Viacom Case Analysis

Strategic Group and Mission Statement:

In 1995 one of the strategic groups Viacom competed in was cable TV content providers with its main competitors including News Corp and Time Warner. The purpose of Viacom is to provide benefit to society through media content. The beliefs Viacom holds to realize its mission are growth, performance, and competition and the values upheld are communication, technology, knowledge, intelligence and the decentralized organization.

General External Environment:

The economic segment of the general external environment reveals that in 1995 the cost of capital is low while the availability of capital is high.

In the sociocultural segment under national preferences the success of cable TV in the U.S. in the eighties assured content providers of the viability of their product. In 1995, this success coupled with a technology boom in cable TV not only increased demand for media content internationally, but also directed the consumer demand for many (hundreds) cable channels with content on each channel 24 hours a day.

An analysis of the political legal segment reveals that in 1984 the cable industry was deregulated which allowed for increased content production and distribution. At the time of the case, firms were just learning how to take advantage of deregulation so as to better vertically integrate.

In the technological segment, basic research on how to distribute content through cable and satellites was being conducted by University electrical engineering departments. Product development being done outside the strategic group but of interest to competitors in the group was new digital technologies with which to vastly expand the number of channels offered. This technology was being used by the telephone industry in particular. Process development in terms of new methods to forward integration and thus how to distribute media through appropriate channels and contracts was perfected by television stations.

The global segment in not applicable to Viacom in this moment because although the strategic group is looking to expand operations in many countries, the group is not initiating business in any country where they are not currently operating.

The market segment includes an analysis of cable content as an organizational product because content goes from the individual content providers to local cable providers not directly to consumers. Cable content providers are classified as resellers of shopping goods because they do not make an industrial product and the product is bought in comparison to similar products being offered. The number of buyers consists of the thousands of local cable suppliers who are located in population centers. The nature of the demand is derived because increased desire for more cable channels derives the demand for more content. Producers do not adjust production schedules due to short term variation in the market because there is never a lack of demand.

The buying influences for cable content are composed of the users who can be defined as the cable providers because they make contracts with the content providers as well as determine content specifications. Influencers are those workers for the cable providers who increase the bandwidth and thus demand more content. Deciders, Approvers and Buyers are all the cable providers. There are not any gatekeepers because content salespersons are in close contact with buyers. Content is purchased from content providers as a modified re-buy in that the product changes in quantity and each platform will have different content in the same genres.

Porter's Five Forces:

Threats of New Entrants

The threat of new entrants for this strategic group is fairly low because there are a significant number of barriers to entry. A new entrant to the strategic group would need to overcome several obstacles before even being able to compete with Viacom, News Corp, or Time Warner. First, members of the strategic group have high economies of scale. Each of the three companies in the strategic group is vertically integrated. To become vertically integrated, a company trying to enter the strategic group would need to acquire several companies in different areas of the entertainment industry. These acquisitions would be highly capital intensive and very risky for a new entrant.

Another barrier to entry is the product differentiation in the strategic group. Each company in the strategic group has certain channels that are considered premium channels. Cable providers are willing to pay more for these channels, which they end up having to charge the end consumer more for. These premium channels differentiate content providers from one another.

The content providing business is a highly capital intensive business. Therefore, the capital required to enter the strategic group and compete is extremely high. To calculate the capital required for a new entrant, we first found the average revenue of the strategic group (~$7.5 billion). We then assumed that a new entrant would have to capture about a third of this average to even make an impact in the industry. Taking this assumption into account, we figured that the new entrant would need about $2.5 billion in its first year of operation. Using this revenue, we then calculated the first year expenses the new entrant would incur.

* Expenses based upon 3 months (3/12):

 Total Expenses (90% of Revenue): $562.5 million

* Beginning Assets (based off Viacom/3):

 Movie and TV inventory: $329 million

 Property and Equipment: $1.033 billion

* Unexpected Expenses: $500 million

* Very Aggressive Estimate of: $2.4 Billion

This estimate for the capital requirements is a very aggressive estimate. It does not include any estimated merger and acquisition costs. These costs of acquiring all the businesses to vertically integrate would be very high and hard to value. Even though it is a very low estimate, $2.4 billion is a lot of capital and would be hard for a new entrant to attain.

A new entrant to the strategic group would not lack access to channels of content distribution. With the increasing amount of channels being offered to consumers, cable providers are looking for any content they can get their hands on. Therefore, a new entrant would not lack access to a distribution channel (cable provider). There are no switching costs