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 video-on- 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.
Amazon 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.
