Picking a lane vs. walking and chewing gum at the same time

As most major television companies rush into streaming, some analysts are urging Viacom and CBS to pick a lane after they complete their long-awaited merger.

One rationale for combining the two media companies — both controlled by the Redstone family’s National Amusements Inc. (NAI) — is to have the scale necessary to compete against Netflix, which has been siphoning off viewers from traditional television, and The Walt Disney Co. and AT&T, which are betting the farm on transforming themselves into direct-to-consumer businesses.

CBS got into the streaming business early with CBS All Access and an over-the-top version of Showtime. Viacom this year bought Pluto TV, the top ad-supported streaming service. But with investors nervous about the expense of producing original programming to create compelling services, the companies plan to continue to sell shows to rivals, which is a lucrative business.

Related: CBS-Viacom Merger Set to Close Dec. 4

Viacom recently sold the streaming rights to South Park in what is reportedly a $500 million deal. Both companies produce dozens of shows for rivals, including Netflix and The Walt Disney Co. (In a bit of a twist, Viacom also renewed its less-costly deal to air reruns of NBCUniversal-owned The Office on its cable channels.)

At the Recode Code Media conference, David Nevins, who will be chief content officer for ViacomCBS, was asked about the two-track strategy. “We believe that we can walk and chew gum at the same time,” he said at the Nov. 18 event. “It's not that complicated to make decisions. Are we going to do better renting this content to someone else or do we want to add it to our platforms and build the quality of our libraries?"

But as the Viacom-CBS merger nears completion, Wall Street is seeking an uncomplicated strategy going forward.

“Once combined, we still sincerely hope that NAI will provide greater clarity into its long-term plan for the assets,” senior analyst Steven Cahall of Wells Fargo said.

In a research note, Cahall called direct-to-consumer the biggest strategic risk for ViacomCBS. “We believe they are biting the hand that feeds them by accelerating cord-cutting,” he said. “ViacomCBS will be plowing cash into scripted originals in a very, very crowded market” with its streaming businesses.

During Viacom’s first-quarter earnings call, analyst Rich Greenfield of LightShed Partners, who said he prefers the “arms dealer” strategy of providing ammunition to combatants in the streaming wars, asked why ViacomCBS would bother with small streaming services like CBS All Access, Noggin and BET+. “The Street is obviously panicking or upset with what CBS has disclosed in terms of the level of the investment they are making in CBS All Access,” he said. “Don’t you have to take a lane, either arms dealer or your own SVOD strategy?”

“We have a multipart strategy — and this is at Viacom and this will be true for ViacomCBS — one which we believe allows us to unlock a range of opportunities in the shifting media landscape,” replied Bob Bakish, who will be ViacomCBS CEO.

Linear Still a Big Piece

Linear TV remains a massive business for the company. “We are going to continue to serve that market,” Bakish said. “We’d be crazy not to.” Demand for content from third parties is “incredible,” he said. At the same time, ad-supported VOD platform Pluto TV is showing strong growth and “our niche SVOD businesses are really natural complements to our media networks,” Bakish said, adding “we have the assets and capabilities including the financial resources to pursue all of them.”

Viacom’s approach to funding the shows it produces for third parties also reduces the company’s financial exposure, he said.

When Viacom produces a show for a Netflix or Hulu, the two companies agree on a budget. Viacom gets a cost-plus arrangement — about 20% — and the exhibitor rents a window for that content.

“They own the show for either a certain window of time, a certain geography, the rights on a certain platform,” Viacom chief financial officer Wade Davis said. “We can then exploit the rights that they don’t own. And then, in the longer term, the associated IP reverts back to us.” That means Viacom can make money from the streaming wars while at the same time build its library.

After the call, analyst Michael Nathanson of MoffettNathanson Research noted that investors had been surprised by how much working capital CBS was using to create content for its streaming businesses: “We are now a little more hopeful that a fresh perspective for the newly combined company can take a harder look at whether the returns from this incremental planned spending justify the investment.”