Few CEOs survive a vote of no confidence as resounding as the one Viacom received last week when investors sent its share price plummeting 20% — the biggest fall taking place on Thursday after it released disappointing June quarter earnings. In a bad week for all media stocks, Viacom was hit hardest. And it wasn’t a single-week panic. As of Friday, Viacom had depreciated more than 43% during the past 12 months, bringing the stock to about where it was three years ago.
Most are tired after seeing ratings dive for more than a year at popular pay TV channels including Nickelodeon, MTV, VH1, Comedy Central and BET. They fear losses will continue as viewers cut the pay TV cord and cable and satellite companies introduce skinny bundles. Two small cable operators, Suddenlink and Cable One, already have ditched Viacom and crowed that it helped their bottom lines.
Viacom needs a creative renaissance. Yet with no clear evidence of a turnaround in sight, some analysts wonder whether the entertainment giant, which also owns Paramount, is destined to be sold, possibly in pieces. It seems unable to make big decisions about its future while everyone waits for 92-year-old Chairman Sumner Redstone, who controls about 80% of the votes, to leave the stage. Dauman, who Redstone used to call “the wisest man I have ever known,” isn’t going anywhere — no matter how much the stock price falls. Redstone’s rarely seen or heard in public these days. The official word is that he remains sharp as a tack and endorses Dauman. But many say he’s just too infirm to deal with sweeping decisions about Viacom (and CBS, which he also controls) while family members, business associates (including Dauman) and personal companions jockey for power over the estate.
Viacom needs to make a powerful statement if it isn’t frozen, and really views itself as an ongoing concern. It could do that by identifying Dauman’s heir apparent, who can speak authoritatively to Hollywood and Wall Street. That would be the right thing to do even if all were well. Having a clear succession plan reduces uncertainty and smooths transitions.
In Viacom’s case it’s especially necessary.
The creative community never warmed to Dauman after he took charge in 2006. He wasn’t a member of the club: Redstone picked his former lawyer to replace the wildly popular MTV pioneer Tom Freston.
“Philippe is one of the world’s great lawyers, but he has no touch for people and the business,” says one of his many highly placed critics.
Dauman lived up to their vision of him as a bean-counting outsider by cracking down on seemingly bloated budgets — and then, since early 2011, spending $14.5 billion to repurchase Viacom shares.
The CEO’s annual compensation packages also put a bull’s-eye on him. He was the nation’s 11th-highest-paid CEO last year, with $44.3 million. Over the past five years Dauman and his deputy, COO Tom Dooley, were the second- and third-highest-paid executives in media — Dauman with a 5-year total of $242.6 million and Dooley with $189 million, according to company proxies.
Memories of the executives’ gluttonous pay stuck in the craw of people at MTV Networks early this year when many — the company won’t provide a number — lost their jobs in a restructuring. The total effort is supposed to save about $350 million a year.
To be sure, Dauman is a smart guy who earnestly wants to fix Viacom’s problems. He’s laid out plans to build Paramount’s new TV production unit, produce and order additional scripted shows for Viacom’s networks, expand to online platforms and increase Paramount’s movie slate to about 15 releases a year. In addition, he’s promoting efforts to sell ads in creative ways and expand overseas (late last year Viacom bought UK’s Channel 5).
Viacom has invested $21.5 billion in programming and content since 2010 and hopes to shorten the time it takes to put new productions on the screen.
“We are at the cutting edge of navigating the transition of our industry into the future, and we have positioned ourselves very well to do so,” he told analysts last week.
Also keep in mind that Viacom faces a special problem. It appeals primarily to young audiences, making it the canary in the media industry coalmine as viewers begin to shift from traditional pay TV to digital venues including Netflix.
Few in Hollywood are willing to give Dauman the benefit of the doubt, though, after a series of perceived missteps — primarily favoring short-term cash needs over long-term asset building — that they say exacerbated Viacom’s problems. Each one is open to debate, but the list of complaints illustrates how deep the animosity runs. Charges include:
- He ran the sprockets off of established hits when he should have invested more to develop fresh content and franchises. At one point SpongeBob SquarePants represented 40% of Nickelodeon’s airtime.
- The company stuck with inexpensive reality TV productions after their novelty began to wear off. Viacom “built franchises that lasted a decade — such as SpongeBob, Dora The Explorer and Jon Stewart — but hasn’t reinvested for the 21st century,” says one executive who knows the company well. “It’s jaw-dropping.”
- Dauman either pushed out or failed to keep some of Viacom’s most creative executives.
- He failed to make bold and early forays into digital media. “Where is MTV in the online music revolution?” one executive asks. “Where’s Nickelodeon in kids’ gaming? They should have been there.”
- He sued YouTube to force it to take down unauthorized clips from Viacom shows at a time when others (such as Saturday Night Live) recognized the platform’s power to build followings.
- He took a short-term financial gain beginning in 2011 by selling kids TV hits including SpongeBob to Netflix. That now appears to have backfired by encouraging young viewers to abandon Nickelodeon and other ad-supported channels and go online where they can watch shows whenever they want, without ads.
- Those ad-free platforms are becoming more appealing as Viacom channels make up for the decline in ratings points by cutting back on programming minutes and packing in additional commercials. By one count, time devoted to ads on BET in primetime was up 15% in Q2 vs the period last year, while MTV and VH1 were up 11%. Nickelodeon’s ad time increased 6% from 7 AM to 7 PM.
- Paramount for years over relied on film distribution deals with other studios including Marvel and DreamWorks Animation. When they fell apart, Viacom’s studio was left with too few of its own hit franchises.
- The studio might have been able to cushion the blow if it had a thriving TV production unit. But that went to CBS in their 2006 split, and critics say Dauman waited too long to build a new TV unit at Paramount. “A stand-alone studio without TV is not a great business,” says one executive who knows the businesses well. “Now they’re trying to do it from scratch. But that’s not an easy thing to do. They’re not Warner or Fox, and they don’t have a library.”
It was easier for Viacom to overlook the grousing when Dauman’s Wall Street fans were happy. Now they aren’t.
One number “captures investor cynicism” about the company’s prospects, Wunderlich Securities’ Matthew Harrigan says. Viacom’s stock, which closed Friday at $45.47, trades for about 7.7 times its expected earnings — about half of the multiple investors give to peers including Discovery, Time Warner, CBS and Disney.
Dauman’s credibility in the financial community took a hit last week when Viacom reported that domestic ad sales fell 9% in the June quarter: In April, he said that he believed the June period ad sales could deliver “a comparable performance” to the first three months of this year, when they fell 5%. He added that with new shows and sales initiatives “we’re quite hopeful we’ll be able to see improvement as the year progresses.”
Perhaps the biggest indignity: With the drop in Viacom’s stock price, a few analysts question the wisdom of Dauman’s much-vaunted share repurchases.
For the $14.5 billion spent since the beginning of 2011 “they could have remodeled their company to better withstand the future,” says Bernstein Research’s Todd Juenger — one of Viacom’s sharpest critics. “For $14.5 billion, they could now own some combination of: Lionsgate, Starz, AMC Networks, and/or multiple [digital multichannel networks] such as Maker Studios. Had they taken that different course, the share price may never have reached [a high of] $88 in 2014, but we suspect it would be much more promising for 2017 and beyond.”
Viacom could, of course, simply keep its head down and work on Dauman’s plans. There’ll always be someone in Hollywood willing to take its money. And Wall Street will come around if something clicks.
But the company could improve the odds of success if it shows that it’s energized, and ready to change. It needs stories for the screen — and an heir apparent who can tell Viacom’s own story without the distractions that make it so hard for so many to listen.