U.S. Markets closed

CBS and Viacom: It's Not Enough to Compete With Disney or Netflix

Daniel B. Kline, The Motley Fool

CBS (NYSE: CBS) and Viacom (NASDAQ: VIA) (NASDAQ: VIAB) have agreed in principle to merge. Viacom shareholders will receive 0.59625 CBS shares for each share they own, according to Bloomberg . Viacom CEO Bob Bakish will run the new company, which will be called ViacomCBS.

This deal reunites the two companies that were split apart in 2005. It marries the CBS broadcast network and other assets to Viacom's family of cable channels, which includes Comedy Central, Nickelodeon, MTV, Paramount Network, and many other associated channels.

The merger gives the combined company a stronger content lineup to offer a digital service that competes with Netflix (NASDAQ: NFLX) and Walt Disney 's (NYSE: DIS) upcoming streaming bundle. It's a good start, but the combined list of assets the company now owns still makes it a second-rate competitor at best.

A man and a woman look at a tablet.

It's a start

One of the chief benefits of this deal is that it will allow CBS to enhance its All Access digital service. That streaming offering has been a sort of also-ran in the market because -- while it offers originals like Star Trek: Discovery , The Good Fight , and a rebooted Twilight Zone -- it lacks the quantity of content needed to compete with Netflix, HBO, Hulu, or the soon-to-launch Disney+.

The merger will help that, as shows from Comedy Central, MTV, and Nickelodeon can eventually become part of the CBS All Access platform. That will give the service much stronger archives. Programs like The Daily Show and some of the MTV offerings enhance its appeal to younger people, while Nickelodeon should help bring in kids.

CBS and Viacom both have some name-brand properties that have attracted a large audience in the past. The problem is that it's very hard to argue that a lineup led by Star Trek , Mission: Impossible, SpongeBob SquarePants, and The Transformers can compete with Disney's intellectual property featuring Marvel, Pixar, Star Wars , and its own animated/classic characters.

This merger makes the poorly named ViacomCBS stronger, but it's still weaker than Disney and Netflix, with the latter having a major incumbency advantage. With Disney bundling Hulu, ESPN+, and Disney+ for $12.99 a month, CBS All Access -- even at $5.99 a month for ad-supported content ($9.99 ad-free) -- does not look like a very good deal.

What's next for ViacomCBS?

The company needs to take a long-range approach to building its streaming platform. It may not have any one franchise as powerful as Marvel, Star Wars , or Pixar, but it has a few with strong niche followings. It can use its multiple planned Star Trek shows to bring in that devoted audience, but it needs to develop compatible shows if it hopes to keep them.

Netflix has shown that it's possible to create new franchises. And CBS, as well as its family of cable channels, certainly has experience in that area. The new company must also decide if it plans to place all its streaming eggs in one basket. Will Showtime, for example, stream its programming on All Access? Will its cable channels drop third-party deals to make the company's platform as strong as possible?

This merger puts All Access on stronger footing than before. That's something the newly combined company can build from. It's not enough for anything more than also-ran status at the moment, but it's a foundation to be built upon.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy .

This article was originally published on Fool.com