Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Are CBS and Viacom Making Money?

How does a collapsing third-rate entertainment company saddled with a dying broadcast TV network survive? If you are CBS (NYSE: CBS) you consider merging with a crumbling send-tier entertainment conglomerate stuck with a bunch of decrepit cable networks – namely Viacom Inc. (NASDAQ: VIAB).

The Viacom/CBS merger has been tried before; between 2000 and 2006, and it didn’t work then, The New York Times pointed out. The best idea the brains at the two entertainment zombies can come up, with is to try and survive by combining their herds of dinosaurs. That does not bode well for their survival and it seems more like desperation than a plan.

CBS and Viacom are in talks for a merger, a move that seems more like a desperate middle-aged couple’s bid to revive a failed marriage than a strategic maneuver. even compared the two companies to Liz Taylor and Richard Burton, the often-married acting power couple of the 1960s and 70s.

The two companies have formed committees to draft merger plans; and discuss acquiring lesser properties like the ailing studio Lions Gate Entertainment Corp (NYSE: LGF.A), Deadline revealed. The deal is far from done because CBS CEO Les Moonves has doubts, The Times reported.

CBS is Desperate to Survive

It is easy to see why CBS is so desperate to merge with anybody – ratings at its flagship network are in freefall.

Only one of the 19 scripted shows CBS renewed from the 2016-2017 to the 2017-2018 TV season displayed a year-to-year ratings increase in the critical 18 to 49 age demographic, data complied by TV Series Finale on 3 February 2018 indicates. That show was the sitcom Mom which saw a 4.72% year-to-year increase in that all-important group.

Every other renewed scripted show on CBS saw double-digit ratings decreases among 18 to 49-year-olds, on 3 February. Disturbingly all but three shows; The Big Bang Theory, Mom, and Life in Pieces, experienced double-digit ratings drops in that demographic.

All of CBS’s renewed scripted dramas experienced a double-digit ratings collapse among 18 to 49-year-olds. Three of them; Scorpion, NCIS: Los Angeles, and Criminal Minds, lost more than one-quarter of their audience between 2017 and 2018, ratings indicate.

CBS has Lost Most of the Audience

These figures spell disaster for CBS because the 18 to 49 year old demographic includes most of the population including; Generation Z (18-19 age group), Millennials (age 20 through 35) and Generation X (age 36 through 50). Since are around 79.41 million Millennials, 65.72 million Generation Xers, and 73.51 million members of Generation Z, according to Knoema, it appears that CBS has lost the entertainment wars badly.

Nielsen estimated that Generation Z and Millennials make up 48% of the total media audience, and Generation Z makes up 26% of the media audience, Marketing Land reported. These figures indicate catastrophe for CBS because Generation Z hates TV and prefers YouTube and video games.

Only 36% of 19 to 24-year-olds pay for traditional TV, but 71% of them admit to having a Netflix (NASDAQ: NFLX) subscription, a Defy Media survey indicates. To make matters worse people in that age group only watch 8.2 hours of regular TV a week, but around 21 hours of streaming video. It is easy to see why Daily Variety claims Generation Z watches more than twice as much streaming video as TV.

Will Advertisers dump TV?

Tellingly, one big advertiser; the United States Marine Corps is not buying ad time on this year’s NBC Super Bowl broadcast, Breitbart reported. Instead, the Marines are buying ad time on digital media because that’s what the 18 to 24s they are trying to sign up are watching.

“I’m not trying to enlist fathers or mothers, I’m trying to enlist 18- to 24-year-olds,” the Marine’s top recruiter Major General Paul Kennedy told the Associated Press. “And they tend to be cord cutters. They take in entertainment differently and they tend to do it on a device rather than a television.”

Kennedy’s sentiments are shared by a wide variety of advertisers data indicates. The CBS Television Network’s advertising revenues fell by 3% in 3rd quarter 2017, Media Post reported. Advertising revenue on all of CBS’s platforms fell by 5% during the same period.

A CBS Viacom Reunion Tour is just Dumb

With numbers like it is little wonder that CBS is trying to sell its radio stations and looking for a merger. Although, a Viacom merger seems dumb. Viacom’s revenues grew by 2.88% during 3rd quarter 2017, but they were only $3.19 billion for the quarter.

Viacom managed to generate an operating income of $697 million and a net income of $674 million in 3rd Quarter 2017, Stockrow data indicates. That’s hardly the kind of cash CBS needs to fend off giants like a Disney (NYSE: DIS)/21st Century combination.

During the same period, CBS managed to generate just $710 million in operating income and $592 million in net income. Its revenues grew by 2.8% in 3rd Quarter 2017, but how long can that continue.

Nor does Viacom offer CBS the media reach it would need to survive. Viacom’s media assets consist of a declining studio; Paramount, and a bunch of second-tier cable networks such as MTV (yes it apparently still exists), Comedy Central (cutting-edge humor for 45-year olds), Nickelodeon, TV Land VH1, BET, and yawn CMT.

Better strategies for CBS would be selling out to Disney or Amazon (NASDAQ: AMZN), or merging with the money-losing Netflix. Although buying Paramount Studios; and leveraging its’ resources (which include the Star Trek movie rights), for digital movie and TV production makes some sense for CBS. If Moonves can negotiate a deal to buy just Paramount he can increase his company’s value.

CBS and Viacom are Lousy Investments

A really smart strategy; that Moonves seems to be pursuing, is to dump as much of CBS’s resources into digital TV production as possible.

A good way to do this would be to sell off older assets – which Moonves is trying to do. A smart move would be to sell the NFL football rights, (if a sucker can be found to buy them) and put something else on CBS’s airtime. Use the cash from the NFL rights sale to scale up digital production fast. Selling off part of the TV network and the TV stations also makes sense.

Some observers will wonder if this makes CBS a value investment, I would say no. At the $54.39 share price reported on 6 February 2018, it was way too expensive. CBS would be a good buy if were way cheaper – around $30 a share. Viacom was also overpriced at $31.76 a share on the same day.

My take is that both Viacom and CBS are lousy investments right now, and a CBS-Viacom combination would be a terrible investment. Stay away from these entertainment industry clunkers until they demonstrate they can do digital.