Philippe Dauman

October 2008

With its MTV Networks division constantly churning out programming that appeals to children, teens and young adults, and the Hollywood studio Paramount Pictures making movies for all age groups, Viacom is a content powerhouse whose product stretches across all screens and devices in an effort to reach viewers everywhere.

But in today’s cluttered, multiplatform media landscape, success goes beyond creating popular programming; the key is to create brands that stand out and resonate with consumers. Building brands is Viacom’s mission, and president and CEO Philippe Dauman is intent on moving those brands into the digital world—from Dora the Explorer, SpongeBob SquarePants and iCarly for kids to The Hills, Real World and South Park for young adults.

At Viacom, brands don’t come only in the form of programs; the many channels themselves are household names for millions of viewers worldwide. Nickelodeon in the U.S. finished the second quarter of this year as the top-rated cable network among total viewers and among kids 2 to 11 for the 53rd consecutive quarter. Internationally it maintained its status as the number one commercial kids’ network in the U.K., and launched in new territories, including Poland and the Middle East. MTV ended the second quarter as the top-rated 24-hour, ad-supported cable network among 12- to 34-year-olds in the U.S. And both Nick and MTV posted large ratings increases in India. BET remained the most popular cable network among blacks 18 to 34 in the U.S. for the 34th consecutive quarter and is expanding globally. And Viacom is working on building its second tier of channels, including the male-targeted Spike, the kids’ service NOGGIN and the teen-targeted The N.

This year, for the second year in a row, Paramount broke the $1 billion mark in both international and domestic box-office sales before any other studio. Its successes so far this year have included Iron Man, Indiana Jones and the Kingdom of the Crystal Skull, Tropic Thunder and DreamWorks Animation’s Kung Fu Panda. Still to come are Madagascar: Escape 2 Africa and The Curious Case of Benjamin Button, with Brad Pitt and Cate Blanchett.

Among the many hits in the Viacom stable, Rock Band is poised to become one of the biggest. The music-based video game allows players to perform in virtual bands. Released in November 2007, Rock Band has had more than 18 million song downloads. Rock Band 2 launched for the PlayStation 2, PlayStation 3 and Nintendo Wii systems this fall, to the delight of the game’s countless fans.

With all these brands driving the business, Viacom’s revenues grew 18 percent in 2007 to reach $13.4 billion, but its stock price has not increased the way management had hoped when it split from CBS in 2006. Viacom, with its numerous cable-related assets, was regarded as the fast-growth half of the combined entity. Separating it from the old-media assets such as broadcast network, radio and outdoor would accelerate its growth and increase its value. This prediction has not yet materialized, as Viacom’s stock price has decreased since the breakup with CBS.

Despite Wall Street’s current valuation of his company, Dauman remains resolutely convinced that the power of Viacom’s brands, with their numerous extensions across a multitude of platforms, will ensure the company’s financial viability for many years to come. He spoke to World Screen in his offices overlooking Times Square in Viacom’s New York headquarters.

WS: When you move your content to the online world, what business models are emerging? Is it subscription or is it ad supported?

DAUMAN: It’s all of the above and more. Right now, advertising is the primary form of monetization, and that includes banner ads and a growing number of video ads. Our sites also get some search-related revenue through deals we have with Yahoo! and Microsoft. Subscription fees are an emerging source of revenue, which we believe will grow at an accelerated rate. This is particularly true for some of the Nick properties, including the virtual worlds as well as online casual games. In addition, we have a huge hit console game called Rock Band, which already boasts a fast-growing song-download business and will soon have new online applications.

Then there is merchandising revenue—real merchandise we sell through partners and virtual merchandise we sell in virtual worlds. Consumers can buy virtual clothes, virtual accessories, virtual beverages and more.

So the first job is to establish your presence and build your brand. Then you can add different revenue-generating layers, evolving to satisfy the interests of your consumers. People who are passionate about a brand will pay more for premium content.

WS: The U.S. economy is not doing well, and advertising tends to be negatively affected in a downturn. Is Viacom sufficiently diversified?

DAUMAN: We have a strong advertising business and one that will continue to grow, but it clearly has been impacted by the economy. But the economy is cyclical, and we’ve gone through good times and not-so-good times before. In general, national cable advertising performs better than local TV and radio stations. Importantly, well over half of our revenues are generated from sources other than advertising. Our affiliate revenues from distribution partners have been growing steadily at double-digit rates. As I already mentioned, we are extending the Nickelodeon brand into several recreation ventures, including hotels, cruises and theme parks. We have a growing consumer-products business based on our valuable brands.

The music video game Rock Band is a megahit, generating significant new revenue even though the brand is still in its infancy. We are in the process of rolling it out globally and [we launched] a new generation of the game this fall. Additional Rock Band revenues come from accessories and song downloads—this is a major, major franchise. It’s a relatively new line of business for us, and we are pleased we are coming out of the gate with one of the biggest hits of all time.

Furthermore, as Paramount has rebuilt its development slate, the studio is delivering an increasingly solid performance. Over time, we will continue to exploit all of our brands in new ways, expanding into new lines of business to create an even stronger foundation for long-term growth.

WS: You are also doing particularly well internationally.

DAUMAN: This is clearly going to be a fast-growing part of our business for many, many years to come. In our Media Networks division, we completed a significant amount of building and restructuring over the last 18 months or so. We’ve established a great platform and launched several new international hits like the Nickelodeon show iCarly. And we’ve been entering new territories. We launched MTV Arabia last year and Nick Arabia this past summer—clearly that’s an important and growing market to be in. We also launched Nickelodeon in Poland and in Denmark. Nickelodeon’s ratings are strong, particularly in the U.K., Germany and India, which is good for the channels themselves and also drives other revenue streams, such as consumer products. As more consumers in those countries discover SpongeBob SquarePants on television, the more SpongeBob dolls we sell! Our online properties are also very strong internationally and we are just starting to monetize those.

On the studio side, we have established our own distribution system. We were previously part of a joint venture with Universal, but with our own distribution arm, we’ve enhanced our revenue-generating capability for the studio business and now have the ability to distribute local product as well. Earlier this year, we formed the Paramount Worldwide Acquisitions Group to centralize acquisition activities for all of Paramount’s international territories. So the global market is a strong factor in the studio business, as well.

There is tremendous opportunity in our global markets and the rate of growth will be significant. Over the long term, the international part of Viacom’s story will become increasingly important.

WS: Of the total pie, what percentage of your revenues comes from international? And where would you like to see that percentage in the future?

DAUMAN: Right now, international contributes about 27 percent of our total revenues and the film business is a substantial part of the total. Our domestic business will continue to grow, but the rate of growth internationally will be stronger, so you will see that percentage rise over time. I don’t have a specific target. We need to exploit the opportunities that exist around the world, especially in emerging markets. Increasingly, consumers around the world have more disposable income and more time to spend on entertainment—we want them to spend time with our entertainment content.

For example, India is such a great market. When you look at the Indian economy, which has been growing at about 8 percent, the entertainment industry within the country has been growing at about 18 percent annually. Those countries that have an emerging middle class are enjoying much higher growth in the entertainment segment. Traditionally, families in India have one television set for the whole family, which makes it difficult for children to watch the shows they want to see. But as they add the second or third television set, then different members of the family can watch different shows at the same time, and that dynamic creates a dramatically higher growth rate for the entertainment business than the general economy—which is why it’s such a good business to be in.

Last year we entered into a joint venture with TV18 in India, where we have several cable networks that all are doing well and growing, including MTV, Nickelodeon and VH1. In July, we launched a major new general-entertainment channel in the Hindi language called Colors. Its ratings are spectacularly higher than we anticipated, and it is already the number three general-entertainment channel in India. It’s very early, but we are thrilled with its performance.

WS: When we first interviewed Sumner Redstone it was about ten years ago. He was very keen on China. Nowadays, don’t you think that because of its legal structure, India is a better place to do business, or are you still keen on China?

DAUMAN: Over this ten-year period that you describe, we have maintained a presence in China. Clearly, it is an important market for the future. For the media business, though, it has not been a very profitable market. We need to see improvement in the legal structure there, including enforcement of copyright, which we anticipate should improve over time. As the country sees more indigenous business development, they will want this protection. But we also need greater access. The entire U.S. film industry is limited in the number of motion pictures that can be viewed in China. There are only 25 Western movies that can be exhibited in China on an annual basis for all studios. So you don’t have access and you can’t choose which films go in; the government decides which ones are allowed. And as we all know, there are piracy problems. We hope that as China continues to build its economy, it will open itself up to the economic development and consumer demand that exists there. We do have a presence there and we look forward to growing that presence. But in terms of allocating our scarce resources today, India is a more fruitful market that is more receptive to investment and development in the media industry.

WS: The Hollywood studios are doing very well right now. This is a record season at the box office, their TV shows are selling tremendously well abroad, and yet Wall Street is not that warm to media companies. Why is that?

DAUMAN: The markets are somewhat susceptible to short-term thinking and to fashion, if you will. Certainly, the “traditional media sector”—which in my view is a misnomer—has been in some disfavor for the past couple of years. What I think the market is missing is the fact that our company and several other companies are home to strong, enduring franchises that have been around a long time and will continue to be around. In fact, we’re introducing these franchises to new generations. We are adapting our content far better to new forms of technology and distribution. And regardless of what form distribution takes in the future, audiences will still crave great content, and no one creates better branded content than Viacom!

People assume that the major players can’t change or won’t adapt as the industry evolves. They say that the end of the world as we know it is coming and it’s just not the case. You still have theater companies around 70 years after television became widespread; TV was supposed to be the death of theaters.

Look, there still is some transition taking place as we expand into new forms of media, but at the end of the day, if you have compelling content and strong brands, you will thrive. The most important thing is to start with that. At Viacom, we’re growing our businesses. We are generating strong cash flow. You cannot get caught up in the short-term market thinking. Over time, the math works itself out and the market eventually recognizes real value.

WS: Do you think Wall Street maybe fears that what happened to the record industry is going to happen to the rest of the media industry?

DAUMAN: First of all, while the media industry has been through some turbulent times recently on the stock market, that’s true of a lot of other industries as well. Right now, there is a phenomenon in the market where there are a lot of other forces at work, including liquidity issues. I am totally confident that at the end of the day, value wins out. We are creating tremendous long-term value by continuing to build our brands, grow our existing businesses and expand into new areas, and we will be just fine.

WS: I remember reading that the reason for the Viacom-CBS split was because your division was the growth company and your stock would grow faster. It has not. I think it’s down 20 percent since 2006. What happened?

DAUMAN: Looking at short-term market considerations is not very relevant, particularly in an overall market that’s declined during that period. In terms of how we live today, Viacom is a pure-play entertainment company. Our mission is very clear, short term, medium term and long term—it is to take our brands and our content and nurture them and grow them. Not just the established brands like MTV and Nickelodeon, but all of these new, up-and-coming brands. We have Spike TV, which is a male-oriented brand and very successful. We’re growing Comedy Central domestically and we’re expanding it internationally with a lot of hit shows. CMT, a country-music-based network, is a growing franchise. BET, which we just started rolling out internationally with a launch in the U.K. and we’re moving to South Africa next. Rock Band, which I’ve mentioned several times, is just beginning to take off and we intend to broaden its influence into more genres and capitalize on the marketing opportunities it presents. Paramount is continuing to build new franchise properties and leverage its valuable library of content in new ways and across multiple platforms.

So we have all these great brands that we are growing. We are very focused strategically and we are financially strong. If you look at building long-term value, which is what we are about, we are in a great position.

WS: But would you be less focused if you were still merged with CBS?

DAUMAN: Personally I am always focused on whatever I’m doing!

WS: To be honest with you, I still don’t understand the split.

DAUMAN: Well, that is historical; I live in the here and now and in the future. Any company has a lot of history behind it, and most organizations are the culmination of transactions of one kind or another. I can go back to what happened 22 years ago, when Sumner bought Viacom and we sold this asset and that asset. A lot of things have happened along the way. We bought Paramount; that was great. We have bought and sold other assets as well. Historians should look at the split after there has been a fair amount of time for each company’s strategies to play out.

The company we’re running now is one that I’m delighted with. I don’t have to deal with any legacy issues. I came in here to run a pure-play content company with great brands and with the opportunity to grow in new areas like online, mobile and games. We will continue to create the stories, the programming, the events and the entertainment that resonate with our audiences and become an integral part of their lives. And along the way, we will create enormous value for our shareholders.

WS: As a leading content company, why is it so important to think multiplatform?

DAUMAN: As an entertainment company and as a content provider, you have to reach consumers where they are, particularly with the young demos we target. We’ve always done that. So if they’re in the movie theaters, you want to reach them there. If they’re watching television, you want to reach them there. Today, we can also reach them on their computers, on their mobile devices and when they are playing games. As the leading pure-play content owner in the world with a lot of great global brands, we entertain our consumers on whatever devices they are using. And many of these new or emerging platforms allow consumers to interact with our content, creating a richer experience.

WS: Would you give some examples of how that reasoning has been extended across many platforms?

DAUMAN: I’ll start with iCarly, which is a big hit on Nickelodeon. Miranda Cosgrove is a great up-and-coming star. The premise of the show is multiplatform because it’s about a girl and her friend who have an online site of their own. Her fans actually upload content onto the iCarly site and we show some of it on air, so it’s a great form of engagement as well. We are extending the iCarly franchise to music; Miranda has performed several songs. We have a vibrant and growing online site. We are distributing iCarly content on mobile phones. We are rolling out consumer products. iCarly is not just a domestic sensation, it’s a big hit in the U.K. and several other territories, so it also extends our global reach.

Then you go to MTV, where we have The Hills, which is a monster hit for us with passionate fans who spend a lot of time on the Hills website. We have a Hills virtual world where fans can create avatars and engage with cast members. The Hills also has a strong presence in the mobile world, where we’ve delivered nearly a million mobile video streams across all carriers.

SpongeBob SquarePants is another mega worldwide hit. This past spring, we aired a SpongeBob movie that attracted more than 6 million viewers, which is extraordinary for a cable channel. We sell DVDs of the SpongeBob series. There are revenues from downloads as well as online and mobile. We have branded casual games online, and we’ve even had a SpongeBob theatrical movie. Of course, SpongeBob merchandise is also a huge business around the world. And when you go on our virtual world site for kids, Nicktropolis.com, SpongeBob and his friends are prominent characters.

When you have great brands that attract passionate, loyal fans, there are so many different ways to reach and connect with them. We’ve now begun extending some of these great brands into recreation opportunities. For example, we are developing Nickelodeon-branded hotels, which will feature all of our great Nick characters. We had the first Nickelodeon cruise set sail in August—it was sold out. And you can bet there was a SpongeBob character walking around on the ship. Next year, we’ll have two Nick cruises. So we not only have great content, but we have built compelling brands that really live in people’s lives.

WS: Beyond your channels and your websites, you’ve also made some agreements with partners to disseminate your content.

DAUMAN: We are in the business of distributing our content everywhere our audiences go. We have smart distribution deals with Microsoft, Yahoo!, AOL, iTunes, Bebo as well as more than 80 mobile carriers globally. We make our content available across the digital landscape so people can view it and then click back to our own sites—we now have more than 340 separate sites at Viacom, and that portfolio keeps growing. But we also let our fans take content via embeddable players, RSS feeds and widgets to share with their friends. We are rolling out a social-networking platform called Flux…[that] will allow people to easily move across our properties as well as to external sites that are a part of the Flux network, using our content and taking it with them as they travel across the web. It’s all about providing them with a more engaging experience as they interact with our content. There are lots of other ways for audiences to consume the entertainment we create, from download-to-own and download-to-rent movies to a single episode or “season pass” television programming. Our mission is to take this great content we have created and find more ways to monetize it.