Doing more with Les & Mel

May 27, 2002  •  Post A Comment

You know those $2 billion deals that OMD is trying to do, one with Viacom and one with Disney? As we reported last week, it’s far more likely that OMD will consummate the deal with Disney than with Viacom.
But here’s the kicker: It was CBS and its parent, Viacom, that actually initiated the unprecedented lump-sum deal talks with the agency last February.
CBS President and Chief Executive Officer Les Moonves, who is most responsible for reshaping, strengthening and now selling CBS’s prime-time position, says simply that CBS and Viacom “refuse to give away the time.”
“At no point are you going to see us sacrificing pricing for a bulk sale,” Mr. Moonves told Electronic Media. “My job is to get as much as I can from CBS.”
With early, fluid negotiations stalled over pricing, OMD might still secure a bulk deal with one or both of the media giants.
But the OMD situation underscores one of the challenges CBS faces even at this promising juncture: It must sell its new season schedule and series to a dramatically changing, often skeptical, always tough-minded ad market with the uncertain winds of economic recovery at its back and the synergistic opportunities of Viacom before it.
“It’s the ultimate irony,” says an executive close to OMD’s negotiations. “Viacom was the first to pitch the bulk-buy idea, and Disney will probably be the first to secure it.”
“CBS has decent shows and ratings for the first time in 15 years. But just how effectively will it leverage what it has built?” the executive asked.
The question is far more compelling and complex than it appears at face value.
How successfully CBS writes more, higher-priced upfront and scatter business will go a long way toward determining Viacom’s financial fortunes because of the company’s 50 percent dependence on advertising and CBS’s trickle-down impact on Viacom’s mainstream businesses–from TV and radio stations to UPN and the cable networks to Paramount program production.
Even as broadcast networks’ ratings and revenue potency have been diminished in a more fractionalized media environment, they remain drivers of broader value.
Analysts say CBS drives more than one-third of Viacom’s $25 billion in annual revenues and more than 25 percent of its parent company’s annual $5.7 billion in earnings before interest, taxes, depreciation and amortization. Anticipation that CBS and other Viacom ad-supported businesses will be the first and biggest beneficiaries of the recovery has buoyed Viacom’s stock at a time when most media issues continue their free fall.
CBS and other Viacom television businesses collectively command 27 percent of the prime-time audience–a cume that CBS and Viacom tout but do not sell to advertisers.
“The point is, even in an increasingly fragmented world, one company still has 27 percent, and the big driver is CBS,” said Mel Karmazin, Viacom president and chief operating officer.
A vibrant upfront, and CBS sales in particular, will be a catalyst for boosting investor perception about corporate advertisers feeling good about their 2003 prospects. Roughly three-quarters of the upfront commitments made in the coming weeks will be for advertising time next year, experts say.
“CBS is important because it is an early indicator of other ad-supported media,” Mr. Karmazin said. “As network television goes, so goes cable, so goes syndication, so goes spot television, so goes radio. When network television does well, there is a trickle-down effect that Viacom, in particular, can benefit from.”
This year, CBS is grabbing not only for improved pricing and volume, but also for an estimated $500 million swing in ad spending from ratings-ravaged ABC and Fox to CBS and NBC. Sources say CBS has targeted at least $300 million of that total.
Leading analyst Jessica R eif Cohen of Merrill Lynch told clients Friday that CBS and UPN will benefit from “a significant broadcast share shift, with CBS realizing 25 percent more in upfront revenues that could top $1.75 billion, on CPM price increases of 5 percent to 7 percent. UPN should see a 75 percent gain in upfront revenues to $350 million on unit increases of 7 percent to 9 percent, bolstered by CBS’s sales efforts.”
But CBS and Viacom also were hoping to come in ahead of the upfront market with a bulk commitment from an agency, spreading almost $1 billion in client money across all of the company’s media outlets in the next year.
While the concept has been well-received, CBS and Viacom, their media peers and the super ad agencies all have found themselves ill-equipped to negotiate, much less execute, such complex lump-sum deals.
“The reality is the company still is set up to sell by silos: CBS, MTV, VH1, Paramount, King World and the rest each sold separately,” notes a leading ad agency executive who asked not to be identified. “They still each have their profit-and-loss targets to meet.”
For now, CBS appears ready to pursue upfront selling in a more conventional manner, squeezing the best prices out of its high-performance media platforms and cross-platform deals where it makes sense.
“From the get-go, there has been a misconception on the buyers’ side that they would get huge volume discounts for placing bulk business orders,” said Joe Abruzzese, president of advertising sales for CBS Television.
The concept was designed to increase the share of ad spending for all of Viacom’s existing businesses by encouraging advertisers and agencies to shift spending from USA to TNN, or from Warner Bros. syndication to Paramount. “We’re not asking for bundles of money where they don’t belong–just a share shift where they do belong,” he said. “But I don’t see this happening right now.”
Viacom and CBS will continue to negotiate Viacom Plus deals, involving single-client spending across all of the company’s media outlets to push a single brand. They also could announce another bundled pact with Procter & Gamble like last season’s $300 million deal.
Company officials have said they were hopeful such spending could comprise more than 10 percent of their overall business next season.
Ahead of more intense upfront negotiations, which are expected to get under way this week, advertiser and agency executives acknowledge CBS’s newfound strength, but privately wonder about the plethora of dark, vigilante crime-and-punishment dramas that appear to fly in the face of family-friendly fare meant to soothe viewers after last fall’s terrorist attacks.
“When Les Moonves ended his upfront presentation to the ad community with a reference to CBS’s `killer schedule,’ you had to wonder what he was thinking,” lamented one high-level agency executive.
CBS executives say they simply are giving advertisers and viewers what they want, and they say they are not bracing for any advertiser resistance to buying into such shows.
“There’s no backlash,” Mr. Abruzzese said. “There is plenty of diversity in our schedule they can buy.”
The Les Moonves Show
“In the last five years or so, Leslie started a rebuilding process at the CBS TV Network that has been an extraordinary success,” Mr. Karmazin said. “It’s not a worst-to-first overnight process. It’s a rebuilding process, night by night, time period by time period. We’re certainly not there yet. But we’re certainly a whole lot better than we have been in an awfully long time.”
As in seasons past, Mr. Karmazin did not preview series pilots and did not know CBS’s and UPN’s fall prime-time schedules until Mr. Moonves privately detailed them for him two days before they were announced to Madison Avenue.
Mr. Karmazin’s role has mellowed from being a poster boy for a bold, holdback upfront inventory strategy a year ago.
“One of the most flattering things Mel has ever said to me is that the day he starts looking at pilots is the day I should start selling my stock,” Mr. Moonves said. “In other words, Mel is a fan of our shows, and this is an area he trusts me with. He’s been unbelievably supportive. He walks out of here saying, `Got it, it sounds great!”’
Mr. Karmazin insists he would take ownership
of last year’s inventory call “only if it went wrong.”
“Those decisions are Les’ because he’s responsible for delivering the results. It’s the pack-your-own-parachute approach to things. I don’t read scripts. I don’t look at pilots. My job is to make sure I have the best people and resources,” Mr. Karmazin said. “I’m not sure my opinion wouldn’t be looked upon as having more value than it should. I think that would be disruptive.”
Mr. Moonves, 52, who once tried his hand at acting, conceded that his old show-biz habits die hard. He still gets opening night butterflies in his stomach before hosting CBS’s upfront presentation for advertisers. His adrenaline still gets pumping when he meets big-name stars with whom he must conduct hardball negotiations. His heart still skips a beat when he hears his name mentioned on national television, even if by his nemesis, late-night talk show host David Letterman.
The immodest Mr. Moonves insists it was keen strategy and not chance that led to last year’s controversial decision to hold back an uncommon 35 percent to 40 percent of inventory during the upfront. Later, due to marketplace tightness created by excessive make-goods at ABC and Fox, CBS was able to get relatively high prices for its scatter inventory.
“Part of your strategy is looking at the competitive landscape. Television in certain respects is a zero-sum game. When you say you’re going to do well in the upfront advertising market, by definition that means someone else is not going to do as well,” he said. “So part of what you’re betting on is the decline of another network.”
During his six-year tenure, Mr. Moonves has been lauded for his people skills and credited with maneuvering the network through some delicate talent negotiations, including Mr. Letterman’s recent controversial contract renewal, which Mr. Moonves concedes never should have been allowed to become “an issue.”
“Dave is a tough guy to get inside of. He’s not the kind of guy you can have a drink with and pal around with. That’s David. But I think he is brilliant,” Mr. Moonves said.
“It was all about where will he succeed and do the best,” he said. The terms of his new pact call for Mr. Letterman to receive lots more promotion for his late-night talk show on MTV, VH1, 183 radio stations and 39 TV stations, and as a tag to any CBS prime-time series promo. Late local newscasts no longer will be allowed to run long.
Mr. Moonves said the on-air ribbing by Mr. Letterman does not bother him. “Not for a second. It’s funny. I am the boss. I’m the one he’s supposed to pick on. There are no bad feelings.”
The CBS Television Network is expected to spend about $2.7 billion on programming this year against $3.6 billion in revenues, according to Richard Bilotti, veteran analyst for Morgan Stanley Dean Witter. UPN’s overall programming costs are expected to decline to about $195 million, from $226 million last year, now that it is under CBS’s wing. UPN revenues are expected to be flat at $157 million, Mr. Bilotti predicted.
To UPN and beyond
Besides CBS, Mr. Moonves now oversees UPN. He conceded that keeping the networks distinctive, but linked enough to mine crossover cost-efficiencies in programming, talent costs, marketing and advertising, will be tricky. UPN recently eliminated an additional 50 jobs.
When CBS is ready to extend UPN’s program schedule beyond 10 hours, it could use repurposed programs. Mr. Moonves says he is leaving open his midseason options.
“You never say never, especially with both network banners under one roof. Anything is possible,” he said.
During the upfront presentation, Mr. Moonves joked about working for two bosses–Mr. Karmazin and Viacom Chairman and Chief Executive Officer Sumner Redstone–who are “not freaked by the bottom line.”
“Luckily they realize that sometimes it take money to make money,” Mr. Moonves explained last week.
One thing he has already learned: Synergies aren’t as automatic as they appear. Rebroadcasting CBS News on BET has worked well, but he says he’s loath to dilute the uniqueness of MTV’s surprise hit series “The Osbournes” with a CBS prime-time special.
There will, however, be feature films and news shared between CBS and UPN, but not prime-time series–at least not just now.
Several weeks ago, CBS backed off its first repurposing foray–airing its series “The Amazing Race” on UPN–in response to affiliate objections.
Instead, Michael Mann’s “RHD/LA” will be repurposed on USA Network as part of the license agreement for the show, produced by Studios USA. The arrangement resulted in a lower license fee but carries restrictions: It cannot air in prime time, and it must air at least a week later than the initial broadcast.
“CSI: Crime Scene Investigation” will be rebroadcast on Viacom’s TNN the next two years before it is available as a syndicated strip. It’s just a matter of time before the sequel “CSI: Miami” follows.
All told, such rebroadcast options can offset spiraling production costs by 15 percent to 20 percent. It is an important way to offset costs and minimize deficits, sources say.
A weekly “Best of Letterman” clip show and “Best of Late Show Music” are being considered for VH1 and MTV. CBS also may produce weekly “Survivor” recaps for MTV.
But last week, Mr. Moonves noticeably pulled back on what would have been a more aggressive repurposing plan for CBS and UPN next fall, which he says will be revisited midseason.
“Repurposing is a good thing at the right price point with the right cable network,” he said. “Right now there are no specific plans to do more new drama, although there may be other opportunities on our own or other cable networks. We’re open to exploring more, but not a whole lot more. We’re not going to push it.” The reason for the adjustment: Advertisers have told CBS, The WB and other broadcast networks that they simply will not pay carryover prices for ad time in the rebroadcast of their series on their own broadcast network air or elsewhere on cable.
“At this point, with the upfront negotiating just starting, why make repurposing an issue?” one CBS official said.
Collectively, he said, all of these new program options “might” offset losses in audience and dollars from broadcast networks’ continued fractionalization or other lost revenues. “That’s the idea,” Mr. Moonves said.
The model will be shifted. “Syndication won’t be the only pot of gold, and it could be a smaller pot of gold, and we’re all trying to figure out what other pots of gold might be out there to make up for that.”
“P&G, Sony and CBS each own one-third of `King of Queens.’ You will see advertisers more involved in those kinds of things. It is another model,” Mr. Moonves said.
CBS has more upside than it has enjoyed in years. Despite flat revenues of about $3.4 billion this year, analysts say the CBS TV Network is expected to post an 8 percent rise in profits to nearly $300 million, or about half that of NBC, the only other profitable broadcast network.
Although CBS’s owned television stations have struggled with flat revenues and cash flow for several years, margins should begin improving in 2002 due to more intense cost cuts, personnel and format changes, stronger syndicated fare and better 10 p.m. network series lead-ins this fall to late local news, Mr. Moonves said.
The Mel factor
Perhaps the biggest unknown cannot even be addressed until late this year or next year: whether Mr. Karmazin, 58, will exit Viacom at the end of his contract or find a way to mend his differences with Mr. Redstone and re-up. The two executives appeared congenial and cooperative at last week’s annual shareholders meeting in .
In the months leading up to the upfront, Mr. Karmazin made personal calls to the leading ad agencies “to make sure Viacom has a very strong relationship with all of our partners at the agencies and their clients. I bring a perspective for all of Viacom. I said to them, however they want to do business, we’ll do it. So if they just want to buy one of our businesses, they can. If we can
help them by having them buy across all our platforms, we can do that. We’re indifferent about the way the agencies and advertisers want to spend their money, and that’s been my message for a long time,” Mr. Karmazin said.
“Do I think it is important for me to have a relationship with every one of our agencies? Absolutely, so that they feel if there is something wrong they can call me. Am I the deals? Absolutely not,” he said.
Some on Wall Street and on Madison Avenue remain skittish about the time when Mel pulls up stakes and leaves, which could happen as early as year’s end or not at all if he renews his Viacom contract next year.
“I’m not going to comment on Mel staying or leaving, or what he does. I love working for him. It’s a great relationship right now and that’s all I’m going to say,” Mr. Moonves said.
A tanned Mr. Karmazin himself diffuses any discussion of his tense relations with Viacom Chairman Redstone, and his decision to leave or stay, with the quip, “We’re thinking of the `Mel’ show. They’re going to put cameras in my office. But the sense is we want to wait a while because we don’t want to hurt `Survivor’ or `The Osbournes,’ so we’re waiting. The company is so well that all I really need to do is hang out and get tan.
“My contract ends at the end of 2003, and I’ve been so focused on my tan that I haven’t thought about what’s going to happen there.”
“I think we make an unbelievable team,” Mr. Moonves summed. “There is no greater guy who knows sales than Mel Karmazin. And me, well, I’m a pretty good program guy.”