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Viacom Entered Into Netflix Partnership Because It Had to

Viacom - Viacom Entered Into Netflix Partnership Because It Had to

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If you can’t beat them, join them. That’s an adage as old as time, but it still applies in the modern era, and curiously in media entertainment.

Long-suffering Viacom (NASDAQ:VIA, NASDAQ:VIAB) shareholders found this out recently when the company joined forces with Netflix (NASDAQ:NFLX). NFLX, if I need to remind anybody, is a fierce rival to traditional media outfits.

The details of the partnership makes the concept even harder to grasp initially. Under the agreement, Viacom will produce content for NFLX. Although it’s an admission that things aren’t going well for VIA these days, offering content to a streaming service isn’t out of the ordinary. CBS (NYSE:CBS) and Warner Bros. have made similar deals with Netflix.

But unlike those major studios, Viacom will offer network-branded content. Its foray into the streaming media world will start with Nickelodeon-branded programming. From there, Viacom CEO Bob Bakish indicated that he wishes to include other network-based shows. These could include marquee brands such as BET, Comedy Central and MTV.

This surprising move gives Viacom a much-needed presence in the streaming-content market. No matter how you cut it, VIA is an aging company in an aging industry that’s suffering death through a thousand cuts.

Additionally, consolidation is the name of the game. First, we have AT&T (NYSE:T) and Time Warner (NYSE:TWX). Next, it’ll be Twenty-First Century Fox (NASDAQ:FOXA) with Walt Disney (NYSE:DIS) or long-shot Comcast (NASDAQ:CMCSA).

Viacom had to do something, and the Netflix deal makes sense in that regard. But from another perspective, critics point out that the content partnership could drive more viewers to Netflix. Again, Netflix already competes with traditional cable TV, so the deal is extremely risky for Viacom.

But despite some concerns, management ultimately made the right decision.

Viacom Played Its Only Card

Having said that, Viacom’s decision isn’t without nearer-term consequences. The media company’s critics are correct: NFLX immediately stands to benefit the most from the deal. It’s a streaming giant, and getting mainstream network content on Netflix’s service only increases its brand reach and appeal.

But we should also look at it another way. If Viacom didn’t enter this deal, we would see the same old thing. That means the aging firm would struggle to gain traction with whatever else it has up its sleeve. Eventually, it’ll die a slow, sad death.

I know I sound mean-spirited in my assessment, but you only have to look at the overall revenue picture. Since 2011 when the firm hauled in $15 billion, Viacom sales have largely eroded. Last year, the company only managed $13.4 billion, or an 11% decline from six years prior.

However, it’s not all doom and gloom. Revenue broken down by segment reveals that Viacom’s filmed entertainment division is responsible for most of the decline. The media networks division, which is what Viacom contributes to NFLX on the deal, holds its own. For instance, in 2011, networks delivered $9.15 billion in sales. In 2017, that figure bumped up to $10.1 billion.

Viacom revenue
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

What this translates to is that audiences still love Viacom’s branded shows. However, because we live in the cord-cutting era, the younger demographic are constantly losing access to these favored shows. So yes, Netflix receives a tremendous boost by having this programming gold on their service. But in the long run, Viacom gets necessary and relevant exposure.

Better Than Doing Nothing

I admit that the NFLX deal initially runs counter to Viacom’s own plans for a streaming service. But I counter that it can’t just beat Netflix or Disney or Amazon.com (NASDAQ:AMZN) on its own. These major streaming players have been in the business for a while and have established a powerful audience base.

At this stage, Viacom is simply admitting that it waited too long to do something. Management knows it could have addressed the cord-cutting dilemma sooner, but failed. Now, it must pay the consequences. That involves getting into deals that are unfavorable now, but have longer-term profitability potential.

For Viacom shareholders, they must have the confidence that no other choice exists. In a perfect world, the media company would revitalize its laggard industry and gain millions of frequent, loyal viewers. But that’s just not going to happen. As unpalatable as the Netflix deal is to some, it buys time, and that’s a luxury in this cutthroat market.

Moreover, with the NFLX partnership, Viacom can add life to its stale franchises, such as MTV’s The Real World. It can also add complementary programming to its popular music and movie award shows. While not a perfect situation, it’s the only card it can play.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/06/viacom-entered-into-netflix-partnership-because-it-had-to/.

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