Note: write on the above point regarding to the case study

please do it

time limit 5 hour please do it

CBS Broadcasting established Viacom as an independent company in 1970 to comply with regulations set forth by the U.S. Federal Communications Commission (FCC) barring television networks from owning cable TV systems, or from syndicating their own programs in the United States. The increasing spread of cable television and the continuing possibility of conflicts of interest between television networks and cable television companies made the spinoff necessary, and Viacom formally separated from CBS in 1971, when Viacom's stock was distributed to CBS shareholders. Viacom quickly became one of the largest cable operators in the United States, with over 90,000 cable subscribers. It also owned the syndication rights to a large number of popular, previously run CBS television series that it made available for syndication to cable TV stations. In 1976, to take advantage of Viacom's experience in syndicating programming to cable TV stations, is managers decided to establish the Showtime movie network to directly compete with HBO, the leading outlet for films on cable television. In 1977, Viacon earned $5.5 million on sales of $58.5 million. Most of its earnings represented revenues from the syndication of its television series, but they also reflected growth of its own cable TV systems, which at this time had about 350,000 sub- scribers. Recognizing that both producing and syndicating television programming could cam greater profits, Viacom's managers decided to produce their own television programs in the late-1970s and early- 1980s. Their efforts produced only mixed results, however, no hit series resulted from their work, and the Big Three television networks of ABC, NBC, and CBS continued to dominate the airwaves. During the early 1980s, the push to expand the cable television side of its business was Viacom's managers' priority, and it rapidly grew its subscriber base. Vincom's managers, however, believed that its core cable operations were not a strong enough engine for future growth. Cable TV prices were regulated at this time, so cable companies had limited ability to increase prices, but its managers believed that real profit growth would come from providing the content of cable programming television programs-not from just cable television service. Given that Viacom had failed to make its own successful new TV programs, its managers sought to acquire companies that made entertainment programs the content. In 1981, Viacom started in a small way by buying a stake in Cable Health Network, a new advertiser-supported television network. Then, in September 1985, in a stroke of fortune, it made the acquisition that would totally change the company's future. Viacom purchased the MTV Networks from a competitor, Warner Bros., that desperately needed cash to invest in its own cable TV system to keep it viable. As it turned out, Warner Bros. had sold the jewel in its crown. The MTV Networks included MTV, a new popular music video channel geared toward the 14-24 age groups: Nickelodeon, a channel geared toward children; and VH-1, a music video channel geared toward an older 25-44 age audience. MTV was the most popular property in the MTV Network. Its quick pace and flashy graphics attracted young television viewers who were a major target for large advertising companies, and the popularity of a TV station's programming determines how much a broadcast network can charge for advertising - which is why Super Bowl ads cost millions. MTV was performing well, but Nickelodeon had been less successful and had not achieved much of a following among young TV viewers, which limited its advertising revenues, Vincom's managers moved quickly to revamp Nickelodeon and give it the slick, flashy look of MTV. They developed unique programming to appeal to children-programming a very different aesthetic than The Mickey Mouse Show, which competitors like the Disney Channel offered. In the next few years, Nickelodeon went from being the least popular children's cable TV channel to being the most popular! Viacom's managers were confident that they had the foundation of a new content programming strategy to complement its cable TV interests to increase the company's profit growth. Enter Sumner Redstone Viacom's hopes were shattered when its Showtime channel lost 300,000 subscribers by 1986 because of intense competition from HBO, which, under its CEO Frank Biondi, had become the dominant sub scriber movie channel. Viacom's cash flow plunged, it reported a loss in 1986, and, weakened by the $2 billion debt incurred to fund its growth, it became a takeover target. Page 2 of 13 After a 6-month battle to acquire the company Sumner M. Redstone bought Viacom for $3.4 billion in 1986. Redstone was the owner of National Amusements Inc. that owned and operated 675 movie theatres. Redstone had built NAI from 50 drive-in movie theaters to a modern theater chain and is credited with pioneering the multiplex movie theater concept. However, running a chain of movie theaters is very different from running a debt-laden media company like Viacom. Many analysts believed Redstone had overpaid for Viacom-but he saw a great potential for growth. Aside from its cable television systems and syndication rights, which now included the popular TV series The Cosby Show, Redstone recognized the potential of its MTV and Nickelodeon channels. Also, Viacom had acquired 5 television and radio stations in major markets that were also valuable properties. Redstone quickly moved to solve Viacom's problems and with his hands-on," directive management style, he fired Viacom's top managers and searched for more capable managers who would be loyal to him. To tum Showtime around, he hired Frank Biondi, who had made HBO the major pay movie channel, as CEO of Viacom. Viacom Speeds Up Redstone bought Vincom because he believed that cable TV programming would become the main channel to deliver customers with entertainment content in the future. Redstone believed Viacom's MTV and Nickelodeon networks were its crown jewels," they provided half the company's revenues and profits, which came both from subscribers (the cable companies that bought the programming) and from advertisers (who advertised on these channels). To strengthen these networks and build their brand name, Redstone hired a more aggressive advertising and sales management team, and against the expectations of industry analysts MTV and Nickelodeon experienced continuing growth and profitability. In 1989, for example, the MTV Networks won 15% of all dollars spent on TV cable advertising. Also, MTV was rapidly expanding throughout the world broadcasting to Western Europe, Japan, Australia, large portions of Latin America, and eventually to countries in Asia. Viacom in the 1990s The problem facing Redstone and Biondi was how to position Viacom for profitable growth in the 1990s. Both executives felt that developing and expanding Viacom's strengths in developing entertainment content was the key to its future success, although this is a very expensive process. They believed that the message or content that is sent is what really mattered, not the distribution channel carrying it. As Biondi put it. "In the end, a pipe is just a pipe. The customer doesn't care how the information is obtained; all that matters is the message." To build its entertainment programming strengths, Biondi worked hard to expand the success of Viacom's MTV channels. His goal was to promote the MTV networks as global brands that were perceived as having something unique to offer. Since MTV's viewers dominate the record-buying audience, Biondi sought to negotiate exclusive contracts that gave MTV the first crack at ing most major record companies' music videos thus making it unique. At the same time, MTV went from being a purely music video channel to a channel that championed new kinds of innovative programming to appeal to a younger audiences, such as Beavis and Butthead, and Road Stories, that were interspersed with music videos. In developing its programming strategy, however, Viacom's interest was not in promoting certain specific programs or Stars all of which may have short-lived popularity of famehut in building its networks as unique brands. For example, on the MTV channel, the goal was to attract viewers because of what the channel as a whole personified- an appeal to youth. Soon, MTV reached 250 million households in 74 countries. Viacom began to perform much better: in 1992 it made profits of $48 million on sales of $1.86 billion, and in 1993 it made profits of $70 million on sales of $2 billion. While the development of innovative programming was one reason for Viacom's return to profitability, a second reason was Redstone's emphasis on keeping costs under control. Redstone is well known for his frugal way of doing business. He runs Viacom in a cost-conscious manner and this is evident throughout the organization. For example, costs soared in Hollywood Studios and television networks as movie stars, writers, and production companies demanded ever increasing prices for their services. Page 3 of 13 At Viacom, Redstone demanded that its own programming should be made by using low-cost, homegrown talent. An example of this is in the production of its MTV shows-most of its homegrown hosts are paid little compared to employees at well-known networks that are often paid millions of dollars per year Changes in the Media and Entertainment Industry Although focused on building Viacom's programming strengths, Redstone and Biondi realized the entertainment industry was rapidly changing and that it was not at all clear how entertainment programming would be delivered, that is, through which distribution channels, in the future. In the 1990s, the U.S. cable television industry was in a state of flux as emerging technologies such as wireless satellite TV and Internet broadband threatened to bypass traditional cable systems-making Viacom's investment in wired cable much less valuable. Also, pressures were building to deregulate the industry so that by the end of the 1990s, companies in different industries-cable companies, telephone companies, Internet service providers (ISP), radio stations, and others, were allowed to enter each other's markets. These changes led to industry consolidation and the emergence of new giants such as Time Warner, News Corp. Comcast, and Disney, companies that were now all competing to offer the best selection of entertainment content or programming "soft-ware" as well as the best way to distribute this content through channels such as cable, wireless, or the Internet, the hardware" side of the business Viacom's business model was based on the premise that to prosper in the fast-changing entertainment industry, a company needed to be the provider of the entertainment to all the different distribution channels. In other words, the most successful entertainment companies would be those that could offer programming suitable for any channel, and be the primary software providers-not the hardware providers that provided the infrastructure to bring entertainment into peoples' homes. With its well- known channels such as MTV, Nickelodeon, Showtime, and its syndicated programming, Viacom should base its strategy on forming alliances with the companies that provided the hardware" channels into peoples' homes. Viacom's revenues would come both from the fees it charged to the hardware providers for its entertainment channels and most importantly, from the huge revenues it would obtain from selling advertising spots on its many popular TV shows, revenues that are determined by the size of the viewing audience. However, the issue was how to obtain high-quality programming at a price lower than the revenues to be earned from advertising and distributing its programs to maximize profits in an industry in which the value of entertainment and media companies was rocketing as stock prices increased The Paramount and Blockbuster Acquisitions Vincom's new mission was to become an entertainment software-driven company with the goal to drive its entertainment content through every distribution channel possible, and to every world region to maximize revenues and profits. To achieve this mission, Viacom needed to acquire companies that could produce unique entertainment programming content for worldwide distribution. In particular, Viacom needed an entertainment company that had an established film TV studio and library that could round out Viacom's current programming portfolio by supplying old feature films and TV shows to its television channels, Paramount Pictures provided an opportunity for this when it became an acquisition target in 1993 Paramount's many businesses included entertainment including the production, financing, and distribution of motion pictures, television programming the operation of movie theaters, independent television stations, regional theme parks, and Madison Square Garden. Paramount also owned a large library of movies. Redstone and Biondi began to picture the extensive synergies that a merger with Paramount would provide Vincom in the future. As Redstone told reporters, "This merger is not about two plus two equaling four, but six, or eight, or ten." Together Viacom and Paramount would be a much more efficient and profitable organization because, for example, Paramount could make films tb featured MTV characters like Beavis and Butthead and new cable TV channels supported Page 4 of 13 Paramount's library of 1,800 films and 6,100 television programs. In 1993, after behind-the-scene talks between Redstone and Paramount executives, Paramount announced an $8.2 billion merger with Viacom. However, a bidding war for Paramount started when Barry Diller, CEO of QVC Network Inc., another large entertainment company, announced a hostile bid for Paramount. On September 20, 1993, QVC announced an $80 per share or $9.5 billion bid for Paramount, and the battle between Viacom and QVC for ownership of Paramount Communications Inc. had begun. This unwelcome bid from QVS was a major problem for Redstone because Vincom still had a substantial debt due to the original 1987 acquisition of Viacom, and the expenses incurred to rapidly develop its own TV programming, Redstone could not afford to counter QVS's bid unless he obtained other sources of financing and cash flow. At the same time, Blockbuster Video's energetic CEO, Wayne Huizinga, who had made it the largest chain of video stores in the nation, was also on the market. Blockbuster was cash rich because of its rapid growth, but Huizinga recognized the growing threat that digital electronic entertainment channels, such as pay-per-view, wireless cable, and the Internet, could pose to the sale and rental of movies and games in the future was looking for a buyer for Blockbuster. Redstone also knew that Blockbuster's future was in doubt because of the development of new digital entertainment distribution technologies, but now Redstone was in a war with Diller to acquire Paramount, and offers for the company soured. In January 1994, Vincom announced an $8.4 billion merger with Blockbuster, it also announced a higher bid for Paramount of $105 a share-a huge premium price--but this bid allowed Viacom to acquire Paramount in July 1994. Redstone hailed the new Viacom as an entertainment colossus" and "a massive global media company." Explosive Growth In a few short years, Redstone had gone from controlling several hundred movie theaters to controlling the properties and franchises of three Fortune 500 companies-Viacom, Blockbuster, and Paramount. By engineering the 3-way merger of Viacom, Paramount, and Blockbuster Entertainment, Redstone created one of the three largest global media empires (the others were Disney Capital Cities ABC, and AOL Time Warner) each with annual revenues in excess of $10 billion. This was a large jump from the $2 billion revenue that Viacom had generated just before its new acquisitions. It was clear that Redstone and Biondi faced several major challenges to manage Viacom's new entertainment empire to allow it to achieve profitable growth Engineering Synergies To justify the expensive purchase of Paramount and Blockbuster, it was essential that CEO Biondi engineer synergies between Viacom's different entertainment properties, cach of which was now organized as a separate business division. Efforts began immediately, Paramount executives were instructed to evaluate the potential of new shows developed by MTV and Nickelodeon to sell to television networks. Viacom launched a new TV channel, the United Paramount Network (UPN) in 1995 to take advantage of its new programming resources across its entertainment divisions. For example, MTV executives were instructed to quickly begin developing programming for UPN. In another attempt to create synergies, Paramount executives were instructed to make their moviemaking skills available to the MTV Network, and to help it make inexpensive movies that could be distributed through Paramount. One result of this was a "Beavis and Butthead" movie produced by Paramount that proved very successful when it was launched in theatres in 1996. To keep costs low, Redstone's strategy was to boost the output of movies at Paramount, while at the same time keeping its budget under control and forcing its managers to find ways to make low-budget successful movies - not an easy task. Redstone and Biondi also searched for synergies between Blockbuster and Viscom's other divisions, hoping that Blockbuster could link its retail stores with Viacom's cable networks and Paramount's extensive film library. Perhaps Blockbuster could sell copies of Paramount's vast library of movies to encourage people to create their own DVD collections. Also, the release of a new Paramount movie on DVD could be timed to coincide with a major advertising campaign in Blockbuster stores to promote the launch. Finally, the launch of new movies could be timed to accompany a major Page 5 of 13 advertising blitz on the MTV channelsomething that happened when Paramount released Mission Impossible in 1996. Redstone claimed that: "Vincom through its new combination of assets is poised to participate in, and in many ways define the entertainment and information explosion about to engulf the globe." As events turned out, however, few potential synergies emerged between Viacom's various divisions to help boost revenues and profits. Media and Entertainment Industry Challenges The fast-changing entertainment and media industry created many challenges for Redstone and Biondi especially because the major U.S. entertainment companies were all rapidly expanding and the industry was consolidating. Seven major studios dominated movie production and the "Big Three networks ABC, CBS, and NBChad for years dominated the production of TV programming for the mass audience. The growing strength of Viacom spurred industry consolidation; in 1995 AOL Time Warner announced that it would merge with Turner Broadcasting, Disney announced that it would merge with Capital Cities/ABC, and News Corp. that had established the Fox channel and owned the 20th Century Fox was also buying new entertainment channels especially online digital channels. As a result, the industry was now composed of four major players: Disney, AOL Time Warner, News Corp., and Viacom, which was the fourth biggest company A major threat by the mid-1990s was that the number of entertainment distribution channels was exploding as government regulations prevented broadcast networks from owning TV programming companies and so on were phased out. Viacom's strategy to develop a full line of movie and TV entertainment programming had also spurred changes in the competitive dynamics of the entertainment and media industry as many new small independent movie and TV studios, such as Pixar and DreamWorks, were established to provide attractive new programming that could be sold to movie distributors and cable TV providers The industry was also experiencing rapid globalization as U.S. movies, news, and TV shows were now being shown around the world. A major challenge facing Viacom was to obtain access to the global marketplace to increase revenues and profits, for example, there was a potential market of over a billion viewers in India and China. As one example of Viacom's global strategy in 1995, Viacom won a cable television license to launch its Nickelodeon and VH-I channels in Germany, Europe's biggest and potentially most lucrative media market, to complement the MTV pop music network that had operated in Europe since 1987. However, all this global expansion was expensive and Viacom's cost structure increased, which resulted in lower profits. New technology challenges also confronted Viacom and the media industry because advances in digital technology, including streaming audio and video over the Internet began to offer online companies viable new channels to distribute entertainment content. Just as the dominance of the Big Three net- works had been eroded by the growth of companies like Viacom with its new programming networks, so now new channels to distribute content to consumers were now threatening major entertainment companies. Moreover, digital piracy had become a major threat to these companies, as Websites such as Napster and Lime Wire were developed to exchange digital music and movie files. This was also a major threat to revenues and profits and by the 2000s digital piracy resulted in major entertainment companies losing billions in potential revenues even new movie releases were often available illegally on-line for download just days after being introduced in movie theaters. Major Problems for Viacom Soon after Redstone's expensive decision to buy Paramount, its new movie Forrest Gump became a surprise hit that generated over $250 million for Viacom and silenced analysts who argued that he had spent far too much to purchase the movie studio. Viacom's managers began to feel like Forrest Gump with his philosophy that: "Life is like a box of chocolates: You never know what you're going to get." It seemed that Redstone and Viacom had been in the right place at the right time and had made a Page 6 of 13 On the revenue side, there were signs that some potential synergies were emerging. Paramount did produce successful Beavis and Butthead movies. Viacom's global presence was widening as its TV studios developed new and customized channels to meet the demands of customers in different countries around the world. In 1997. growing demand for its entertainment content led Viacom to buy the rest of Spelling Entertainment, with its Star Trek franchise, to help its struggling UPN network that was failing (it became part of CBS in 2006). Redstone integrated Spelling Entertainment into Paramount's TV operations to obtain economies of scale and scope in the production of new television programming such as new Star Trek programming that has proved to be highly profitable. Although Redstone was focused on creating long-term benefits from his entertainment empire, the poor performance of Viacom's stock was a continual embarrassment to him because he had not been able to realize the potential of Viacom's entertainment assets. However, Blockbuster enjoyed increasing revenues in 1999 because of its revenue sharing agreement, and this gave Redstone the opportunity he needed to dispose of this risky asset. Viacom announced that Blockbuster stock would be listed separately from Vincom's so its performance could be evaluated separately. Approximately 18% of Blockbuster's stock was sold at $16 to $18 a share, and this raised over $250 million that was used to pay off Vincom's debt. Also in 1999, Redstone hired the experienced media and entertainment manager, and former head of CBS, Mel Karmazin, as Viacom's CEO to help solve its ongoing problems. Kammazin had made his reputation by selecting hit TV programming, and for his hands-on ability to find ways to leverage resources to increase profitability. He set to work to restructure Viacom's different entertainment assets to engineer cross-divisional synergies, create new programming content, and enhance its revenue and carnings. Both Redstone and Karmazin understood that the most important source of profits from owning an entertainment empire was to achieve economies of scale and scope that arise when a company is able to offer large companies the opportunity to advertise their products across multiple channels that attract different kinds of viewers. In other words, a potential advertiser could produce one or more themed commercials to run across all of Viacom's different TV networks as well as its movies, theme parks, and other channels. Redstone noted that Disney merged with the Capital ABC networks to provide it with important new distribution and advertising channels for the Disney franchise. Since the majority of Viacom's future revenue stream would come from the success of its advertising, Redstone established a new unit, Viacom Plus, to provide a centralized advertising service to manage relationships with large companies and handle advertising for all of Viacom's divisions. For example, in 2001, Procter & Gamble (P&G) and Viacom Plus negotiated a new cross-channel deal whereby P&G would pay $300 million for advertising spread across 9 of Viacom's major divisions. This deal worked out so well for P&G it paid $350 million in 2002 for advertising spread across 14 of Viacom's divisions. P&G could obtain a much better deal than if it negotiated with each Viacom channel separately and Viacom Plus had reduced the costs of managing the vital advertising process across the company. Other companies followed P&G's lead to "scatter their advertising dollars across Viacom's different channels and reach different demographic groups including children who watched Nickelodeon, teens who tuned into MTV, and different groups of adults who watched its different network programming, The future of the Viacom advertising platform looked bright indeed, perhaps it could provide the platform for giving the company the synergies it needed to boost revenues and profits. The CBS Acquisition To capitalize on advertising synergies, a new opportunity arose in 1999 when CBS was in trouble because of falling ratings, and its managers were interested in merging with another entertainment company. Redstone decided that CBS's entertainment assets would give Viacom access to a much larger number of channels to reach the greatest number of viewers and listeners (CBS-owned Infinity Radio Broadcasting) of any media enterprise, spanning all ages and demographics from "cradle to cane." This would allow Viacom to become the premier outlet for large companies around the world because it Page 8 of 13 Viacom's Failing Business Model: Bye Bye CBS Viacom had failed to realize the importance of building strong online entertainment assets when they were cheap, and it now lagged behind major competitors like Disney and News Corp. At the same time, de-spite having spent 5 years developing strategies to realize the value from the 2000 CBS acquisition, it was clear that Redstone and Karmazin had failed. Adeling TV and radio stations and a host of other media assets to Viacom's TV channel and movie programming empire had increased the strategic problems associated with managing its empire of media assets. Redstone learned the hard way that the different divisions of a company grow at different rates, and the performance of the weakest division pulls down the performance of the whole company and Viacom's growth was slowing fast. Its CBS assets, like Blockbuster had before, could not meet Viacom's aggressive growth targets. Redstone was frustrated once again that Viacom's underperforming assets were dragging down its stock price, which hy 2004, was almost half of its 2000 stock price! Karmazin had wamed Redstone about this, and the personal relationship between Redstone and Karmazin now deteriorated fast. Redstone fired Karmazin (who was the CEO of SiriusXM Radio in 2011). In 2005, to improve Viacom's future growth, Redstone announced that he would split the $60 billion conglomerate into two smaller, separately traded companies. CBS would be allocated Viacom's slow and steady growth properties and channels, such as CBS TV programming and TV and radio stations, Showtime, outdoor advertising, and so on. The future Viacom would be made up of high potential growth properties and channels such as MTV, Nickelodeon, BET Networks, and Paramount Studios essentially the company's focus after it divested Viacom, and before it merged with CBS. CBS was also allocated slow-growth Paramount Parks, which it later sold to amusement park operator Cedar Fair in 2006. The split took effect at the beginning of 2006 and effectively retracted the Viacom CBS merger. The New Viacom Business Model After a decade of growth by acquisition, Viacom, like other media conglomerates, such as Sony, Disney, and Time Warner, began to reconfigure its business model. These companies were now being pushed hard by new Internet technologies and changing customer viewing habits that had altered the channels on which they could hope to obtain maximum advertising revenues-still the main source of revenues upon which most entertainment companies depended. By the 2000s, the cookie-cutter business model, whereby a media giant could simply add new media properties to its existing ones to increase profitability, had been shown to be a failureat least in terms of generating consistent increases in a company's stock price. As noted above, Redstone's focus upon fixing the ongoing problems with his media empire also delayed his recognition of the growing importance of the Internet as an entertainment distribution channel and the threat of competition from (illegal) digital video downloading and streaming media. In the mid- 2000s, Vincom moved to acquire some small Internet media properties such as Neopets, a virtual pet Website, and Xfire, iFilm, Quizilla.com, Harmonix Music Systems, and Atom Entertainment, that served niche markets. However, these acquisitions didn't have the reach of News Corp's acquisition of the social networking company MySpace, which was valued at $3 billion (although it had been bought for only a few hundred million in 2004). Viacom was much slower than its rivals to react to the changes in digital and Internet technologies taking place, and its stock price continued to suffer. The entertainment company with the best digital strategy in the 2000s had been News Corp. As the "unknown" names of its Internet acquisitions suggest, Viacom was failing in its attempt to develop a strong, coherent Internet strategy. This strategic failure hurt its stock price, which had risen to $45 after the 2005 split, but now plunged to $35 in 2006. Redstone, as usual, responded by firing Viacom's CEO, blaming him for the company's poor performance, and appointed Philippe Daumanas the new CEO of Viacom. Dauman had been one of Redstone's top strategists for decades, and a top Viacom executive from 1994 to 2000- he was now in charge of maximizing the value from Viacom's assets. Page 1 of 13 last 5 years, Viacom has excelled at creating new shows that have resulted in major increases in its advertising revenues and profits. At the same time, Dauman has been vigilant to protect the value of Viacom's digital content, and in 2019, it sued Google because it claimed its YouTube channel was allowing the streaming of thousands of its TV shows and movies. It lost the suit, but Google has been forced to more closely monitor the content being uploaded onto YouTube. In addition, realizing it was too late to establish its own online entertainment distribution channels, Dauman has been increasingly working to form strategic alliances with distribution companies such as Netflix and Hulu and license the rights to show its programming content in re-turn for a share of the revenues. Given that once the programming has been made and shown on its own networks, where it receives advertising revenues to cover the costs of production and make a profit, almost all the revenues it makes from online streaming agreements translate into profits. This is also true of streaming its Paramount movies through other distribution channels, where it can at least obtain some revenue by attracting customers that dislike illegal downloading, and are willing to pay a modest fee to obtain Viacom's content in a safe and legal manner. Every dollar Viacom obtains from licensing its content results in 90% profit because the costs of making its content available to Intemet distributors are extremely low. Viacom in 2011 How well has Dauman's new business Strategy succeeded? Perhaps the best way to evaluate this is to look at Viacom's financial results released in August 2011, and the new business model behind the company. Viacom announced that its third-quarter earnings grew 37% because its portfolio of entertainment properties resulted in growing advertising sales and higher fees from cable TV companies that wish to show its programming, and by online companies, such as Netflix, that want to stream its content. The media company earned $574 million, or $0.97 per share, up 37% from $420 million (or $0.69 per share) a year earlier. Advertising and programming revenues grew because of the success of its new movies, TV networks and its new TV shows such as "Jersey Shore" and "16 and Pregnant." CEO Dauman said the "breadth of hit programming found across Viscom's media network portfolio was the major contributor to its strong advertising growth. In a press release, Dauman said: "Our media networks are creating hit after hit, sought after by both audiences and advertisers, and Paramount Pictures is putting together a truly unprecedented year of box office success." Viacom said revenue from its media or TV networks division that includes MTV, Nickelodeon and other channels grew 16%; revenues from its Paramount film division increased by 13%, thanks to gains in DVD sales and TV license revenue. At the same time, global advertising revenue grew by 14%, which was more than in the previous quarter a sign that the global advertising market was improving. In addition, Viacom's efforts to secure more revenues from the cable and wireless TV providers, and online digital providers that want to show its entertainment content, also increased by 19%. This includes revenues from Viacom's older TV shows such as "SpongeBob SquarePants," and especially from new shows such as "Jersey Shore" and Comedy Central's "The Sarah Silverman Show." Its agreement with Hulu and Netflix significantly boosted revenues. Its blockbuster film Transformers: Dark of the Moon was released too late to contribute to its reported profits, so it expects a continuing improvement in revenues through 2011. In 2011, it seemed that Dauman had been able to realize the value in Viacom's assets, and had been able to develop new potential sources of revenue. He had also kept the company's cost structure under control while pursuing new low-cost digital avenues to expand its revenues. How well has Viacom performed compared to its competitors over the last 5 years? In August 2011, while its stock price had increased by 150%, Disney's had increased by 20%, while News Corp. had fallen by 16%, and Time Warner's had fallen by 38% Under Dauman. Viacom finally appears to be managing its entertainment assets and channels to add value to the company; if its good performance continues, it will be able to reduce its debt and develop new entertainment content that will provide new sources of revenue and profit for the future Required Question: 1. Corperate strategy 2. Business strategy 3. PESTEL 4. SWOT 5. Porter's 6. IFAS CBS Broadcasting established Viacom as an independent company in 1970 to comply with regulations set forth by the U.S. Federal Communications Commission (FCC) barring television networks from owning cable TV systems, or from syndicating their own programs in the United States. The increasing spread of cable television and the continuing possibility of conflicts of interest between television networks and cable television companies made the spinoff necessary, and Viacom formally separated from CBS in 1971, when Viacom's stock was distributed to CBS shareholders. Viacom quickly became one of the largest cable operators in the United States, with over 90,000 cable subscribers. It also owned the syndication rights to a large number of popular, previously run CBS television series that it made available for syndication to cable TV stations. In 1976, to take advantage of Viacom's experience in syndicating programming to cable TV stations, is managers decided to establish the Showtime movie network to directly compete with HBO, the leading outlet for films on cable television. In 1977, Viacon earned $5.5 million on sales of $58.5 million. Most of its earnings represented revenues from the syndication of its television series, but they also reflected growth of its own cable TV systems, which at this time had about 350,000 sub- scribers. Recognizing that both producing and syndicating television programming could cam greater profits, Viacom's managers decided to produce their own television programs in the late-1970s and early- 1980s. Their efforts produced only mixed results, however, no hit series resulted from their work, and the Big Three television networks of ABC, NBC, and CBS continued to dominate the airwaves. During the early 1980s, the push to expand the cable television side of its business was Viacom's managers' priority, and it rapidly grew its subscriber base. Vincom's managers, however, believed that its core cable operations were not a strong enough engine for future growth. Cable TV prices were regulated at this time, so cable companies had limited ability to increase prices, but its managers believed that real profit growth would come from providing the content of cable programming television programs-not from just cable television service. Given that Viacom had failed to make its own successful new TV programs, its managers sought to acquire companies that made entertainment programs the content. In 1981, Viacom started in a small way by buying a stake in Cable Health Network, a new advertiser-supported television network. Then, in September 1985, in a stroke of fortune, it made the acquisition that would totally change the company's future. Viacom purchased the MTV Networks from a competitor, Warner Bros., that desperately needed cash to invest in its own cable TV system to keep it viable. As it turned out, Warner Bros. had sold the jewel in its crown. The MTV Networks included MTV, a new popular music video channel geared toward the 14-24 age groups: Nickelodeon, a channel geared toward children; and VH-1, a music video channel geared toward an older 25-44 age audience. MTV was the most popular property in the MTV Network. Its quick pace and flashy graphics attracted young television viewers who were a major target for large advertising companies, and the popularity of a TV station's programming determines how much a broadcast network can charge for advertising - which is why Super Bowl ads cost millions. MTV was performing well, but Nickelodeon had been less successful and had not achieved much of a following among young TV viewers, which limited its advertising revenues, Vincom's managers moved quickly to revamp Nickelodeon and give it the slick, flashy look of MTV. They developed unique programming to appeal to children-programming a very different aesthetic than The Mickey Mouse Show, which competitors like the Disney Channel offered. In the next few years, Nickelodeon went from being the least popular children's cable TV channel to being the most popular! Viacom's managers were confident that they had the foundation of a new content programming strategy to complement its cable TV interests to increase the company's profit growth. Enter Sumner Redstone Viacom's hopes were shattered when its Showtime channel lost 300,000 subscribers by 1986 because of intense competition from HBO, which, under its CEO Frank Biondi, had become the dominant sub scriber movie channel. Viacom's cash flow plunged, it reported a loss in 1986, and, weakened by the $2 billion debt incurred to fund its growth, it became a takeover target. Page 2 of 13 After a 6-month battle to acquire the company Sumner M. Redstone bought Viacom for $3.4 billion in 1986. Redstone was the owner of National Amusements Inc. that owned and operated 675 movie theatres. Redstone had built NAI from 50 drive-in movie theaters to a modern theater chain and is credited with pioneering the multiplex movie theater concept. However, running a chain of movie theaters is very different from running a debt-laden media company like Viacom. Many analysts believed Redstone had overpaid for Viacom-but he saw a great potential for growth. Aside from its cable television systems and syndication rights, which now included the popular TV series The Cosby Show, Redstone recognized the potential of its MTV and Nickelodeon channels. Also, Viacom had acquired 5 television and radio stations in major markets that were also valuable properties. Redstone quickly moved to solve Viacom's problems and with his hands-on," directive management style, he fired Viacom's top managers and searched for more capable managers who would be loyal to him. To tum Showtime around, he hired Frank Biondi, who had made HBO the major pay movie channel, as CEO of Viacom. Viacom Speeds Up Redstone bought Vincom because he believed that cable TV programming would become the main channel to deliver customers with entertainment content in the future. Redstone believed Viacom's MTV and Nickelodeon networks were its crown jewels," they provided half the company's revenues and profits, which came both from subscribers (the cable companies that bought the programming) and from advertisers (who advertised on these channels). To strengthen these networks and build their brand name, Redstone hired a more aggressive advertising and sales management team, and against the expectations of industry analysts MTV and Nickelodeon experienced continuing growth and profitability. In 1989, for example, the MTV Networks won 15% of all dollars spent on TV cable advertising. Also, MTV was rapidly expanding throughout the world broadcasting to Western Europe, Japan, Australia, large portions of Latin America, and eventually to countries in Asia. Viacom in the 1990s The problem facing Redstone and Biondi was how to position Viacom for profitable growth in the 1990s. Both executives felt that developing and expanding Viacom's strengths in developing entertainment content was the key to its future success, although this is a very expensive process. They believed that the message or content that is sent is what really mattered, not the distribution channel carrying it. As Biondi put it. "In the end, a pipe is just a pipe. The customer doesn't care how the information is obtained; all that matters is the message." To build its entertainment programming strengths, Biondi worked hard to expand the success of Viacom's MTV channels. His goal was to promote the MTV networks as global brands that were perceived as having something unique to offer. Since MTV's viewers dominate the record-buying audience, Biondi sought to negotiate exclusive contracts that gave MTV the first crack at ing most major record companies' music videos thus making it unique. At the same time, MTV went from being a purely music video channel to a channel that championed new kinds of innovative programming to appeal to a younger audiences, such as Beavis and Butthead, and Road Stories, that were interspersed with music videos. In developing its programming strategy, however, Viacom's interest was not in promoting certain specific programs or Stars all of which may have short-lived popularity of famehut in building its networks as unique brands. For example, on the MTV channel, the goal was to attract viewers because of what the channel as a whole personified- an appeal to youth. Soon, MTV reached 250 million households in 74 countries. Viacom began to perform much better: in 1992 it made profits of $48 million on sales of $1.86 billion, and in 1993 it made profits of $70 million on sales of $2 billion. While the development of innovative programming was one reason for Viacom's return to profitability, a second reason was Redstone's emphasis on keeping costs under control. Redstone is well known for his frugal way of doing business. He runs Viacom in a cost-conscious manner and this is evident throughout the organization. For example, costs soared in Hollywood Studios and television networks as movie stars, writers, and production companies demanded ever increasing prices for their services. Page 3 of 13 At Viacom, Redstone demanded that its own programming should be made by using low-cost, homegrown talent. An example of this is in the production of its MTV shows-most of its homegrown hosts are paid little compared to employees at well-known networks that are often paid millions of dollars per year Changes in the Media and Entertainment Industry Although focused on building Viacom's programming strengths, Redstone and Biondi realized the entertainment industry was rapidly changing and that it was not at all clear how entertainment programming would be delivered, that is, through which distribution channels, in the future. In the 1990s, the U.S. cable television industry was in a state of flux as emerging technologies such as wireless satellite TV and Internet broadband threatened to bypass traditional cable systems-making Viacom's investment in wired cable much less valuable. Also, pressures were building to deregulate the industry so that by the end of the 1990s, companies in different industries-cable companies, telephone companies, Internet service providers (ISP), radio stations, and others, were allowed to enter each other's markets. These changes led to industry consolidation and the emergence of new giants such as Time Warner, News Corp. Comcast, and Disney, companies that were now all competing to offer the best selection of entertainment content or programming "soft-ware" as well as the best way to distribute this content through channels such as cable, wireless, or the Internet, the hardware" side of the business Viacom's business model was based on the premise that to prosper in the fast-changing entertainment industry, a company needed to be the provider of the entertainment to all the different distribution channels. In other words, the most successful entertainment companies would be those that could offer programming suitable for any channel, and be the primary software providers-not the hardware providers that provided the infrastructure to bring entertainment into peoples' homes. With its well- known channels such as MTV, Nickelodeon, Showtime, and its syndicated programming, Viacom should base its strategy on forming alliances with the companies that provided the hardware" channels into peoples' homes. Viacom's revenues would come both from the fees it charged to the hardware providers for its entertainment channels and most importantly, from the huge revenues it would obtain from selling advertising spots on its many popular TV shows, revenues that are determined by the size of the viewing audience. However, the issue was how to obtain high-quality programming at a price lower than the revenues to be earned from advertising and distributing its programs to maximize profits in an industry in which the value of entertainment and media companies was rocketing as stock prices increased The Paramount and Blockbuster Acquisitions Vincom's new mission was to become an entertainment software-driven company with the goal to drive its entertainment content through every distribution channel possible, and to every world region to maximize revenues and profits. To achieve this mission, Viacom needed to acquire companies that could produce unique entertainment programming content for worldwide distribution. In particular, Viacom needed an entertainment company that had an established film TV studio and library that could round out Viacom's current programming portfolio by supplying old feature films and TV shows to its television channels, Paramount Pictures provided an opportunity for this when it became an acquisition target in 1993 Paramount's many businesses included entertainment including the production, financing, and distribution of motion pictures, television programming the operation of movie theaters, independent television stations, regional theme parks, and Madison Square Garden. Paramount also owned a large library of movies. Redstone and Biondi began to picture the extensive synergies that a merger with Paramount would provide Vincom in the future. As Redstone told reporters, "This merger is not about two plus two equaling four, but six, or eight, or ten." Together Viacom and Paramount would be a much more efficient and profitable organization because, for example, Paramount could make films tb featured MTV characters like Beavis and Butthead and new cable TV channels supported Page 4 of 13 Paramount's library of 1,800 films and 6,100 television programs. In 1993, after behind-the-scene talks between Redstone and Paramount executives, Paramount announced an $8.2 billion merger with Viacom. However, a bidding war for Paramount started when Barry Diller, CEO of QVC Network Inc., another large entertainment company, announced a hostile bid for Paramount. On September 20, 1993, QVC announced an $80 per share or $9.5 billion bid for Paramount, and the battle between Viacom and QVC for ownership of Paramount Communications Inc. had begun. This unwelcome bid from QVS was a major problem for Redstone because Vincom still had a substantial debt due to the original 1987 acquisition of Viacom, and the expenses incurred to rapidly develop its own TV programming, Redstone could not afford to counter QVS's bid unless he obtained other sources of financing and cash flow. At the same time, Blockbuster Video's energetic CEO, Wayne Huizinga, who had made it the largest chain of video stores in the nation, was also on the market. Blockbuster was cash rich because of its rapid growth, but Huizinga recognized the growing threat that digital electronic entertainment channels, such as pay-per-view, wireless cable, and the Internet, could pose to the sale and rental of movies and games in the future was looking for a buyer for Blockbuster. Redstone also knew that Blockbuster's future was in doubt because of the development of new digital entertainment distribution technologies, but now Redstone was in a war with Diller to acquire Paramount, and offers for the company soured. In January 1994, Vincom announced an $8.4 billion merger with Blockbuster, it also announced a higher bid for Paramount of $105 a share-a huge premium price--but this bid allowed Viacom to acquire Paramount in July 1994. Redstone hailed the new Viacom as an entertainment colossus" and "a massive global media company." Explosive Growth In a few short years, Redstone had gone from controlling several hundred movie theaters to controlling the properties and franchises of three Fortune 500 companies-Viacom, Blockbuster, and Paramount. By engineering the 3-way merger of Viacom, Paramount, and Blockbuster Entertainment, Redstone created one of the three largest global media empires (the others were Disney Capital Cities ABC, and AOL Time Warner) each with annual revenues in excess of $10 billion. This was a large jump from the $2 billion revenue that Viacom had generated just before its new acquisitions. It was clear that Redstone and Biondi faced several major challenges to manage Viacom's new entertainment empire to allow it to achieve profitable growth Engineering Synergies To justify the expensive purchase of Paramount and Blockbuster, it was essential that CEO Biondi engineer synergies between Viacom's different entertainment properties, cach of which was now organized as a separate business division. Efforts began immediately, Paramount executives were instructed to evaluate the potential of new shows developed by MTV and Nickelodeon to sell to television networks. Viacom launched a new TV channel, the United Paramount Network (UPN) in 1995 to take advantage of its new programming resources across its entertainment divisions. For example, MTV executives were instructed to quickly begin developing programming for UPN. In another attempt to create synergies, Paramount executives were instructed to make their moviemaking skills available to the MTV Network, and to help it make inexpensive movies that could be distributed through Paramount. One result of this was a "Beavis and Butthead" movie produced by Paramount that proved very successful when it was launched in theatres in 1996. To keep costs low, Redstone's strategy was to boost the output of movies at Paramount, while at the same time keeping its budget under control and forcing its managers to find ways to make low-budget successful movies - not an easy task. Redstone and Biondi also searched for synergies between Blockbuster and Viscom's other divisions, hoping that Blockbuster could link its retail stores with Viacom's cable networks and Paramount's extensive film library. Perhaps Blockbuster could sell copies of Paramount's vast library of movies to encourage people to create their own DVD collections. Also, the release of a new Paramount movie on DVD could be timed to coincide with a major advertising campaign in Blockbuster stores to promote the launch. Finally, the launch of new movies could be timed to accompany a major Page 5 of 13 advertising blitz on the MTV channelsomething that happened when Paramount released Mission Impossible in 1996. Redstone claimed that: "Vincom through its new combination of assets is poised to participate in, and in many ways define the entertainment and information explosion about to engulf the globe." As events turned out, however, few potential synergies emerged between Viacom's various divisions to help boost revenues and profits. Media and Entertainment Industry Challenges The fast-changing entertainment and media industry created many challenges for Redstone and Biondi especially because the major U.S. entertainment companies were all rapidly expanding and the industry was consolidating. Seven major studios dominated movie production and the "Big Three networks ABC, CBS, and NBChad for years dominated the production of TV programming for the mass audience. The growing strength of Viacom spurred industry consolidation; in 1995 AOL Time Warner announced that it would merge with Turner Broadcasting, Disney announced that it would merge with Capital Cities/ABC, and News Corp. that had established the Fox channel and owned the 20th Century Fox was also buying new entertainment channels especially online digital channels. As a result, the industry was now composed of four major players: Disney, AOL Time Warner, News Corp., and Viacom, which was the fourth biggest company A major threat by the mid-1990s was that the number of entertainment distribution channels was exploding as government regulations prevented broadcast networks from owning TV programming companies and so on were phased out. Viacom's strategy to develop a full line of movie and TV entertainment programming had also spurred changes in the competitive dynamics of the entertainment and media industry as many new small independent movie and TV studios, such as Pixar and DreamWorks, were established to provide attractive new programming that could be sold to movie distributors and cable TV providers The industry was also experiencing rapid globalization as U.S. movies, news, and TV shows were now being shown around the world. A major challenge facing Viacom was to obtain access to the global marketplace to increase revenues and profits, for example, there was a potential market of over a billion viewers in India and China. As one example of Viacom's global strategy in 1995, Viacom won a cable television license to launch its Nickelodeon and VH-I channels in Germany, Europe's biggest and potentially most lucrative media market, to complement the MTV pop music network that had operated in Europe since 1987. However, all this global expansion was expensive and Viacom's cost structure increased, which resulted in lower profits. New technology challenges also confronted Viacom and the media industry because advances in digital technology, including streaming audio and video over the Internet began to offer online companies viable new channels to distribute entertainment content. Just as the dominance of the Big Three net- works had been eroded by the growth of companies like Viacom with its new programming networks, so now new channels to distribute content to consumers were now threatening major entertainment companies. Moreover, digital piracy had become a major threat to these companies, as Websites such as Napster and Lime Wire were developed to exchange digital music and movie files. This was also a major threat to revenues and profits and by the 2000s digital piracy resulted in major entertainment companies losing billions in potential revenues even new movie releases were often available illegally on-line for download just days after being introduced in movie theaters. Major Problems for Viacom Soon after Redstone's expensive decision to buy Paramount, its new movie Forrest Gump became a surprise hit that generated over $250 million for Viacom and silenced analysts who argued that he had spent far too much to purchase the movie studio. Viacom's managers began to feel like Forrest Gump with his philosophy that: "Life is like a box of chocolates: You never know what you're going to get." It seemed that Redstone and Viacom had been in the right place at the right time and had made a Page 6 of 13 On the revenue side, there were signs that some potential synergies were emerging. Paramount did produce successful Beavis and Butthead movies. Viacom's global presence was widening as its TV studios developed new and customized channels to meet the demands of customers in different countries around the world. In 1997. growing demand for its entertainment content led Viacom to buy the rest of Spelling Entertainment, with its Star Trek franchise, to help its struggling UPN network that was failing (it became part of CBS in 2006). Redstone integrated Spelling Entertainment into Paramount's TV operations to obtain economies of scale and scope in the production of new television programming such as new Star Trek programming that has proved to be highly profitable. Although Redstone was focused on creating long-term benefits from his entertainment empire, the poor performance of Viacom's stock was a continual embarrassment to him because he had not been able to realize the potential of Viacom's entertainment assets. However, Blockbuster enjoyed increasing revenues in 1999 because of its revenue sharing agreement, and this gave Redstone the opportunity he needed to dispose of this risky asset. Viacom announced that Blockbuster stock would be listed separately from Vincom's so its performance could be evaluated separately. Approximately 18% of Blockbuster's stock was sold at $16 to $18 a share, and this raised over $250 million that was used to pay off Vincom's debt. Also in 1999, Redstone hired the experienced media and entertainment manager, and former head of CBS, Mel Karmazin, as Viacom's CEO to help solve its ongoing problems. Kammazin had made his reputation by selecting hit TV programming, and for his hands-on ability to find ways to leverage resources to increase profitability. He set to work to restructure Viacom's different entertainment assets to engineer cross-divisional synergies, create new programming content, and enhance its revenue and carnings. Both Redstone and Karmazin understood that the most important source of profits from owning an entertainment empire was to achieve economies of scale and scope that arise when a company is able to offer large companies the opportunity to advertise their products across multiple channels that attract different kinds of viewers. In other words, a potential advertiser could produce one or more themed commercials to run across all of Viacom's different TV networks as well as its movies, theme parks, and other channels. Redstone noted that Disney merged with the Capital ABC networks to provide it with important new distribution and advertising channels for the Disney franchise. Since the majority of Viacom's future revenue stream would come from the success of its advertising, Redstone established a new unit, Viacom Plus, to provide a centralized advertising service to manage relationships with large companies and handle advertising for all of Viacom's divisions. For example, in 2001, Procter & Gamble (P&G) and Viacom Plus negotiated a new cross-channel deal whereby P&G would pay $300 million for advertising spread across 9 of Viacom's major divisions. This deal worked out so well for P&G it paid $350 million in 2002 for advertising spread across 14 of Viacom's divisions. P&G could obtain a much better deal than if it negotiated with each Viacom channel separately and Viacom Plus had reduced the costs of managing the vital advertising process across the company. Other companies followed P&G's lead to "scatter their advertising dollars across Viacom's diffe