Market Mad House

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

The Death Spiral

Facebook and Viacom Prove the Old Media is Dying Fast

The legacy media is dying faster than we thought. The first quarter earnings reports from Facebook (NASDAQ: FB) and Viacom (NYSE: VIA); show us just how quickly the old media is dying, and demonstrate the speed at which social media is rising to dominance.

Just last year in March 2015; Viacom’s revenues of $13.83 billion, were slightly higher than Facebook’s revenues of $13.51 billion. Just one year; later Facebook’s revenues of $19.77 billion exceeded Viacom’s by $6.77 billion. Over the past year, Facebook grew like a weed adding nearly $7 billion in revenue; while Viacom lost $830 million in revenue.

This should be worrying; because Viacom owns some potent old media properties, including Paramount Pictures, Nickelodeon, MTV, VH1 and BET. Yet the revenue proves it is has a hard time sustaining market share and competing with digital media outlets.

Has the Television Apocalypse Begun?

The revenue numbers lend credence to BTIG TM Analyst; and self-proclaimed “Media Futurist,” Rich Greenfield’s thesis that Facebook is growing more than twice as fast as Viacom is.

“Facebook added nearly two Viacoms of ad revenue last quarter,” Greenfield Tweeted on April 28, 2016.


Greenfield estimated that Viacom’s advertising revenue fell by 4.2% or $49 million in the first quarter. Meanwhile Facebook’s ad revenue grew by 56.8% or $3.317 billion during the first quarter of 2016.

If Facebook keeps adding $3 billion in ad revenue a quarter; it could add $12 billion revenue over the next year. That would make the Social Network nearly twice the size of Viacom in just a year.

It looks as if companies like Facebook are stealing Viacom’s advertising revenue. One has to wonder how long it will become before Viacom’s business will become unviable. Is Summer Redstone’s historic media company facing the death spiral?

Has Viacom entered the Death Spiral?

Despite its revenue collapse, Viacom is still making money; it reported a profit margin of 10.1% and a net income of $2.27 billion for the first quarter. Viacom’s net income also grew by $356 million in the first quarter; rising from $1.871 billion in December to $2.227 billion in March.

This indicates that Viacom’s business is still profitable, but the cash from operations indicates it might not be viable. Viacom’s cash from operations fell by $214 million during the first quarter dropping from $2.131 billion in December to $1.917 billion in March. Viacom’s cash from operations actually fell during every quarter of the past year dropping from $2.464 billion in March 2015 to $2.314 billion in June to $2.313 billion in September to $2.131 billion in December to $1.917 billion March.


If this keeps up Viacom will have to take actions like raising subscription prices or selling off or shutting down assets to cut expenses. It sure looks as if Viacom is at the beginning of the death spiral as its business generates less and less cash. This could explain why Paramount is taking the desperate action of giving old movies away online.

One has to wonder how much longer Viacom will be able to offer shareholders a dividend yield of 3.58%, an earnings-per-share number of 5.57 or a return on equity of 68.31%. The numbers also raise the question of whether or not Viacom is a value investment.

Value investors will point to the dividend and the fact that Viacom’s enterprise value of $29.96 billion exceeds the market capitalization of $17.72 billion as a reason to buy this stock. I would say no, because that enterprise value might be unrealistic. The drop in advertising revenue shows that the enterprise is no longer capable of generating new revenues, its assets such as cable networks and libraries of old movies and TV shows may not be worth that much.

Is Content Still King?

The old adage that content is king may no longer be true in the age of digital media. There might simply be too much content out there that’s readily available; meaning that Viacom’s business model no longer works.

The business model for old-media entertainment companies was based on a limited amount of content that advertisers or subscribers were willing to pay a premium for. Think three or four broadcast TV networks, and a dozen cable channels; which was what the average American had access to just 15 years ago at the turn of the 21st Century.


Today anybody with a decent internet connection has access to a virtually unlimited stream of digital content thanks to YouTube, Amazon Prime, Hulu, Facebook, Netflix, etc. Content has become a discounted product, meaning those who own the digital delivery systems are making the money.

This puts Facebook; which has around two billion users for its social media solutions such as WhatsApp in a great position. Mark Zuckerberg can deliver the largest audience in history. He also acts as the toll collector for the social media world.

Facebook is a Value Investment for the Future

This means that Facebook could be a value investment because it fulfills Warren Buffett old dream of acting as a toll booth. Facebook generates income by charging those who want to advertise in social media for the privilege.

That income is growing, Facebook added $998 million or nearly $1 billion in net income during first quarter 2016. The Social Network reported a net income of $3.688 billion in December 2015 that grew to $4.686 billion in March. If that was not impressive enough, Facebook’s net income grew by $1.876 billion over the past year; rising from $2.81 billion in first quarter 2015 to $4.686 billion in March 2016.

The amount of money flowing through Facebook’s till is also growing. Facebook’s cash from operations increased by $1.3222 billion during the first quarter; rising from $8.599 billion to $9.882 billion. Over the past year Facebook’s cash from operations grew by $4.01 billion; rising from $5.872 billion in March 2015 to $9.882 billion a year later.


Facebook has a lot of Float, Viacom has none

This is giving Facebook a lot of float; it reported $20.62 billion in cash and short-term investments on March 31, 2016. That number grew by $2.19 billion during the first quarter; rising from $18.43 billion to $20.62 billion. If that was not enough during the past year, Facebook’s bank account grew by $8.28 billion. Facebook reported $12.41 billion in cash and short and term investments in March 2015.

Meanwhile Viacom reported $480 million in cash and short term investments on March 31. That was a $155 million increase over December when it had $327 million in the bank; but it hardly rivals the amount Facebook can generate. Facebook’s business is generating a vast amount of float, Viacom’s is not.

Therefore, if you are looking for a value investment for the future; buy Facebook stock. If you want to take a trip down the death spiral; invest in old media companies like Viacom, it looks as if they have nowhere to go but down.

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