The Prospects of Viacom

Economics Article on Viacom - April 2004

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Pining for the Prize:
The media industry is changing. Will content prove to be king?

Last year, Viacom and cable service provider EchoStar stepped into the ring and threw the gloves off to duke out who was king in the ongoing battle between content producers and distributors. It was a lengthy fight. The details are in, “and according to Wall Street observers, the winner in the new deal between the two companies is ... the content side.”1

There are four big gun, world-wide media companies: Disney, Time Warner, News Corporation and Viacom. At a time when media moguls are dropping like flies, there are still two going strong. Whether News Corporation’s Rupert Murdoch or Viacom’s Sumner Redstone comes out on top might soon be decided.

The two media moguls have a good deal in common. Aside from them being similar ages, both inheriting small family businesses and building them into global empires that seemingly will be passed down in a monarchical fashion, both Redstone and Murdoch are frugal businessmen. They stick to what they know.

The triumph over EchoStar reinforces Redstone's philosophy that, “content is king”.2 Entertainment relies on hit films, TV and radio shows. If one distributor will not carry the programming viewers want, they will get it somewhere else.

Thus proved to be the case as the contract allowing EchoStar to carry Viacom channels ended December 31st, was stretched to mid-March by three court orders, and ended as the NCAA championships, carried by Viacom’s CBS, approached. Many viewers’ solution was spelled simply by college basketball fans on sports’ bulletin boards, “Two words: Rabbit ears…Or a sports bar.”3 EchoStar loses and content wins forcing the distributor to carry more of its less popular channels in order to get the premium ones.

But there is another player on the scene pulling heavy strings and shaping the future of the media industry. Surely there are multiple reasons for the deposing of Disney’s Michael Eisner and Time Warner’s Stephen Case over the last year, but the chief media stock picker for the L.A.-based investment firm Capital Research & Management, Gordon Crawford, definitely had something to do with it.

The ultimate weapon of money managers is to dump all of their shares. This is a bold tactic though and persuasion is typically courted. But Crawford has sent major shockwaves through the industry recently with his ultimate weapon.

Gordon Crawford’s actions are closely watched on Wall Street. Considered as one of “the media world’s savviest investors,” Crawford is known for long-term investments and it is eerie how prophetic his predictions have been to this point.4

He realized the money to be made from licensing old movies and TV shows as well as cable service providers in the mid-1970’s. In 2001, he began dumping cable operators for satellite TV, and perhaps the fact that he has held on to his Time Warner stocks, even when they took a severe nose dive after the dot-com bubble burst, is a sign of things to come.

In early 2001, Crawford liquidated Capital’s Disney shares completely, prompting other investors to lessen their holdings, destabilizing Disney’s already rocky position and spelling Eisner’s doom. In late 2002, Crawford met with Time Warner Chairman Stephen Case and gave him a simple and clear recommendation: Resign. Now it appears Crawford has set his sights on Viacom’s Sumner Redstone.

Viacom has maintained the most stable stock value and steady growth since the dot-com bust in 2000. Regardless, Crawford cut its stake in Viacom by half on September 30th of last year raising many investor eyebrows.

Analysts say, “Crawford has no management issues with Viacom,” but that this move represents concerns over underlying changes in the media industry.4 “The fastest-growing media companies will have names like Yahoo, Google, InterActiveCorp, Ebay and Amazon,” Crawford said in a speech to the Museum of Television and Radio in New York.4 Crawford’s words may prove prophetic in the longer-term, but in the immediate future it appears Viacom will go to the bank in 2004.

Sumner Redstone and Rupert Murdoch are good at what they do and stick to what they know. This has spelt success by their, “opportunistic knack of replicating a tested formula in new markets”.2 This is the reason Viacom did not take the opportunity to merge with AOL or to branch out into more bizarre arenas like Disney (professional sports and record companies).

The gem that Redstone and Murdoch have struggled for for years now seems to be in grasping reach: China. “I have no patience for patience,” Redstone told a Chinese reporter on his last trip.5 An exception to this can be marked by Redstone’s annual pilgrimage to China.

For six years now, Redstone has made his way to try and crack the nut that is Chinese communist authorities, “wary that foreign media and entertainment could undermine traditional morals and loosen their grip on power,” and have thus maintained tight control over the sector. This patience, compromise and negotiation has a handsome reward however: a viewership of 1.3 billion people. And now it looks as if Redstone might have his foot in the door.

The Chinese State Administration of Radio, Film and Television eased restrictions on foreign investment in TV programming and film studios last year. Viacom has also just signed a deal to broadcast an hour and a half of shows from Nickelodeon on a new Chinese Central Television (CCTV) children’s channel and this comes a full year after receiving permission to run MTV 24-hours a day to southern China. Now a joint venture with Chinese production to produce TV shows in Shanghai is on the table.

“I think they trust us. This time, I tell you, we were amazed at the openness.” Redstone said of the recent deal. 5 As a palm-greasing concession, Viacom has agreed to carry CCTV’s English-language channel in its program package deal to more cable service providers. “Most of what they know is distorted and unfair, and we’re determined to change that,” Redstone said in regard to western perspectives of the Chinese.5

Why does Redstone say, “this time,” about dealing with the Chinese? Because Murdoch has been in China for years, as well as his son, making similar efforts to do the exact same thing and make the exact same concessions, but are still only providing limited programming to southern China’s Guangdong Province, three star hotels, and some of the big cities.6

What makes Viacom different to China? While the other big three media corporations have branched out in various directions, Viacom has remained respectively specialized on producing with Redstone’s, “content is king,” mantra. Perhaps this gives the Chinese State Administration of Radio, Film and Television the extra trust they need to allow Viacom to be the first major western media corporation to begin producing and broadcasting in the country. Murdoch has made similar concessions as Redstone with the Chinese, but News Corp’s huge investment in satellite systems, most notably STAR whose footprint covers the whole of Asia and Australasia, could prove quickly unruly if given too much freedom.

Gordon Crawford sees the future piggy bank of media to rest in the internet because splintering audiences more and more will be able to download programs they want and deny broadcasters their advertising dollars. Redstone rebutted to Crawford’s prediction, “We believe that this year will be the best advertising year in history and that Viacom will be the primary beneficiary.”4

Crawford’s view is reminiscent of pre-dot-com perspectives and may well be right in the long run, but if indeed Viacom can crack the Chinese market (where internet is also censored/regulated) and increase its viewership by 1.3 billion, the near future looks incredibly lucrative for Viacom and content will continue to be king.


-Bossa Nova

-BusinessWeek Online

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-CNN Money

-“Viacom and News Corporation: Still rocking.” The Economist. 21 November 2002.

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