paramount and that studio have fared in the past few years. Paramount is the major studio behind Viacom's filmed entertainment segment. Dan, I looked through my show notes, we first talked about the drama going on behind the scenes at Viacom with the Redstone family, that was way back in May 2016. For listeners who have not followed the situation as closely, can you give a quick 30-second summary of what happened and what's driving decisions right now for the company?
Kline: Basically, the long term management of Viacom was forced out by some combination of the Redstone family. We're not sure if it's Sumner, we're not sure if it's his daughter who's actually making the decisions. A lot of that was based on the previous CEO and his successor wanting to sell off Paramount. Now, they're holding on to Paramount, and the problem is, the movie world, especially with these big $100 million temples, has moved to sure things, your Disney and Marvel movies, your Fast and the Furious. And Paramount doesn't have many of those. So, when you're making Ghost in the Shell, a property I had never heard of, you have a lot more risk than Comcast and Disney, which have these franchise machines.
Shen: Yeah. And with some of the management overhaul that took place at the company with Philippe Dauman being ousted, along with quite a few other members of the management team, Bob Bakish now has taken on the CEO role, and it's clear in the latest quarterly results and the conference call that he's working to right the ship and lift results across the company with a focus in vision that's probably been lacking for a few years now.
Viacom has seen revenues decline for about five years running, the worst of it coming from this filmed entertainment segment. In 2011, revenue for that segment stood at about $5.9 billion. Last year, it came in at $2.7 billion. Shrinking from about 40% to just 20% of the top line for the company, quite significant. Then, within that filmed entertainment segment, there's a few different businesses. There's theatrical, which is what we're talking about now with these movies, these big tentpole films. There's home entertainment, which includes things like DVD and Blu-ray sales, also streaming deals. Licensing, which is putting out some of their IP for other businesses to air. All of those in that period from about 2011 to 2016 have seen huge declines, anywhere from 22% for licensing to 72% for the theatrical business. This is all in the context of the fact that Paramount Pictures, from 2007 to 2011, was always either the No. 1 or No. 2 highest grossing studio for Hollywood. Then, from 2012 to 2016, it never even managed to break the top five.
Kline: The problem they have, obviously, they don't have the properties, but if you look at a Disney or a Comcast, they own many of the same assets. They have the cable channels. When you're going to make a movie like Ghost in the Shell, you can introduce it to the audience. For example, two years ago, there could have been a show on Nickelodeon introducing it to young children. There could have been specials on Spike. There's so many things you can do to prime the pump. And what Bob Bakish has done in his reorganization of the company is, he's going to put them in a position to have a strategy where these aren't all silo-ed businesses. Where film entertainment and TV talk the same way they do at Disney. Maybe -- they have a little bit of a theme park deal with some of their properties, but maybe they can make a theme park deal, because they don't own that. They have to figure out a way to either get better properties, and that's very hard, or nurture something from TV to the movies, from the movie to TV, and just find a better way to get these properties in front of people. I have a 13 year old son, and the only time he'd ever heard of Ghost in the Shell was seeing the previews, whereas Boss Baby was everywhere. That became a joke in my house, there were so many ads for it and places you could see it and pop culture references. That just isn't happening with Paramount.
Shen: In addition to Bob Bakish, who is the new CEO for Viacom, there's also new leadership for Paramount Pictures. That's with Jim Gianopulos. He took the reins just last week. It's funny, the way you described how a lot of the businesses at Viacom here silo-ed off from each other. Some people were describing the theatrical division for the filmed entertainment segment as being its own island, in terms of the way it's operated.
In the most recent earnings call, management has talked about how they're really trying to focus their efforts behind six of their major brands, and those include BET, Comedy Central, MTV, Nickelodeon, Nick Jr, and Paramount, and how they're trying to bring more film to television, and more television properties to film. For example, I think their Spike network is now going to be rebranded in the next year or so. By 2018, it's going to be the Paramount Network. Overall, our last question here from me in terms of your view of this company, beyond bringing some of these properties and this IP that they have to different mediums and formats to leverage that revenue and profitability there as much as they can, any other priorities do you see for either Jim or Bob moving forward? Especially, you have the recent news that before, they had this potential $1 billion financing deal with some firms in China, that potentially having fallen through. What do you think?
Kline: I'd stop making movies. They have the problem that there's very little room in the marketplace for out-of-nowhere $200 million movies. You have to have a name property. If I owned these assets -- and clearly, Sumner Redstone or Shari Redstone does not want to do this -- I would sell it off for parts. In many ways, Viacom is a company, like a kid who collects baseball cards and did it based on volume. Instead of having the best cards, he has a lot of cards. So, they have all these TV networks. MTV and Spike, those have value. But maybe they'd have more value if owned by somebody else. If you're making movies just because you have to fill out a film slate every year, you're going to spend $300 million to make $200 million time after time after time. They either need to slow down and just make Transformers films and genre movies that are more reasonable budgets and try to revive a China deal, because if you have local partnership in China, then you can get your films released in the limited number of slots there are there.
And with Ghost in the Shell, that's not going to save its profitability, but being released in China is actually going to take a movie that would have been talked about as a colossal loss and make it, perhaps, more of a manageable loss. That's not good news, but it's like saying, "Vince, the bad news is, you're dying. The good news, it's going to be 20 years from now." But, I just think the smart thing to do is take the assets that make sense within the Viacom CBS family -- because the Redstones also own CBS -- hold on to those, merge them with CBS, and then sell off the rest of the parts. Because right now, you have a lot of stuff that just isn't going to work well together, and a film studio that is not set up to run like a film studio needs to run in 2017.
Shen: I will add that the non-voting B shares for Viacom, they have generally traded between $35 to $45 for some time now. That gives them a forward price to earnings valuation of less than 12 times. So generally quite cheap at this point, but for you, Dan, is this a buy? Do you buy into the turnaround, at least?
Kline: No. Here's the thing, I do think they're going to stabilize. I think they have good management in place. But when you have the person who has the overall control in questionable mental health, and dealing with his child who may or may not be on the same page as him, I don't like any of that palace intrigue. And until that gets settled, until I know, "OK, Shari Redstone is making the decisions, this is where it's going to go," no, I'm staying away from it, because the factors that can influence this company go well beyond whether they can figure out how to spend less money or make profitable movies.
Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.