ViacomCBS Earnings Preview: Bakish Can’t Have It Both Ways

ViacomCBS Earnings Preview: Bakish Can’t Have
VIP

Even before the Covid-19 pandemic impacted the markets, 2020 was not shaping up to be a good year for ViacomCBS. The stock price tanked after CEO Bob Bakish unveiled plans on February 20, during the Q4 2019 earnings call, for a “House of Brands” OTT service based on CBS All Access and Viacom TV brands. Investors, already spooked by weak results, did not have faith in the SVOD plan Bakish set out to restore the company’s fortunes.

As Q1 ended, ViacomCBS’s market cap was down by $16.89 billion from January 2nd, a decline of 60.6%. It had plunged by 28% (-$6.89B) in the week following the Q4 earnings call, with the COVID-19 plunge, a week from the Oval Office address, of 38% (-$5.59B) coming after. 

For context, the company declined in value by more than the $11.8 billion CBS paid for Viacom in December, wiping out any value gains from the acquisition. The company’s valuation has picked up a little since, improving by 9%, or $1.04B, as of May 1, but more bad news is on the way as the valuation will likely fall again following the Q1 call.

The cancellation of March Madness is estimated to have cost CBS $650 million in ad revenue, with overall ad revenues approximated to be down by 12% for the TV industry across 2020. In addition to lost box office revenue from theater closures, simply delaying a movie incurs debts, with Paramount’s pulling of “A Quiet Place 2” estimated to have cost $30 million. The ongoing growth of streaming AVOD service acquisition Pluto TV will be a bright spot that should burn brighter and brighter over the coming months, helped in part by the expansion to 17 Latin American countries at the start of Q2, but this won’t be enough to salvage investor confidence.

How can Bob Bakish end this nightmare? The market already signaled a lack of confidence in his expanded CBS All Access idea due in part to it being the last major product launch/upgrade in a rapidly crowding SVOD arena. Bakish is also guilty of trying to have his cake and eat it: During the Q4 earnings call, Bakish touted the ability of ViacomCBS to be both a content supplier and distributor. 

Currently the company makes hits such as “The Haunting of Hill House” and “13 Reasons Why” for Netflix, with the streamer signing a new partnership deal with Viacom network Nickelodeon in November 2019, bringing in revenue. Other recent big name shows produced within ViacomCBS for rival services include “Tom Clancy’s Jack Ryan” for Amazon, “Catch-22” for Hulu, “Watchmen” for HBO and “Home Before Dark” for Apple TV+. 

Bakish appears unwilling to jettison the revenue from supplying in lieu for bolstering his own expanded service. This idea of being a supplier isn’t compatible with having a top-tier SVOD. Both AT&T and Disney have a much higher proportion of SVOD shows in development for their own services than their rivals do. NBCU has an equal proportion of developing shows in and out of house, but only Viacom has nearly twice as many shows being developed for external SVODs. Viacom’s CBS TV Studios and Paramount TV Studios have 23 titles in development across Amazon (4), Apple TV+ (4), Disney+ (1), HBO Max (7), Hulu (2), Netflix (2) and Quibi (3), with only 13 for CBS All Access.

In order to excel in one area, preferably one’s own subscription service, the other has to suffer. It’s going to take a leap of faith by investors to believe that Bakish can both upgrade a legacy CBS SVOD service with enough Viacom content to make it compelling to new subscribers while also supplying content to other services, let alone do both simultaneously. 

Buyers are going to want to have top quality shows for their subscribers. By deciding to step up their own subscription game but keep selling shows to rivals, ViacomCBS stated their intent to not just sell their enemies high-quality armaments, but to continue to do so after going to war with them.

This highlights an additional weakness that investors found in the strategy. Legacy Viacom’s content may be great for attracting an audience to a free streaming service like Pluto TV, but the jury is out on its appeal for paying customers. This is hampered even more by the fact that Viacom’s most well-known current series, “South Park”, is being licensed out to HBO Max. The deal netted ViacomCBS half a billion dollars, but denies one of their most noticeable brands from being included in their own service.

This is where the sacrifice comes in. In order to restore investor confidence, one must be made. Analysts have suggested Bakish offer up one of his fat lambs, like Showtime or Paramount Pictures, in order to raise short-term cash and focus on the core TV network business. 

But instead of offering up a physical sacrifice, Bakish must kill his idea of being both TV show supplier and distributor, or at least tilt it toward the favor of ViacomCBS versus supplying rivals.

Shows based on Paramount IP such as “Last of the Mohicans,” “Jack Reacher” and “Grease” number among the developing titles, and would be valuable to a CBS-branded service given their name recognition. It’s too late for these titles, but given the considerable film library at ViacomCBS, there will be others available. This will be boosted by ViacomCBS’s recent stake in Miramax (see VIP’s commentary), which gives ViacomCBS the rights to develop content based upon Miramax IP.

Another possibility would be for Bakish to ape the model of WarnerMedia’s HBO Now, and create a true “House of Brands,” rolling premium-brand Showtime into the expanded CBS All Access. This would give the streamer the shot in the arm it needs from a high budget show perspective, as well as provide a great deal more name-brand choice for consumers. 

Should Bakish change investor perception with a wise pivot in the upcoming earnings call, confidence in ViacomCBS will be partly restored. It won’t be enough to see the stock make up considerable ground on the self-imposed losses, but will convince the market that the strategy going forward is sound. Given the current climate, that’s the best that can be hoped for.