With New Deal, Viacom Steadies VOD Ship

Pact with Amazon—after Netflix split—keeps its part of revenue stream flowing

Viacom's new deal with Amazon has put to
rest—at least for now—concerns that streaming
video revenue, which stoked TV companies’
profits for the past year, could dry up.

Worries arose in April, when Netflix said it would
allow its broad deal with Viacom Networks to expire at
the end of May. “As we continue to focus on exclusive
and curated content, our willingness to pay for nonexclusive,
bulk content deals declines,” Netflix CEO
Reed Hastings said in a letter to shareholders.

Fortunately for content companies hoping to monetize
their libraries, Netflix isn’t the only buyer in the
stream. That’s good news as online subscription videoon-
demand deals expire for companies that are more
reliant on streaming revenue than Viacom, such as
CBS and Discovery Communications.

Amazon last week snapped up what it called hundreds
of TV shows and thousands of TV episodes from
Viacom for its Prime Instant Video service—some of
which had been previously available on Netflix—plus
fresher content, some of which will be exclusive. The
content includes Nickelodeon kids shows such as
Bubble Guppies and Team Umizoomi, new episodes of
Dora the Explorer and SpongeBob SquarePants, MTV series
such as Awkward and Comedy Central’s Tosh.0.

All along, Viacom CEO Philippe Dauman has been
assuring analysts that, even after Netflix said it would
not renew its streaming deal, affiliate revenue would
be up 10% this year. “We continue to see the digital
distribution arena as a growing opportunity, and one
that will be complementary to what we do. And it’s just
growing the pie over time,” Dauman said during the
company’s second-quarter earnings call in May.

0610 Currency Streaming chartAmazon Deal a Prime Mover

When the Amazon deal was announced, analysts
said it fulfilled Dauman’s promise. UBS analyst John
Janedis headlined a research note about the deal “Affiliate Growth Story on Track.” Janedis said, “We expect
that it will have a $60 million-$70 million impact
in fiscal 2013, allowing Viacom to meet its 10% affiliate
fee growth guidance.” He pegged Viacom’s affiliate
growth at 9.7%.

Marci Ryvicker, analyst at Wells Fargo Securities, said,
“Netflix’s loss is Amazon’s gain and either
way, Viacom still wins.” The deal “reinforces
management’s comments that there are
willing buyers of its content,” she added.

Viacom is also talking to Netflix about
a domestic deal for some programming
not included in the agreement with Amazon.
The two companies do business in
international markets. But analysts expect
any new Netflix deal to be smaller
than the one that expired.

Analyst Todd Juenger of Sanford C. Bernstein
is concerned that Viacom affiliate
growth will slow in 2014. “How will Viacom
be able to grow SVOD revenue in the following
year(s), considering the Amazon
deal is multi-year and includes exclusive elements?”
Juenger asked in a research note.

The question is an important one for programmers.
Juenger calls the programmers’ need for SVOD revenue
“an addiction.” He estimates the big media companies
now take in about $1.5 billion a year in streaming licensing
revenue. Because there are very few costs associated
with streaming revenue, nearly all of it falls to
the bottom line, making it a big contributor to media
company profits.

For example, Juenger estimates that CBS takes in $325
million-$375 million in SVOD revenue, which accounts
for 2% of its total revenue and 10% of operating income,
making it tops in the field. Streaming represents
5% of profits at Discovery, Time Warner and Viacom,
4% of profits at News Corp. and 3% at Disney.

Juenger said there will be about $4 billion in SVOD
content spending over the next two to three years, but
a growing percentage will go toward original programming,
such as Netflix’s House of Cards and Arrested Development.
Also, the increase in spending will reflect an
uptick in subscribers and lead to more viewership, which
means ratings for the programmers’ core businesses will
be cannibalized, particularly in the kids arena.

Juenger points out that in announcing the deal with
Viacom, Amazon noted that kids’ shows are one of the
most-watched TV genres on Prime Instant Video. “This
observation is consistent with previous Netflix comments
and supports our view that SVOD will continue to cannibalize
linear kids’ viewing, as many kids and their moms
prefer to access content via the SVOD platform regardless
of what content is ultimately available,” Juenger said.

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