What’s really behind Viacom’s problems with Nickelodeon? And how much will they cost the company?
Viacom CEO Philippe Dauman has warned Wall Street that an “inexplicable” drop in Nickelodeon’s ratings will have an impact on the company’s advertising revenues this quarter. Dauman pointed a finger at Nielsen, which has said it’s found nothing wrong with its methodology.
Nickelodeon represents a big share of Viacom’s ad revenues and profits, especially in the fourth calendar quarter, so Credit Suisse analyst Spencer Wang took a deep dive into what’s behind the situation.
Set-top box data shows that Nick’s viewership is falling in the fourth quarter, but not by as much as Nielsen data shows, Wang says in his report. Nielsen has Nick down double digits; set-top data pegs the decline in the high single digits.
Wang says that some have blamed Nick’s decline on Viacom’s decision to sell more of its shows to Netflix, but Wang says the timing doesn’t line up. The programming became available online in February, but the ratings declines began in September and became pronounced in October.
Instead, he says it appears that the size of the children 2-11 demo has shrunk in October and November by 4% and 4.8%, respectively, contributing to Nick’s lower ratings. At the same time, Nick appears to be losing share to the Disney Channel. “Disney Channel ratings have improved throughout 2011,” Wang says. “Further, Disney Channel’s ratings trends show acceleration in calendar year 4Q, increasing about 10% in both October and November. This may suggest that some shift in viewer share within the children’s demo is another cause of Nick’s ratings weakness.”
Whatever the cause, the ratings decline will have a financial impact on Viacom. Viacom has acknowledged that it is providing make-good commercials to advertisers because of the Nielsen ratings shortfall in the fourth quarter.
Wang had been forecasting that Nick’s ad revenue would be up 8% for the quarter. He estimates that Nick sold about 70% of its inventory for the quarter during the upfront at a healthy 9.5% price increase on a cost-per-thousand-viewers basis. He figures that Viacom committed to flat to slightly higher viewership and assumed no make goods because Nick’s ratings have historically been fairly stable.
Given a 17% ratings shortfall according to Nielsen, Wang estimates Nick will have to devote about 14.3% of its inventory in the quarter to make goods, leaving only 16% available to sell in the upfront market. Since there’s no income associated with make goods, Wang estimates that Nick’s ad revenue will fall 9.3% in the quarter, compared to an original estimate that ad revenues would rise 8%.
Because the calendar fourth quarter is a big one for toy makers and other marketers looking to reach kids, Nick’s contribution to Viacom’s ad revenues is bigger than normal, accounting for about 25% of Viacom’s total. With Nick’s ad revenues going down this quarter because of the ratings and make-good issue, Wang estimates that Viacom’s ad revenues will be up only 3% in this quarter, compared to his earlier 6% growth projection.
That $47 million shortfall in ad revenues will knock about $22.7 million, or 4 cents a share, off Viacom’s earnings in what is the company’s first fiscal quarter, according to Wang.
“At this stage, we are not changing estimates for FY2Q12-FY4Q12 as we are giving Viacom the benefit of the doubt that an influx of new original programming on Nick will help address ratings going forward,” Wang says in his report. He retained his neutral rating on Viacom shares.