It makes a lot of sense when you see a swathe of entertainment conglomerates – CBS, NBC, Sony Pictures, Dish Networks and DirecTV – all talking about offering an OTT network, that something has to have gone wrong in their world, or be about to go wrong.
We note that in another related story this week, many of the US broadcasters among these are limiting contracts for OTT to 2 million homes, prior to renegotiating – a clear sign that they want to control the switch to OTT delivery and make sure it has only positive effects on their revenues.
But it’s obvious that companies of this size do no change strategy overnight and for no reason. So what is it? Are content and pay TV businesses responding to changes they see coming on the horizon, or to changes they have already seen in their latest quarterly results?
We have long held the view at Faultline that little would change in TV delivery, until the process of making content changed. It began to change as new entrants like Netflix have begun to fund original content differently, about 4 years ago. Others have now caught on and this is a clear trend in the industry.
But one change we have long predicted and been on the look-out for evidence of, is that in the shift to OTT video, the content on less popular TV channels would fail to make sufficient money to pay for itself. This will lead to fewer TV channels and result in layoffs throughout the industry.
Viacom this week duly obliged with a warning about its next quarter and the announcements of write-offs due to changes in the media landscape.
It will take a pre-tax charge of $785 million in its upcoming quarterly results in a strategic realignment. Its previous quarter ended in December showed no sign of a problem, with revenues up 5% to $3.3 billion, flat operating margins, and slightly lower net income.
If you look at its old partner in crime, CBS, which was spun out separately a decade ago, we also see no clear problem – revenues up 3% on the back of rising advertising tends. Affiliate revenues are also up. The other US bellwether or the group is Time Warner and here we see the same trends in play, with good revenue gains and huge progress in earnings up 18%. Time Warner is perhaps more engaged in the OTT world, as it owns HBO, itself in the middle of a switch to OTT and with the Game of Thrones about to come out for its new season, likely to do even better in the next quarter.
Back at Viacom the company said it would undertake a review across its worldwide Media Networks, Filmed Entertainment operations and corporate functions, and will reorganize three of its domestic network groups into two new organizations.
It talks about promoting cross-marketing and cross channel programming activity. But surely that’s precisely the opposite of what you’d expect – if some channels are falling apart, why have the good channels try to rescue the weaker channels – surely that’s a recipe for disaster.
Viacom said it will expand data analysis, technology development and consumer insights – implying that it doesn’t know what its audience is really doing.
The $785 million reflects the impact of write downs of underperforming programming, including the abandonment of some acquired titles, and costs associated with workforce reductions. We understand these are at MTV, which is making less and less money.
At Faultline, we think the trick is to make more money out of the well-received channels. Viacom will also reduce the time to amortize programming over – which is all about changing revenue projections for original programming.
The initiatives are expected to provide ongoing annual savings of approximately $350 million. The savings in fiscal 2015 are expected to be approximately $175 million.
Viacom has gone further and will temporarily pause share purchases under its stock repurchase program in order to stay within its target leverage ratio. It says it will come back to share repurchases in October. There will be more detail on April 30th, when its next quarterly numbers will be out.
“The charge reflects the impact of write-downs of underperforming programming, including the abandonment of select acquired titles, as well as costs associated with workforce reductions,” Viacom said in a statement.
Ratings are down in the key 18-49 demographic by over 9% at Viacom’s Comedy Central. They’re down a whopping 27% in prime time for the MTV flagship channel, and 33% overall among kids ages 2-11 for Nickelodeon.
Viacom has moved MTV away from its pure music orientation into a variety of cheap reality TV content – we’re not too surprised that it will become one of the first content makers to feel the financial pain which we have always felt OTT would bring.
What are trickle losses today will become avalanches later and Viacom, so long the strongest content maker in the US, with a reputation for quality and sustainable revenues, looks like it has come too late to an OTT party that its executives do not understand.
Analysts are split with one half saying the worst is behind it, and the other saying, there is more to come – we’re with the naysayers and believe its short term weakness will become infectious and perhaps explains why everyone is suddenly going OTT.
The fact that Sumner Redstone, its largest stock holder, is 92 years old and the company’s succession is pre-determined through family controlled trusts and existing execs, suggests that no-one will have the remit to change its downward momentum.