Philippe's Domain

With Shares Up 60%, Robust Ratings, Money to Spend, Viacom CEO Dauman is Content
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As the steward of some of the most iconic brands in the entertainment industry, Viacom CEO Philippe Dauman knows all too well what a roller-coaster ride the television business can be. Just a year ago, Viacom was mired in declining ratings, sluggish ad sales and a fear that its networks — once the definition of the cutting edge of youth culture — had lost their way. While MTV had languished in ratings declines in the wake of the final season of pop-culture phenomenon Jersey Shore, and its Nickelodeon kids network lost its first monthly ratings crown in March of 2012 to rival Disney Channel, Dauman was the voice of reason, calmly telling Wall Street and anyone else who would listen that better times were ahead.

Through a systematic plan of investment in new programming and a corporate restructuring that infused its key channels with new management blood, Viacom has not only turned the corner, it has thrived. MTV has regained its position atop youth-oriented networks with edgy scripted and reality programming like Teen Wolf, Awkward and Catfish: The TV Show.

And Nick, once thought to be a case study for over-the-top cannibalization of viewers, has cut a new online deal with Amazon and has regained its dominance in the kids space, with new animated and live-action shows such as Teenage Mutant Ninja Turtles, Sam & Cat, The Haunted Hathaways and Sanjay and Craig to augment perennial ratings leaders like SpongeBob SquarePants and The Fairly OddParents.

Even older fare like the MTV Video Music Awards — which some have criticized as an awards show for videos the channel doesn’t air anymore — has seen a resurgence. The VMAs also seem to have regained their edge, with ratings for the Aug. 25 telecast up more than 50% from the prior year, fueled by singer Miley Cyrus’ controversial “twerking” performance that helped drive more than 300,000 Twitter posts per minute during the show, beating the 231,000 per minute during last year’s Super Bowl blackout and just shy of the 327,000 per minute during last year’s presidential election, according to Forbes.

Through it all, Viacom stock has risen nearly 60% in the past nine months and domestic ad-revenue growth has returned to positive territory — it reported 6% domestic ad-sales growth in the fiscal third quarter ended June 30, far outpacing analysts’ consensus estimates.

At the same time, Viacom has remained at the center of several key issues in the cable landscape — it was sued by Cablevision Systems in February over the practice of bundling channels in carriage negotiations; it has been a staunch opponent of a la carte packaging; and it has maintained that affiliate-fee increases have helped drive programming innovation and turned networks — not just its own — into household names.

Dauman, who was co-chairman of last Wednesday’s Walter Kaitz Foundation Dinner with Comcast Cable CEO Neil Smit, also has been a champion of diversity in his company and the rest of the industry. Just prior to kicking off that fundraiser last week, Dauman sat with Multichannel News editor in chief Mark Robichaux and senior finance editor Mike Farrell at his offices overlooking New York’s Times Square to discuss the company’s remarkable turnaround and his vision for the future for both Viacom and the pay TV industry. An edited transcript follows.

MCN: How would you rate the industry and Viacom from a diversity perspective?

Philippe Dauman: I think the industry has a long way to go. This is not something that happens overnight, but the fact that we are celebrating the 30th anniversary of the [Walter] Kaitz [Foundation] Dinner shows that the industry has been at it for decades, which most industries have not.

We’re certainly proud of our industry and what it’s done, and we're certainly proud about what Viacom has done. We really live a notion of what we call a global inclusion. And we take it so seriously that we have an advisory council, which I chair, which has representatives from every chief operating officer of each of our divisions.

And it’s very results-oriented. The Kaitz Foundation and the dinner fund a lot of very worthwhile initiatives that we send a lot of our own executives to, a lot of leadership training, that really help advance diversity in the organization.

MCN: Nickelodeon seems be back on track as the No. 1 kids’ network, after fears of online cannibalization. How is Nick doing now and what is your feeling about putting content over the top at the same time you’ve got it on a cable network?

PD: Let me take the two parts of your question separately. Nickelodeon is doing great. They had a little bit of a wakeup call a couple of years ago now, and took a number of actions to affect what they could control, and that was [to] take a whole new look at the development process, both live-action and animation, how we schedule, how we program our different Nickelodeon networks.

It’s all come together to the point where we’ve now had eight consecutive months of year-over-year growth. We have a lot of new hit shows to add to our great hits, continuing great hits, like SpongeBob, notably. And we have a very vibrant pipeline ahead.

As I've told the leadership, actually the entire group, what they went through has made them a much stronger organization and has set them up for great success in many dimensions.

At the same time, our consumer-products initiatives have been accelerated by shows like Teenage Mutant Ninja Turtles. And the whole consumer-products initiative on our part is very important to Viacom as a whole, because it is a sustainable source of annuity-type revenue, very high margin, global in scale, and will provide some stability and other forms of stable revenues that we can grow significantly from where we are.

MCN: And what about over-the-top?

PD: As far as the [subscription video-on-demand] marketplace as it relates to Nickelodeon content, and this is true generally for Viacom, we do not air our programming on those kind of platforms — Netflix, Amazon, Hulu — at the same time as it airs on the television.

We have windows for different forms of content. So a lot of what we licensed to Netflix was older content that is no longer appearing on television; even some that’s more recent appears after a longer window. Now we switched over during the summer from Netflix to Amazon in the U.S. for a lot of the Nickelodeon content.

Amazon, being in the consumer-products business, likes to sell DVDs or sell various SpongeBob merchandise when somebody watches a Nickelodeon streamed video, so it’s a good driver of our business without impinging on the core of the television.

MCN: So you sell to all comers?

PD: Absolutely. Viacom is 100% in the business of creating content and for the most part, branded content. So our business is to figure out how to reach consumers with that content as many ways as possible while making sure that all of our business partners are successful in doing business with us.

The cable companies have continued to do very well while these new entrants have also done well, and that's the beauty of being in the content business. Having our content helps drive a lot of businesses for them.

MCN: Where does VOD fit into that equation?

PD: We have a lot of video-on-demand content with the cable and satellite and telco distributors. To the extent that we can have video-on-demand with advertising on it, it’s basically the ability for consumers to view programming when they want.

You can have the same commercials you had on the original airing within the C3 [live plus three days] window, or C7 [live plus seven days], if we go to that window. And then, after that window, you can have dynamic ad insertion, which we’re all starting to experiment with, so you could have more current ads with video-on- demand.

MCN: Are you satisfied with TV Everywhere, with what the cable guys have done?

PD: No, there’s more to do. There’s still a long way to go to have true TV Everywhere.

I don't think if you asked them they’d be satisfied with where they are.

MCN: When ratings were faltering as MTV lost Jersey Shore, and analysts began to fret, you essentially said, “All we need is a hit.”

PD: Multiple hits.

MCN: Can you sustain it? Do you feel vindicated?

PD: I don’t think of it as a vindication. What I do know is that MTV has been around well over 30 years now and it’s had to reinvent itself every two, three, four years since inception — that is what it does. It stays very close to the youth culture.

We’re focusing on millennials now and we do a lot of research relating to our audiences, not just at MTV but other networks. And we were fortunate to have one of those monster hits in Jersey Shore, but you can't expect to have that on a continual basis. You enjoy them while they last.

We now actually have a healthier environment because we have multiple hits across different days across the schedule. It’s both reality and scripted programming, like scripted, like Teen Wolf or Awkward, Catfish

MCN: Don’t forget the VMAs — and twerking.

PD: I can't believe we’re still talking about the Miley Cyrus performance over a month after it happened. It’s part of the cultural conversation. It shows every time somebody talks about MTV not being quite what it was, they disprove it every year all the time. That's because it stays close to the culture.

MCN: So you’re satisfied with where MTV is now?

PD: I'm more than satisfied, I'm very happy with where they’re at. In fact, we are at a very happy moment at Viacom where if you look at what's happened in the last several months, virtually all of our networks were up in the ratings, which is somewhat unusual — not because there’s any lack [of ratings] on any individual network, but we are the largest cable-network group there is.

We have a lot of health across the board and that’s because we always stay focused on the content and the creative aspect of our business and being sure that we attract the best talent, the best ideas and people. Creative work is the hardest work there is.

MCN: Can you sustain this growth?

PD: With new technologies come new demands for our content. There is immense opportunity to grow outside of the U.S. over a long period of time, and we are using a time of economic difficulty in Europe, for example, to launch new networks, really setting a bigger platform for our future.

We have multiple revenue streams that allow us to spend significantly more on content every year, while at the same time improving strong cash-flow margins. That's why the investment community views this as a good business overall.

MCN: A lot of that growth will come through different ways people are viewing your content on different screens. Are you satisfied so far with the way Nielsen’s metrics measure that viewing on the screen?

PD: No. [Laughter.] Would you like me to elaborate? That’s a loaded question. I haven't been satisfied, everybody knows that, and I'm not alone. I think it's a universally held view on our side of the business.

The way we measure viewing has not kept up with both consumer behavior and technological change. We have the technology to go beyond the sample method that has been used heretofore. We are sometimes particularly disadvantaged by the way viewers record what they’re viewing, for example. For Nickelodeon, a child has to record or a parent on behalf of the child, has to push a button or take action to say they’re looking at a show. And certainly it doesn't capture co-viewing. There are a lot of things that aren't captured, even in the existing methodology.

Given that viewing on a device that is not measured takes away from viewing on a device that is measured, it is natural that a provider of content who funds that content through the sale of advertising will be reluctant to make that content fully available. So, you’ve seen the pay services be more willing to put a lot of content, including our own, [premium channel] Epix, put content out in a true TV Everywhere, linear, streaming environment, to the extent that technology allows it.

I think that because there are other forms of measurement available now — including our ability to measure ourselves, consumption on our sites, on our apps — there will be more accurate forms of measurement on mobile video viewing, which will become more and more significant. And when we have our own information, we can sell that information.

But that also has prodded Nielsen to move more quickly. And so they have announced some initiatives, some of which will come to fruition, they say, in a year, to measure viewing on multiple devices — in fairness to them, they’ve been working at it.

MCN: Comcast just announced an app that allows you to view any program on a tweet, and earlier, Twitter unveiled plans for an IPO. Any thoughts on the Twitter’s bear hug to TV?

PD: We were, I think, probably the first media company to be involved with Twitter. We have had a very symbiotic relationship with them, almost from the point they started.

The Miley Cyrus performance set a Twitter record. We had announced a venture with them which began with the VMAs, so they are as extraordinarily pleased with it, as we are. We drove traffic to them and it helped drive the ratings. The ratings on that show were up over 50% from last year, by the way.

MCN: Let's talk about bundling. Viacom is currently in a lawsuit now with Cablevision, and this issue has driven a wedge between the programmers and distributors. How do you respond to complaints of high prices and “unfair” packaging?

PD: In the case of our company, first, we provide great value. And we do offer our services on an individual basis. We have a rate card and we offer a discount to the extent distributors take multiple services. And by and large, distributors take the broader bundle from us because we provide great value.

If you look at our family of networks, we provide close to 20% of all viewing on ad-supported cable. The Viacom family of networks is the No. 1 position. The proportion of affiliate fees that we receive for that level of viewership is in the high-single-digit percentages. So we provide great value.

You hear this line, “Well we just want to pay for the channels that we want to watch.” You can’t say, “Well let me divide the total cost over however many networks, let me pay that fraction.” That’s not how it works. You have to pay more if you take them on an individual basis. So it would not be a bargain to the consumer.

At the end of the whole process, the consumer would pay as much or more for a lot fewer choices. Plus, you wouldn’t get the ability to discover a new program. Who knew what AMC was as a network years ago? Now, it’s a significant network, because they had this opportunity to be widely distributed to have an audience discover them.

Generally, [distributors] find it more favorable to get the volume discount for getting a lot of networks, just like consumers benefit from the discount that the distributors offer if they take the triple play, which is generally cheaper than if you take each one separately.

MCN: But distributors have said the increases are just getting so high that they can't swallow them and soon consumers just can't pay for TV anymore.

PD: Let me just say this, this is an industry that has done very well for both sides of the equation, distribution and programming, for a long time. It’s been a great partnership, and it will continue to be a great partnership. By the way, many of the broadband [subscriptions] that they sell, to which they attribute no programming cost, are being sold to video customers.

While there is a lot of publicity on the disruptive events, the overwhelming majority of renewals — overwhelming, very high nineties percent of the deals — get done quietly without anybody ever knowing about it.

There’s too much focus in our industry on the areas of tension, which are a small part of what we do. Naturally, it’s more interesting to watch a train wreck than the trains rolling on time.