Viacom Quietly Becomes Major Force in TV

When The Cosby Show ran away with top TV ratings and critical raves last season, most bouquets were tossed the way of NBC and Brandon Tartikoff, its entertainment chief, who agreed to broadcast the show after it was turned down by ABC.

But NBC wasn’t the only company entitled to stand in the congratulations receiving line. Viacom International, the diversified media company, jumped in to provide key financial backing when the show appeared to be a high-budget long shot.

Bill Cosby wanted artistic control, permission to direct the show in New York, and a princely salary. Terrence A. Elkes, Viacom president and chief executive, worried that Cosby intended a long-running version of his comedy routine.

“How long can you drag out a nightclub act?” he asked. “It sounded like a pretty risky proposition.”

Victory was particularly sweet for Viacom, for in five years in the TV programming business it had turned out little more than such forgettable offerings as “Dear Detective” and “The Lazarus Syndrome.”

“Before the show, I’d give our programming efforts about a C-minus,” said Elkes. “Now it looks like we’re headed in the right direction.”

The show’s success has been one of several recent happy developments for Viacom, which was created in 1971 as a spinoff of CBS and has since been quietly assembling assets to become a force in the entertainment business.

Only last month, Viacom joined the major leagues of TV programming by striking a $670-million deal to buy the 50% it didn’t already own of Showtime-The Movie Channel, and all of MTV Network, owner of the ad-supported rock video station.

With the acquisition, Viacom controls programming for five cable services, since MTV Network also owns VH-1, a rock-video service aimed at 25-to-54 year olds, and Nickelodeon, an ad supported service for children.

Viacom already owned a one-third interest in Lifetime, an ad-supported cable service that offers programs on health.

Besides these interests, the company is the tenth-largest operator of cable-television systems, owner of a broadcast chain of eight radio and four television stations, and a leading distributor of movies and programs to television stations worldwide. It is the largest non-network syndicator of television reruns, with an inventory that bulges with such TV classics as “All In the Family” and “The Mary Tyler Moore Show.”

Strong Profit Growth

Combined, these operations last year yielded earnings of $30.6 million for Viacom, on revenues of $321 million. In its first 14 years, Viacom’s profits grew 23% a year on a compounded basis, winning the company the admiration of many on Wall Street--and adding it to the list of rumored media-industry acquisition targets.

Viacom’s appetite for acquisition isn’t sated. Elkes says the company is now negotiating the purchase of “one or two “ broadcast properties, and has its eyes open for cable-television systems as well.

In particular, it would like a piece of the No. 3-ranked Group W cable company, recently put on the auction block, if owner Westinghouse Electric backs off its announced intention of selling the property whole. Viacom is most hungry for Group W’s large Seattle operation, since it already owns an adjacent franchise.

“This is a very ambitious company,” Elkes said.

Viacom is expected to benefit from a sharp improvement in the fortunes of the cable-TV business, which slumped in the early 1980s under the weight of heavy capital spending and programming expenses. Now experts say much of the industry’s capital investment in wiring and other hardware is behind it, and the deregulation of cable rates put in motion by Congress last year promises to further increase profits.

Can Overcome Slowdown

Pay-TV services have been battered by a slowdown in growth, a slowdown that has not spared Showtime-The Movie Channel. While some analysts are less hopeful, Viacom officials contend that deregulation and smarter marketing will enable operators to broaden cable’s appeal and overcome the pay-TV’s slowdown.

Few dispute that the improving ratings of independent and cable stations have already increased demands for TV programming, and brightened the prospects of companies in TV programming, syndication and distribution.

With the acquisition, 58% of Viacom’s revenues will be derived from its cable programming services, compared with 35% before the deal. Some expect Viacom to join HBO-owner Time Inc. and Turner Broadcasting in the handful of companies that dominate cable programming.

Viacom officials have a very specific view of the direction cable TV is headed.

The cable deregulation bill called for the gradual freeing of basic cable-television rates from their prices that now range from $9 to $12 a month. Elkes, like some other industry experts, believes the deregulation will prompt operators to create a new “basic” service in which they offer more programs--including movies now available on a subscription basis--for a price that is somewhat higher than today’s.

Such a basic service might be offered at $25, he speculates. Viewers who want more might pay $35 for a larger cluster of programs and recent movies.

Offer Special Events

In addition, operators could offer special events such as concerts or sporting events, for $10 or $15 apiece, Elkes speculates.

The industry is already experimenting with such pricing arrangements. Bob Daniels & Associates, a Denver-based cable operator-broker, offers a service called Showcase that includes several pay channels and costs $15.95 a month, said Paul Bortz, a partner in the Denver cable consulting firm of Browne, Bortz & Coddington.

Unlike its rivals at HBO, Viacom has been outspoken in proclaiming pay-per-view services as a great bright hope for the pay-television business. For seven years Showtime has tested demand for such services, and currently offers pay-per-view movies to 350,000 cable subscribers in seven states, at prices of $3.95 to $4.95 a show.

“We’ve established that there is demand, and enough of it to make pay per view a profitable enterprise,” said Scott Kurnit, general manager of Showtime Pay Per View.

The company is now negotiating with various parties--movie studios, program producers, telephone companies, cable operators--to set up a nationwide, satellite-based pay-per-view operation. Kurnit said it is not clear when the operation may get under way, but said it could be before the end of the year.

Some industry officials have also suggested that Viacom might use its newly enlarged inventory of programs to develop a package that could be broadcast to the owners of home satellite dishes. Viacom officials say they have no immediate plans for such a product, however.

Expect Advertising

Viacom officials also say they expect advertising to begin showing up on pay-TV offerings, until there is little distinction between channels that are supported by subscription and those that are supported by ads.

“You’ll see Viacom itself experimenting with advertising on the pay channels before too long,” predicts Mark Riely, analyst with the F. Eberstadt brokerage in New York. “They may just insert a minute here and there during natural breaks in the programming, unobtrusively, but you’ll see it.”

Naturally, with only a few firms in cable programming, each has the opportunity to earn a large slice of new cable advertising, says consultant Bortz.

But he says it is not clear how much revenue will be generated by such advertising--because it is not clear how many commercials the subscription-paying public will tolerate.

“When you ask somebody to pay $8 to $10 today for a single channel, you’ve got to be very careful about advertising,” Bortz says.

Elkes acknowledges that earnings from pay-television services will probably remain about flat for the next several years. Showtime-The Movie Channel grew to 8.5 million subscribers last year, from 2.2 million in 1980, for a 28% market share that ranks it second after HBO.

Earnings Declined

But Showtime subscriptions have not grown as expected, and operating earnings declined one-third in the first half of 1985, to $19.8 million on revenues of $178 million.

MTV Network is expected to help Viacom increase its growth rate, even if, as some expect, its growth rate also slows. The company last year burst into the black after losses that totaled $34 million in the previous three years, earning $11.9 million on revenues of $109.5 million.

With its new palette of programming, Viacom gains several other advantages. Analysts estimate that it can save several million dollars a year combining the staff of its pay and ad-supported networks, and can offer programming to the cable services from its syndication library.

For example, Nickelodeon, the cable channel for children, might decide to supplement its programming with “My Three Sons” reruns.

Elkes says the company is confident that its programming efforts have turned the corner. The staff of its Los Angeles-based Viacom Productions has grown to 200 employees from 35 in 1981, and has established connections with producers and others in the entertainment community that it hopes will produce more winners.

One such connection is its affiliation with Carcey-Werner Productions, the company that offered the idea of “The Cosby Show.” Analysts estimate that if the show lasts four years, Viacom might get $70 million syndicating its reruns.

Radio Acquisitions

Elkes says Viacom’s acquisitions in the broadcast field will probably be radio stations because of the mounting prices that have recently been bid for television properties. Broadcast revenues accounted for 17% of the company total last year, but the figure will decline to 11% after the acquisition.

Last month’s acquisition announcement deflated Viacom’s stock price, which had been buoyed for months by takeover speculation. The stock closed Friday at $46.375 a share, after rising from $29.675 last year to a 52-week high of $52 in August.

Yet, Elkes insists that the company’s acquisitions were not motivated even in part by a desire to reduce its attraction as a takeover candidate.

He contends, and some analysts agree, that while the purchases add a substantial amount of debt, the burden is not heavy by industry standards. With the acquisitions, Viacom’s capitalization will consist of two-thirds debt and one-third equity, compared to a previous ration of 40% to 60%.

Elkes says the company plans to reduce that debt level over the next three years, to 57% of capitalization. Viacom is also considering offering securities in 1986 to help pay for the purchase, which has been so far financed with bank borrowings, he says.