Sector

Media

Background

Naveen Chopra is the CFO of ViacomCBS and Chris Marangi is co-CIO at Gabelli Asset Management. We cover the economics of a typical cable network channel, dive deep into the dynamics of content creation and capital allocation, and discuss ViacomCBS' transition into streaming.

Cover

Date

January 26, 2022

Episode Number

44

ViacomCBS Business Breakdown

Background / Overview

ViacomCBS is a global media conglomerate with a rich history rooted in radio, broadcast television, cable networks, and filmed entertainment. Originally founded as a radio company, it evolved into one of the "big three" broadcast networks in the U.S., alongside NBC and ABC. The company has undergone significant transformations, including a separation in 2006 into CBS and Viacom, followed by a re-merger in 2019. Today, ViacomCBS operates as a diversified media company with a portfolio spanning broadcast television (CBS), cable networks (MTV, Nickelodeon, BET, Comedy Central, Showtime), filmed entertainment (Paramount Pictures), and a rapidly growing streaming business (Paramount+, Pluto TV, Showtime OTT, BET+). The company is headquartered in New York and employs thousands globally, with a focus on content creation, curation, and distribution.

The business model is unique in its ability to leverage content across multiple distribution channels—linear TV, theatrical releases, and streaming—while capitalizing on intellectual property (IP) through franchises like Star Trek, PAW Patrol, and Mission: Impossible. This multi-platform approach allows ViacomCBS to monetize content through advertising, affiliate fees, box office revenue, and subscriptions, creating a diversified revenue stream that mitigates risks associated with any single channel.

Ownership / Fundraising / Recent Valuation

ViacomCBS has a market capitalization of approximately $20 billion, with 650 million shares outstanding at around $32 per share. The company carries $11 billion in net debt, resulting in an enterprise value of roughly $31 billion. Its valuation reflects skepticism about its ability to transition from a declining linear business to a competitive streaming model, especially compared to larger players like Netflix ($300 billion market cap) or Disney. The company is publicly traded and not owned by private sponsors, with no recent fundraising or transactions noted in the provided context. The market appears to assign a low value to its extensive content library, particularly Paramount’s film catalog, which is potentially worth billions based on comparable transactions (e.g., Amazon’s $8.5 billion acquisition of MGM).

Key Products / Services / Value Proposition

ViacomCBS operates four primary segments, each with distinct value propositions:

1. TV Entertainment (Broadcast): Anchored by CBS, the #1 U.S. broadcast network, this segment offers broad-appeal content like NCIS, FBI, NFL broadcasts, and news. Its value lies in its massive audience reach and dual revenue stream of advertising and affiliate fees from local stations. Globally, it includes Channel 5 (UK), Network 10 (Australia), and Telefe (Argentina).
2. Cable Networks: Includes iconic brands like MTV, Nickelodeon, BET, Comedy Central, and Showtime. These networks cater to niche audiences with high brand loyalty, generating revenue through affiliate fees ($0.50–$2 per subscriber per month) and advertising. Their value proposition is delivering targeted, culturally resonant content.
3. Filmed Entertainment (Paramount Pictures): Paramount produces and distributes films, from blockbusters like Mission: Impossible to cost-effective hits like A Quiet Place. Its value lies in its storied library and franchise IP, which can be leveraged across theatrical, streaming, and consumer products.
4. Streaming: Paramount+ (premium and ad-supported tiers at $9.99 and $4.99/month), Pluto TV (free ad-supported), Showtime OTT, and BET+ represent the future of the business. Streaming offers direct-to-consumer (DTC) access, leveraging ViacomCBS’s content library to compete in a crowded market.

Table: Key Products/Services

Segments and Revenue Model

ViacomCBS’s revenue model is diversified across four economically separable segments:

1. TV Entertainment: Generates $10 billion in revenue, split between advertising ($4 billion) and affiliate fees (~$6 billion). Revenue is driven by viewership (ratings points) and affiliate contracts with local stations, some owned and others licensed.
2. Cable Networks: Also ~$10 billion in revenue, with a dual revenue stream of affiliate fees ($0.50–$2 per subscriber per month) and advertising. Affiliate fees provide predictable, recurring revenue, while advertising fluctuates with viewership and ad rates.
3. Filmed Entertainment: Generates ~$2–3 billion, primarily from theatrical box office (25–75% of revenue, depending on the film) and downstream windows (home entertainment, licensing to TV/streaming). Franchise IP enhances downstream revenue through consumer products (e.g., PAW Patrol toys).
4. Streaming: Generated $2.5 billion in 2020, expected to reach 15% of total revenue in 2021. Paramount+ earns subscription revenue ($4.99–$9.99/month) and advertising (ad-supported tier), while Pluto TV is entirely ad-supported, generating over $1 billion in 2021.

Revenue Dynamics

• Content Leverage: The ability to repurpose content across linear, theatrical, and streaming platforms is a core dynamic. For example, PAW Patrol generates box office, streaming, linear TV, and consumer products revenue, amplifying returns on content investment.
• Franchise IP: Franchises like SpongeBob, Star Trek, and PAW Patrol drive customer loyalty and repeat viewership, reducing churn in streaming and boosting downstream revenue.
• Dual Revenue Streams: Both broadcast and cable networks benefit from advertising and affiliate fees, providing stability against viewership declines.
• Streaming Growth: Streaming is the fastest-growing segment, driven by subscriber acquisition and ad revenue. The ad-supported model (Paramount+ essentials tier, Pluto TV) enhances revenue per user (RPU) potential.

Splits and Mix

Revenue Mix (2020)

• Advertising: $8 billion (32%)
• Affiliate Fees: $8 billion (32%)
• Streaming: $2.5 billion (10%)
• Licensing/Other: $6.5 billion (26%)

EBITDA Mix

• TV Entertainment: $2–3 billion (50%)
• Cable Networks: $2–3 billion (50%)
• Filmed Entertainment: $200–300 million (~5%)
• Streaming: Loss-making, reinvesting for growth

Channel Mix

• Linear (Broadcast + Cable): ~80% of revenue, declining mid-single digits annually due to cord-cutting.
• Streaming: ~10% in 2020, projected to reach 15% in 2021 and grow significantly with international expansion.
• Theatrical: ~10%, volatile due to box office fluctuations and COVID impacts.

Geo Mix

• U.S.: Dominant market, ~80–90% of revenue, driven by CBS, cable networks, and Paramount+.
• International: ~10–20%, with presence in the UK (Channel 5), Australia (Network 10), Latin America (Telefe), and expanding streaming in 25+ markets.

Customer Mix

• Broad Audience: CBS targets mass-market viewers (e.g., NCIS, NFL). Cable networks serve niche demographics (e.g., Nickelodeon for kids, BET for African-American audiences).
• Streaming: Targets younger, tech-savvy consumers, with Paramount+ appealing to families and broad audiences, and Pluto TV attracting price-sensitive viewers.

Mix Shifts

• Streaming Growth: Streaming’s share of revenue is increasing rapidly, driven by subscriber growth (75 million target) and international expansion.
• Linear Decline: Linear revenue is declining 5–9% annually, offset by rate increases in affiliate fees and advertising.
• Theatrical Volatility: Box office revenue is down 20–30% from pre-COVID levels, with a shift toward shorter theatrical windows (45 days) to boost streaming.

KPIs

• Subscriber Growth: Paramount+ and other streaming services are targeting 75 million+ global subscribers, with strong net additions in 2021.
• Viewership: CBS remains the #1 U.S. broadcast network, but linear viewership is declining 5–9% annually.
• Box Office: 70–80% of pre-COVID levels, with shorter theatrical windows driving streaming engagement.
• Pluto TV Revenue: Over $1 billion in 2021, with healthy margins despite reinvestment.
• Content Spend: $15 billion in 2020, increasing as streaming scales and COVID impacts fade.

Headline Financials

Table: Financial Summary (2020)

Revenue Trajectory

• Historical: Revenue has been flat due to linear declines offset by streaming growth. 2020 was impacted by COVID, reducing content production and box office revenue.
• Drivers: Streaming is the primary growth driver, expected to reach 15% of revenue in 2021 and grow with international expansion. Linear revenue declines are mitigated by rate increases.
• Forecast: Streaming could surpass 50% of revenue by 2025–2030 if subscriber targets are met, with linear stabilizing at a lower base.

Cost Trajectory / Operating Leverage

• Content Costs: $15 billion in 2020, over 50% of expenses across segments. Costs range from $20–200 million per theatrical film, with reality TV and kids’ content being lower-cost.
• Fixed vs. Variable:
• Fixed: Content production is largely fixed, amortized over years across platforms. Facilities, talent, and infrastructure are also fixed.
• Variable: Marketing, distribution, and some production costs (e.g., talent fees) vary with output.
• Operating Leverage: High fixed content costs create leverage as streaming scales. As subscriber revenue grows, content costs become a smaller percentage, boosting margins. Linear businesses already enjoy 40–50% EBITDA margins due to scale.
• EBITDA Margin: 20% overall, with linear segments at 40–50% and streaming loss-making. Margin expansion depends on streaming achieving scale.

Capital Intensity and Allocation

• Capex: Not explicitly detailed, but likely low relative to revenue (<5%), focused on production facilities and streaming infrastructure.
• Content Investment: $15 billion annually, treated as a capital-like expense, amortized over time. This is the primary capital allocation priority.
• Free Cash Flow: $2.5 billion in 2020, driven by high-margin linear businesses. FCF is reinvested into streaming to fund subscriber growth.
• Capital Allocation:
• Streaming: Primary focus, with heavy investment in Paramount+ and Pluto TV content.
• M&A: No recent activity noted, but historical mergers (e.g., Viacom-CBS) suggest a willingness to consolidate for scale.
• Debt Management: $11 billion net debt is manageable given $5 billion EBITDA, but streaming losses could strain FCF if growth falters.

Value Chain Position

ViacomCBS operates midstream in the media value chain, between content creators (writers, producers, talent) and distributors (cable providers, theaters, streaming platforms). Its primary activities include:

• Content Creation: Producing TV shows, films, and streaming originals, leveraging in-house studios (Paramount, CBS Studios).
• Content Curation: Programming networks (CBS, MTV) and streaming services to maximize viewership.
• Distribution: Broadcasting via owned and affiliated stations, licensing to cable providers, releasing films theatrically, and delivering DTC via streaming.

Go-to-Market (GTM) Strategy

• Linear: Sells advertising and licenses content to affiliates, leveraging brand strength (CBS, Nickelodeon) and exclusive content (NFL, Star Trek).
• Theatrical: Releases 10–15 films annually, targeting diverse audiences, with shorter windows (45 days) to drive streaming.
• Streaming: DTC via Paramount+ and Pluto TV, with aggregation deals (e.g., T-Mobile, Comcast) to expand reach. Marketing focuses on franchise IP to reduce churn.

Competitive Advantage

• Content Library: Paramount’s film library and TV archives (I Love Lucy, Star Trek) provide evergreen revenue.
• Franchise IP: Strong franchises drive loyalty and cross-platform revenue.
• Production Scale: In-house studios and global production hubs reduce costs and enable rapid content creation.

Customers and Suppliers

Customers

• Linear: Advertisers (auto, CPG), cable providers, and local broadcast stations. End consumers are viewers, primarily U.S.-based.
• Theatrical: Moviegoers (domestic, international, China) and downstream buyers (streaming platforms, TV networks).
• Streaming: DTC subscribers (75 million target), with a focus on families, young adults, and price-sensitive viewers (Pluto TV).

Suppliers

• Talent: Writers, actors, directors, and producers are critical, with rising costs due to competition.
• Production Inputs: Studios, equipment, and technology providers.
• Content Partners: Sports leagues (NFL, PGA) for exclusive rights, which are costly but high-margin.

Pricing

• Linear: Affiliate fees ($0.50–$2/sub/month for cable, higher for sports) and ad rates based on ratings. Contracts are multi-year, providing visibility.
• Theatrical: Box office tickets ($10–20), with 25–75% of revenue from theaters and the rest from downstream windows.
• Streaming: Paramount+ at $9.99 (premium) and $4.99 (ad-supported), Pluto TV free. Pricing is value-oriented compared to Netflix ($15–20/month).
• Drivers: Pricing is driven by content quality, franchise strength, and competition. Streaming prices may rise as scale increases.

Bottoms-Up Drivers

Revenue Model & Drivers

• TV Entertainment:
• Model: Advertising (ratings-driven) and affiliate fees (per-subscriber).
• Price: Ad rates vary by viewership; affiliate fees are stable.
• Volume: ~80 million U.S. subscribers, declining 5–9% annually.
• Drivers: Exclusive content (NFL, NCIS), brand strength, and rate increases offset declines.
• Cable Networks:
• Model: Dual revenue (affiliate fees, advertising).
• Price: $0.50–$2/sub/month, ad rates based on niche appeal.
• Volume: ~80 million subscribers, declining mid-single digits.
• Drivers: Niche brands (Nickelodeon, BET), reality TV for cost efficiency.
• Filmed Entertainment:
• Model: Box office (25–75%), downstream windows (licensing, consumer products).
• Price: $10–20 tickets, licensing fees vary.
• Volume: 10–15 films/year, 70–80% of pre-COVID box office.
• Drivers: Franchise IP (PAW Patrol, Top Gun), shorter theatrical windows.
• Streaming:
• Model: Subscriptions ($4.99–$9.99/month) and advertising (Pluto TV, ad-supported tier).
• Price: Competitive, with potential for increases.
• Volume: 75 million+ target subscribers, rapid growth.
• Drivers: Franchise IP, theatrical releases, international expansion.

Cost Structure & Drivers

• Content Costs: $15 billion (60% of expenses), with films ($20–200 million) and sports (NFL) being high-cost, reality TV and kids’ content lower-cost.
• Marketing: Significant for new shows and films, variable based on release strategy.
• G&A/People: Fixed costs for talent, engineers, and infrastructure.
• Fixed vs. Variable:
• Fixed: Content production, studios, and overhead (~70% of costs).
• Variable: Marketing, distribution, and some talent fees (~30%).
• Contribution Margin: Linear segments have high margins (40–50%) due to scale. Streaming is loss-making but improving with subscriber growth.
• EBITDA Margin: 20% overall, with linear at 40–50% and streaming negative. Margin expansion hinges on streaming scale.

FCF Drivers

• Net Income: Driven by $5 billion EBITDA, offset by interest on $11 billion debt and taxes.
• Capex: Low, focused on production and streaming infrastructure.
• NWC: Moderate, with receivables from affiliates and inventory (content) manageable.
• Cash Conversion Cycle: Efficient due to recurring affiliate fees and ad revenue.

Capital Deployment

• Streaming Investment: Primary focus, with $15 billion+ in content spend to drive subscriber growth.
• M&A: No recent activity, but historical mergers suggest openness to consolidation.
• Buybacks/Dividends: Not prioritized, with FCF reinvested in streaming.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Linear TV: ~$100 billion U.S. market, declining 5–9% annually due to cord-cutting. Global market is larger but fragmented.
• Theatrical: ~$40 billion global box office pre-COVID, currently 70–80% of that, with growth tied to consumer behavior.
• Streaming: ~$100 billion global market, growing 20–30% annually, driven by subscriber growth and ad revenue.
• Growth Drivers: Streaming adoption, international expansion, and franchise IP. Industry growth is fueled by population growth, digital penetration, and consumer willingness to pay for multiple services (4–5 per household).

Market Structure

• Linear TV: Oligopoly with CBS, NBC, ABC, and Fox dominating broadcast, and cable fragmented but led by ViacomCBS, Disney, and Warner.
• Theatrical: Consolidated, with five major studios (Paramount, Disney, Warner, Universal, Sony).
• Streaming: Fragmented, with Netflix, Disney+, Amazon, Hulu, and Paramount+ competing. Minimum efficient scale (MES) is high, requiring significant content spend and subscribers.
• Competitors: Netflix (200 million+ subs, $30 billion content spend), Disney+ (rapid growth), HBO Max, and Amazon Prime Video.

Competitive Positioning

• Differentiation: ViacomCBS offers a broad content portfolio (sports, news, kids, reality, theatrical) compared to Netflix’s scripted focus. Franchise IP and production scale are key advantages.
• Pricing: Value-oriented streaming prices ($4.99–$9.99) vs. Netflix ($15–20).
• Risks: Disintermediation by tech giants (Amazon, Apple) or failure to scale streaming.

Market Share & Relative Growth

• Linear: ViacomCBS holds significant share in U.S. broadcast (CBS #1) and cable, but losing share due to cord-cutting.
• Theatrical: Paramount is a top-five studio, with ~10–15% global box office share.
• Streaming: Small but growing share, with 75 million+ subscribers targeted vs. Netflix’s 200 million+.
• Growth: Streaming growth outpaces market (20–30% vs. market), while linear lags.

Hamilton’s 7 Powers Analysis

1. Economies of Scale: Strong in linear (40–50% margins) and growing in streaming as subscribers scale. High fixed content costs create leverage.
2. Network Effects: Limited, but franchise IP creates viewer loyalty, reducing churn.
3. Branding: Iconic brands (CBS, Nickelodeon, Paramount) drive trust and willingness to pay.
4. Counter-Positioning: Ad-supported streaming (Pluto TV, Paramount+ essentials) differentiates from Netflix’s subscription model.
5. Cornered Resource: Paramount’s film library and exclusive content (NFL, Star Trek) are unique assets.
6. Process Power: In-house production and cross-platform content leverage enhance efficiency.
7. Switching Costs: Moderate, with franchise loyalty reducing churn but easy app-switching in streaming.

Strategic Logic

• Streaming Focus: Heavy investment in Paramount+ and Pluto TV to capture growing DTC market, with international expansion in 2022.
• Content Leverage: Repurposing content across linear, theatrical, and streaming maximizes ROI.
• Franchise IP: Prioritizing franchises (PAW Patrol, Star Trek) to drive engagement and consumer products.
• Theatrical Windows: Shortening to 45 days to boost streaming while preserving box office.
• Risks: Overinvestment in streaming without scale, faster linear decline, or rising content costs.

Valuation

ViacomCBS’s $20 billion market cap and $31 billion enterprise value imply a low multiple (~6x EBITDA), reflecting skepticism about its streaming transition. Comparable transactions (e.g., Amazon-MGM at $8.5 billion) suggest Paramount’s library alone could be worth billions, indicating potential undervaluation. Key valuation drivers include streaming subscriber growth, linear stabilization, and content library monetization. Risks include failure to scale streaming or a faster-than-expected linear decline.

Key Takeaways

1. Multi-Platform Content Leverage: ViacomCBS’s ability to monetize content across linear, theatrical, and streaming platforms is a core strength, amplified by franchise IP.
2. Streaming Growth Potential: Paramount+ and Pluto TV are rapidly growing, with a differentiated ad-supported model and international expansion as key drivers.
3. Linear Resilience: The linear business remains highly profitable (40–50% margins), with rate increases offsetting declines.
4. Franchise-Driven Model: Franchises like PAW Patrol and Star Trek drive loyalty, cross-platform revenue, and consumer products, reducing churn and boosting margins.
5. Content Cost Dynamics: High fixed content costs ($15 billion) create operating leverage as streaming scales, but require careful capital allocation.
6. Competitive Challenges: ViacomCBS faces intense competition from Netflix, Disney+, and tech giants, with success hinging on execution and scale.