When Sumner M. Redstone's Viacom Inc. bought the CBS television network in 2000, adding its television stations and Infinity Broadcasting radio stations to his movie studio, theme parks and Blockbuster video stores, he said the new company would be a "formidable media giant."
For a time, it was. But now, five years later, bigger may no longer be better, both for Viacom and several of its behemoth media and entertainment peers.
Viacom has spun off Blockbuster, which was crippled by competition from digital video on demand and services like NetFlix. The company is looking to sell its slow-growth, expensive Paramount theme parks and buy a booming video game company. Finally, last week, Redstone said he would push to split the $60 billion conglomerate into two smaller, more nimble companies, one running CBS and the stations and the other the movie studio and cable channels, such as MTV and Comedy Central.
"We live in a different world today, and you have to be able to respond to the changing world," Redstone said in an interview Friday.
Focusing on core business
After a decade of growth by acquisition, media conglomerates such as Viacom, Sony Corp. and Time Warner Inc. are beginning to reconfigure, pushed by new technologies and changing consumer habits. At the same time, the 1990s cookie-cutter model of a media giant -- take one television network, add a movie studio, theme parks, music company and maybe a pro sports team -- is falling from favor, as companies settle on their core identity, analysts said.
For instance, "theme parks make sense for Disney," said Legg Mason Wood Walker analyst Blair Levin. "That's part of the Disney DNA," allowing fans to interact with the Disney characters. For Viacom, which has five Paramount theme parks, and NBC Universal Inc., which operates Universal Studios theme parks, he said, theme parks make less sense in the mix.
Sony, which made its name in electronics, has had much greater success in music and movies over the past five years. Its once-trendy home electronics and even its groundbreaking Walkman were bypassed by popular micro-gadgets such as Apple Computer Inc.'s iPod. Poor sales in Sony's electronics division forced the company in January to reduce its projected earnings for the fiscal year ending this month.
Meanwhile, earnings at its movie studios have soared on the strength of hits such as "Spider-Man," and a 2004 merger between its music company and Bertelsmann AG's BMG Entertainment has cut losses in that business unit.
Sir Howard Stringer, head of Sony Corp. of America, was tapped to become Nobuyuki Idei's successor as the company's global chairman and chief executive earlier this month. Days after his ascendance, he rolled out a line of new digital music players, aimed directly at the iPod. Stringer has consistently called for Sony to spin off the American movie and music assets in a separate public company -- similar to Redstone's proposal for Viacom -- but the idea was resisted by Sony's Japanese headquarters. With Stringer now running the entire company, he may refloat the idea, analysts said.
Dismantling assets
Meanwhile, cable giant Comcast Corp., the nation's largest provider with nearly 22 million customers, has done an about-face in acquisition strategy from this time last year. In February 2004, the company announced an unsolicited takeover bid for the Walt Disney Co., saying that it wanted to add content to its delivery system.
Rebuffed, Comcast withdrew the offer and returned to its core business. It has joined with Time Warner to make a multibillion-dollar bid for Adelphia Communications Corp. and its 5 million customers.
Liberty Media Corp. Chairman John C. Malone is also in the midst of dismantling his hodgepodge of media assets. Last week, after enduring years of Liberty stock trading at a discount as compared with the value of its assets, Liberty said it would spin off its roughly 50 percent stake in Discovery Communications Inc. into a new publicly traded holding company. If the other major shareholders, Cox Communications Inc. and Advance/Newhouse Communications Inc., which each own about 25 percent of Discovery, merge their shares with Liberty's, Discovery will effectively become a public company -- which is what Malone expects. If Malone is right, then Discovery will be in a better position to acquire other businesses or be acquired itself.
At Viacom, the past five years have taught Redstone that all parts of his company will not grow at the same rate, he said, which is why it makes sense to split the steadier, slow-growth company -- the CBS side -- from the faster-growth side, MTV and the film studio.
In 2000, after the government erased the national radio ownership cap, Viacom's radio business grew at a 27 percent clip, fueled largely by acquisition, he said. Now, with nearly 200 stations, the company's radio division produces steady cash but only single-digit growth.
The businesses that have not met Viacom's aggressive growth goals would be jettisoned in the reorganization, he said, mentioning the company's 856 movie screens in Canada. As for the theme parks, he said, "They may go, also."
Tech bust
Redstone has been frustrated that the slower-footed elements of Viacom have been a drag on Viacom's stock price, which is still far below its early-2000 high of nearly $70 per share. Time Warner learned the same lesson after it was acquired by AOL: The online unit pulled down the stock price as it shed subscribers and advertising dollars and endured a government accounting probe. The AOL brand was dropped from the company's name in 2003.
Topping Redstone's shopping list are more cable television channels to add to the MTV/Nickelodeon empire, he said. He added that Viacom is "underinvested" in the Internet and will look for acquisitions there. "But not Yahoo or Google," he said. Also not on Redstone's list: a cable or satellite system. "I would expect the company would not be involved in distribution," he said. "We don't need it."
Like Rupert Murdoch's News Corp., Viacom cannot buy any more television stations in the United States, thanks to a cap put in place by Congress last year.
In 2004, General Electric's NBC bought Vivendi Universal's movie studio, cable channels and theme parks, but not Universal Music Group, seeing an industry troubled by sales losses and piracy. Compared with others, GE was a latecomer to the media mega-mergers and has so far not made an Internet investment, passing on the tech-boom temptation that nearly sank Time Warner and cost Disney millions. It learned by the mistakes of the too-early adopters.
Randel A. Falco, president of NBC Universal Television Networks Group, said the company surveyed the remains of the tech bust and decided its play would be content, not distribution.
"We looked at a lot of things; we looked at satellite," he said in an interview Friday. "But it seemed to me that the way digital platforms emerged and are emerging. . . . I don't want to say distribution is a commodity, but it almost is a commodity. There are so many different ways to get content into your home, why would you want to make a bet on what is the right distribution system of the future?"
"Everyone needs content," he said.
From sports to video games
Disney has not made a major acquisition since its 1996 purchase of the ABC and ESPN networks. However, it did sell its Anaheim Angels baseball team in 2003 and agreed last month to sell its Anaheim Mighty Ducks National Hockey League franchise. Sleeker by two expensive-to-run teams and richer by more than $200 million, the company is focusing on keeping its remaining, core businesses -- theme parks, movies and television -- and expanding into Asia, which analysts see as sound strategy.
"Disney is driving synergies amongst divisions and should remain intact in our view," Deutsche Bank Securities analyst Doug Mitchelson wrote last week.
News Corp. -- which owns all or part of the Fox Entertainment Group, film operations such as Twentieth Century Fox, 35 television stations, DirecTV Group Inc., the New York Post and HarperCollins Publishers Inc. -- once thought that the Los Angeles Dodgers would be the foundation of a cable sports network to rival ESPN. But News Corp. found greater success with its regional sports networks and sold the Dodgers last year.
Now, News Corp., like its peers, is eyeing the video game sector, President Peter Chernin has said. Regarding the Internet, Lachlan K. Murdoch -- Rupert's son, the company's deputy chief operating officer -- told investors last month that the company wants to grow its Internet presence but not via major acquisition.
Sanford C. Bernstein & Co. analyst Tom Wolzien cautions that size sometimes has its advantage for media giants, providing bargaining heft and a big collective toolbox for business units to draw on.
"If the stock is languishing, [selling off pieces] might do something that has a short-term positive impact, but then down the line, will the operators be hamstrung because they don't have the tools they need?" Wolzien said in an interview Friday. "I think it is the responsibility of management to make the case to [Wall Street] about why the pieces that are being broken apart are not essential to working together."
Staff writers Annys Shin and David A. Vise contributed to this report.
