How many Nickelodeon-loving children will shed tears over Netflix‘s Viacom programming dump? Deadline reader Zeke sends in this message from his 4-year-old son to Reed Hastings. (Netflix’s loss is Amazon Prime‘s gain):
Investors who bet on media should have warm memories from Q2. The Dow Jones U.S. Media Index rose 6.0% in the quarter vs. the Standard and Poor’s 500 which was +2.4%. Sony led the Big Media pack …
The agreement provides Amazon with “hundreds of TV shows and thousands of TV episodes” including “a collection of TV shows that customers won’t find on any other digital video subscription service,” the companies say. But it’s especially interesting because it comes days after Viacom’s streaming carriage agreement with Netflix expired. Although execs said last week that they’re still negotiating, Netflix made it clear that it now favors deals that would give it exclusive access to programming. “We valued [Viacom's] content for sure, we just disagreed about the value of the content,” Chief Content Officer Ted Sarandos told investors at the Nomura U.S. Media & Telecom Summit. “We’re into a whole new space about what people are watching and what it’s worth.” But Viacom CEO Philippe Dauman told the same gathering that he doesn’t want to be tied down. “There isn’t a player or potential player doesn’t come by our door and we work with all of them.” Streaming, he added, “is a continuing good overall opportunity for us and any growth opportunity for us.” Viacom shares are up about 2% in early trading. Here’s today’s release:
Shares opened up more than 4% this morning after Philippe Dauman reassured investors that Viacom will continue to generate lots of cash from deals with streaming services — even if its program licensing pact with Netflix expires at the end of this month. “We’re still in discussions with Netflix…and with others,” he told analysts in a conference call. “We’re open to licensing content, some of it on an exclusive basis.” Netflix CEO Reed Hastings raised some fears last week when he said that his company would let its current deal with Viacom expire. Netflix is shifting its focus to “exclusive and curated content” as opposed to “non-exclusive, bulk content deals,” he said. The streaming service would be fine without Nickelodeon shows because “with all the recently added fresh programming from Disney, Cartoon Network, Hasbro’s The Hub and DreamWorks Animation, we have a great kids offering.” But Dauman also says that Viacom has little to fear without Netflix — and has “enough visibility” to know that the entertainment company can realize its forecast to see streaming revenues grow 10% this fiscal year.
Several key numbers were down, although cost-cutting at Paramount appears to have enabled Viacom to slightly beat the Street’s profit expectations. The company’s fiscal Q2 net earnings from continuing operations came to $489M, -18.4% vs the period last year, on revenues of $3.14B, -5.9%. Analysts thought revenues would reach $3.19B. But earnings at 96 cents per share were a penny above forecasts. At Viacom’s core pay TV networks operation, revenues increased 2% to $2.23B while operating income fell 2% to $873M. Domestic affiliate revenues were up 3%, but the company says that if you factor out the streaming deals that helped last year’s results the number would be up by a low-double-digit percentage. Ad sales in the U.S. and abroad were up 2% — an upturn that many investors wanted to see after last year’s ratings declines at Nickelodeon. Filmed entertainment was the weakest link with revenues -20% to $941M and operating income -43% to $65M. Viacom says its worldwide theatrical revenues fell 15% without a film that provided the same boost it saw last year from Mission: Impossible — Ghost Protocol.
Analysts expect to hear encouraging news across the board from the barrage of Big Media Q1 earnings reports and conference calls this week and next. But they’ll be listening especially carefully to Viacom on Wednesday. Its shares — which recently hit all-time highs — are down 3.6% since Monday night, when Netflix said that it will let its streaming deal with Viacom expire next month. Netflix says it would rather secure exclusive rights to particular shows instead of broad deals for shows that also appear on other streaming services including Amazon and Hulu. That worries some investors: Viacom has reassured them that all’s well following Nickelodeon‘s ratings dive last year — and backed up its confidence by promising to repurchase $2.5B in stock this year and pay $1 per share in dividends. The question now is whether Viacom can afford to make good on those vows. “Cash, rather than content, remains king,” Pivotal Research Group’s Brian Wieser says this morning. The Netflix news adds to the concerns about Viacom already held by Bernstein Research’s Todd Juenger — the company’s toughest critic on Wall Street. “We don’t think Netflix will bid a big sum for the specific programs it wants from Viacom,” he says this AM. “If they were willing to do so, they wouldn’t have gone through this exercise.” Nor does Juenger believe that Amazon will become a white knight. It “has all the leverage. Anything they offer to Viacom is better than nothing.” He adds that it would be “the ultimate irony if Viacom claimed the loss of Netflix would help their linear ratings, given years of arguing the opposite.” Others are more sanguine about Viacom’s prospects.
UPDATE: After besting Viacom for the second time in three years in the multi-million copyright infringement suit the media giant brought against them, Google released this statement today:
The court correctly rejected Viacom’s lawsuit against YouTube, reaffirming that Congress got it right when it comes to copyright on the Internet. This is a win not just for YouTube, but for people everywhere who depend on the Internet to exchange ideas and information. – Kent Walker, Senior Vice President & General Counsel, Google
PREVIOUSLY, 2:53 PM: Even though it suffered the second loss in three years on the same multimillion-dollar copyright suit against YouTube, Viacom today said it plans to appeal the latest ruling against it. “This ruling ignores the opinions of the higher courts and completely disregards the rights of creative artists. We continue to believe that a jury should weigh the facts of this case and the overwhelming evidence that YouTube willfully infringed on our rights, and we intend to appeal the decision,” said the company in a statement after a U.S. District court judge in New York granted YouTube yet another favorable summary judgment today. “The Clerk shall enter judgment that defendants are protected by the safe-harbor provisions of the Digital Millennium Copyright Act from all of plaintiffs’ copyright infringement claims and accordingly dismissing the complaint, the costs and disbursements to defendants according to law,” Judge Louise Stanton wrote Thursday (read it here).
Even with plans to appeal, this second verse sounds a lot like the first. Viacom lost a previous summary judgment in the case back in July 2010 on the suit, which it instigated in 2007. Among its many provisions, the Digital Millennium Copyright Act offers legal protection from liability to an unwitting website from infringement that its users may perform. Almost two years later, the plaintiffs then got a second swing at the video-sharing website thanks to the Appeals Court in April of last year ruling that YouTube hadn’t adequately proven it was actually entitled to the protection of the DMCA. The Appeals Court also noted it believed that in fact YouTube did know its users were putting up Viacom-owned material on the site. Unfortunately for Viacom, the judge, who delivered a similar ruling back in 2010, thought the system worked just fine and that YouTube had done all it needs to do in this case.
Here’s more proof that Wall Street has freed Viacom from the penalty box following last year’s steep ratings declines at Nickelodeon and MTV. The stock’s up 2.5% in late morning trading — and touched a record $65.25 — after Nomura Equity Research’s Michael Nathanson and RBC Capital Markets’ David Bank said that trends are improving for the entertainment giant. Nickelodeon’s ratings rose 1% in Q1 and with new shows including Teenage Mutant Ninja Turtles establishing themselves “we expect that the ratings momentum at Nick should continue,” Nathanson says. That could pay off if, as the analyst expects, studios boost spending to promote new movies later this year. If that happens and Nick’s ratings continue to improve then it “can likely take back some [advertising] market share from Cartoon Network,” he says. Bank’s upbeat case for Viacom goes beyond Nickelodeon. He says that ratings momentum “accelerated in roughly half of Viacom’s ad revenue portfolio” including Nick At Nite, BET, and Comedy Central. What’s more, he says MTV should look a lot better when year-over-year comparisons no longer include Jersey Shore, which ended its run late last year.
Corporate governance practices at Viacom have been so bad for so long that I was tempted yesterday to just laugh off the announcement — made right after the annual shareholder meeting — that it has appointed Inside Edition anchor Deborah Norville to its 15-member board. Sumner Redstone owns about 79% of the voting shares. What he says goes. So what difference does it make if the board includes someone who has never demonstrated an interest in corporate finance or affairs? Norville has ”more than 30 years of media and television experience and brings a unique perspective to our board that enhances the diversity,” a Viacom spokesman says.
Sorry, but that’s not good enough. Viacom is a $30.8B global company that employs nearly 10,000 people. And Redstone controls 79% — not 100%. He gladly takes other people’s money to run the enterprise. That means he has both a legal and moral responsibility to protect them as well as himself. It should lead him to bend over backwards to ensure that the board represents shareholders, and does so effectively. It needs people who know what’s on investors’ minds, who are well versed in the issues being discussed, and feel independent and fearless enough to stand up to Redstone when they think he’s wrong.
The Inside Edition anchor joins Cristiana Falcone Sorrell, who’s Senior Adviser to the Chairman at the World Economic Forum, on the Viacom board which has been expanded to 13 members. Sumner Redstone says the newcomers bring “valuable skills and complementary experience to our current board.” Sorrell also brings a close connection to the advertising world: She’s married to WPP Group chief Martin Sorrell. Norville’s appointment is a surprise. She’s not known to have had a particular interest in the world of finance and corporate governance. Viacom’s release notes that she “graduated 4.0 summa cum laude from the University of Georgia, where she was elected to Phi Beta Kappa.”
NEW YORK, March 21, 2013 — Viacom Inc. (NASDAQ: VIAB and VIA) today announced the election of Cristiana Falcone Sorrell and Deborah Norville as members of the Viacom Board of Directors, effective immediately. In connection with the election of Ms. Falcone Sorrell and Ms. Norville, the Viacom Board has expanded from eleven to thirteen members.
Add Viacom to the growing list of companies hitting the credit markets to take advantage of today’s low interest rates. The company just announced two initiatives: It will sell $300M of senior notes due in 2023 that pay 3.25% …
The analysis today from Nomura Equity Research’s Michael Nathanson could dampen the mood at TV networks as we head into the big upfront ad sales season. The most startling discovery: total ad revenues didn’t grow at all in 2012 at the Big Media companies he tracks. Declines at Viacom and News Corp outweighed gains at Discovery and Scripps Networks while sales were “essentially flat” at CBS, Disney, and Time Warner. “Given the surge in media stocks, the aggregate 0% growth was somewhat surprising,” Nathanson says. Factoring out political and Olympics-related ads in 2012, he sees ad sales at the companies growing 3.6% in 2013. But the analyst is “cautious” about his forecast. The pickup in the U.S. economy has been “weak” and the ongoing budget stalemates portend “an uncertain economic future.” Meanwhile Internet-based media are taking market share, and driving ad rates down. “In effect, online advertising — specifically online display advertising — is enabling advertisers to reach their ‘eye-ball targets’ with less (and sometimes even no) ad dollar budget growth.” For example, last year media and entertainment companies cut their ad spending 4.2% — even as box office sales hit a record high.
The argument in a redacted version of Cablevision’s antitrust lawsuit at U.S. District Court in New York, released today (read it here), hits at a key part of Viacom’s defense. The entertainment company says that Cablevision could have licensed Viacom channels individually in the long term deal that they signed two months ago, and that businesses often provide discounts to customers who accept package deals. But the cable company says the “penalty” for not taking the package was so onerous that it “was no offer at all.” Indeed, the difference in prices over the life of the contract (undisclosed, although they typically run about six years) ”exceeded Cablevision’s entire 2013 budget for programming.” Viacom has so much market power, the suit says, that it was able to raise its prices at a time when ratings fell for its most popular networks which include Nickelodeon and MTV. What’s more, national ratings show “substantial declines in the daytime and primetime ratings” for nearly all of Viacom’s networks with Logo and VH1 Classic ranking “among the 10 lowest-rated cable networks, for both prime-time and 24-hour average viewing.” If Cablevision wasn’t forced to carry the lower rated Viacom channels, it says that it could have offered “superior programming” from Ovation, GMC, Me-TV, ASPiRE, and Retirement Living TV.
Viacom CEO Philippe Dauman just teased the announcement which he says will be coming “shortly.” The studio’s initiative will be “very small,” beginning with “a project based on one of our film properties,” he said at the Deutsche Bank …