Barron's Streetwise - TV's Sink Or Stream Moment

Episode Date: May 15, 2020

ViacomCBS CEO Bob Bakish on soaring demand for streaming; why advertising will come back; and what makes Pluto TV the company's secret weapon. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. I think we're starting to get some credit for the fact that we have the number one free ad-supported streaming television service in the United States, and it is growing very quickly, and it is expanding internationally. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The person you just heard, that's Bob Backish. He's the CEO of ViacomCBS, which is the ratings leader in television and which owns the largest free streaming service. It's called Pluto TV. We'll hear more from Bob in a moment about why that's

important. Demand for streaming is soaring during the shutdown, but advertising is slumping and sports are on hold. This week on the podcast, we look at whether the pandemic will sink or save television. Plus, in a moment, we'll discuss why bad news for the economy isn't necessarily bad news for stocks. Hi, Meta. Hey, Jack. Are you watching any TV these days? That would be a yes. Do you have cable television?

No, I haven't had that for many years. I've been streaming for a while. Right, because you're young. You're young and unbundled. I'm happily married but grumpily bundled with a cable service right now, but I have a week off coming up next week. There's not a lot to do. It's not like we're jumping on a plane and, you know, somewhere. We're hanging around home. So it's time to get caught up on stuff I've been putting off. And one of these things is to figure out what I'm going to do about my television situation.

The big decision to make is do I keep my super duper cable bundle, even though I don't watch a lot of TV and I watch mostly streaming, or do I cancel the bundle and then pick a bunch of streaming services? I'm not sure which way I'll go. I'm going to spend the week. It'll be like a Hollywood audition meta. I'm going to try them out. I'm going to see what they've got for me. I feel like I wield enormous power at this moment.

So you're going to watch a lot of TV this vacation, is what you're saying? When you put it that way, it doesn't really sound that powerful, but yes. Let's come back to television after we say a quick word about the stock market. It turned a little rocky this past week, which in a way was a relief to see because it was starting to get strange watching stocks go straight up in the face of bad news meta have you heard of a movie from the 1970s called the bad news bears the bad news bears it was a team of superstars like mike i wish i could say yes i have not it's about a little league baseball team that's made up entirely of misfit players. With a team like this, there is only one way you can go. Cups and supporters. I keep thinking of the phrase

bad news bulls to describe what's happened in the stock market this year. Because we've seen some tentative good news, right? Like COVID-19 infection rates are trending lower in many states. That's a promising sign. But there's news out there that's just beyond bad. We lost more than 20 million jobs in the month of April alone. And some of those people are going to go back to work once businesses reopen, but not all of them. I keep hearing people say that investors aren't worried about bad news in the near term because investors are forward looking. I'm starting to wonder just how far forward are these investors looking at this point? I mean, stocks are already expensive relative to last year's record earnings.

And it might take a couple of years to return to that level of earnings. My worry is that we become bad news bulls because of interest rates. One thing about a weak economy is that it gives the Federal Reserve a reason to keep rates exceptionally low, near zero. Low rates make stocks look attractive relative to bonds and savings accounts, and that pushes stock prices higher. We saw that during the decade leading up to the pandemic. Now, people can disagree about just how strong economic growth was or whether this or that politician deserves credit or blame. But what was clear is that when rates were near zero for the better part of that decade, stock prices roared. When the Fed began slowly, gently to raise rates, It barely got over 2 percent.

That's less than half the historical average before the stock market through a temper tantrum in late 2018. The Fed had to reverse course. Today was the worst trading day ever on a Christmas Eve, and it comes after the markets finished their worst trading week since the 2008 financial crisis. OK, another topic the president's been tweeting about is essentially the market sell off. He said earlier that the only problem the economy has these days is the Federal Reserve. Let's bring Jonathan Honig. Now, rates are back to zero again and stocks crashed earlier this year, but they've

bounced back quickly, all things considered. What I'm wondering is, are we dependent on low rates for many years to come? In the 1990s, we used to talk about a Goldilocks economy with fast enough growth to keep investors happy, but not so fast as to cause inflation. What if we're stuck now in a Grizzlylocks economy, where we need a weak enough economy to keep rates near zero, but not so weak that we trigger a crash. Now, when I hear myself start throwing around terms like grizzly locks in my head, it probably means I've been spending too much time stuck in my home office thinking about the stock market.

It's time to connect with the outside world and get a fresh perspective. This is Katie. Hi, Katie. It's Jack Howe from Barron's. How are you? I called up Katie Nixon. She's the chief investment officer for the wealth management business at Northern Trust. These days, the new version of starting a conversation with polite chit-chat about the weather

is talking about how nuts it's getting trying to work from home. You know what? It's become so acceptable. I mean, I've worked from home before on and off because I live in New York and I work all over and I have a dog. And so I would typically like put her in her kennel or try to keep her quiet during meetings. Now, I don't even care. No one cares. Babies are running around. Dogs are barking. Cats are jumping into the frame. It's just it's a free for all and it's acceptable. So I don't even worry about it. I asked Katie why the stock market keeps rising in the face of bad news. I think what investors are saying is that fundamentals eventually will recover. And you know how the market is. It's all about the second derivative. So it's just things

just have to stop getting worse in order to start actually looking better. You might have heard that term second derivative before. It comes from calculus. In this context, it means investors might be willing to get back into stocks even if things are getting worse, so long as they're getting worse at a pace that is declining from the pace at which they were getting worse earlier. Because when that happens, it means before long, things will start getting better. I asked Katie whether investors should be worried that stocks seem to have gotten expensive relative to earnings. It does mean that future returns off very high starting points are going to be lower. It doesn't mean negative and it doesn't mean we're going into a bear market,

but it just means that investors are going to have to temper their expectations a bit here in terms of future returns because we are pricing in a recovery. And when you start at 20 times forward earnings, you don't have a lot of room to go. That's good news as long as rates stay as low as they are now. And I think they will for years to come. But is there a chance that I could be wrong about that? I asked Katie. Our base case is that we will be at zero for the foreseeable future. But I will tell you that there is a scenario under which we could see higher rates. And that's if we see inflation. That's important.

One reason the Fed has been able to keep interest rates so low is that there has been very little inflation for decades. And there are a variety of causes. Globalization has kept the lid on consumer prices. Technology, especially the Amazon effect, might have played a role in holding down prices too. Low birth rates in the rich world mean populations are aging, which can have a dampening effect on growth. And we've had two traumatic economic events, the Great Recession and the current pandemic. All of that means inflation isn't likely to return

soon. Over the past two months, we've had deflation. But Katie's point is that with so many trillions of dollars being spent on stimulus around the world, investors can't be sure that we'll have two more decades of low inflation, or even one more decade. Higher inflation would likely mean higher interest rates, and that could one day bring stock valuations lower. None of this changes what we've been saying here in recent weeks. Stick with stocks and stay diversified. With luck, our bad news bull run will see us through until good news returns. Matt, I know you could give me a long list

of things that are available to watch on Netflix. What can you watch on any of the channels available through ViacomCBS? I'm asking you because you're a certified young person. This is market research. I don't know. Hmm. All right, well, how about a late night show

with a guy called Stephen Colbert? You know him? Oh yeah. I know that one. Okay. That's on the CBS network. How about a show called NCIS? It's like a crime type of show. People aren't just numbers on a bottom line. They have names. Turn that off. No. yeah. I know that well. Okay. And then there's 60 Minutes, the news program. Yeah, I know that too. So those are CBS shows, but they're cable channels too. You've heard of SpongeBob SquarePants, right?

Mm-hmm. He's the most famous of the SquarePants, and he's on Nickelodeon. Now, I'm fascinated by the contrast on Wall Street between Netflix and the newly merged ViacomCBS, because it shows just how much investors are in love with streaming television and want no part of traditional television. Netflix has obviously been wildly successful gaining subscribers. It's expected to bring in close to $25 billion in revenue this year. But ViacomCBS is expected to bring in a little bit more, about $26 billion. It makes money selling advertising. It's not a great year for advertising right now.

But CBS has been the most watched TV network in America for 12 straight years. The company also has a big cable audience with networks like Nickelodeon, Comedy Central, and MTV. In addition to advertising, ViacomCBS is paid fees by cable carriers for the right to include its networks in their TV bundles. It owns the Showtime Premium channel and TV and film studios, including Paramount. Now, movie theaters are closed, but ViacomCBS also makes money making shows for streaming services, including Netflix. And ViacomCBS has a streaming business of its own.

That includes CBS All Access, something called Showtime OTT, for those who want to subscribe to Showtime without going through a cable company, and there's Pluto TV, which is a free streaming service that makes money from advertising. In general, streaming services are not especially profitable yet, whereas traditional TV is a cash cow. So Netflix is expected to burn through $1.2 billion in cash this year. But ViacomCBS, it's expected to generate positive free cash flow of $1.4 billion. To me, that makes the difference in stock market values a little surprising.

Netflix is valued by stock investors at $190 billion. ViacomCBS, it's valued at just $11 billion. billion dollars. ViacomCBS, it's valued at just $11 billion. Investors are treating these businesses as though a year or two from now, TV is going to disappear and streaming is going to generate big profits. In reality, viewers are leaving their cable bundles, but slowly at a rate of less than 5% a year. And Netflix isn't expected to generate free cash until 2023. So that makes me wonder if the difference in values for these two companies, while maybe justified, has just gotten too wide. And maybe I'm not the only one wondering that because ViacomCBS stock jumped more than 20 percent over two days after the company reported first quarter financial results on May 7th. So what did investors see in that report that they liked so much? I called up ViacomCBS Chief Executive Bob

Backish. Bob Backish here. Oh, hey, Bob. Good to speak with you. Okay, now Bob likes to talk about TV ratings, and when TV people talk about ratings, I usually understand about half of it. We have the number one portfolio in the country, number one in all key day parts, five of the six top comedies, top two dramas, number one news show, number one late night show. We also maintain leadership on the cable side where we have the number one rated portfolio in total day and nearly half of the top 30 on 18 to 34s, 9 of 10 in kids. So that's good. Half of the top 30 on 18 to 34s. That sounds like something I hear people say when they're ordering lotto tickets. But like Bob says, it's good. A lot of people are watching his TV shows.

That can't be what moved the stock, though, because remember, investors just don't care about television right now. All they want to know about is streaming. And Bob also mentioned streaming. We had our strongest streaming quarter ever. And, you know, that was on track before COVID hit. And we've seen, if anything, increased momentum in the last, say, six to eight weeks. The company's number of paid streaming subscribers hit 13.5 million. That's up 50% from a year earlier. So it's fast growth, although 13.5 million is small relative to Netflix's 182 million subscribers or Disney's more than 90 million subscribers

across Disney+, Hulu, and ESPN+. But ViacomCBS also reported another 24 million regular users of Pluto TV. That's its free streaming service that makes money from advertising. And that was up 55%. Pluto just got a big upgrade in March. Bob says it's a mistake to think of it as a standalone business. It's also key to our integrated streaming strategy, where it'll serve as an important complement to and funnel for our paid services. In fact, in June,

we're going to take the first step in this by introducing these click-through ad units on Pluto embedded in relevant content that allow users to subscribe to CBS All Access. Now that's important. Streaming is getting crowded. Later this month, AT&T will launch HBO Max. That's going to combine HBO with CNN, TNT, and some other TV content. Then in July, NBCUniversal will launch a service called Peacock. There's a limit to how many streaming services cord cutters will pay for. Some might want to switch pay services every few months, but everyone will be willing to try a free service. With Pluto TV, users get more than 250 channels where they

can watch, for example, back episodes of Reno 911 from Comedy Central. Who put up the sticker in the locker room that says legalize it? It's got a little, uh, the leaf, the marijuana leaf, and it says legalize it. I don't know why you're looking at me. Meta, have you heard of Reno 911? No, I haven't. It's a police comedy, and it's funny because there's a cop who wears super tight shorts. That's inherently funny. Now, Bob says the next step will be to remake the paid service, CBS All Access, this summer, adding more of the content that was picked up in the merger, Viacom cable shows and Paramount films.

And I think people are starting to say, OK, wait a minute. This is pretty interesting. I asked about whether there will be a fall TV season with production shutdown. Bob says because his ratings are strong, more than 80 percent of his shows are returning, which means he has a backlog of shows that are written and ready to shoot. He says production can begin as soon as June. The easiest place to start in terms of controlling for safety will be what's called soundstage production. Picture sitcoms with familiar sets. Dramas can be more complicated because many are shot partly at unique locations. Bob says those will probably front load the soundstage shooting

and then later fill in the location shooting. He also talked about restarting sports. I've talked to the commissioners of a number of leagues personally. I mean, they're all focused on playing. They all have, you know, ranges of contingency plans. I think it is quite likely that, you know, it'll start with no fans. Certainly that's how golf is starting. I need the golf. You got to get me some golf. June 11th, PGA, Texas starts. In fact, we actually are doing the cruise differently. We're going to use kind of an integrated traveling crew unit. We're actually going to capture some content of those guys too, because we know you golf fans are really dying

for golf content. Bob said he's seeing good demand for advertising for that golf event in June. And he said he's optimistic about a broader bounce back for advertising. June. And he said he's optimistic about a broader bounce back for advertising. April was very quiet. May and June are better. And I do believe that the third quarter will be better than the second quarter. And look, drive around and look at dealerships. There are tons of cars in lots. They got to sell those cars as an example. And we know advertising works and we know the market was tight pre-COVID, so the ad market will rebound. ViacomCBS is much more concentrated in television than big entertainment conglomerates like Disney and Comcast. That might not be such a bad thing now, considering theme parks are closed. We don't have

a huge event in theme park business, which there's now a lot of uncertainty out. I mean, you know, pre-COVID, I would have loved to have it right now. Not the worst thing to be much more, let's say, media focused. Now, ViacomCBS still faces plenty of challenges. It ended last quarter with $18 billion in long-term debt. That's manageable, but it's ambitious, especially considering that there's a dividend that needs funding. The yield on that dividend works out to over 5%. That's great income, but only if the company can continue making payments while paying down its debt and funding show and film production. It seems doable, but there's not a lot of room for more things to go wrong. Cost savings and asset sales from the merger will help. One of those assets is CBS's

old headquarters, a Manhattan building that could be worth more than a billion dollars. But right now, a lot of Manhattan offices are empty and the sale is on hold. All that said, the shutdown seems to have given ViacomCBS a boost in streaming. And as we've seen, stock investors seem to care far more about streaming than traditional television. It'll be interesting to see if Bob can sustain his streaming growth in the quarters ahead. You know, people said it's a show me story. Well, we're starting to show them and we're just getting going. And there's a tremendous amount of value to create here. Thank you for listening. Metal Lutzhoft is our producer.

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