July 22, 2006 A Surprise After the Split: Viacom Struggles as CBS Holds Its Own By GERALDINE FABRIKANT NY Times
http://www.nytimes.com/2006/07/22/business/media/22viacom.html?pagewanted=print It was not supposed to be this way. When Viacom announced last year that it would split into two companies Viacom and CBS Wall Streets darling was Viacom. Unshackled from the slower-growing CBS, the thinking went, Viacom would achieve new heights. What a difference a new year makes. Since the January split, stock in CBS, which also owns the CBS network, has risen 9 percent. Viacoms stock, meanwhile, has been pummeled, falling nearly 20 percent, to close yesterday at $33.47 a share. For Viacom the summer has been rough. Advertising on cable networks the core of Viacoms business has been soft. The companys youth-oriented networks, which have long been dominant, are increasingly being challenged. And the company has been faulted for not being aggressive enough in making Internet acquisitions. Without CBS, Viacom now relies mainly on the success of those cable networks, which include MTV, Nickelodeon and Comedy Central. The company also owns Paramount Pictures which is in the middle of a hoped-for turnaround but the cable networks account for about 70 percent of Viacoms revenue and nearly all of its cash flow. As doubts about cables prospects have grown, Viacoms stock has fallen more than twice as much as Time Warners this year, while shares of Disney are up 18.7 percent and News Corporations shares have jumped 14.2 percent. The cable upfront market where advertisers buy time in advance for the coming fall season is to conclude by the end of the summer. And analysts are now forecasting a mere 7 percent to 9 percent increase in advertising spending at Viacoms networks, after years of double-digit growth. It has been a slow upfront and a tough upfront, Viacoms chief executive, Tom Freston, conceded in an interview. But I am convinced, he added, we are going to perform at the top because we have strong brands and multiplatforms. It is too soon to say it is going to be a tough year. Aryeh Bourkoff, a media analyst at UBS, says the problems are more than just a cyclical softening in the ad market. If advertisers are paying a premium for the growth of audiences on the Internet, they may be more cautious about allocating dollars to the cable networks, he said. Whether the slowdown is cyclical or structural, investors are concerned. One disillusioned investor was Morris Mark of Mark Asset Management, which dumped its roughly 500,000 shares of Viacom stock in the second quarter. Mr. Mark, a longtime media investor, said: It seems as though the cable network business is feeling some of the same pressures as the broadcast networks have been feeling. It has to do with ad revenue growth. It is not just the slow advertising market that has investors worried. Critics say Mr. Freston has been late to the digital game and has not been as forceful as some of his rivals particularly News Corp. in making acquisitions in new media. Five years ago, no company in the world had a stronger grip on the youth culture and kids than Viacom, said Leo J. Hindery Jr., managing partner of Intermedia Partners, a private equity firm that invests in media businesses. In the intervening period, Viacom has shown no obvious competitive response. Both he and Mr. Bourkoff of UBS cite News Corporations outbidding Viacom for MySpace.com the Web site where young people post personal pages and socialize as an indication that Viacom is facing new competition in the youth market. Though MySpace is not yet profitable, it has huge potential because it has aggregated more users than any new medium in a long time, Mr. Bourkoff said. Mr. Freston counters that his company has been focusing on organic growth online, including extensions of MTV and other popular cable properties, while making smaller acquisitions. And he is seconded by Michael Nathanson, a media analyst for Sanford C. Bernstein & Company, who thinks the News Corporation mystique online is overblown. Just a year ago, News Corporation was seen as old line, he said. With one stroke of the pen, they are in it, he said, referring to the MySpace acquisition last year. The idea that Viacom has lost its edge because of one deal is ridiculous. I think Viacoms problems are cyclical. Viacom has made a clutch of acquisitions in the youth area, including Neopets, a Web site that lets youngsters adopt and feed virtual animals. But Richard Greenfield of Pali Research argues that the company has not communicated well how these businesses fit into Viacoms central strategy. Mr. Freston responds that Neopets has broadened Viacoms reach to younger audiences. He also noted that Nickelodeon and Neopets get 60 percent of the childrens advertising directed to new media. Mr. Freston, 60, is widely credited with building the host of cable networks that are Viacoms bedrock. Though he spent much of the 1970s traveling around the world, at one point creating a business shipping clothes by air freight from Afghanistan, his professional life took off when he joined MTV as a marketing director, rising to become head of the cable network empire. Despite his great success, Wall Streets infatuation with Mr. Freston has dimmed. One analyst, Mr. Greenfield of Pali Research, argues that the board should replace him if he cannot swiftly reorient Viacom. Sumner M. Redstone, Viacoms chairman and controlling shareholder, disagrees strongly. There are no circumstances under which I would consider discharging Tom, he said. There is nobody better. I know Tom has been criticized a lot, Mr. Redstone added. But he is an outstanding leader and he is breaking his back to make this work. Under Mr. Freston, Viacom has continued a multiplatform strategy of offering content in places like the Internet and cellphones, in addition to cable, to broaden the companys revenue sources. In April we did 210 million video streams, Mr. Freston noted, referring to the number of times people watched Viacoms broadband video offerings. While there are certainly new opportunities for Viacom, revenue from areas besides cable is still minuscule. And while Wall Street wants results right away, it may have to wait. Mr. Redstone estimates Viacoms digital businesses will generate about $500 million in three years. That would be just 4 percent of the 2009 revenue that Sanford C. Bernsteins Mr. Nathanson is projecting for the company. Other factors have weighed on Viacom shares as well. The companys first-quarter results this year the first it posted as an independent company were disappointing, in part because MTV lost a major advertiser in Germany. And it has not gone unnoticed that Mr. Redstone has been selling stock after decades of publicly saying he would never sell shares. While the sales were prompted by an agreement that Mr. Redstone would reduce his holdings to keep his stake from increasing as the company bought back shares, several people close to Viacom said Mr. Redstones decision to take capital out of the company has created a perception that has hurt the stock. Meanwhile, some on Wall Street are not happy that Mr. Redstone and Mr. Freston have been reaping enormous salaries and bonuses in cash. In 2005, Mr. Redstone earned $12.9 million in salary and bonus and Mr. Freston earned $18.3 million. Because of that criticism, the board is discussing restructuring executive compensation to include a larger component of stock options. Still, Viacom has done some impressive deals, including this springs $300 million sale of commercial time to OMD, Omnicoms media buying firm. OMDs spots will appear on Viacom cable as well as video on demand, broadband and podcasting. Viacom is also selling to wireless providers programming based on Viacom cable networks. Wall Street, of course, has a history of overreacting, and not everyone is bearish on Viacoms future. As the stock price declines, Mr. Mark said he might well become a buyer again. Some investors see bright spots. For example Viacom does not require large amounts of capital to create new programming that it can distribute across all its platforms. And Viacom has expanded its cable network business into emerging markets like China and India. For years Mr. Redstone has bragged about the companys overall expansion. But some analysts say that effort has not been as dramatic as one might think. Mr. Nathanson of Sanford C. Bernstein estimates international ad revenue will account for just about 10 percent of the $3.9 billion in cable ad revenue he is forecasting for this year. And even expansion in Europe has had some blips. Analysts were confused when the company said recently it was focusing too heavily on Europe just after buying Viva, a German cable music channel. Mr. Freston said the deal was important because we wanted scale in Europes major market. With all those concerns, Viacom is trading at 15 times expected 2007 earnings, leading Mr. Greenfield of Pali Research and the Morgan Stanley analyst Richard Bilotti to conclude the stock is inexpensive compared with its peer group. Mr. Greenfield says he is bullish on the shares because Viacoms brands are healthy, though the company may not be investing enough to drive future growth. They are too worried about tomorrow and not willing to take enough chances to enhance value over the next few years, Mr. Greenfield said. Viacom does have several other options for growth. Among other things, executives are counting on Brad Grey, the new head of Paramount Pictures, to turn the studio around. Only a few movies overseen by the studios new management have made it to the screen yet. Mission Impossible 3, brought in a healthy $362 million at the worldwide box office, according to IMDBpro.com, but that is less than what the original and the sequel individually earned. But instead of blaming the studio for the shortfall (critics liked the movie) many in the industry chalked the results up to movie goers recent disenchantment with Tom Cruise. Nacho Libre, the studios movie about a Mexican friar turned wrestler, was a hit, bringing in $78 million at the domestic box office. Now the looming test of Paramounts new strategy is Oliver Stones World Trade Center, the story of two officers trapped in the rubble of the World Trade Center on Sept. 11, 2001. ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 antunes at uh dot edu Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list [email protected] To unsubscribe send an email to: [EMAIL PROTECTED]
