View:
Tom Freston, Viacom Inc. Co-President, Co-Chief Operating Officer
Presentation Transcript
Goldman Sachs Global Investment Research Communacopia XIV Conference
Event Date/Time: September 21 2005, 10:25am E.S.T.
Filed by: Viacom Inc.
Pursuant to Rule 425 under the Securities Act of 1933, as amended
Commission File No.: 001-09533
Subject Company: Viacom Inc.
This presentation contains information relating to the proposed separation of
Viacom into two publicly traded companies. In connection with the proposed
transaction, Viacom intends to file a Registration Statement on Form S-4 with
the U.S. Securities and Exchange Commission. Investors and security holders are
urged to read the Registration Statement and related materials that are filed
with the SEC when they become available, because they will contain important
information about the proposed transaction. Investors and security holders will
be able to obtain copies of these documents, and other documents containing
information about Viacom, without charge, at the SEC's website at www.sec.gov.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Great. We're going to go ahead and get started. I would like to now introduce
our next company, Viacom and Tom Freston, Co-President and Chief Operating
Officer. As we noted earlier, Viacom's Board of Directors having unanimously
approved the creation of two separate publicly traded companies. Upon
separation, Mr. Freston will become CEO of the new company that will retain the
Viacom name and will be comprised of MTV Networks, BET, Paramount Pictures,
Paramount Home Entertainment and Famous Music. The new Viacom will focus on
using its free cash flow for organic growth, supplemented by complementary
acquisitions in high growth areas, particularly in the digital and interactive
space, as well as return value to stockholders through a significant share
repurchase program.
Notably, Cable Networks have provided an exceptional growth for Viacom with
double-digit EBITDA growth while contributing 80 plus percent of the Company's
overall EBITDA growth for the combined Viacom entity since 2003. Beyond the
continued success of MTV Networks the Company's increased investment in newer
networks such as Spike and LOGO should allow Viacom to continue its strong cable
network growth. We also note that Viacom's increased investment in content,
something we focused on previously, has led to Paramount Pictures' most
successful summer season in several years. It has been led by the strong box
office successes of "War of the Worlds" and "The Longest Yard". And its new
management team including Brad Grey and Gail Berman are poised to continue the
turnaround at the Studio.
Tom is Co-President and Co-Chief Operating Officer and was named in June 2004;
previous to his appointment at Viacom Tom was Chairman and CEO of the MTV
Networks, a position he has held since 1987. With that, please join me in
welcoming Tom.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Tom, since we are entering a new era for Viacom, I thought we would start with
an overarching question and just really focus on what are your top strategic
priorities in the post split year similar to (inaudible)
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, we're about to start a very exciting new Company, hopefully in January.
And I say this is a vision for our new Company is very simple, it is to be a
premier growth entertainment company. That's, that's global, that's
multiplatform on all platforms that we see our consumers using. And is - excuse
me one second -- yes, it is a fully integrated company so it isn't just a group
of disparate assets like we've had with Viacom. And the Company will be kind of
centered around the brands that we have and the demographics that we serve.
We're going to operate very simply on three platforms: television, film, and
digital interactive and the focus will be on content creation. The strategy is
very simple to create content that is great, that works, that is on all existing
distribution platforms and emerging ones.
Now the priorities for the Company are: one, is to evolve and strengthen the
brands that we have; two, is to introduce new brands into the marketplace; the
third one is to really aggressively move into the digital interactive space and
extend the positions that we have demographically in those areas; a fourth
position is to revive Paramount Pictures; and lastly is to be global in
everything that we do in every business that we have we want to approach that
with a global orientation. We have metrics for earnings per share, return on
invested capital that we like to see improve over time, and that's basically the
game plan for the new Company.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
I want to come back to those five priorities that you mentioned. Could you share
with us the growth profile of the Viacom post split and the key drivers and also
you mentioned ROIC, what would be the target of return for this Company?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Okay, well the growth, the profile pretty much is sustainable double-digit
growth on revenue, earnings per share and free cash flow. That is what we intend
to achieve. We think that is very achievable. We think there is a lot of things
that drive that and make that possible for us. For one, we see a continued flow
of of money moving into the advertising and the cable marketplace. From
broadcast and from elsewhere we see that continuing into the future. A second
growth driver we have is basically the hit machine I think we've created. We've
got a consumer obsessed, terrific program development model that has led to most
of our networks being really at all-time ratings highs, including MTV which is
at an all-time ratings high and it is in the 24th year of its existence. All of
that activity increases ratings, which obviously allows us to take more and more
of the cable marketplace in terms of ad share. We currently take over $0.25
cents of every dollar that is spent on cable. A third growth driver is the kind
of worldwide solid distribution deals we have with virtually every distributor
worldwide that gives us not only guaranteed carriage but also gives us sort of
guaranteed rate increases over time.
A really unique growth driver for us and a very significant one is our activity
in the international marketplace. We are easily the leader internationally. We
run 111 networks worldwide behind the various brands that we have. We operate in
about 160 countries in front of about 430 million households. These are markets
that in many cases are undeveloped vis-a-vis the United States. It is a
profitable business for us and the fastest-growing part of our portfolio.
Our multiplatform approach which is basically keeping the brands we have or
creating new brands and following our audiences wherever they are, which means
for us its very great opportunities in wireless and in broadband where we've got
networks like MTV Overdrive we've recently created that really takes advantage
and levers our place as really professional video production operations. We have
a business in terms of launching new brands; we just launched LOGO which is a
gay and lesbian network advertising supported. We launched it in June. We
surpassed our subscriber goals of 12 million, we are now at 18 million
subscribers growing quickly. Original programming is going to hit the slate
beginning next month.
We have digital extensions of brands that we have which is a real important part
of our particularly domestic portfolio. MTV has five screens here with MTV U,
MTV 2, MTV Hits and so forth. We also have I think a very great growth profile
with Paramount Pictures, which has been in the last several years sort of at the
bottom of the heap in Hollywood. Our bottom line is about one-third of what it
was five years ago. So just sort of bringing it back to where it was would be a
significant growth story in and of itself.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
One of the things that you had mentioned as part of the focus of the Company is
acquisitions. And I was wondering if you could talk about size of acquisitions
you would consider and types of assets you would like to add. And specifically
if you can comment on some of the Internet properties that have been bought by
some of your competitors and some of the other larger Internet companies -- if
you're interested and why they didn't make sense.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Okay, well we're not really looking to make any big acquisitions. It is not as
if I look at this Company and say there is some huge missing piece here. We're
not going to go out and buy some -- make some billion, multi-billion dollar
acquisition. But we're literally looking at things that are sort of more in the
tuck-in variety or things that really relate to our core businesses or
strengthen our core demographic positions in those markets where we currently
have a strength. And basically the areas we're looking at would be in the
digital space and in cable networks. If we can find things that work for us, we
apply to that financial filters kind of strictly. We look at return on invested
capital. Discounted cash flow, those are metrics we use. We, there has been a
couple of MySpace and IGN, have been two properties that we did bid on. We did
not end up getting these properties, and we did not think that -- we couldn't
really make it work through our financial metrics to be honest with you. We're
trying to create shareholder value when we spend this money, and we didn't think
that the prices at which those two properties traded we would really be doing
that.
An example where we did do that I think is with the acquisition of Neopets last
spring, which is the leading kids destination online. We got that for I think a
very good price. It's a very good fit into our portfolio because if I put
together with Nick.com, we have control over the majority of GRPs essentially
against the kids marketplace online which replicates the position we've got with
kids on television with Nickelodeon. So we've got a lot of -- we're looking at a
lot of properties right now, and that's a really a place of really acute
interest. But I would stress that small tuck-in type acquisitions, not big, not
big multi-billion dollar plays.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
You should seriously believe that its important to have one location with the
aggregation of all of your online and digital content, whether it is mobile or
MTV Overdrive or Neopets and Nickelodeon? Do you need to have that sort of
everyone hates the word portal, but it is the only word I can think of.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, that's the word. I think it isn't really the same for every company. And
for some companies that's a great strategy. I mean you look at Yahoo, certainly.
MSN, the big portals, that's what they are. Our Company has been sort of built
around a brand philosophy, and we have what we call the multiplatform strategy
where the brands at the center. There's not a lot of audience overlap between a
lot of these brands. So we tend to look at -- you come into each brand
separately and under each brand there will be a different types of
functionality, different places of interest. We would want to add to that. But
it's pretty much done by demographic, not a single company portal.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
When you think about the opportunity to add incremental revenue to to the
business from digital and when I say digital I mean interactive, online, mobile
but also trading contents. I think MTV right now is producing Yahoo's IMU
reality online show. And so I put that into that bucket as well. Over the next
three years can, can Viacom generate $500 million in revenue, how big is the
opportunity that you have given a mandate to the company? Can you get to $500
million of revenue in the next three years from all of those digital activities,
producing content online, driving transactions to advertising yourself online,
people consuming your products on mobile devices?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Um, yeah, easily; I believe we can easily do that. We currently make over 100,
well over $100 million worldwide now just in the wireless space. And we've got
probably 50 wireless deals outside the United States with all major
distributors. I look at 2006 as really the year of video with the advent of 3G
phones, and I think we'll have probably the largest global footprint of any
content provider sort of in the, in the wireless digital space. But we've seen
this is currently the area of greatest growth right now in our Company. It is
the area of greatest focus. Our audience is particularly kids, teens, young
adults spend a lot of time there. We've launched MTV Overdrive back in April,
and already get CPMs that are three to four times what we get on television.
There is a long line of advertisers have already signed up. We've been able to
pretty much double our growth almost every month with that service. And the
target you talk about, I think easily achievable.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Getting back to your existing cable network assets, Les was up here earlier when
we talked about Verizon and SBC needing and wanting to launch the television
product; they need your cable networks to do so. As you negotiate with them for
the affiliate fees, do you think you'll be able to obtain the same level of
affiliate fees that you get for MTV, that you get for Spike from a telco as you
have from the major cable MSOs, given that your negotiating -- making so to
speak, not with CBS but by yourself?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, yes, we're in very advanced stages of negotiations with both of those
companies. I really believe -- we've got 26 networks in the United States, and
we've never been dropped by anybody. And we have what is in many cases almost
must carry content for certain demographics. So I feel fine about negotiating
without having CBS backing me up, and I, I believe that the deals we will strike
with the telcos will not be not only broad probably encompassing all 26 of our
networks, because they want to put an offering in place that they feel is
superior to cable and satellite. So they are really coming to us and saying we
will take everything, and the rates that we get are very nice addition; I can't
really get into what they are, but these are people who'd normally have a volume
discount at the moment because they don't have any customers. So we are
starting off with the rate structure I think that is very favorable and might be
incremental to us.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
In the near-term that would appear to be incremental somewhat because of paying
for the the content before they actually get the subscribers. So over time if
they start to cannibalize the cable and the satellite subscribers are going to
lose in one bucket and gain it in another. So similar to the timing benefit,
over the longer-term is there other content that you will be able to leverage to
give them exclusively and make the pie bigger?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, I don't know about giving exclusive content. That's something we really
haven't done in the past. I will just say that the more distributors -- the way
I look at it the more distributors that are in there the more intense the
competition is, the more they want to carry everything that the other guy hasn't
and put a superior offering in place. And that bodes well not just for us but
for anybody who is in the contents business and is a distributor. So when we saw
satellite come in, clearly they grew the size of the entire pie, not just taking
subscribers from cable. And we were the beneficiary of that as was everybody
else, and I think that is something we will see happen again. Yes, people will
migrate to a telco package but probably the overall penetration in this country
will increase.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Focusing on the current business trends within cable networks the upfront for
cable networks was reported in the press as being somewhat challenging or below
expectations in terms of the amount of inventory that was sold at the price that
cable networks wanted to sell. (indiscernible) comment on more recent scatter
trends for cable network advertising.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, we had the third quarter with -- the second quarter, I should say, was -
no, I'll move right to the third quarter. We had a very good scatter market,
solid double digits. It was better than the activity we saw in the second
quarter. And the fourth quarter scatter market looks solid right now. It's
premature to make a full declaration. I will say something we've seen for
probably the last five quarters is the buying pattern is one in which
advertisers are buying later in the cycle. But they do show up. They do spend
money, and year to year these are good increases for us. So I feel good about
our prospects for the balance of this year.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
As you think about the sustainability of the growth within the cable network
package overall, one component is the advertising component. We talked a little
bit about affiliate fees and a strategic level and what (indiscernible) the
telcos. As you separate into another company does your exact growth and
affiliate fees are going to be a lot more important to the overall growth of the
Company. And so if I think about what is the most critical driver of your
growth, that's going to have visibility versus being driven by the cyclical
environment or be it your affiliate fees for your new business. What type of
affiliate fees growth do you really see for the overall business over the next
three years?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, it's in the mid to high single digits in terms of - I mean, two things
really happen here. We have built-in rate increases that are mid to high single
digits basically on all the deals that we do, not only here but throughout the
rest of the world. But the other thing that drives it is volume increases. I
mean, w've added hundreds of millions of subscriber units with our digital
services. So we see the benefit of a lot of VH1 Classic or Noggin or MTV2 as
these things get further and further distributed as Digital continues to roll
out. We see a volume increase on top of the rate increase which puts us pretty
much in the projectable high single digits for affiliate fee growth, solid high
single digits.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Could you comment specifically within cable networks the comment specifically on
MTV Overdrive performance? I know that has been a big technology investment and
what are you seeing in terms of users and also the ability to.monetize it.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, it's really exciting. We have put in place -- first of all MTV Overdrive
is sort of a hybrid broadband network where you can -- it is all short form
video that you can either get on a stream basis or download on demand. And
Forrester in fact just a week ago released a study rating it at 94 out of 100 in
terms of excellence. It is sort of a state-of-the-art now for people in the
television business who want to have a broadband service that's seen as a very
high-level success. We launched it in April without a lot of fanfare. We've
since launched by the way similar services for Nickelodeon; one called Turbo
Nick, one for VH1 called VSpot. We have them for Comedy Central, MTV U and many
other services like this. We will be launching, but take video advertising in 15
second units, we have CPMs as I said earlier, three to four times what we get on
television. Our -- the amount of streams is -- we just did -- we've already done
since the video music awards which ran on the 28th of August -- we've had 13
million streams of programming that you were able to pick from just from that
particular show. Which really kind of -- I think we had 20 million in the month
of August, almost 20 million users. And we've been able to almost grow the
audience by multiples every month so we're really excited about this form of the
business and are looking for various offshoots so we can essentially create more
inventory in this world.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
I was surprised by the CPMs of three to four times television advertising. That
is pretty impressive. If you're doing $100 million in mobile revenue online,
what is the magnitude of the revenue doing just on online advertising sales?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
It is right now in the United States it's a, it's a probably under $100 million,
it is 75 to $100 million this year but growing very rapidly. This is a year
where we see, we've seen -- we've seen it growing from a small base rapidly, but
this year increase in the rate of growth.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Within programming MTV how will you cope with the departure of "Newlyweds" and
"The Osbornes," particularly in light of such new shows as Cameron Diaz,
"Trippin'" and "Meet the Barkers" is not doing as well?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
We put a lot of shows on the air. And those two shows went off the air in March.
So the second and third quarters have been the highest rated quarters in the
history of MTV so clearly we didn't miss those shows. They were very good for us
at the time. On MTV you can have a show that might go like "The Real World,"
which is in its 16th season. And by the way the 16th season which was based in
Austin, Texas was the highest rated of all 16 of them. But that is more the
exception to the rule. Usually things just -- we don't expect things to have a
huge shelf life on MTV; we keep putting things out there. We have "Laguna Beach"
out there now, "My Sweet Little 16", "The 70s House", which took a bunch of
young people and put them in a house when they had to live with only the
accoutrements of what happened in the '70s, no cell phones, no Internet, no
remote controls on the television set, shag carpets, ugly furniture and bad
music. And take that as a realty show, it did fantastic. So we got four or five
shows that regularly are in the top 10 now in terms of series for 18 to
34-year-olds; so, and the philosophy at MTV is constant experimentation,
constant pushing the needle.
We do put shows on like the Cameron Diaz show for "Trippin'", we knew it wasn't
going to be a big rating success. But we thought from a social net basis that it
was about a pro-environment show essentially. We thought in terms of sort of the
pro-social part of things we do and the image part of things we do it made a lot
of sense. We just ran a big telethon for the -- across all of our networks for
the Hurricane Katrina victims. So again, not really put on the air for a big
ratings but serves our purpose in many many ways. We have got 24 hours to deal
with 7 days a week, you're in a much different position from say NBC or CBS that
have 21 hours where they want to optimize every particular half hour. But I mean
I just think it is a great achievement, and it's really a reflection of the kind
of people we have working not only in MTV but our other networks. Almost
everyone is at an all times rating high after being in businesses for this
period of time. They're almost getting regularly better at what they do.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Obviously a successful story -- MTV that sounds like they continue to be very
strong. Spike TV very good distribution but not necessarily the best returns
against that distribution. I know there has been programming changes and
repositions over the last three years. Can you give us an update on the trend on
Spike TV since it switched positioning and you've increased some investment
behind it?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, Spike TV first channel for men. It is great position; nobody had it. We
currently are the fastest-growing network for men 18 to 49 and people 18 to 49
in prime time. It is doing extremely well. It is under the leadership of Doug
Herzog who has run Comedy Central, has run USA Networks in the past as a
longtime MTV veteran. We are putting a lot of money into program development
there and have really great aspirations where it can be. And many times it beats
ESPN in terms of male delivery. It is a network with a much better cost
structure. I will just say that if you look at Spike and then look at the other
services we have sort of on the adult demo, the 18 to 49 demo, Comedy Central,
VH1, CMT, Nick at Night, all of these are much less developed in terms of the
kind of advertising they pull in relative to their competition versus say MTV or
Nickelodeon. And that is an area where we see really as a major growth lever
going forward because they are more undeveloped brands. They got more upside.
And I think great futures ahead of them.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
You had mentioned in your opening remarks an opportunity to launch new brands.
And you launched LOGO and it is obviously exceeding or meeting and exceeding
your expectations. What brands do you think can be created where the consumers
needs aren't being well met in cable networks? Programming?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Oh, you mean what great ideas haven't been taken? Most of the great ideas are
gone. It's not like there is some single great idea that is working. A lot of
these things work more on the margins. We are in the process of launching four
services of what we call MTV World. This is one example. These are basically
domestic channels in the United States for emigre audience. We have MTV Desi
which is for South Asians. MTV Chi which is for American and Chinese-American
audience. We also have services that will be launched soon for the Russian
emigre audience and Korean audience. We are looking at a lot of channels that we
have in development, particularly channels that would work in sort of what we
call the 45 to 60-year-old; sort of the front half of the baby boomer market
that are around the lifestyle area.
That is something we are actively looking at; not just for linear channels, but
also for channels who have big VOD applications. I don't think there is some big
killer idea out there that no one's done before but there is a lot of things
that you can do if you have the scale around the margins that you can sort of
add to your portfolio. We now got 111 networks. We just launched a new brand in
Japan called FLUX that is the purpose is to create and distribute content in the
wireless world, which is as you know a very advanced wireless marketplace. And
it's off to a fantastic start. We have the Music Factory in the UK which is on
digital terrestrial television, that's doing wonderfully for us. We can make and
launch these things at very low marginal cost.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
I want to transition to the film and home video business. Brad Gray has been
the CEO for almost half a year. Has the company really defined its strategy in
developing a film slate and specifically in regards to a number of films per
year, the mix of the types of films? Whether they are big budget films or
specialty low cost films? And what is your approach, last year you were kind of
slow waiting through that perspective? Have you solidified it?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
It takes a long time to turn around a movie studio and I will say Brad Grey has
in his six months -- he's done I think -- he is off to a great start. He has
such a great tone for the studio. He is while he has never run a movie studio
before, very much an insider in Hollywood and great talent, relations abilities
and he has brought in a great management team with Gail Berman from Fox, Rob
Moore who worked the revolution at Sony. And he has elevated Tom Leskinski, who
I think is one of the premier home entertainment executives in the business
today. And while the strategy isn't fully mapped out or in place, I think we
kind of have the wind at our backs for a couple of reasons. We just had the best
summer we've ever had in Paramount's history, led by a couple of big blockbuster
pictures but also some smaller successes.
We've put together an idea I think creatively -- we've made the studio a place
where it was sort down on the bottom of the list in Hollywood as a place people
would want to bring projects for a bunch of reasons, and I think we have
corrected those. We've been able to put in place first with development deals
with Brad Pitt's Plan B Company with John Singleton who just produced the "Four
Brothers" for us is a very adept producer and director. And I think we've got a
slate that is coming up involving people like Oliver Stone, other -- we've got a
very exciting project of our slate of movies that is pretty much a balance
between your tentpole pictures, which we're still going to be in the business of
like "War of the Worlds", "Mission: Impossible 3," currently in production. And
increased focus on specialty films, which is an area that Paramount was pretty
much left out of entirely which is a great way to start connections with new
talent, relationships with new talent. And you can just look at the "March of
the Penguins" and some of these movies that cost very little and do very well.
We had "Hustle & Flow" this summer, which we think was a critical hit and we've
made money on that. So that is an area of increased emphasis. We are moving
towards a model of creating movie labels for MTV and Nickelodeon and BET. Now
MTV and Nickelodeon have been production companies at Paramount. They've made
movies -- about 30 movies now that have been among the most profitable ones that
Paramount has put out in the last five or ten years and we want to move those
production companies into labels that would we think would give us great
marketing advantage, talent relationship advantage, and we are also very
actively making Paramount an international company; largely it had been a
domestic company, worked with Universal through UIP. Many of you probably saw
the announcement a couple of weeks ago that UIP beginning in '07 was going to
sort of begin to deconstruct in a sense. And we would sort of take direct
control over distributing our own movies in a lot of key foreign territories.
That's very exciting for me.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
You mentioned before, Tom, that the profitability of Paramount is not where it
was several years ago. This year obviously since the successful box office films
that we talked about, when do you think and maybe that is a possibility to
attract the talent again to regain the momentum in the label. When do you start
to see the improvement in the profitability from this reinvestment and focus?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
I am looking at improved profitability every year. This year's going to be
better than last year, and we are betting that '06 is going to be better than
'05 and so forth. You never know in the movie business. I mean a lot of it is
driven by, obviously what 14 to 16 major titles we put out there which was sort
of a range we are still in plus this specialty area. But we feel good about some
of the pics we have made. We think that for one thing 60% of your revenue these
days comes out of the DVD marketplace. And Paramount did not believe in the DVD,
which is hard to believe. But we are the beneficiaries of that in a sense
because we are sort of last to market, so we still haven't released half of our
film library and in a DVD library business which is a very big, important and
growing part of the business. And we are a leader with the size of our library;
we've only released about 10% of that. So we think that we've got good growth,
growth prospects in terms of just library sales from the DVD business.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
With your comment that 60% of the revenue comes from DVD's, it leads me to
believe that the bulk of your profits comes from DVD's. Is that a fair
statement?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Yeah, that is a high margin business, a lovely business.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Given all the activity and chatter around the issues in the DVD market I think
Paramount has really benefited from Tom when we were out there, I think there is
a number of 230 DVDs being released by Paramount and both in theatrical and
television. So there is a pretty big bump in the DVD business there. As you go
into 2006 it sounds like 2005 really benefited from that profitability. How does
that profile change? Will you launch that many -- release that many?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Yeah, well, they're planning on launching that many and more. We've got the
depth in library; we are also looking at -- the product that we released was
also released at higher price points than any of our other competitors as an
opportunity to come back in. Either remarketing things at lower price points and
driving more volume or taking things like "Titanic", which we are doing and
having sort of a special edition with all kinds of new special features, which
has been a very successful tactic used by most of the other studios and we have
not really done yet with most of our library. So we're looking at several years
of good, solid growth out of the DVD business vis-a-vis our competition. We see
it as a business where we are really going to be increasing share over time. And
we have seen significant increases in share this year in terms of both the
regular DVD business and the TV DVD business where we are now like number two.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Right. You had mentioned specialty films. Does that require you going out and
buying a studio or is that something you can do internally?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
We looked at a couple of studios -- there's not that many to buy first of all.
But they didn't seem -- they were very expensive; good businesses, very
expensive and we think we've got the infrastructure. It is really a question of
I think the build versus buy scenario works a lot better for us. So our sense is
that we can do a lot better just by investing money more. We've got a
distribution system. We have Paramount Classics in place now. And we think by
making better choices, budgeting it more aggressively, allowing them to engage
in original productions and not just sort of last-minute or foreign
acquisitions, we can build a very good business and compete very effectively.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Let me run through some investor questions here in our last five minutes. The
question is given your multiplatform strategy and strong growth prospects in
mobile, are you considering launching a private-label mobile service to key
demographics like ESPN and Disney are doing, basically in MVNO?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
You know, it's a good business, the MVNO business. Our strategy is pretty much
to partner with people who are already in that business. We've had a great
partnership domestically with Virgin. We are in business with Verizon so we are
probably not going to be in the MVNO business directly, no.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Can you provide an update on China? The Government obviously has been cracking
down on cable and satellite broadcasting. Is there an opportunity there? And
what is the current state of being able to increase your growth given this?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
We still feel good about China. We've been in China for twelve years. We have, I
think, in many ways, a lot more than many of our competitors do. We have the
only global brand, 24 hours a day with MTV that operates in China. We've got a
very big syndication business that goes into like over 130 million households.
We've got a joint venture with Shanghai Media Group for Nickelodeon that is
called HAHA Nick that is off to a good start. We do a lot of production. We just
did a huge Nickelodeon Kids choice as a co-production with CCTV. So we've got a
lot going on there. We make money in China now. You know, in China it's always
been a slow, gradual game. Regulations tend to change. We've kind of bobbed and
weaved along with it all. We are in for the long haul. We have solid
relationships with the type of government people I think that we need to have.
And, you know, it's difficult to say what happens next in China. When you talk
about a crackdown its not like a bunch of people ran out and like took everybody
off the TV screen and herded them away. There's a lot of people still in
business and doing business and I think prospects in China are solid. And it's
one of our -- if I look at all of the markets we operate in -- we are in like
160 countries, If I nail like the top eight, China is certainly one of those.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
A question from an investor, Lifestyle Network, is there reason to partner with
a distributor like Comcast to launch this? Why give up the economics?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, we have a lot of things in development as I said for VOD and for linear
networks. And we're talking to all kinds of people about that, people who might
be program creators, distributors and what not. Historically we have been in
joint ventures a lot. We are in a joint venture now with Sky in the UK. We have
been for a longtime with Nickelodeon. We've got joint ventures for MTV, for VH1
in countries like Brazil and Korea and Japan and Russia. So we've been and are
in partnerships with a variety of people. We were once partners with Time Warner
with Comedy Central. We ended up taking that partnership out. Usually that is
the way these partnerships ends up with one person buying out the other person.
So I wouldn't rule out us doing business if it made sense with either a program
supplier or a distributor in the future.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Is the rationale just there is less capital at risk so - and you're ....?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Less capital at risk -- it isn't so much the capital risk. You get some kind of
strategic advantage from it. I mean we have the money, basically, but in many
cases it looks like it would be a better business proposition to have a partner
because they're going to give you something you can't necessarily get so fast
somewhere else.
- --------------------------------------------------------------------------------
Unidentified Speaker
The next question Anthony mentioned that MTV is creating a reality program, IMU
for Yahoo. This reminds us of what Warner Brothers did for NBC and etc. Is this
a big opportunity and how do the economics work in creating online shows for
other companies?
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well, this is, you know, Yahoo and MSN they are just really getting in this
business. And I suspect this is going to be a good business. And one of the big
applications they're going to have -- it is not like they are going around
asking people to make half hour shows yet. I mean they are looking for short
form products. We're kind of good at that. We can take, we can take things on
Comedy Central and slice them up into small pieces or create specifically for
that. So I think it will be a growing piece of our business. We are well
positioned to do it. We are in discussions with these companies to do it now.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
There is a question about when you discussed the breakup of the Company and
whether or not Sumner will retain voting rights and how you and Les felt about
the impact that would have on shareholder value. And whether or not you can
provide a perspective on whether voting rights were discussed as potentially
going away.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Well it wasn't discussed for very long. Sumner has full intention of keeping his
position in both of these companies. And you know, I think he has done a good
job. So this is something he is very excited about the split of the Company. He
really sees this move as being an innovative move. And it is going to be a
successful one. And he sees this as a great way for his, his investment to
improve in value.
- --------------------------------------------------------------------------------
Anthony Noto - Goldman Sachs - Analyst
Tom, thank you. You have definitely built some great assets, and it looks like
you are on the cutting edge in trying to get them to the next platform through
Internet and mobile. So thank you.
- --------------------------------------------------------------------------------
Tom Freston - Viacom - Co-President, Co-COO
Thank you, Anthony.
[applause]