Viacom U.K. Networks Unit Set for Viewer Share, Revenue Records

ViacomCBS Networks International CEO Dave Lynn
Courtesy of ViacomCBS

ViacomCBS Networks International CEO Dave Lynn

Two years in, the acquisition of Channel 5 has "massively exceeded our expectations," says a key executive, with the business on track for an operating profit record and two back-to-back fiscal-year profits.

While Viacom has continued to face challenges in its U.S. networks and film business, and controlling shareholder National Amusements has suggested a possible recombination with CBS Corp., the company’s international channels business has been a rare bright spot.

"We do want to call out the fact that international was really strong," Wells Fargo analyst Marci Ryvicker wrote after Viacom's most recent quarterly earnings report. “This has not been the focus for the stock, but it's nice to see something going right."

Wunderlich Securities analyst Matthew Harrigan similarly called the international TV business "a distinct positive," with "strong positions in U.K. and India."

Viacom's U.K. channels unit has been an internal success story, and figures for the latest fiscal year show further improvement. Two years ago this September, Viacom closed the acquisition of U.K. broadcaster Channel 5 for $725 million, boosting the size of its British TV business as part of its strategy to increase scale in key international markets.

Since then, management has focused on shoring up ratings and turning around the mostly money-losing Channel 5 business. "The acquisition has really massively exceeded our expectations," David Lynn, president of Viacom International Media Networks, U.K., Northern and Eastern Europe, tells THR just before the end of the company's fiscal year on Friday. "Channel 5 is performing very strongly with record ratings, and the Viacom U.K. pay channels are also having a super-strong year with record ratings."

For Viacom’s fiscal year ending on Friday, the company, as of the start of the week, was on track to record its best-ever U.K. share of viewing for its target audience of people aged 16-34 at 11.7 percent, or an average of 168,000 viewers every minute of the day. The Channel 5 group, which as of the latest fiscal year also includes Spike U.K., was on track to reach a demo share of 6.6 percent, compared with its previous record of 6.2 percent, and Viacom’s U.K. pay TV networks, which include MTV, Comedy Central and Nickelodeon, were on track to slightly exceed its previous record of 5.1 percent.

Viacom's combined total share of TV viewing in the U.K., for people aged 4 and older, was also on track for its best-ever result with 8.3 percent, or 724,000, according to data from British ratings organization BARB. The individual figures for the Channel 5 group (6.1 percent) and the Viacom pay channels (2.2 percent) didn't set annual records in this metric.

Lynn also lauds the performance of Viacom's four kids channels in Britain, saying their combined audience in the core demo of 4-15-year-olds exceeded that for Disney's three U.K. kids networks for the fiscal year for the first time in 10 years. "Nick Jr. has been a star performer, but we're seeing strength across the whole Nickelodeon portfolio,"  Lynn says. He cites such hit shows as Paw Patrol as key contributors.

“It’s been a challenging year with the Olympics, Paralympics, Euro Cup [soccer] and so forth," meaning the performance has come amid not-so-easy circumstances, says Enders Analysis analyst Toby Syfret. “Channel 5 is getting along quite nicely. The main Channel 5 is having its profile now younger-oriented than even Channel 4.”

Channel 5 and Viacom's overall U.K. networks revenue are also both set for company records for the fiscal year ending Friday after Channel 5 in the previous year reached £322.7 million, or $418.5 million under current exchange rates. Channel 5 is also expected to post its second full fiscal-year operating profit in a row, the company’s first-ever back-to-back profits, after last year reporting an operating profit of £21.0 million, or $27.2 million currently, reversing a loss for the year before. Observers expect the operating profit to set a new company record.

Viacom executives say additional original content investments at Channel 5, a refocusing on a younger demo and cross-promotion of networks and their shows have all helped drive the performance. "Our key strategy has been to invest in content," Lynn says. "There has been a real creative transformation," led by Channel 5 director of programs Ben Frow who arrived in early 2013. "That's something we really accelerated."

One insider speaks of "a nearly complete makeover" since Frow joined, before the Viacom deal was struck. While Channel 5 has kept such anchor shows as reality favorite Big Brother and business revamp doc series The Hotel Inspector and continues to fulfill its news and other public broadcasting requirements, the network now only airs seven shows that it had on air before Frow joined. And programming spending at the Channel 5 group, programming spending was up 10 percent this fiscal year.

When Viacom announced the acquisition, British industry watchers feared Channel 5 would end up being Americanized. In contrast, one key change has been an ongoing shift away from third-party content, such as U.S. series like NCIS and films, to more local originals, mostly reality, documentary and factual entertainment and general entertainment fare. In calendar year 2013, about 50 percent of Channel 5's schedule consisted of originals. This calendar year, that number is expected to reach about 65 percent.

“It is going more for factual programs, not committing to the massive risks that the bigger ones, like ITV, are doing" in drama and the like, Syfret says. Lynn also cites such factual Channel 5 hits as Baby-Faced Brides. But he says the success goes beyond that. “We’ve gone bigger on sport and have added in natural history titles,” Lynn explains. “We brought entertainment and comedy back." As cases in point, he mentions Lip Sync Battle UK and a British version of Impractical Jokers.

Company executives have said that Channel 5 can spend money on originals and make additional revenue by airing them on other networks in the group, such as 5* and Spike, and also exporting them to other international markets, such as Scandinavia.

Channel 5 and MTV and other Viacom networks have also developed a closer working relationship and shared content. For example, reality show 10,000 BC aired on Channel 5 and then got repeated on MTV.

All that has helped boost ratings and reposition Channel 5 from its traditional focus on an older, less sophisticated to a younger, more up-market audience under the new slogan “spirited TV with an emotional heart.” The hope is to continue making audiences’s view more positive — Channel 5 used to be known for airing soccer films and soft porn in the past, says one insider, but Lynn said it has started to be perceived as more popular with a sense of irreverence. "The rebrand is really helping to change perceptions among the audiences," he said.

Importantly, the company has been able to leverage the audience trends into higher advertising revenue. Lynn credits the revamp of Channel 5's advertising sales organization last year as a key driver. Channel 5 used to have its own ad sales team, but Viacom handed its accounts to Sky Media in May 2015 in addition to the other Viacom networks that the unit of pay TV giant Sky has been handling. The move led to job cuts, which meant savings. But the company says it also changed the game.

Observers say that as a smaller player, Channel 5 used to always be at the back of the line in talks with marketers. But via its Sky Media deal, Viacom has been able to leverage the broader channel portfolio and translate ratings gain into ad gains even though U.K. ad market momentum has this year been held back by the Brexit vote as marketers were cautious in the run-up to it and have been reported to continue holding back somewhat.

FBR analyst Barton Crockett in a recent report said the U.K. was the biggest part of international for the company, but expressed some caution about the near future. "We would expect international to be tempered given the scale of Channel 5 in the U.K. and ad spend trends post-Brexit," he wrote.

"Nobody really knows yet what Brexit is going to mean in terms of the ad market," Lynn says, acknowledging that forecasts and expectations have softened. "My view is that I want to stay the course, continue investing in the channel, continue to grow share. But clearly, we're going to face a softer ad market than we had last year."

And he believes there is more upside for Channel 5 and the broader Viacom U.K. channels business. "I'm still incredibly ambitious for Channel 5," Lynn says. "Our ambitions and aims are to keep on investing in the channel. I have every expectation, we are going from strength to strength. We're going to have more content sharing, we're going to have more investment in content, and that's going to continue to drive ratings and revenue."