As Viacom's (VIA) Paramount Looks For Partner It May Be Bought Out

The DVD business is bad. Video-on-demand, available on most cable systems, and internet streaming of premium content have cut into one of the largest profit centers in Hollywood.

Viacom’s (VIA) Paramount studio operation is looking for a partner for its home entertainment unit, which produces and sells DVDs, in the hope of cutting costs. The most logical marriage of that business would be to another studio which faces that same problem with eroding margins.

According to the FT, Viacom “is in advanced talks with Sony Pictures and News Corporation’s Fox studio, signaling that Hollywood could soon see a wave of consolidation.” The conversations are not likely to end with the subject of back office savings given the state of the global premium entertainment industry.

Profits at large media companies including Viacom (VIA), News Corp (NWS), CBS (CBS), and the entertainment and news operations at GE (GE) are getting worse almost every year. Content offerings that the firms used to be able to make a profit on from advertising and subscriptions are faltering. Print and broadcast marketing revenues are being hurt by online availability of content and the recession. Movie budgets are up. Theater sales are still strong, but DVD sales are not. Shows that used to support CBS, ABC, and NBC are now shown on internet services like Hulu where the income from advertising is less than it was from traditional broadcast sales.

Sony’s (SNE) core electronics business is in deep trouble. It has not had a hit like the Apple (AAPL) iPhone or iPod in years. Its digital cameras and flat screen TVs are commodities. Its studio has no relationship to the rest of the company. It needs to sell it off or merge it with the film business of one of its peers. Viacom’s earnings have been weakened by the economy. Its shares are down 40% over the last two years. The controlling shareholder of the company, Sumner Redstone, is anxious to keep his fortune. His other large investment, in CBS (CBS), is down 80% over that last 24 months. He has plenty of incentives to dump his studio or consolidate it with a competitor to improve margins or raise cash.

Studios will go beyond combining DVD operations.  It can’t afford not to.

Douglas A. McIntyre