Group Members:Ang Li

Tim Schmelzle Tyson BanburyYe (Fred) Tian

Xinglong (Malone) Ma

Agenda• Summary• Industry Overview• Porter’s 5 Forces• Company Overview• SWOT Analysis• Competitors• Valuation• Recommendation

SummaryGoal: To be the world’s leading branded entertainment

company across television, motion pictures, and digital media platforms.

• Two main segments• Media Networks• Filmed Entertainment

• Ticker: VIA – Class A, Voting shares ($27.4 billion) VIA.B – Class B, Non-voting shares ($23.7 billion)

• Targets wide range of age demographics including kids, tweens, teens and adults

Industry OverviewUnited States media industry value: $ billion, 2006–10

CAGR=0.9%

Source: Datamonitor http://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=media&Ntx=mode%2bmatchall&D=media&No=25&Nty=1&N=210&Ntk=All

Industry OverviewUnited States media industry segmentation in 2010

Source: Datamonitor http://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=movie&Ntx=mode%2bmatchall&Nty=1&D=movie&Ntk=All&Ns=

Porter’s Five Forces Broadcasting & Cable TV

Supplier Power —— Medium• Production companies form a major supplier • Typically depends upon the quality of content

Barriers to Entry —— High• Big players are able to maintain high levels of capital expenditure in purchasing rights to the most popular content• Difficult for new entrants to secure the rights to popular programs• New entrants also have to ensure that they comply with regulations as

monitored by the Federal Communications Commission (FCC)

Threat of Substitute —— Medium High• A significant increase in popularity of other entertainment • A rise of downloading programs through the internet, both legally and

illegally• TV is still the most effective form of advertising

Porter’s Five ForcesBroadcasting & Cable TV

Bargaining Power of Buyers —— Medium High• Sensitive to the increasing concentration and dominance of cable and

satellite program distributors• Distributors are demanding higher-quality program productions in the

HD digital format, to satisfy subscribers' unique interests

Industry Rivalry —— Very High• Rivalry is strong between broadcasters to purchase the broadcasting

rights for the most popular programs, events and sporting events• Players within the market are typically large, owning multiple television

channels so that they have a high level of assets, with high fixed costs and exit costs• Rivalry is greater between players broadcasting shows and events of

similar genres

Porter’s Five Forces Movies & Entertainment

Supplier Power —— Medium Low• Supplies required by film production companies include: scripts, costumes, make-up, props, sets, cameras, film stock, lighting, and stunt and action equipment. • Revenue highly rely on movie industry

Barriers to Entry —— Medium High• Diversity of audiences provides chances for both big and smaller players• Fixed costs do not have to be high as independent films can be made on

a low budget, giving a successful independent film a high profit-to- cost ratio, while a failure would incur minimal losses• Current market situation does not offer an attractive prospect

Threat of Substitute —— Medium• Illegal downloading through the internet and video piracy• Cinema experience is still attractive

Porter’s Five Forces Movies & Entertainment

Bargaining Power of Buyers —— Low• Large number of potential customers

Industry Rivalry —— Medium• There are a number of large market players, movie production companies and independent companies• The wide range and diversity of audience tastes allows films scope for

significant differentiation in terms of genre and content

Company Overview – Business Strategy• Expanding brand through creation of programming,

channels, motion pictures, and other entertainments• Invest in programming content that will grow ratings

across networks• Strengthen relationships with advertising, cable,

satellite, online, mobile and licensing partners• Develop new ways of reaching audiences• Maintain cost-savings while executing key ‘tentpole’

films supplemented by other smaller productions and acquisitions

• Build international presence through both Media Networks and Filmed Entertainment businesses

Viacom 2010 10-K, pg.2

Company Overview - History1971: Viacom spun off from CBS, establishing itself as a public company1985: Acquired 66% of MTV Networks1987: National Amusements Inc. acquires 83% of Viacom1991: Acquired controlling interests of MTV Europe1994: $9.9 billion merger with Paramount Communications Inc.1999: Viacom starts trading on NYSE (VIA, VIA.B)2000: Viacom merges with CBS2001: Acquired BET Holdings II Inc.2005: Viacom (new) spun off, remaining company (old Viacom) changes

name to CBS Corporation2006: Acquired several interactive platforms2010: Announced regular quarterly cash dividend and recommences stock

repurchase program

Viacom Website, History http://www.viacom.com/aboutviacom/Pages/history.aspx

Company Overview – Business SegmentsMedia Networks• MTV Networks

• Approximately 160 Networks worldwide including: MTV, VH1, Nickelodeon, Comedy Central, CMT, Spike TV, Logo, and TV Land

• Digital Assets that provide interactive entertainment such as videogames and virtual pets include: Neopets, Atom, and Harmonix

• BET Networks• Provides content focused on Black media and entertainment to

over 100 million homes including BET, Centric, and BET.com

Filmed Entertainment• Paramount Pictures Corporation – brands include Paramount Pictures,

Paramount Vintage, MTV Films, Nickelodeon Movies and Paramount Home Entertainment

Company Overview – Segment RevenuesMedia Networks• Advertising Revenues – Sale of advertising time on program services

and digital properties• Key factors: number of subscribers, viewer demographics, program

ratings by third party researchers• Revenues fluctuate seasonally, generally highest in Q4 calendar

year• Affiliate Fees – Affiliates pay Viacom for the use of their content

• Contracts with affiliate distributors are typically multi-year with staggered end dates, providing a more stable source of income

• Ancillary Revenues – Revenues derived from content licensing and sales of home entertainment products (DVD’s, Video-On-Demand, etc.)

Data from 2010 10-K, pg. 3

Company Overview – Segment RevenuesFilmed Entertainment• Theatrical – Release approximately 14-16 films per year domestically

• Volatile revenues due to incurring larges costs prior to recouping revenues to cover expenses

• Revenues are cyclical, rising during summer months• Films often use third party financing

• Home Entertainment – Sale of DVD’s and Blue-ray discs for films distributed by Paramount, other Viacom brands, and third

parties• Licensing – Films owned or distributed by Paramount are licensed to

video on demand, basic cable, and TV syndicates

Data from 2010 10-K, pg. 11

Company Overview – Recent NewsFiscal Year - Change of fiscal year end from December 31 to September 30

• Better aligns financial reporting and budget planning with business cycle (cable broadcast year)

• Compare pro forma 9-month statements

Sale of Harmonix – Board authorizes management to proceed with sale of Harmonix, developer of music-based games (Rock Band)• $299 million write-down in Q3 20101

• Originally purchased in 2006 for $175 million plus payouts based on 2007 and 2008 performance1

EPIX-Netflix Deal – EPIX, a joint venture between Viacom, MGM, and Lionsgate that offers films to subscribers, enters a multi-year deal with Netflix to license its content to Netflix

1 http://paidcontent.org/article/419-viacom-selling-rock-band-maker-harmonix-profits-fall-on-writedowns/

Controlling Interest• Executive Chairman Sumner Redstone controls National Amusements, Inc. (NAI)

which has voting control of VIA• In 2008 and 2009, NAI converted a portion of Class A shares to Class B shares

which it then sold to meet requirements under its restructuring indebtedness• NAI does not currently have plans to continue converting and selling VIA stock;

however, this does not guarantee this will not reoccur• Also as part of this restructuring, NAI has collateralized all of its Class A VIA

shares• This creates the potential creditors to foreclose on the collateral in the event of

a default by NAI, converting Class A stock to Class B stock and subsequently selling the Class B shares, driving down the stock price

Source: Bloomberg

Company Overview – Recent Performance

Yahoo Finance: http://finance.yahoo.com/echarts?s=VIA-B+Interactive#chart9:symbol=via-b;range=1y;compare=^gspc;indicator=sma(20,200)+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Management• Viacom is overhauling its business structure

Viacom: http://www.bsu.edu/web/tsstewart2/profile.html

Fading Management

• Primary shareholder and Executive Chairman

• A lifetime of experience / education

• Considered a visionary and enigmatic

• Lifelong philosophy is that content, not distribution medium is the key to success.

• Controlling stock interest is in an irrevocable trust with his grandchildren being the beneficiaries.

Sumner M. Redstone (87)

New Management

• Friend and Legal advisor to Redstone

• Been with Viacom since 1993

• Yale undergraduate and Columbia Law graduate

• Scored a perfect 1600 on SATs at the age of 13

• Significant legal and financial experience, but little experience in managing entertainment

Phillippe Dauman, Viacom CEO since 2006

SWOT• Strength:

Scale and scope of businessStrong brand name & copyrights

• Weakness:The size of the conglomerateDeclining profitability

• Opportunities:Have a more effectively constructed management teamDevelop a worldwide strategyThe outlook for broadcasting market is very lucrative

• Threats:Audience Acceptance Global Economic Conditions Competitive IndustriesTheft of Our Entertainment Content

Major Players

• Disney• Time Warner Cable• News Corp• CBS• Time Warner Inc

Market Share by Rev. (Millions)

$38,063$17,868$32,778$13,200$26,505

Viacom $13,770

Competitors:

Revenue StreamsViacom Disney

Time Warner Cable

News Corp.

CBS Corporation

Time Warner Inc.

Various Media Networks:

8,288.0

17,162.0

17,868.0 15,068.0 10,683.6

11,703.0

Filmed Entertainment:

5,482.0

6,701.0 7,631.0

11,066.0

Parks and Resorts: 10,761.0

Consumer Products: 2,678.0

Interactive Media: 761.0

Publishing: 8,548.0 793.5

3,736.0

Other: 1,531.0

Outdoor: 1,722.6

Total: 13,770.0

38,063.0

17,868.0

32,778.0

13,199.7

26,505.0

Dollar figures are in Millions

60% of Viacom’s Revenue Media Networks

Assets 16,189.0 N/A 43,694.0 21,214.0 11,326.6 36,143.0

Revenue 8,288.0 17,162.0 17,868.0 15,068.0 10,683.6 11,703.0

Profit 2,934.0 5,825.0 1,1912.0 2,718.0 649.8 3,545.0

Dollar figures are in Millions

40% of Viacom’s Revenue Filmed Entertainment

Assets 5,549.0 N/A 0 7,122.0 0 17,060.0

Revenue 5,482.0 17,162.0 0 7,631.0 0 11,066.0

Profit 219.0 N/A 0 1,349.0 0 1,084.0

Dollar figures are in Millions

Valuation

Valuation

Valuation

Valuation

Recommendation

DCF Model Price $36.32+/- 10% $32.69 - $39.95

Sensitivity Analysis Price Range$33.32 - $40.98

Price as of December 1, 2010$39.22

RecommendationNot Recommended for

Purchase and Watchlist