Viacom President Quits, Ending Strained Executive Partnership

An uneasy executive-suite alliance between two of the entertainment industry’s most powerful and willful executives ruptured Tuesday with the resignation of Viacom Inc. President Mel Karmazin, whose relationship with Chief Executive Sumner Redstone had been strained since their companies merged four years ago.

The departure of Karmazin, who headed CBS before its merger in 2000 with New York-based media giant Viacom, sent speculation swirling throughout the media landscape, from studio lots to Howard Stern’s radio show. The central question: What’s next for Mel?

Known for his bottom-line orientation, Karmazin, 60, is considered one of the few entertainment executives with the stature to run his own media company.

That prospect immediately raised questions about whether Karmazin might be a contender for the job of Walt Disney Co. Chief Executive Michael Eisner, 62, whose critics have called for his resignation. Eisner’s contract expires in two years.

The Disney board, which has said it is developing a succession plan, quickly tried to quell the speculation, saying Eisner had its continuing confidence. Disney sources have said, however, that Karmazin is among those the company might consider as chief executive in the future.

Replacing Karmazin at Viacom are the company’s two most influential division heads: MTV Networks CEO Tom Freston and CBS Television CEO Leslie Moonves. Named co-presidents and co-chief operating officers, the two men are pitted in a contest to succeed Redstone, Viacom’s 81-year-old controlling shareholder.

Redstone said Tuesday that he would step down as CEO within three years, but in an interview he said he would remain “a very active and energetic chairman” after that.

He said his daughter Shari Redstone, a Viacom director, would inherit his controlling interest in the company but would not be his successor.

Karmazin’s departure was surprising mostly because of its timing. Inside Viacom and on Wall Street it was no secret that the relationship between Karmazin and Redstone did not mirror the smooth marriage of their companies.

Redstone, who built Viacom from a chain of drive-in theaters inherited from his father, had difficulty relinquishing day-to-day control over the newly merged entertainment empire to his new partner, as Karmazin’s contract required at the time.

Some on Wall Street said Redstone had provoked and taunted Karmazin. In an interview with The Times in 2001, Redstone said he would not give up his title of CEO to Karmazin or consider him as a successor over others who had helped build Viacom into the third-largest U.S. media company.

By late 2001, investors had grown concerned about the friction and its potential to damage the company. As a result, its stock price began to slide.

The sniping had become so bad by early 2002 that Viacom’s board ordered the executives to patch up their differences for the good of the company.

Investors were encouraged the next year when Karmazin signed for three more years, until December 2005, giving Redstone got new powers.

But more recently, behind the scenes, the problems festered.

One source close to the board said Redstone had been angling to oust his second in command. He used the poor performance of Viacom’s radio and billboard group as an opportunity to pounce.

When Karmazin caught wind of the plan, the sources said, he beat Redstone to the punch, resigning first.

Another person, who is close to Karmazin, said the executive also learned that Redstone was not planning to name him as his successor as part of a planning process underway at the board level.

During a conference call with reporters, however, Redstone and Viacom board member David McLaughlin, chairman of the board’s governance committee, said it was Karmazin who took himself out of the running with his resignation.

“Nobody asked Mel to resign,” insisted Redstone several times Tuesday in conference calls with analysts and reporters.

Redstone said he and Karmazin, who also was chief operating officer, had few differences about running the company. Redstone dismissed reports of disagreements over Viacom’s strategy.

“Mel and I were exactly on the same page,” Redstone said.

He said Karmazin was frustrated by Viacom’s falling stock price and by the performance of the radio group.

Karmazin is expected to be paid about $30 million to settle his contract. Redstone said his former No. 2 would serve as a consultant for several months and would not be blocked from taking a top job at a competing media business. But Redstone added, “At the moment, I don’t see an important place for him.”

Given Karmazin’s ambitions, others aren’t so quick to write him off.

The son of a New York taxi driver, Karmazin began his career as a radio ad salesman in the mid-1970s. Within a decade, he was CEO of the radio group, Infinity Broadcasting. He helped hire the then-relatively unknown Howard Stern, fired by a rival station.

On his show Tuesday, Stern lamented the departure of Karmazin, who had backed the radio personality in his battles with the Federal Communications Commission over alleged indecency violations.

“Between the FCC and Mel leaving the company,” Stern said, “I’ve got to be on shaky ground now.”

It was through Infinity that Karmazin moved to the upper tiers of the media industry. He sold the radio group to Westinghouse Electric Corp., which owned CBS. He became president of the company -- renamed CBS Inc. -- and soon pushed aside its chief executive.

After selling CBS to Viacom, he hoped to overtake Redstone, Viacom sources said. “Redstone was more cunning than he thought,” said one knowledgeable source.

During the last year, relations seemed to thaw between the two men until Viacom stock started sliding. One poor performer has been the radio division, a sore point given Karmazin’s background.

Other investors were upset that Karmazin hadn’t sold Blockbuster Inc. before the video retailer began being undercut by Wal-Mart and other rivals.

Viacom’s Paramount Pictures also has suffered from a cold streak. Redstone recently seemed to be taking a swipe at Karmazin when he suggested that a lack of financing had stymied the hits.

With the stock in decline, according to sources close to the company, Redstone saw the opportunity to push out Karmazin, long a favorite on Wall Street because of his cost-conscious management style.

The reaction on Wall Street to Karmazin’s resignation seemed to make the point: Viacom’s actively traded Class B shares dropped only 39 cents Tuesday, closing at $36.50 on the New York Stock Exchange, but the stock is down 18% this year.

Sources said Tuesday that Karmazin’s replacements -- Freston and Moonves -- both wanted control of the movie studio. But Redstone gave the prize to Freston because, among other reasons, his MTV Networks group had released about 26 pictures with Paramount, including the “Rugrats” movies and “Jimmy Neutron.”

Freston, who has a reputation as a relaxed and confident leader, also will oversee premium cable channel Showtime, publisher Simon & Schuster and MTV Networks, which includes MTV, Nickelodeon, VH1 and Comedy Central.

Moonves, whose management style is harder edged, will continue his successful stewardship of CBS-TV and the company’s station group, and take on the added responsibilities for the troubled radio and billboard group. Under the new arrangement, Paramount Television, the producer of “Frasier” and “Entertainment Tonight,” will report to Moonves instead of Viacom Entertainment Group chief Jonathan Dolgen, whose future at the company now seems uncertain.

Wall Street will be closely watching how Freston and Moonves manage their power-sharing arrangement in the face of their dramatically different approaches and backgrounds.

“Longer term, you have to see how these guys mesh,” said Jessica Reif Cohen, who follows the company for Merrill Lynch. “As much as I like them both, they have to step up to the plate and fill some pretty big shoes.”

Times staff writer Claudia Eller contributed to this report.

*

An empire’s assets

Here is a list of Viacom’s major holdings:

CBS Television: Includes CBS, UPN, 39 TV stations and production units

Blockbuster: Video retailer

Paramount Pictures: Movie and TV studio

MTV Networks: Cable channels MTV, VH1, Nickelodeon, Comedy Central, TV Land

Infinity Broadcasting: About 185 radio stations

Viacom Outdoor: Ad billboards

Simon & Schuster: Book publisher

Los Angeles Times