By Keach Hagey And Shalini Ramachandran
Jon Stewart's fans will mourn his departure from Comedy
Central's "The Daily Show." So will the channel's parent company,
Viacom Inc.
The media giant is facing growing concerns on Wall Street that
pay-TV providers will decide they can do without its bundle of
channels, which also include Nickelodeon, MTV and smaller ones like
TV Land and Spike. Being dropped by cable providers, whose
subscription-fee payments power revenue and profit growth for all
media companies, would be a significant blow for Viacom.
As ratings have sagged across all Viacom's major networks,
Comedy Central has been a key element of the package in its
discussions with distributions. The company's leverage was
strengthened by having two marquee stars with passionate fan bases,
Mr. Stewart and Stephen Colbert, who hosted "The Colbert Report."
But Mr. Colbert left in December, and now Mr. Stewart has said he
would be out the door later this year.
"The pay-TV content ecosystem is increasingly about having
tent-pole programming, and Viacom has arguably lost their two
biggest tent poles over the last few months," says Dan York, chief
content officer at DirecTV, the nation's second biggest pay-TV
provider after Comcast. DirecTV in 2012 signed a long-term deal
with Viacom after a nine-day blackout battle.
Viacom spokesman Carl Folta rejected the notion that the twin
stars of Comedy Central were so crucial.
"These are important shows, but they are two among many across
the Viacom portfolio," he said, pointing to other successful
franchises like "SpongeBob Squarepants" on Nickelodeon, "South
Park" on Comedy Central and "Teen Wolf" on MTV. "The reason we are
as widely distributed as we are is that we have the biggest share,
in the most attractive, young demographic, of any content
company."
Last year more than 60 small cable operators covering about two
million subscribers dropped Viacom's channels, amounting to about
2% of U.S. pay TV households. The question is whether bigger
distributors will do the same. On an earnings call in November,
Dish NetworkCorp. Chairman Charlie Ergen brought up the Viacom
problems with small operators and suggested not every pay-TV
company will carry every channel in the future.
Viacom has played down the threat, saying it has long-term
distribution deals covering 70% of subscribers. The company also
has emphasized that no major deals are currently up for
renewal.
A Viacom executive said the company is confident it can preserve
the "Daily Show" franchise and that Mr. Stewart will play a vital
role in picking his successor. The executive said fresh blood won't
be a bad thing, pointing to Jimmy Fallon, who took over the
"Tonight" show from Jay Leno and boosted NBC's ratings.
"Everybody was surprised by how well Fallon did," the executive
said. "I think it's very possible to make a new franchise as big or
even bigger."
The executive also noted the ratings for Larry Wilmore, Mr.
Colbert's replacement. He has drawn over 1 million total viewers
and 367,000 viewers in the 18-34 demographic so far this season, a
respectable result for a new show, even if it is down from Mr.
Colbert's 1.6 million total viewers and 502,000 18-34-olds.
"The Daily Show" has been a crucial franchise for Viacom in
negotiations with carriers. An executive at one pay-TV company said
it has even sought to time its contract extensions with Viacom to
expire when Messrs. Colbert and Stewart typically took vacation.
That way, if the carriage negotiations between the companies broke
down, Viacom wouldn't be able to use blackouts of the Comedy
Central shows as leverage.
An executive at a small cable operator said after the company
dropped the Viacom channels last year, "Stewart at 'The Daily Show'
came up over and over again" in interactions with upset customers.
Though Mr. Stewart's primary audience consisted of "millennials,"
the executive said, there were complaints from people in their
mid-40s and mid-50s. "He was that powerful in terms of his draw,"
the executive said.
Losing Mr. Stewart is just one of several problems. All of the
big Viacom channels are suffering double-digit viewership declines.
Nickelodeon, Comedy Central and MTV are down 32%, 16% and 25%,
respectively, in their target demographics so far this season,
according to an analysis of Nielsen ratings by Jefferies.
The entire cable-television industry has suffered ratings
declines this season, but Viacom has been particularly affected,
Viacom's Mr. Folta said, because its young demo is more likely to
watch in nontraditional ways.
Viacom has pushed back on Nielsen's measurement system, saying
it doesn't adequately account for online viewing. Viacom has said
that it wants to make half of its revenue "non-Nielsen dependent,"
up from 30% last year.
Meanwhile, Viacom's future is the focus of intense speculation
on Wall Street. Its executive chairman, Sumner Redstone, is 91
years old and didn't speak on Viacom's most recent earnings call
last month, as has been his habit. Viacom said Mr. Redstone was
listening in from Los Angeles. Mr. Redstone controls Viacom through
National Amusements Inc., which has roughly 80% of Class A voting
shares. Should he die, his holdings would be transferred to a
trust, with Viacom Chief Executive Philippe Dauman as one of the
trustees.
Some analysts say Viacom could become a potential acquisition
target. Some analysts have begun calling for it to reunite with
CBS, which it split from in 2006. Those who support the idea point
to the pending mergers of Comcast Corp. and Time Warner Cable, and
DirecTV and AT&T, noting that content providers probably need
to bulk up to gain leverage. Backers also say benefits would come
from combining CBS's growing broadcast subscription fees in the
U.S. and content-licensing revenue with Viacom's reach
internationally.
"I think there's a clear bias toward scale in today's media
landscape, and putting CBS and Viacom together would make both of
those companies much larger," said Brett Harriss, an analyst at
Gabelli, who called for the merger in October.
Michael Nathanson, an analyst at MoffettNathanson, said Mr.
Stewart's departure adds fuel to the recent pessimism: "There has
been a wave of worry for Viacom. People are worried. They worry,
'Can Comedy Central now be dropped when you lose a passionate
connection to Jon Stewart'?"
Nickelodeon long has been Viacom's powerhouse among the big
networks, and it still is. The SpongeBob franchise remains a force
in children's TV, evidenced by the strong box-office showing of the
latest movie. But Nickelodeon's role is diminishing due to ratings
declines and the proliferation of children's content on
subscription video on-demand services like Netflix, pay-TV
executives say.
"The Daily Show" averaged about two millions viewers last year,
but its real strength has been its long-standing dominance over
other late-night shows in younger viewers, including the 18- to
34-year-old demographic.
But the competitive landscape has gotten tougher. Jimmy Fallon's
"Tonight Show" averaged 656,000 viewers ages 18 to 34 last year,
beating Mr. Stewart's 522,000, after years in which Mr. Leno
trailed him by a wide margin, according to Nielsen data analyzed by
Horizon Media.
The average age of the audience of "The Daily Show" has begun to
creep up. According to Brad Adgate, director of research for media
buyer Horizon Media, the average age viewer was 29 shortly after
Mr. Stewart joined in 2000 and had risen to nearly 45 by 2014.
Write to Keach Hagey at keach.hagey@wsj.com and Shalini
Ramachandran at shalini.ramachandran@wsj.com
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