August 22, 2019

CBS/Viacom Merger – Together Again

In order to compete in the quantum media universe, Viacom and CBS have once again decided to join together (the companies split in 2006). The combined company will be called ViacomCBS Inc., with a market cap of roughly $30 billion.

According to the merged company’s President & CEO, Bob Bakish, ViacomCBS will now have the content library and the spending scale to compete with streaming rivals such as Netflix, Disney+, Amazon Prime Video, HBO Max, NBCUniversal, and Apple TV+.

Is Mr. Bakish correct? Will ViacomCBS emerge as one of leading global content producers and providers or will it end up as a relic of a bygone era?

History
CBS and Viacom have a very long history together. Viacom was originally incorporated in 1970 by CBS as its in-house syndication division, but regulators forced CBS to divest the Viacom division in 1971. Soon after the spinoff, Viacom began to purchase television stations and cable companies, most notably MTV and Nickelodeon in 1984. In 1986, Sumner Redstone’s National Amusements took a controlling interest in Viacom and continued to purchase valuable media assets, including Paramount Pictures in 1993.

In 1995, Westinghouse Electric (renamed CBS Corporation) acquired CBS for $5.4 billion and, four years later, CBS Corporation was purchased by Viacom for $36 billion, forming an $80 billon media empire. (And that’s 1995 dollars, giving you an idea of just how much value the company has lost in the last 25 years, now worth only $30 billion.)

Sumner Redstone believed that the purchase of CBS Corporation by Viacom would create synergies because CBS was at heart a broadcast television and radio organization and Viacom’s strength was in the film and television industry. He believed that the cross-promotion of media properties would be exponentially beneficial to the organization.

In the early years of the merger, Mr. Redstone was proven correct, but by 2004 it all fell apart. The most pronounced example of dysfunction occurred during the 2004 Super Bowl halftime show, produced for CBS by MTV, when Justin Timberlake tore off part of Janet Jackson’s clothes on camera resulting in significant fines and embarrassment for CBS.

In 2006, Sumner Redstone declared that the age of the diversified media conglomerate was over, and that the split of the two companies was necessary in order to respond to the changing media landscape.

Flash-forward 13 years, and Shari Redstone was quoted as saying, “I am really excited to see these two great companies come together so that they can realize the incredible power of their combined assets.” It appears that the same spin was used to justify both the original 2006 split and the 2019 re-merger: adjusting to the changing market conditions. As to the specifics of the re-merged entity:

As to the official press release, ViacomCBS plans to use its combined $30 billion in resources to accelerate direct-to-consumer offerings, enhance distribution activities, and become a leading producer and licenser of premium content to third-party platforms globally.

So Will It Work?

As more and more media companies launch their own DTC streaming services, the fragmentation inherent in multi-app experiences worsens. This, in turn, fuels consumer demand for a single integrated interface with unified cross-app search and recommendations, as well as a single point of payment and control.

In other words, as TV shifts from legacy linear to an app, demand will grow for someone to aggregate all of these ‘streaming channels’ into a single service, which is where Pay-TV 3.0 aggregators like Amazon Prime Channels and the Roku Channel Store fit in. These next-gen pay-TV operators will evolve into a la carte bundlers, if you will, offering a discount structure conceptually similar to MVPDs. The more streaming channels you include in your bundle, the bigger the discount. TDG warned traditional service providers to not sleep on this model, as within a few years it will become a legitimate option for the next generation of channel bundles.

It is obvious that both CBS and Viacom understand the validity of this model, and that competing in the world of Pay-TV 3.0 is dependent upon the vastness of one’s content arsenal. CBS All Access, while successful, does not have enough content to compete with the likes of Netflix and Disney+, and Viacom’s acquisition of Pluto TV is too little too late. The combination of the two companies at least provides both with an opportunity to be competitive for several more years, and establish a larger company capable of making major content acquisitions (Discovery, Sony, and Starz are said to be in play).

The Positives

  • As separate entities, CBS & Viacom have been pursuing less-risky streaming strategies with both companies steadily growing while avoiding spending shortfalls. As a merged company, ViacomCBS can better afford to be more aggressive in its business decisions and also avoid the financial pains inherent in going it alone.
  • Global reach
    • 4.3 billion cumulative subscribers
    • 180+ countries
    • Film studio operates globally
  • Big content spenders ($13 billion over the past 12 months)
  • Film studio operates globally
  • Boardroom dramas seem to be a thing of the past.
  • #1 in key demographics, including:
    • Total audience
    • Kids 2-11
    • A 18-49, A25-54
    • African American & Hispanic
  • Prospects for Pay-TV 3.0
    • CBS’s NFL broadcasts can greatly enhance the status of Pluto TV
    • The Viacom properties can bulk up the quality of the All Access service
    • Paramount Pictures content can enhance the status of Showtime OTT
  • The Negatives

    • 60% of ViacomCBS profits will come from a declining asset – traditional TV networks
    • Will account for 22% of all TV viewership, but only 11% share of affiliate revenues.
    • Pushing content to streaming hurts the legacy business because streaming changes viewing habits. There is now a significant share of audience that will wait for the linear program to end and binge watch the show once it enters its streaming run.
    • Creating quality DTC content will likely accelerate the pace of cord cutting, adversely affecting billions of dollars in carriage fees from cable operators for channels that may no longer be the hottest properties created by their parent studios.
    • Competitive landscape is fierce and getting fiercer, as technology companies enter the space.
    • 2018 subscriber base for CBS & Showtime was five million, compared with Netflix at 130 million and Amazon Prime Video at 100 million.
    • WarnerMedia, Disney+, Apple TV+, Comcast about to launch new streaming products, several certain to disrupt the established order.
    • ViacomCBS will have a market cap of $30 billion, compared with $136 billion for Netflix and $246 billion for Disney. The newly re-merged company will be a small fish in a maxed-out pond populated by ever-larger sharks, making long-term survival difficult (though less so than if each company had continued on their own).

    Conclusion
    There is no doubt that at this time that CBS and Viacom are much stronger together than they were as independent entities. However, these two great media companies, even in combination, will not be a major player in the media 3.0 environment if they stop at this merger alone. Other M&A activity will happen, and thanks to prudent financial decisions, ViacomCBS is in a position to spend.

    When it comes to competing with the likes of Netflix, Apple, WarnerMedia, and Netflix, ViacomCBS has a very long way to go. However, both companies have a history of innovation, creativity, and breaking the mold in a way that makes one remiss to discount them. Then again, history does not favor ViacomCBS, and it wouldn’t surprise me if they ultimately end up being sold off to the highest bidder – yet another medal on the chest of the new-media powerhouses listed above.

     

    A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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