Redstone Sees More Growth for Viacom

After a stint practicing law, Sumner Redstone went to work for his father’s drive-in movie chain near Boston. Almost half a century later, Redstone, 78, has parlayed his interest in his father’s theater chain into the world’s second-largest entertainment company.

Today, Viacom Inc., which Redstone controls with 67% of the voting stock, includes CBS, UPN, MTV, Nickelodeon, VH-1, Showtime, the National Network, Black Entertainment Television, Blockbuster Video, Infinity Broadcasting and Paramount Pictures.

The acquisition of CBS last year made Viacom more dependent on advertising sales than any other media giant because of its broadcasting, radio and billboard businesses. As a result, Viacom’s shares have fallen 7% this year--more than its bigger and less advertising-dependent rival AOL Time Warner Inc.

CBS also brought Redstone a new business partner, Mel Karmazin, now chief operating officer of Viacom. Since the CBS deal, Viacom has been dogged by rumors of tensions between the limelight-loving Redstone and Karmazin, a darling of Wall Street who has kept a low profile.

In a wide-ranging interview recently at the Beverly Hills Hotel, Redstone discussed the advertising slowdown, his management team, acquisition targets and his relationship with Karmazin.

Question: After working with Mel Karmazin for the last year, what are your impressions?

Answer: He’s a very good operator. He’s very much like I am. He came from nowhere. He built what he built. It wasn’t as much as I built, but it was impressive what he did with his life. He’s driven by the stock price and that’s very important. What troubles me about this whole subject is that first, there is no rift. It’s a myth. Secondly, I don’t know why Wall Street focuses on any one person so much, whether it’s Mel or me. If neither Mel nor I were here, Viacom would still be a great company.

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Q: Part of your management style is to have dinner regularly with your top executives. Do you and Mel do that?

A: Mel is not as much of a social businessperson as I am. I don’t just spend time with the old Viacom managers, but with the top people at CBS--with [CBS Television CEO] Les Moonves, [CBS president of ad sales] Joe Abruzzese, [Infinity Chief Executive] Farid Suleman. It’s not politics. I like these people. I think it’s good for the company. In the case of Mel, we’re business friends but not social friends.

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Q: If Mel asks to become CEO when his contract comes up for renewal in two years, would you give it to him?

A: Mel is doing a fine job. He’s doing just as well as I expected or better. But I’m not going to give up my job. I work very hard. Next week, over five days, I’m going to be in London, Copenhagen, Stockholm, Zurich, Geneva, Amsterdam and Frankfurt. I love this company and I work at it, but there’s another factor also. There are people who have built Viacom with me in the last 15 years. If you had invested in Viacom when I acquired it, you would have done twice as well as with Time Warner or News Corp. or Disney. So I give great tribute to the people who helped me do that. I think it would be very destabilizing to name any successor at this time. But I wouldn’t denigrate Mel because he doesn’t deserve denigration. He deserves praise.

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Q: All media companies are looking to cut costs. You could save $30 million a year or more by merging CBS and the fledgling UPN networks. Why not do it?

A: We could merge Nick and MTV too, but we’re not going to. The amount of cost savings has been overstated, and also you have to consider how your executives would feel. [Viacom Entertainment Group Chairman] Jonathan Dolgen is an extremely valuable executive. He and [Paramount Television Chairman] Kerry McCluggage have done a great job with UPN. Gleefully, the day we launched “Star Trek Enterprise” this season [on UPN], we beat the WB [network] by 299%. You have to be very wary about taking something away from somebody who has done a great job.

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Q: What was the toughest part of building Viacom?

A: Blockbuster. When Blockbuster tanked [four years ago], I got slaughtered. I went from genius to idiot. It was like a second fire. [Redstone survived a hotel fire by hanging from a window ledge by one hand, which was severely burned.] You remember the Business Week story “Sumner’s Last Stand?” I was invited to a party at [Disney Chairman] Michael Eisner’s house. I didn’t want to go. I was humiliated by the story, which was not sound. I walked into the house and Michael said to me--and I’ll never forget it--’Sumner, forget it, it will be trash in six months.’ Fortunately, Forbes about six months later wrote a story called “The Vindication of Sumner Redstone.”

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Q: Blockbuster has turned around, [the stock is up 200% this year], but what about its long-term future in an age when people can order movies over cable or the Internet?

A: Studios are not going to do anything to hurt the video rental business. Without video rentals, there is no studio business.

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Q: Viacom bowed out of the bidding to buy the Spanish-language network Telemundo. But now I hear you are interested in Univision. When is the last time you talked with Univision’s CEO, Jerry Perenchio?

A: I’m not going to answer that question. We bowed out of Telemundo because we weren’t going to pay 27 times cash flow. Same thing with Family Channel, which went [to Disney] for something like 38 times cash flow. That kind of transaction does not interest Viacom.

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Q: Don’t you already reach the Family Channel audience through your cable networks such as Nickelodeon, TV Land and the National Network?

A: We would look at any cable programming asset because it is the best and fastest-growing part of the entertainment industry and of Viacom, particularly because our brands are not just domestic. MTV is in 145 countries with 350 million subscribers. Nickelodeon reaches 300 million subscribers and we’re moving BET and VH-1 around the world. We’re at the cusp of huge growth internationally. We’re now making money every place in the world but Asia, where we expect to break even in a year or two. In the U.S., maximum distribution in cable is 70 million subscribers. In Asia, we’ve gone from about 70 million to 150 million subscribers in the last two years. There are 3 billion people in Asia and 2 billion of them are under the age of 35. So we’ve just scratched the surface.

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Q: If you are so bullish about cable, why go for CBS?

A: We didn’t just buy the network, we got the most powerful radio station group in the U.S. with Infinity, we got television stations and we got King World. One of the things that distinguishes Viacom is that we’re the only media company in the four fastest-growing segments of the media industry--television, radio, outdoor and cable--in the 10 biggest cities in America. That has allowed us to do cross-platform deals with advertisers such as Kraft, Proctor & Gamble, Merrill Lynch, DaimlerChrysler and others.

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Q: But CBS also made Viacom dependent on advertising for 50% of your revenue.

A: The advertising slowdown is real, but let me give you a perspective. In the second quarter, CBS revenues were up 15%, Paramount was up 15%, [our] cable networks were up more than that. And just before the terrorist attack, television as an industry was down, but our television was up 5%, cable programming was down as much as 20%, but MTV was up hugely. We are the advertising juggernaut and we’ve been punished for that. But in the worst environment I can remember, we were growing 12%. So when the environment changes, we will fly.

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Q: And when will the economy turn around?

A: I would hope by mid-year. A year after the Gulf War, media stocks were up significantly. Advertising is a leading indicator, and the fact that the [stock] market starts down and ends up at the end of the day is a very good indicator. I think it’s possible we are lifting out.

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Q: CBS diverged from the other networks this summer by refusing to sell the bulk of its upcoming prime-time advertising in hopes that the economy would rebound. Did Mel make a mistake with this strategy?

A: We think the other networks made a huge mistake because they not only hurt themselves for this year but for the future.... [Our] strategy was right and rational and it’s working. [Our] ad sales for NFL games ... are up 5% from last year. Fox and ESPN’s NFL sales are down 9% to 11%. And we didn’t get any cancellations of our upfront commitments, which is important. Advertisers who left are back, like Schwab and Gateway Computers and the airlines.

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Q: Are you in favor of a merger of the nation’s only two satellite providers, DirecTV and EchoStar?

A: We grew up in an environment--cable--that was a total monopoly and we did very well. And what a lot of people don’t know is that satellite broadcasters pay us more for the same programming than cable operators. If you have powerful brands, they are going to find their way into every part of the distribution chain.

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Q: FCC Chairman Michael Powell is expected to further deregulate the media industry. How will Viacom take advantage of this?

A: We would be interested in more television and radio stations, but we’re not just looking for numbers. We want only big stations in big markets--revenue producers. As far as outdoor advertising, we are now spread throughout the U.S. Overseas, the one thing you can buy and control is billboards. You can’t control radio, television stations. We bought five outdoor companies in Europe. We’ll build them out in their respective countries.

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Q: How is consolidation good for creativity?

A: The rationale for all these regulations--scarcity--doesn’t exist today with the Internet, satellites, cable and even Blockbuster. Look, CBS is open to everybody. CBS does not buy Paramount product because it’s related. Paramount does not sell its product to CBS, it sells to the highest bidder. Where is [Viacom’s] Oprah Winfrey show? Not with us. We could have had it. But we are getting a huge price from ABC.