Viacom's (NASDAQ: VIA) (NASDAQ: VIAB) Transformers: The Last Knight came up short at the North American box office, bringing in just $69 million across its five-day debut period in American theaters -- good enough to nab the top spot, but also well below the $100 million weekend debut of its 2014 prequel, Transformers: Age of Extinction and the $109 million that Transformers: Revenge of the Fallen posted with its first weekend in 2009.
That's worrying for Viacom considering that Transformers is its most important box office commodity and even more concerning in light of the challenges facing its television networks.
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How bad was Last Knight's debut?
While Last Knight can be counted as a significant disappointment in the American market, and will likely post the series' lowest unadjusted domestic gross by roughly $75 million, the picture is faring better overseas thanks to strong sales in China -- with a $196 million international opening that's closely in line with the $200 million international opening that Age of Extinction posted in 2014.
The fifth entry in the Transformers series did manage to post a $123 million opening in China, beating Age of Extinction's $92 million debut in the country, but it looks like the property is now on the decline in most other territories. The Last Knight's $12.9 million South Korean five-day debut was down from the $22.4 million for Extinction, while its $5.4 million opening in the U.K. was down from the $20 million for the series' 2014 entry. Even with strong sales in China, the picture is at risk of becoming the lowest-grossing Transformers film -- below the roughly $710 million in unadjusted ticket sales that the franchise's first entry posted in 2007.
Somewhere in the neighborhood of $700 million in ticket sales might not sound bad, but given the franchise's significance and Viacom's recent history of costly box office flops that have included Ben Hur, Ghost in the Shell, Monster Trucks, and Teenage Mutant Ninja Turtles: Out of the Shadows, it could be a significant setback. The next Transformers film is slated to release in June 2018, and will be a spinoff film centering around the franchise's Bumblebee character that Viacom is hoping will spawn its own successful series. Following that, a mainline sequel is expected to bow in summer 2019.
Viacom and the TV transformation
Like other companies with significant television network businesses, Viacom is facing pressure as the cord-cutting trend continues to reduce the number of cable subscribers and threaten carriage and affiliate fees. This trend is even more worrying for Viacom because roughly 73% of its sales in the last quarter came from its media networks, and core channels including MTV and Comedy Central are facing significant ratings declines.
Comedy Central has lost many of its biggest shows and stars and MTV continues to be a network that seems to be struggling to find an identity. Declining ratings means lower ad sales, and the possibility also exists that cable providers will either move to drop the networks or demand that the company lower its prices.
This has already played out on Sony's PlayStation Vue online streaming service, which dropped Viacom networks in November 2016. If skinny bundles continue to gain share, it could pose problems for even the company's core channels, to say nothing of offerings like MTV2 and Spike (soon to be rebranded as Paramount Network). Similarly, Charter Communications recently made five of Viacom's channels exclusive to its premium cable package for new subscribers, which will likely limit their reach and lead to lower affiliate fees for the company.
Can movies play a bigger role?
With the television landscape looking increasingly unfavorable, Viacom is hoping that its Paramount film wing can play a bigger part in overall performance. The challenge here is that the company doesn't have a cache of properties that put it in good position to succeed in the highly competitive movie market. Transformers has been the standout, and its upcoming spinoff series seem like good moves, but the recent stumble for The Last Knight looks to put another kink in its film strategy.
Its plan to bring more Nickelodeon properties to the big screen could pay off in a big way, as the company's lineup of 1990s cartoons still has some clout and nostalgia is big at the box office. Film success for Nick franchises also has the potential to benefit the TV network. So, Viacom's film business isn't entirely dependent on Transformers, but there also aren't any properties in its stable that give the clear appearance of being on the upswing.
Trading at roughly 11 times forward earnings and packing a 2.3% dividend yield, Viacom might have some appeal for value investors who are looking to add exposure to the media industry, but it's clear that the company's film and television businesses both have big challenges ahead.
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