Viacom shares traded higher on Wednesday after the media giant reported better-than-expected earnings, on lower costs. But one problem plaguing the company is a drop in ratings thanks, in part, to DVR viewing.
Revenue fell 17 percent to $3.36 billion, a bit lighter than expected on a drop at the film business, but thanks to lower costs, earnings excluding certain items came in at $1.21 per share, beating expectations by four cents. (Read More: Movie Studios: Have They Gone the Way of Dinosaurs?)
The media giant's strong suit is affiliate fees at its media-networks division—domestic affiliate revenue grew 12 percent thanks to new digital deals and rate increases. But advertising continues to be a problem, on weak ratings and a soft ad market.
Ad revenues fell 6 percent domestically and 7 percent internationally in the quarter. Ratings are a big part of the problem: at Nickelodeon they dropped 25 percent.
That's better than the 29 percent drop in the prior quarter, thanks to easier comparisons and momentum from the new "Teenage Mutant Ninja Turtles" hit. Now Barclays' Anthony DiClemente said he expects another quarter of sequential improvement.
But Viacom's ratings decline is also about the rise of DVR viewing—a growing issue that's plagued all the media giants this quarter.
"Time-shifted viewing is growing more prevalent," CEO Philippe Dauman said in the earnings conference call. "Audience is nearly double when including plus three," which means viewing for the three days after a program first airs.
But accurate measurement of later viewing—and compensation for that viewing is a growing problem—Dauman called the "lack of comprehensive measurement" a "roadblock."
RBC Analyst David Bank wrote in a note ahead of Viacom's report that the move to measure seven additional days of DVR-ed viewership, rather than just three is "less of a pipe dream than one might think." (Read More: A DVR Ad-Eraser Causes Tremors at TV Upfronts.)
He estimated that including those extra four days would offer a 5 percent lift to ratings. Obviously ad sellers want this new measurement plan, but Bank said buyers do too, on the condition of modest price discounts Bank projects will set back dollar volumes the first year.
The hope for "C 7" is the expectation that viewing in those additional four days will grow more quickly than viewing in the first three days declines.
Viacom's Dauman made a big deal of the push the company is making to tackle this DVR issue.
In addition to getting paid for that DVRed viewing, Viacom is trying to create more content that must be watched in real-time. It's investing in "event programming" for Nickelodeon and MTV, calling the likes of holiday specials "a critical and consistent ratings driver."
But the DVR is just one piece of the larger shift to digital distribution and growing viewership on every screen but the TV. (Read More: Predictions—The Future of TV.)
Dauman said the company is trying to position itself for 'a convergent multi-platform world where viewership is accounted for on all screens." He noted the company's additional revenue from new digital distribution deals—with Hulu Plus, an Epix deal with Amazon, and a download-to-own deal with Barnes & Noble's Nook.
The big questions facing Viacom and its rivals: How soon will the "plus seven" metric be adopted and what kind of a price cut will the ad sellers have to take? And how will movie studios, who want trailers to run ahead of the weekend, adjust or pull back?
And then there is the multi-billion dollar question: Can additional revenue from digital distribution and this DVRed viewing compensate for the declines we're seeing in traditional revenue streams? We're seeing that the digital shift isn't entirely incremental—it's somewhat cannibalizing the core. We'll see how the media giants roll out their changes to tackle this problem in the next few quarters.
As to Viacom's future, Chairman Sumner Redstone dropped some heavy hints that Philippe Dauman is his chosen successor, calling Dauman his "most trusted advisor."
Redstone, who has a pattern of extreme praise for Dauman and CBS CEO Les Moonves, called Dauman his "forever friend … a genius and the wisest man I ever met."
—By CNBC's Julia Boorstin
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