Market Mad House

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

Market Insanity

Why Is Paramount Giving Away Movies for Free?

Paramount Pictures—the historic Hollywood studio owned by Viacom (NASDAQ: VIA)— is doing something very strange. It is giving away movies by posting hundreds of full-length films at a YouTube channel called “The Paramount Vault” and letting anybody download and watch them for free.

Naturally, many people will think that this is a hoax or a practical joke, but it is apparently for real. The Vault has actually been up and running on Alphabet’s (NASDAQ: GOOG) YouTube for quite some time (since October), but it is only now attracting some media attention.

A Radical Shift in Business Model

Once you’ve visited “The Paramount Vault” and seen it for yourself, you’ll probably be wondering why. After all, the whole experiment goes against 30 or 40 years of movie industry practice. For decades Hollywood has been doing everything in its power to suppress piracy and force us to pay for movies.

Paramount is, after all, one of the same studios that put that ludicrous FBI warning on every videotape and DVD in existence for years. The idea that the world’s top law enforcement agency would take time out from hunting terrorists and gangsters to prosecute Grandma for selling an unlicensed tape of an old Jerry Lewis film is moronic.


Yet the exact same organization is now giving away the product it once tried so hard to control. What has prompted such a radical shift in a Hollywood studio’s business model?

Viacom’s Revenue Is Dropping

The major reason Viacom and Paramount are changing their business model is a very basic one: their revenue is dropping. Viacom saw its revenues slide by $900 million 2015. In December 2014 the media conglomerate reported a TTM revenue of $13.93 billion; that number fell to $13.08 billion a year later.

What’s even more frightening for Viacom’s management team is that it reported a TTM revenue of $15.04 billion just four years before, in December 2011. These figures show us that Viacom’s present business model of relying on traditional entertainment venues such as cable television (MTV, etc.) and movies is not working.

To make things worse, Viacom’s income is also dropping. The entertainment conglomerate reported a net income of $2.344 billion in December 2014 that fell to $1.871 billion in December 2015.

Viacom reported $2.36 billion in cash from operations in December 2014 and $2.131 billion in cash from operations a year later. That means it is generating less cash and less float to sustain its operations. Something has to be done soon to keep it from spinning into the death spiral.


How Giving Away Movies Could Help Paramount Make Money

You obviously get the picture, folks; Viacom is losing money, but you are probably asking, how will giving movies away help the company make money? There are actually several good reasons for this strategy, most of which are rooted in marketing psychology.

Some reasons why giving away movies on YouTube could help Paramount and Viacom include:

  1. Paramount is not making much money out of these movies anyway. Most of them are B and C stuff, not blockbusters or classics, that have been simply gathering dust in the vaults for decades. The current list of titles at the Vault includes such gems as Puddin’ Head, The Phantom Speaks, The Deadly Bees, I Married a Monster from Outer Space, Shanks and Bride of Vengeance. There’s lots of corn, camp and big-budget flops of the past (remember Mel Gibson in Hamlet ?). There are a few big stars but in lesser roles; John Wayne fans will have to settle for Angel and the Bad Man rather than The Searchers.


  1. Paramount is betting that some of this stuff might go viral and find a new audience. A lot of it is really weird or downright bizarre, the kind of stuff that could find an audience online. After all, a lot of people will download something like I Married a Monster from Outer Space just to see if it is for real.


  1. It is possible to develop a huge audience through YouTube. World Wrestling Entertainment (NYSE: WWE) attracted 456.4 million views on YouTube in August 2015, according to The Guardian.  Its channel shows mostly clips of old wrestling matches, many with big stars such as Hulk Hogan and Stone Cold Steve Austin. Paramount is probably betting they can best that; the Vault has some gigantic stars, including Jerry Lewis, Patrick Swayze and Chuck Norris. It also some classic pop culture moments such as Ferris Buller faking out his parents and Crocodile Dundee and his knife.


  1. The Vault could provide Paramount with a lot of free advertising. It offers clips and classic moments to share, the idea being that some that see one of those old movie clips at a website or in a tweet might want to watch the whole film and possibly pay for it. Word-of-mouth advertising is the most powerful form of promotion around, and social media is a tremendous means of harnessing it.


  1. Paramount’s old movies could reach the largest audience in history. The most successful social media solution Facebook (NASDAQ: FB) subsidiary WhatsApp reported having one billion users, or around one sixth of the world’s population, in February 2015. Just imagine how people might see a clip shared through WhatsApp.

  1. Giving movies away takes advantage of a psychological marketing tactic called reciprocity. Reciprocity is the first of the six key principles of persuasion identified by psychology and marketing professor Robert Cialdini in his classic book, Influence: The Psychology of Persuasion. Cialdini’s thesis is that people are more likely to make a commitment or a purchase in return for a favor. A person that participates in Trader Joe’s free wine tasting is more likely to buy a bottle of Two Buck Chuck for example. Paramount might be hoping that people who download Masters of the Universe or Don’t Give Up the Ship for free might be willing to pay $1 to see Star Trek: The Wrath of Khan.

So Is Viacom a Value Investment?

The stock geeks out there will be wondering if Viacom is a value investment despite its falling revenue. The answer is maybe. Viacom is cheap—it was trading at $43.50 a share on March 4, 2016—yet it did pay out fairly well.

Viacom offered investors a dividend yield of 3.52% and a return on equity of 59.35%. That means it is a good buy if you’re looking to add some dividends to your portfolio, yet it has some growth potential. In addition to offering dividends, Viacom was undervalued with a market capitalization of $17.23 billion and an enterprise value of $29.49 billion.

If you’re looking for something to watch tonight and you don’t want to spend a dollar at Redbox, pay a visit to the Paramount Vault. If you are looking for a cheaper stock with a good dividend, look into Viacom.