Radio Drives Huge Loss at Viacom

In a move that reflects the continued challenges facing the struggling radio business, Viacom Inc. dramatically wrote down the value of its Infinity Broadcasting division Thursday, contributing to the fifth-largest quarterly loss ever reported by a U.S. company.

The New York-based media giant, which also owns CBS, MTV and Paramount Pictures, posted an $18.4-billion loss after taking an $18-billion charge against fourth-quarter 2004 earnings.

The bulk of the charge -- $10.9 billion -- was attributed to Viacom’s radio holdings, while $7.1 billion was related to its outdoor advertising business.

The write-down came on the heels of a $1.5-billion charge against earnings that Viacom reported in the third quarter. That loss was associated with the company’s spin-off of the video rental chain Blockbuster Inc.

Viacom, the nation’s second-largest radio broadcaster, is the latest company to report significant radio-related losses. In 2002, the biggest U.S. radio company, Clear Channel Communications Inc., posted a loss of $16.9 billion after writing down the value of assets it acquired during a buying spree.

Analysts said Thursday that the Viacom write-down wasn’t surprising, given that radio advertising, which accounts for 15% of the company’s revenue and profit, had been sluggish. Across the board, broadcasters have faced increased competition for listeners from satellite radio, the Internet and digital music players such as Apple Computer Inc.’s iPod.

Bishop Cheen, an equity analyst for Wachovia Securities Inc. in Charlotte, N.C., said broadcasters also were wrestling with continued fallout from a media buying binge in the late 1990s during the dot-com boom.

“Everything in media peaked in 2002,” Cheen said. “That’s how these properties were carried -- at 2002 prices. Now, it’s dot-gone and [the value of] radio has come back to earth.”

That’s not to say that radio is a losing business. Nationwide, radio revenues are growing in the single digits. That’s less than the double-digit growth in the late 1990s and 2000, but profit margins are still healthy.

Leslie Moonves, co-president of Viacom, said in a conference call with investors that getting the radio business “back on a growth path” was a top priority.

“We’re being realistic about growth expectations for radio in the current environment,” Moonves said. “It still produces a tremendous amount of cash for us.”

Moonves and Chief Executive Sumner Redstone said Viacom would soon pare down its exposure to radio by selling stations outside of the top 25 markets.

Whether Moonves succeeds could determine his future. When Mel Karmazin resigned as president of Viacom in June after a prolonged power struggle with his boss, Redstone named as co-presidents his two top lieutenants: CBS chief Moonves and cable chief Tom Freston, who also was given responsibility for Paramount Pictures.

Redstone has said that one or both of his presidents would succeed him as CEO in 2007, when he plans to relinquish day-to-day management of the company.

When Viacom entered the radio business through the acquisition of CBS Corp. in 2000, the oldest electronic medium was booming. Station values had soared in the late 1990s after federal radio ownership limits were relaxed in 1996. The economy was roaring, spurred in part by a technology boom. Radio stations were considered some of the most prized media assets as the Internet brought in a gushing vein of new advertising.

But the landscape for radio changed after the dot-com boom went bust. Thousands of Internet companies collapsed, sucking billions of dollars out of the advertising market.

The terrorist attacks in 2001 further derailed an economy that was showing signs of weakness.

Yet Viacom remained one of the biggest champions of radio under the leadership of Karmazin, who had built Infinity Broadcasting before selling it to CBS in the 1990s. In fact, many media analysts said Karmazin’s continued optimism about radio led to his downfall at Viacom.

Karmazin over-promised, they said, and under-delivered. When he resigned, Karmazin cited his frustration in turning around the radio operation and its effect in dragging down Viacom’s stock price.

On Thursday, Viacom spokesman Carl Folta said cash flow from radio increased in the 20% range during 2001 and 2002, but started declining in the second half of 2003. Negative growth in 2004 forced Viacom to take the year-end charge, he said.

“The trend became irreversible,” he said.

Thursday’s write-down came despite the continued strength of Viacom’s cable and broadcast television businesses. Wall Street was disappointed in the company’s conservative 2005 outlook, driving down Viacom’s class B shares 74 cents, or 2.1%, to $35 on the New York Stock Exchange.

Despite dire predictions, radio has survived challenges in the past, such as broadcast and cable TV.

“People are always predicting radio’s demise,” said Peter Handy, managing partner of Star Media Group in Dallas. But, he added, “although I love my iPod, it’s never going to break any new music. So I don’t ever see radio replaced by it.”

To ensure that remains true, Viacom has recently reversed Karmazin’s tight-fisted approach and begun investing in marketing and programming.

“In the past few years, no money was spent on marketing, like zero,” said Moonves, who added that he was encouraged by a plan put in place this summer that invested $13 million in eight stations. He said six of the eight have experienced double-digit ratings gains.

“The revenue is going to follow,” he said, adding that he planned to extend the program to at least six more stations.

In addition, Viacom plans to sell or trade what analysts have estimated to be as many as 70 smaller radio stations outside the country’s top 25 markets. Viacom says it will concentrate its efforts in the major markets, which account for 80% of revenue and cash flow.

Still, some analysts used Viacom’s write-down to criticize the company’s acquisition record, which some believe has been overly aggressive.

Richard Greenfield, an analyst at Fulcrum Global Partners, on Thursday encouraged the company to sell non-strategic assets such as radio stations.

“Whether they thought they paid a fair price at the time or not,” he said, “the bottom-line impact is that Viacom overpaid for these assets.”

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Times staff writers Jon Healey and Jube Shiver Jr. contributed to this report.