Karmazin upfront about CBS’s promising ad forecast

Feb 24, 2003  •  Post A Comment

Although Mel Karmazin can’t say whether he is being renewed at Viacom, he is bounding into an all-important upfront where price increases will start in the mid-teens and advertiser spending will likely exceed last year’s $8 billion broadcast network take.
While the nature and length of a war and any economic downturn can alter everything, Mr. Karmazin said in an interview he expects upfront pricing to jump between 12 percent and 15 percent and go even higher in some cases. For the past month, NBC has signaled it could raise its prices between 15 percent and 20 percent.
“Realistically, I think it would be very weird to think there would be an upfront that would be up 20 percent. I certainly would not think that way,” said Viacom’s chief operating officer, who is in the middle of a well-publicized contract negotiation on which he declined to comment.
Depending upon price and demand, he expects the company to once again sell 80 percent to 85 percent of its upfront inventory.
“Based on the last upfront and what we’re seeing in scatter and the fact that demand is so strong and there is so little inventory, I would expect advertisers to spend in record amounts,” he added.
He credits plans to launch 25 new automobile models this year and the sweeping prime-time reality series craze as factors likely to fuel advertiser spending. Since reality isn’t every advertiser’s cup of tea, it will generate higher demand and premiums for ads on scripted comedy and drama series.
Those are among the reasons Mr. Karmazin does not consider the historically high scatter market premiums, which have run as high as 50 percent at CBS, an anomaly. He expects scatter sales in the second half of the year to remain strong, with inventory tight and cancellations low.
“We think the upfront will be very, very strong because the people who waited for scatter did not get the bargains they were hoping to get. Many of them got shut out,” he said.
With sweeps and season-to-date ratings leads for CBS, Viacom is positioned to take advantage of what continues to be a surprisingly strong television ad market, even where its older demographics are concerned.
“We are going to sell what we’ve got. If we have older demographics, we’ll take those shows with older demographics and sell them to those advertisers looking for those older demographics,” Mr. Karmazin said.
“We’ve taken shows out of the upfront, where people were buying only to [age] 49, and sold them to pharmaceuticals and financial services, and that strategy has worked well for us.”
Although the war is an uncertainty for which Viacom has tried to budget, Mr. Karmazin sees more upside than potential downside in the year ahead, with 46 percent of Viacom’s revenues coming from advertising. Although Mr. Karmazin declined to be specific, Morgan Stanley analyst Richard Bilotti estimated the initial cost of war coverage and the loss of advertising, especially in the early days, at $75 million for Viacom.
Not much is likely to shake CBS and UPN this year, even as News Corp.’s Fox Broadcasting Co. moves forward with a plan to stagger-start its new 2003-04 series in the summer and fall around its baseball telecasts. “The better programs are getting bigger increases no matter where they are,” Mr. Karmazin said.
“I am indifferent to where advertisers want to spend their money. If they want to spend it in broadcast television, syndication, cable or out of home, we are fine with that,” he said, referring to Viacom’s diversified cable, broadcast and outdoor media platforms.
“I don’t think the agencies need us telling them where they and their clients need to be spending their money. They have access to the same research and we have not seen a material shift of dollars going from the broadcast networks to the cable networks. People buy and watch programming,” he said.
In fact, Mr. Karmazin said based on the ratings and ad pricing success, and prudent cost structure, he estimates that CBS has the most profitable prime-time schedule, even though NBC overall continues to generate more profits. “We know what NBC is paying for shows like `Friends’ or `ER,’ according to published reports. When we take a look at the cost-per-spot differential that NBC gets on Thursday night and we use that public information about the per-episode cost of shows on NBC, we conclude CBS has far more profitable nights of television than NBC,” he said.
“Our cost structure on `Survivor’ and `CSI’ and `Without a Trace’ is far more beneficial to our shareholders,” Mr. Karmazin said.
Mr. Karmazin’s hallmark has been prudent cost control and maximized ad revenues, both of which will fuel Viacom’s upfront and 2003 performance.
Viacom TV networks and stations cash flow grew 25 percent last year to about $800 million on a 4 percent rise in revenues to $5.3 billion, Mr. Bilotti said. He expects CBS network ad revenue to rise by up to 8 percent in 2003, and by as much as 11 percent in 2004.
He forecasts up to 5 percent growth for CBS and UPN TV stations in the first half of 2003, up to 5 percent growth in the second half of the year, and up to 10 percent advertising growth for Viacom’s MTV cable networks.
Despite the trademark enthusiasm of television’s consummate salesman, Wall Street analysts say they are concerned about the impact uncertainty will have on Mr. Karmazin’s contract negotiations and the impact the pending war will have on the upfront market, Viacom’s stock price and the company’s outlook.
He declined to discuss his contract status in the interview, one of the few he has done in recent months. He also declined comment on Viacom’s earnings call with investors earlier this month. Asked whether he would be around to see through the next several prime-time seasons at Viacom, he simply responded, “I don’t know.”
Asked whether he would like to be at Viacom then, he paused and said, “If things work out, sure.”
Viacom Chairman Sumner Redstone recently told investors that while a timely resolution is critical, it’s more important to “get it right.” Mr. Redstone is seeking to diminish the operational control and absolute power Mr. Karmazin has under a contract that expires at year-end. In what looks like a power play from the outside, Mr. Redstone wants to be able to fire Mr. Karmazin “at will” without board approval and have say in daily management, sources said.
Wall Street experts say there is a 50/50 chance Mr. Karmazin will leave, and that the outcome of the negotiations, being aided by a board committee, could be known as early as March. Sources said Mr. Karmazin is willing to yield on immediately accepting the CEO title. Both men are major shareholders who have most of their personal wealth tied up in Viacom stock.
“I think the strength I bring Viacom is beyond Wall Street. I have for my entire career been an operator. I enjoy operating companies. I am very proud of the great team we have assembled and the operations that are the best in the business,” Mr. Karmazin said.
In any event, Mr. Karmazin said he is preparing to put some of Viacom’s $3 billion annual free cash flow, strong balance sheet and borrowing power to work making acquisitions that could include some Vivendi Universal cable network assets, TV stations and entire TV station groups, radio stations and possibly even CNN, since its merger talks with ABC News have been terminated. Sources estimate CNN is valued at upwards of $8 billion.
“I can’t tell you what the price would be, but it certainly would be an asset we would be interested in if it were available,” Mr. Karmazin said.
“I wouldn’t rule out anything in the future that would vie for us to be able to do news gathering a more efficient way than we are doing it now.”
Mr. Karmazin said he has not talked to AOL Time Warner about buying CNN lately, and was refused by the company when he inquired about it more than a year ago. Discussions that CNN and CBS once had about a cooperative news-gathering arrangement broke down over control issues.
High-level sources at AOL Time Warner say the company now would be more receptive to a s
ale of CNN based on its need to reduce a $27 billion debt and the results of an internal study that determined an estimated $400 million in annual savings could be realized if CNN was folded into a broadcast network such as Viacom’s CBS. That’s more than twice the annual savings yielded from a CNN-ABC News merger.
Jeff Bewkes, entertainment and networks group chairman at AOL Time Warner, said because it is a public company, the management and board would have to consider all fair offers for CNN even they intended to sell to a particular buyer.
“If they really wanted to sell CNN-just like if they really wanted to sell their 50 percent interest in Comedy Central or Court TV-it would be done,” Mr. Karmazin said.
Ted Turner, CNN founder and outgoing AOL Time Warner vice chairman, said he does not have the resources to buy back the news company and does not want to see it sold or merged.
Mr. Karmazin’s hallmark has been prudent cost control and maximized ad revenues, both of which will fuel Viacom’s upfront and 2003 performance.
Some investors are concerned that nearly half of Viacom’s revenues are advertising-dependent, and that 89 percent of Viacom’s cash flow comes from broadcast television, cable, radio and outdoor businesses. However, Mr. Karmazin said the company’s “laserlike focus” will keep free cash flow at about 47 percent of its annual earnings before interest, taxes, depreciation and amortization.
Mr. Karmazin, under whose leadership Viacom and all of its core operations have aggressively grown, points out that the company’s free cash flow has gone from 8 cents per share in 1999, the year before it acquired CBS, to $1.46 per share in 2002. “This may have been the best merger of all time,” Mr. Karmazin said during Viacom’s recent fourth-quarter earnings call.
Viacom just met the low end of its double-digit increase guidance to Wall Street for 2002 earnings, which drove some analysts to lower their 2003 earnings estimates for the company and hedge some of their bets.
If there was a sense of disappointment by some analysts, “It was because we hit the low end of our guidance and didn’t blow away our numbers as we have historically done, and the reason we didn’t is 2002 was a very challenging year and we managed to hit our number,” Mr. Karmazin said.
In a report to clients, Tom Wolzien, veteran analyst at Sanford Bernstein, sounded the acerbic view from Wall Street, saying that just maybe Mr. Karmazin’s departure from Viacom-if it comes to that-may not adversely impact its stock.
“The Karmazin soap opera has not had a recent impact on Viacom stock,” Mr. Wolzien maintained after doing some in-depth analysis. “In fact, Viacom has actually performed a bit better than it should have during this most recent period of Mel stories.”
Mr. Karmazin responded to that sentiment during the recent earnings call the only way he knows how-by crediting the well-regarded deep executive team he has put in place and the core operations that are generating double-digit earnings in what some would characterize as a time of mixed blessings in television.
“Viacom is a large-cap growth stock trading at a value multiple showing strong top-line growth, leveraging that into double-digit earnings growth, picking up market share, great brands, great depth of management, great free cash flow and a great balance sheet-it’s all here,” he said.