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Viacom, Inc. (NYSE:VIA) is a media & entertainment conglomerate. The company owns and operates some of the world's best known media networks and film production studios including networks such as MTV, BET, Nickelodeon and Spike TV as well as film production companies including Paramount Pictures and DreamWorks Pictures. Viacom's content reaches over 520 million households worldwide in over 160 countries and territories. In 2005 Viacom became a stand-alone public company when it separated from CBS (CBS). In 2009 the company earned $13.6 billion in revenues, a decrease of 7.4% from 2008.^[1]

Business Segments

Viacom operates through two separate busins segments in the media industry. The first is their media networks segment which includes television networks as well as digital properties both domestic and international. The second business segment is known as Filmed entertainment and is responsible for the production, promotion and distribution and licensing of feature films.

Media Networks

Viacom's media networks segment controls over 150 television channels and more than 300 digital properties, which include online, broadband and mobile television services. The media networks segment generates revenue from three sources: The sale of advertising time on cable and digital networks, from fees that are payed to cable network television operators and satellite television operators and other distributors and finally ancillary revenue which includes the sale of consumer products including video games, as well as the licensing of its content to third parties. In 2009 the media networks segment was responsible for $8.29 billion in revenues earned.^[1]

Filmed Entertainment^[2]

The filmed entertainment segment is responsible for the production, financing and distribution of motion pictures. Viacom's filmed entertainment segment owns and operates Paramount Pictures, Paramount Vantage, Paramount Classics, DreamWorks Pictures, MTV Films and Nickelodeon movie brands. Films are generally released in theaters in the United States and abroad and then released to DVD and licensed to Video-On-Demand distributors and other third parties for further distribution. All revenues from these various forms of distribution are recorded under the filmed entertainment segment. In 2009, filmed entertainment earned $5.48 billion in revenue and increase of $551 million, or 10.1%, from 2008. The process of creating, releasing and later licensing filmed entertainment is broken down into four segments that create different revenue streams. These segments are home entertainment, television licensing and ancillary revenues.

• Theatrical: Revenues from the theatrical release of Viacom's films are recorded in this segment. In 2009 theatrical revenues accounted for $1.71 billion of the company's total revenues, an increase of 14.5% from 2008. This increase was largely due to the successful release of the films Indiana Jones and the Kingdom of the Crystal Skull and Marvel's Iron Man, which performed better than comparable films released in 2008.

• Home Entertainment: Revenues from the distribution of filmed entertainment to households through DVD sales are recorded under the home entertainment segment. Home entertainment earned $2.7 billion in 2009, an increase of 8.5% from 2008. The increased revenues were largely due to the success of the DVD release of Iron Man.

• Television Licensing Fees: Once films are released in home entertainment formats (and thus out of theaters) Viacom sells the rights to distribute its content to various third parties. Television networks, video-on-demand services, pay and free cable services and in some cases airlines and hotels are all service providers that pay Viacom for the rights to air the company's films. Television licensing fees also increased in 2009, returning $1.33 billion, 2.92% higher than in 2008.

• Ancillary Revenue: Revenues from studio revenues, consumer product licensing and the distribution of filmed entertainment through new online and mobile platforms are recorded as ancillary revenue in the filmed entertainment segment. In 2009 these revenues accounted for $262 million, an increase of 15% from 2008.

Trends and Forces

• Intellectual Property: Piracy in the entertainment industry is a serious concern for Viacom. The rise internet file sharing has made it increasingly easy for consumers to gain access to content without paying anything. As a result, companies like Viacom lose revenue. Increased piracy regulations in the U.S. and abroad (particularly in China, where such regulations are very lax) could be very helpful for Viacom. If piracy is not controlled or strongly regulated in the future Viacom could see serious losses from the intellectual property violations.

• Success of Content: The success of the programming that Viacom licenses - measured by box office returns, or television ratings - is what generates revenue, as this is what determines the amount Viacom can charge in affiliate fees. These fees are determined through negotiations with cable and satellite distributors and the more successful a program is, the larger the fee Viacom can charge for the licensing. As the entertainment industry is extremely fast paced, it is essential that the content Viacom produces keeps up with what is currently popular.

• Decline in Cinema Viewing: Most movies produced today are break-even projects for Viacom and its competitors. As the costs of producing major block buster movies continue to rise, the revenues from these movies must also increase in order for the projects to remain worthwhile. In recent years revenues from theater releases have fallen, causing high cost projects to become less attractive. This decline in cinema attendance is coupled with an increased demand in the DVD market. The company is using newer technologies that are harder to replicate illegally - like IMAX and 3D movies - to combat this trend.

Competition

Viacom competes directly with other major media conglomerates including Time Warner (TWX) and Walt Disney Company (DIS). While Viacom's revenues and market cap are significantly smaller than those of its competitors it does maintain an advantage in operating margin.

The below table shows the 2009 box office revenues for the major American film studios along with their market share. Warner Bros. is the industry leader bringing in $2.1 billion in revenue from the box office and controlling 19.9% of the market share.

References

1. ↑ ^{1.0 1.1} VIA 2009 20-K pg. 110  
2. ↑ VIA 2009 10-K pg. 49  
3. ↑ Studio Market Share. Box Office Mojo.