Why CBS and Viacom Are (Probably) Merging And What Happens Next

Size matters in digital media, and here’s why:

* Acquisitions. Neither CBS with a $19 billion market value nor Viacom with a $12 billion market value is big enough alone to make an acquisition like Sony Pictures ($35 billion) or Discovery ($14 billion). Also, CBS and Viacom have essentially been sidelined the last few years from individually making major acquisitions or being acquired by a company like Amazon or Verizon because of internal issues at National Amusements, which owns a controlling interest in both companies. (More on that later.)

* Advertising. CBS and Viacom are both advertising companies at their cores. A combined company would have a huge lineup of ad-supported TV, streaming, digital and social outlets including Viacom’s cable networks (MTV, BET, Nickelodeon), streaming outlets (PlutoTV) and events businesses (Clusterfest, VidCon), and CBS’s broadcast networks (CBS, one-half of The CW), cable networks (Showtime, Pop), streaming outlets (CBS All Access, CBSN), and dominant digital presence (CNET, GameSpot).

* Film distribution. Viacom’s Paramount Pictures — now the No. 6 studio with only 6 percent of the U.S. box office — needs to make big franchise movies with big marketing campaigns to keep pace with Disney (Marvel, Pixar, The Lion King and Star Wars) and Warner Bros. (DC Comics, Fantastic Beasts, Godzilla), which account for half the U.S. theatrical business and will use those films to grow their upcoming Disney+ and HBO Max streamers.

* TV distribution. CBS and Viacom are heavily dependent on the subscriber fees that satellite and cable carriers pay, and those carriers are losing subscribers. CBS is currently is a carriage dispute with AT&T that CBS says “could last a long time,” and Viacom had a contentious renewal with AT&T earlier this year. A combined CBS-Viacom would have more bargaining power with big carriers and a bigger market presence to grow streaming services like CBS’s Showtime and CBS All Access and Viacom’s PlutoTV and forthcoming BET+.

* TV production. CBS Television Studios produces shows for CBS (Elementary, NCIS), The CW (Dynasty, Nancy Drew), Showtime (Bryan Cranston’s Your Honor), nearly all of CBS All Access’s originals (Star Trek: Discovery, The Twilight Zone), and projects for outside outlets like Dead to Me for Netflix and the Gossip Girl revival for HBO Max. Viacom’s Paramount Television produces in-house projects including Sexy Beast and Paradise Lost for Paramount Network and projects for streamers like Jack Ryan for Amazon Prime Video and The Haunting of Hill House for Netflix. A combined CBS-Viacom would be able to make more and bigger originals.

CBS and Viacom’s intermingled history is long and complicated. They were part of a single company until 1971 when CBS spun Viacom off to comply with media ownership rules. CBS continued to be mainly a broadcast TV network, and Viacom evolved toward cable networks.

In 1987, Sumner Redstone’s National Amusements movie-theater chain bought Viacom, which by that time owned MTV, VH1 and Nickelodeon. Over the next decade, Viacom acquired Paramount Pictures and Blockbuster Video and grew from a $3 billion company to a $30 billion company.

The companies re-merged in 2000 and brought together Viacom’s cable networks, film studio, TV studio and movie-rental chain with CBS’s broadcast channel, local TV affiliates, radio network and outdoor advertising. Major problems — radio and outdoor advertising declined sharply, Blockbuster Video collapsed, and Paramount Pictures had lean years — and Redstone’s first of two divorces forced a restructuring of National Amusements into a complex series of family trusts.

In 2005, Viacom and CBS split again to free Viacom’s fast-growing cable networks from CBS’s slower-growing legacy media business. “It’s a mathematical certainty that cable’s going to slow down,” media analyst Michael Nathanson wrote at the time. “The notion of watching TV in a linear fashion is going to be turned on its head.” He was 100 percent right.

Even as CBS and Viacom watched their competitors scale up through mega-mergers over the last several years, Redstone’s combative management style, family drama and subsequent health issues, which are all well documented by Wall Street Journal reporter Keach Hagey in her 2018 book The King of Content, kept Viacom and CBS on the sidelines.

Today, Shari Redstone is effectively in charge of CBS and Viacom and has made clear to both companies and to Wall Street that she intends to re-merge them. Sumner Redstone, her father, is 96 years old and now largely sidelined. Former CBS chairman Les Moonves, who opposed merging the companies, was fired last year in a #MeToo scandal. Viacom CEO Bob Bakish will likely run CBS-Viacom after the merger.

The recent news around CBS has been less about the impending merger with Viacom than with its ongoing carriage dispute with AT&T. After CBS and AT&T were unable to renew their most recent carriage deal, CBS went dark on July 19 for 6.6 million of AT&T’s DirecTV, DirecTV Now and U-verse subscribers. AT&T and Viacom narrowly avoided a similar blackout by reaching a new carriage deal in March.

Carriers pay Viacom roughly $4 per month per subscriber and CBS roughly $2 per month per subscriber to have the companies’ channels on their lineups. For the last several years, broadcast and cable networks have been able to make up for cord-cutters by charging carriers more per subscriber.

With cord-cutting accelerating — by 3 million U.S. households last year, according to data compiled by Leichtman Research Group — and the average cable bill already at an obscene $107 a month, carriers have no stomach for fee increases. A combined CBS and Viacom will have more bargaining power with carriers and better scale for growing a combined portfolio of streaming products to offset the cord-cutters.

An upsides of CBS’s carriage dispute with AT&T is heightened awareness of CBS All Access, which includes live streams of CBS, CBSN, CBS Sports HQ and ET live, on-demand shows, and originals for $6 a month. CBS has reportedly seen a “dramatic spike in new subscribers” to CBS All Access since the 6.6 million AT&T subscribers went dark.

CBS said in March that its CBS All Access and Showtime streamers had reached 8 million combined subscribers — two years ahead of its initial projections — and CBS raised its target from 16 million to 25 million combined subscribers by 2022. CBS is adding more ambitious originals to All Access, including Star Trek: Picard and an adaptation of Steven King’s The Stand, and Viacom will give the service a bigger catalog and a steady supply of originals.

“CBS All Access probably won’t change that much after the merger but should get some great new content from Viacom,” said Dan Rayburn, a media analyst at Frost & Sullivan. “That will help the combined company cut down on content costs for the service by owning more of it instead of having to license it.”

Viacom, meanwhile, has a global footprint with its Paramount+ and Nick+ streamers in Europe and Latin America, which have originals and catalog shows plus international distribution for shows like The Handmaid’s Tale. Viacom also bought ad-supported streamer PlutoTV earlier this year and will launch BET+ this fall in the United States.

“Some companies are aggregating all the different demographics into one subscription product,” Rayburn said, “and others taking a more focused approach where you can target the marketing and the ad dollars to a specific demographic.” With a mix of subscription streaming, ad-supported streaming and content production, a combined CBS-Viacom will have eggs in all the major U.S. and global media baskets.

PlutoTV, which Viacom bought for $340 million in January, is available on most smart TV and smartphone platforms and has free, ad-supported movies and TV shows and live feeds for news channels like Cheddar and CBSN. The service has 16 million monthly active users as of May and has been adding about a million new users a month this year.

There are similar services — Roku Channel, Tubi, Crackle, Xumo, Amazon’s IMDb TV — but a Viacom-powered PlutoTV now has a content advantage. The service has Logo, Nick, MTV, BET, etc., channels programmed from Viacom’s catalog and even has channels devoted to 24/7 reruns of MTV’s The Hills and Nick’s Dora the Explorer.

“Viacom doesn’t think consumers will pay for all the SVOD services and that free, ad-supported services are the way to go,” said Andrew A. Rosen, a former Viacom exec who writes the PARQOR Newsletter about the streaming business. “When it comes to TV ad sales, Viacom has some of the best relationships in the marketplace and the best track record of delivering what advertisers need.”

A combined CBS-Viacom could turbo-charge PlutoTV with newer catalog shows and even originals. PlutoTV recently launched Bajillion Dollar Propertie$, an original scripted series starring Paul F. Tompkins that Paramount Television made for the now-defunct Seeso streaming service, and will premiere a fourth season on August 5 that never aired on Seeso.

The U.S. streaming market has big SVODs (Netflix, Hulu and Prime Video), premium channels (CBS All Access, Showtime, HBO Now, Starz), streaming bundles (YouTube TV, DirecTV Now, Sling TV), niche services (Philo, Acorn TV), and free streamers (The CW, Pluto TV, Tubi). Four new services — Disney+, Apple TV+, HBO Max and NBCUniversal’s as-yet-unnamed service — will launch within the next year.

Would a combined CBS-Viacom load up CBS All Access or Showtime with dozens of new originals and take on the big streamers?

“I certainly hope not,” media analyst Rich Greenfield said. “That content would be far more valuable sold to third parties than stuck on CBS All Access. Sell to Netflix. Sell to Amazon. Sell to Apple. Sell to Hulu. Being an arms dealer to Netflix makes more sense than trying to compete with Netflix.”

Netflix missed its second-quarter growth target by 2.3 million subscribers and actually lost 130,000 U.S. subscribers, and HBO said it lost an unspecified number of U.S. subscribers in the quarter. If there is a reckoning for streaming subscribers over the next several years, Greenfield said, established streamers like Netflix will still need new originals.

Whether a combined CBS-Viacom becomes an “arms dealer” to the streamers, an ad-supported streaming giant, a waystation to bigger acquisitions, or — most likely — all of the above, bigger is unquestionably better. “Trying to compete with Netflix,” Greenberg said, “makes no sense without scale.”

Scott Porch writes about the TV business for Decider and is a contributing writer for The Daily Beast. You can follow him on Twitter: @ScottPorch.