Mel Karmazin, the consummate salesman and Viacom’s operating guru, is looking beyond next week’s unveiling of CBS’s and UPN’s new fall television schedules and their upfront sale to advertisers in a depressed market.
A year after Viacom merged with CBS, Mr. Karmazin admits to eyeing another large acquisition, which could be Yahoo! or a more traditional media company. And he longs for the day further deregulation would allow ownership of dominant broadcast networks and dominant TV stations in the same market.
The chief operating officer and president’s immediate challenge is getting the upfront advertising price increases he needs for enough of CBS and UPN’s available inventory to meet his targeted 20 percent 2001 growth in earnings before interest, taxes, depreciation and amortization to $6.2 billion, even if the economy and ad spending fail to rebound in the fourth quarter.
His plan to hold back as much as half his company’s available ad inventory in hopes of securing increased prices and demand in the scatter market could backfire.
“If that happens, then we miss the numbers,” said Mr. Karmazin, who sat down last week with Electronic Media.
In the edited transcript that follows, the interview begins with Mr. Karmazin’s discussion of the quid pro quo made with News Corp. that delivered “Buffy” to UPN.
EM: Obviously you intend to more aggressively develop UPN as an independent brand. How much of that has to involve News Corp.?
Mr. Karmazin: You should not assume that News Corp. is coming in, although I’m certainly not ruling it out. As part of the transaction involving 20th Century Fox’s sale of `Buffy’ to us, News Corp. also gave us a longer-term UPN affiliation agreement for the Chris-Craft stations. If we were going to give them a long-term commitment for a program, we needed to know we were going to be able to keep the network going. In order to keep the network going, we needed to have a New York and Los Angeles and San Francisco affiliate for UPN. Now that we have those affiliations locked in, we can focus on making UPN profitable.
Now that we have the long-term affiliation agreement with News Corp., we are very comfortable running the network alone.
We see no reason that we need a partner. Having said that, we have a terrific relationship with those people. If UPN could be made better from having them as a partner, we would be open to it. Originally News Corp. talked about wanting an equity position in UPN in exchange for giving us a long-term affiliation agreement for the Chris-Craft stations. We have said we will keep talking about it. It is now an opportunity, not a condition.
We continue in active discussions with News Corp. about a role for them in UPN and about station swaps, even though there is no longer a sense of urgency. We still believe in duopoly economics.
EM: If you were to work out an equity ownership arrangement between News Corp. and UPN, would Viacom still control it?
Mr. Karmazin: I can’t imagine us being involved in the network and not having control of it. We never really got that far in our discussions with News Corp. on subject.
EM: Will you change the name of UPN?
Mr. Karmazin: There was talk at one time about changing the name to the Paramount Network because it was a better brand name. But that’s a decision the network would make in conjunction with its affiliates, which are branded in their market with UPN. I’m not convinced that there is something wrong with the UPN name that requires we change it. But if we were starting from scratch today, I’m not sure the name would be UPN. `MEL’ works well. It’s three letters.
EM: How much of your upfront business will you sell bundling two or more of your media platforms?
Mr. Karmazin: I would say the only one could be a pre-upfront deal. We are having those discussions with two major ad agencies and two major advertisers we have existing deals with now. Once the upfront starts, everyone goes to the mattress, and everyone is so focused on specific buys, no one has time think to about the creative ways of packaging, and value added and promotion.
EM: Procter & Gamble has been talking to the networks about a pre-upfront cross-platform deal. Where are you in your talks with them or other blue chip advertisers about pre-upfront deals?
Mr. Karmazin: We have had some discussions. There is interest on the part of a couple major agencies and a couple of major advertisers. It is probable there would be a big deal done by our company prior to the upfront.
The question will be whether or not we want to do it, rather than whether we can do it. Very often what an advertiser is looking for in the pre-upfront is the `D’ word we’re not so good at talking about. We’re not in the business of discounting our prices.
Why would we want to sell inventory at prices less than we can get in the upfront or get in scatter? We’re really indifferent about when we sell something.
EM: But you are a prime candidate for acquiring other broadcast groups when we emerge from this current lull.
Mr. Karmazin: It depends upon what happens with ownership rules. The FCC on its own, possibly even before the courts decide, needs to give us a road map about what we can own. We’re in each one of the top 18 markets. If we had our choice, we would prefer to have two stations in every one of the top 18 markets rather than buying stations in the next tier that give us depth.
The next wave of consolidation that will probably happen will be when the newspaper-television cross-ownership rules are dropped. We’re not big fans of the newspaper business. So we’re not suddenly going to buy one of those companies.
We’re pretty comfortable with our television station assets at 41 percent of the country. We would hope the rule would ultimately be eliminated, with no ownership cap at all.
We would have liked to prevail in buying Chris-Craft. The opportunity to own two stations in New York and in Los Angeles would have been terrific.
But we have an acquisition discipline. Our balance sheet is so strong that we could, if we wanted to, overpay for anything. We just won’t do it. We would not get close to the ultimate price that Fox paid. That’s not to say Fox overpaid for the Chris-Craft stations. The jury is still out.
EM: What do you buy then with your estimated $3 billion of annual free cash flow?
Mr. Karmazin: An acquisition has to be in our area of core competency. It has to be accretive and create value for our shareholders and have a growth rate that won’t slow down the whole company.EM: So a Yahoo! acquisition is out?
Mr. Karmazin: We have a bunch of businesses in the Internet, so I would not rule out an Internet situation at all.
Yahoo! is a great brand, and Terry Semel [Yahoo!’s new CEO] is a great quality executive. They have indicated that their interest is staying alone. We don’t feel incomplete. Based on where prices are, until our stock trades at $150 a share and not $45 a share, we certainly could not do something accretive.
The question one has to ask is whether the model for advertising on the Internet is a good model and whether or not in a fragmented business [it is] where advertisers will put more of their traditional dollars.
I believe as time goes on there is a move toward more wireless that would allow people to get the Internet from their cellphones. If the screen is that small, then what is the advertising model in that situation?
Even in broadband, there is a question about whether people are so used to going on the Internet and not seeing ads or commercials, and they may not want to see them there.
EM: So what do you go after?
Mr. Karmazin: Since the merger a year ago, we bought BET. We bought $2 billion of radio and outdoor billboard. We bought the rest of Infinity we didn’t own. We like the cable business. We like the radio business. We like the outdoor business. We’d also like to expand internationally. We’ve bought outdoor businesses abroad, but because of the regulatory rules we’d have to be minority investors in a lot of things, and we’re not really good minority investors, although MTV Italy was done that way.
EM: Not long ago, you said you expected an advertising and economic recovery the second half of the year and that Viacom would reach its 2001 target of 20 percent earnings growth. But you’re in a position now where half your company’s revenue that comes from advertising is on the line, and that accounts for 70 percent of your earnings. There are no convincing signs of a recovery until 2002. How can you stick to your optimistic outlook?
Mr. Karmazin: I think it’s pretty simple. The actual numbers play in our favor because our growth rate the second half of last year was a whole lot lower than in the first half. So we’re going to have an easier comparison to last year. And I think there will be easy comparisons in the first part of 2002.
I also believe that our company, whether it is because of CBS or TNN, is in a better position to pick up market share going into the upfront. The market will be bigger and our share will increase, so we will pick up revenues and watch our expenditures.
When one important economic indicator, GDP [gross domestic product], was up only 2 percent in the first quarter, Viacom sales were up 6 percent, our [earnings were] up 15 percent and our free cash flow was up 20 percent. If there is a tax cut and another lowering of interest rates, we think that things will get better.
EM: To make your earnings growth target for the full year, you have to see better than 20 percent growth the second half of the year. If the recovery doesn’t kick in by then, where does that leave you?
Mr. Karmazin: The question isn’t whether the economy turns around, it’s whether our business is able to. Let’s assume the upfront is not as strong as I believe CBS is or UPN is or MTV is or TNN is. In order for me to hit the year-end number, we have to do a certain amount of revenue. We’ll find out if we can do it, and if in fact we can’t do it, then we don’t hit the number.
You sell a lot of advertising, you watch your expenses and you hit the number. We still don’t know about a possible strike or what the upfront is. But based on the information we have today, this is what we believe we’ll do.
EM: Are you still prepared to hold to selling only about 55 percent in the upfront to wait for a strong scatter market?
Mr. Karmazin: What we care about is how we finish the fourth quarter. And we’re totally indifferent about whether we sell it in scatter or in the upfront or the pre-upfront or as part of Viacom Plus. Advertisers have to decide whether they will buy the upfront or wait for scatter. I believe the buyers are gong to think the cheapest prices will be in the upfront.
EM: If fourth-quarter scatter doesn’t develop as you hope and you hold back inventory, then your only alternative is to further cut costs?
Mr. Karmazin: No, then you just don’t make the numbers. You do the best you can. You do better than anyone else can do. You’re still going to be up. But you don’t cut your company’s future prospects to hit a quarter’s numbers.
EM: You have $158 million in merger-related cost reductions you can take this year. Does that accurately reflect the extent of the redundant and other cost reductions you plan this year?
Mr. Karmazin: Whenever there is a merger, there are opportunities to look at things differently because you often have two of everything. There was also an opportunity in a lot of our businesses to rationalize a lot of our dot-com spending. We have significantly scaled back the amount of money we were spending in the dot-coms.
But at the same time, we are spending more money for `Buffy’ and for TNN to buy [reruns of] `CSI’ [and to develop] new `Star Treks.’ Some days we’re reducing the expenses, and some days we’re spending a whole lot more.
EM: Explain the economics of `Buffy.’
Mr. Karmazin: Our decision to put `Buffy’ on the network is that we thought it was a very transforming transaction for us that will give the entire network a halo effect. We believe there will be opportunities for CPM [cost per thousand] growth, not just for the night it’s on. I think we will have a very exciting UPN schedule to present in the upfront that will include `Buffy.’ We need to make the UPN Network profitable, and we think that this was a step in the right direction. It was sort of like the NFL. You can’t make a network profitable by not investing in programming.
EM: What could be the economic impact of whatever the terms turn out to be for paying residuals to writers in the current contract talks?
Mr. Karmazin: If there is additional cost to provide content to new media and other platforms, there also will be additional revenues to more than offset that, so I’m not worried about that. The producers will agree on what they can afford to pay. The networks and the studios are not high-margin businesses, so it’s imperative that we watch every dime.
EM: If there is a strike, what is your contingency plan?
Mr. Karmazin: We’d have a lot of reality programming and a lot of films and made-for-TV movies to get the largest audience you could get.
But it would be impossible to go into the upfront with an alternative schedule. Because what would happen if you sold that alternative schedule to advertisers? They would not want to pay a higher rate for the original fall schedule.
I think that is another reason advertisers will be flocking to the upfront: We have historically been giving them audience guarantees, so there is little risk.
In a strike, you would sell the shows you had and then work out an arrangement with each advertiser for the audience you did deliver. Anything you do, there is going to have to be a lot of discussion.
There has been so much consolidation on the advertiser and on the agency sides that no one is going to do something that is not in each other’s business. There are so few players. There are maybe only one dozen ad agencies that account for 80 percent of our business.
EM: The media companies are the same way …
Mr. Karmazin: Yeah, I’ve said before. I was forced into this. I was happy being a small media executive. But, these guys made me do it … (laughs)
EM: I have a theory: You maneuvered yourself into this from the time you got Westinghouse to buy Infinity Broadcasting just so you could go after CBS and, eventually, Viacom.
Mr. Karmazin: I think this was done long before that. It was done from the time I worked for Metromedia and John Kluge. He’s probably influenced me more than anybody else in my business career. The only thing I can’t tell is what the next big deal is, because that’s the really interesting one.
Buying is really easy, and it’s intense. But the main thing is that you have to run them. But with every single deal we have done, there is no one who can look back and say we never should have expanded the radio business, or merge[d] with CBS or do[ne] the Viacom deal. It’s all so clear to me. But a lot has to happen from a regulatory standpoint before we can get to the next big deal.
EM: What do you want?
Mr. Karmazin: I think our feeling has been that we’re in the distribution business. Blockbuster and our television stations and radio and our networks. We don’t like businesses that are high-capital intensive. We happen to be focused on lot of brands and content. There are opportunities out there.
If we hit all [our] numbers, our stock will be trading at a really good price, I will smile for a change, we’ll be happy campers, and that cash will be burning a hole in our pockets unless we find something [to buy], and I believe we will.
What that is will be determined by whether there is a change in television duopoly rules that allow you to combine the No. 1 and No. 2 stations in a network. I would like the dual-network rule changed to allow for the ownership of two broadcast networks so that–and I’m not suggesting this would ever happen–but Disney and Viacom could arguably combine.
And it would not just take an FCC rule change, but is Congress ready today for two big networks to combine? We think they should. There will be more deals done between people who own distribution and people who own content. There are the telcos. Is there going to be
a deal done one day between Verizon and Disney? So it is a really exciting time to be in business today. So much is going on.
EM: How about your affiliates?
Mr. Karmazin: We’re spending an awful lot of money across all our platforms on content. As an advertiser, we spend about $1 billion a year to promote our shows and services. In order for us to continue to spend that money, we need to continue to watch our expenses. And that’s why affiliate compensation has always been an issue. I would think the affiliate would rather have me take the money that I have available and invest it in programming than to give it to them.
The affiliates could generate their revenues from advertising. They don’t necessarily need comp. I don’t think there’s anything wrong with the network-affiliate relationship today.
We’re station owners affiliated with CBS and UPN. I would much rather have my networks healthy. If 50 percent of an affiliate’s programming and revenues are derived from the network, I would want to have a stronger network.
EM: Would you agree to give affiliates equity ownership in the network or programming? That’s what some of them are calling for.
Mr. Karmazin: Let me get this straight. You want me to give them all of their programming. You want me to give them their news and the NFL, and you want me to give them equity? Anybody that wants equity in our network can do that by buying Viacom stock.
At a time when CBS was losing $180 million the first year that I came, no affiliate wanted a piece of that then.
EM: What do you think about the petition filed by the National Affiliated Stations Alliance that asks the FCC to investigate network violations against their affiliated stations?
Mr. Karmazin: I don’t understand what the issue is. I have been in this job a long time now, and nobody has come to me to talk about this issue. The only issue I have heard about is comp. We have never stopped any of their deals or said we want to take their spectrum. So I was very hurt by being included in a filing where the affiliates were critical of things that we have gone out of our way not to do.
Unlike a lot of other networks, we are having an affiliate meeting because we believe in the model of a network and its affiliates. We want our affiliates to be strong. It makes us stronger.
I was personally very troubled that our industry organization [the National Association of Broadcasters] took a position on this issue that was filed. I have been a member of the NAB going back to 1967. I called Eddie Fritts when we resigned and told him how hurt I was that I was forced to resign from this organization because it foolishly took a position on an issue they never should have gotten involved in.
I don’t think there is anything wrong with people having differences of opinion, but when the NAB comes out and takes that position, that was intolerable. The NAB was silent on TV duopoly. If you want to be an industry organization, you can’t get involved in a conflict between members.
EM: Will you return to the NAB?
Mr. Karmazin: Never say never. The hurt is still there.
EM: Was your decision to keep Blockbuster rather than spin it off predicated on plans for the company to deliver movies and even big-event pay television directly to homes?
Mr. Karmazin: There’s a whole lot more we can do with it in the future. The brand name is terrific, as are its initiatives with DirecTV and Radio Shack. There are many potential options, whether it is DSL delivery or digital cable or whatever, which is why we are in a great position owning a lot of the content. If Blockbuster can figure out a way to make CBS and other of our services part of a branded home-entertainment service, we’re interested.
EM: Will you seek to begin renegotiating your three-year contract by early next year?
Mr. Karmazin: … Because you mean I’m worried about being fired? (Laughs) I think I will be here as long as I wake up in the morning and I have the fire to go to work and I have the desire to do what I’m doing.
I would be very happy not to have a contract. I think that a board of directors needs to decide who they really want in management. And if the board wants me and I want to stay, and Sumner [Redstone, Viacom chairman] and I want to continue to work together, that’s great.
EM: You wouldn’t wait to the end of the contract in 2003 to negotiate.
Mr. Karmazin: I think it would be important for shareholders and important for everybody to know. If I feel the way I feel today, then I would stay. If I feel like I want to do something else and people can forget about my past, maybe I will run for political office. But right now my inclination is I’m having fun doing what I am doing.
EM: How did you ever manage to secure the current contract terms you did–that Sumner can’t fire you and has to let you run the company without interference?
Mr. Karmazin: We don’t need them now. His agenda and my agenda are exactly the same. I don’t even want hands-off. If Sumner can help get the stock to where it needs to be and make CBS’s ratings better, I’m happy to have anybody do anything.
These were issues at the time of the merger, because our board was not willing to do the deal unless the terms were in writing. In merging with a company over which Sumner had voting control, our board needed to have some certainty.
I don’t really want to sound egotistical about it, but at the end of the day it will be my decision as to what I want to do. The answer today would be, “Absolutely.”
… The only other thing I would want to do today that I’m not doing now is to be the media buyer … (laughs). I mean, when I die, I want to come back as a media buyer. They’re the ones that have all the money and are dictating all of the terms.