Ad Cuts Will Wound Viacom

In a column I wrote last Friday I outlined some short ideas from the Internet revolution:

Advertising: The interstitial commercial has peaked. Likewise, all those advertisers who are seeing the secular decline in radio and television know that they have to move to where the audience is. And they are actively shifting spending to the Internet. No clear shorts here (yet).

Video: It's next, as video piracy and P2P trading is starting to catch on. And as broadband speeds increase, making file size irrelevant (though that's probably another decade or so away from being mainstream), the concept of "broadcasting" video will fade away -- and that business will be fully in secular decline. As in advertising, no clear shorts here (yet).

Well, it didn't take long for that "yet" to be removed. Viacom is in big trouble here.

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The company depends way too much on interstitial advertising (both television and radio) revenue for its business. If this shift away from commercials is actually starting to happen to the magnitude and with the velocity that it now appears it is, Viacom's going to really feel the crunch in a hurry.

To be clear, the company's got plenty of cash flow from these businesses that even an accelerating secular decline isn't going to wipe the company out. And Viacom's actively trying to address at least some of these issues by splitting the company apart, which will make this a tricky short. It's also possible, though unlikely, that someone comes in and buys Viacom in part or in whole. But with cheap premiums on in-the-money puts that will expire several months out, I've started building a position on the dark side in this name.

By using puts, I'm defining my potential losses if I turn out to be dead wrong, since I can only lose the amount of capital I've committed to the puts. I wouldn't short the common ahead of earnings, as I'm not sure the company will blow up just yet, and I'm also leery of how the stock will trade into the split-up. But over the next two or three quarters, this one could get ugly.

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At time of publication, the firm in which Willard is a partner was short Viacom, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.