Company Town : Strategy of New ITT Borrows Liberally From Hollywood
When it comes to merging content and distribution in the new world of entertainment, ITT Corp.’s vision of “vertical integration” is most unorthodox.
This is not your classic combination of movies, music, publishing and theme parks, but a twisted variation featuring gaming, hotels, sports and TV that has simultaneously inspired enthusiasm and doubt.
In contrast with the conglomeration of cosmetics, telecommunications, baking, insurance, hotel and industrial businesses that Harold Geneen assembled in the ‘70s under the ITT banner, the “New ITT” fancies itself a lean-and-mean entertainment company after spinning off its insurance and heavy industry units into separate public companies in December.
As it prepared for the split, ITT over the last two years beefed up its Sheraton hotel chain with the purchase of Madison Square Garden, including the New York Knicks and Rangers sports teams and a regional sports cable network; the Caesars World casino empire; and a barren UHF television station in New York that it will soon control with Dow Jones & Co., the owner of the Wall Street Journal.
Now it’s pursuing a strategy that borrows liberally from Hollywood. Just as the Walt Disney Co. trots out Mickey Mouse and Mighty Ducks memorabilia at its theme parks and company stores, ITT plans to barrage the 50 million or so guests of its casinos and hotels with an array of entertainment brands.
“People going to hotels today expect all the comforts of home with a lot more entertainment, a little bit of pizazz,” said Robert Bowman, ITT’s 40-year-old president. “Sports is a staple for our guests. You need to control the content and the delivery so that you deliver something consistent and don’t have to worry about renegotiating the contracts. That’s why Disney bought ABC instead of doing an alliance.”
As ITT sees it, Sheraton guests with idle time on their hands might pay for a Knicks game, a fight at Caesars or business news reports on a special hotel channel--customized from the broadcasts of the local UHF station in New York, which will begin pumping out sports and news some time this summer. They might buy a Rangers jersey or Caesars cap at the hotel gift shop.
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Though the company is currently preoccupied with digesting its three big acquisitions, longtime Chairman Rand Araskog says other entertainment properties will be added. He likes Gaylord Entertainment, the country music cable king that has been rumored to be for sale and that could provide a theme for a new casino. Bowman says a theme park would also make sense.
The mix of assets is unusual and the “synergy” is suspect, but Wall Street seems intrigued by the possibilities. Several investment houses predict that the stock will jump to the mid-$60s this year, from the current low $50s.
One supporter, analyst Harold Vogel of Cowen & Co., puts ITT at the forefront of an inevitable convergence of entertainment and gaming, as casinos position themselves as family resorts with circus acts, animals and rides while entertainment companies eye their cash flows and promotional possibilities. The gambling and hotel configuration got a vote of confidence last week from Hilton, which reversed its plan to separate the two operations.
And despite ITT’s inexperience in these new fields, investors are encouraged by its progress. Cash flow at the Garden, for instance, rose to an estimated $80 million in 1995, from $20 million a year earlier, with projections for $100 million next year, according to C.J. Lawrence.
Bowman said there are still too many dark nights at the storied Garden. But, he added, costs are under control and the company can now look to own acts that play for more than a couple of nights at a time.
“We want to control our own destiny,” he said. “Put more at risk and have more of the upside.”
Analysts say the company has also moved quickly to install more slot machines at Caesars, whose reliance on high rollers and board games had made it vulnerable to huge profit swings.
Yet many industry executives say the company is groping in the dark in trying to learn three new businesses at once and that its strategy is ill-conceived. Its management experience lies in hotels, but it has paid top dollar to enter the highly competitive TV, professional sports and gaming businesses.
ITT paid $207 million for the WNYC station in New York, three times more than the New York City government expected from the sale. And ITT and Cablevision Systems, a Long Island cable operator that owns regional sports networks, had to outbid John Malone’s Liberty Media Corp. for Madison Square Garden last year, paying $1 billion.
“It’s one thing to be a good strategist, to cut costs, buy and sell businesses,” said one analyst. “It’s another to be an operator in businesses you don’t know and where synergy is questionable.”
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But Wall Street’s skepticism seems mild considering the risks. “Call it the cult of Bowman,” said the analyst.
Bowman, a former Michigan state treasurer, won the trust of Araskog after becoming chief financial officer of ITT in 1992 and is seen as the architect of ITT’s overhaul. He is expected to succeed Araskog, who is 64 and recently signed a five-year contract.
“ITT will rise from the ashes because of the dynamic duo of Araskog and Bowman,” said Peter Barton, president and chief executive of Liberty, who still believes his company will own the Garden someday. “They have cleverly put their money into higher-returning businesses to capitalize on a captive audience at their hotels that is prequalified and has time on their hands.”
Yet some say ITT has yet to realize the full consequences of cross-ownership of such disparate assets. Sources wonder whether Gaylord, for instance, with its Christian leanings, will sell out to a gaming company.
And already the basketball and hockey leagues have pressured ITT to ban betting on Knicks and Rangers games at Caesars even as it allows wagers on sports teams it does not own. Critics accuse ITT of trying to curry favor with the leagues in hopes of getting concessions on merchandising and broadcast rules as part of its quest to transform the Knicks and Rangers into the nation’s favorite sports teams.
A key vehicle for doing so is WNYC, the UHF station whose name will be changed to WBIS and whose focus will be on business news from Dow Jones and sports from the Garden network. The partners had envisioned turning WBIS into a superstation analogous to Ted Turner’s TBS, but the company now acknowledges that such a transformation will be more difficult than originally envisioned.
“We want national distribution, but economically, we can make it work with just the 9 million viewers we’ll reach in New York,” Bowman said.
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ITT could have other headaches if its partner Cablevision fails to put up its half of the money for the Garden purchase. The cable company--whose Sportschannel regional cable service has rights to the New York Islanders and the New Jersey Devils of the NHL, the New Jersey Nets of the NBA and the baseball Mets--has been granted a six-month extension that expires in March.
Analysts expect the partners to merge Sportschannel and the Madison Square Garden network. “The smart money is betting that they come up with the money,” Bowman said.
Even if ITT finds national distribution for WBIS, the bigger question, perhaps, is whether viewers in Oklahoma will pay for a steady diet of games outside their region.
