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The Scoop On Cnn's Bottom Line

The Scoop On Cnn's Bottom Line

Two days after the start of the gulf war, the president of Cable News Network is huddling with editors and producers at the international desk when a phone call interrupts the impromptu meeting. It's Jordan's King Hussein. From him, W. Thomas Johnson Jr. learns that five CNN crew members, including anchor Bernard Shaw, have made it safely across the border out of Iraq. Johnson, who has been in the newsroom nearly every waking moment since the invasion began, is visibly relieved. In the same call, he persuades Hussein to agree to an interview and, more important, to let CNN move one of its portable satellite dishes from Amman to Jordan's border with Iraq. Johnson gets off the phone and gives a silent thumbs up as news of the phone call spreads through the room.

Thumbs up is getting to be a familiar sight around Atlanta-based CNN, thanks to its coverage of Operation Desert Storm. The only network with continual live reporting from Baghdad the first night of bombing, CNN has drawn grudging respect from rival networks and rave reviews from TV critics, government officials, and other influential viewers. At a press conference after the initial U. S. bombing runs, Defense Secretary Richard B. Cheney and General Colin L. Powell, chairman of the Joint Chiefs of Staff, admitted that they were getting some of their information from CNN. Many independent TV stations and even a few network affiliates carried CNN during the war's early moments.

SATELLITE LINKS. The network's ratings skyrocketed the night of the invasion, to 11% of U. S. households, vs. a little less than 1% on a normal day. But it's unlikely that CNN's war-coverage coup will translate into a financial windfall--at least in the short term--for parent company Turner Broadcasting System (TBS) Inc. Costs have risen sharply as CNN has scrambled to add staff, secure more satellite links, and pay other production costs. Now, the challenge for Johnson, who was vice-chairman of Times Mirror Co. until July, is to solidify the ratings blitz into steady viewership gains after the war ends.

Experience has shown how difficult that can be. CNN has been through ratings binges before, most notably during the protests in China's Tiananmen Square and the San Francisco earthquake. Neither event brought a sustained ratings jump. "The only way they're going to boost ratings long-term is to come up with a solid strategy to grab viewers from regular network programming," says Stephen M. Leff, director of media at advertising agency Backer Spielvogel Bates Inc.

Johnson, 49, knows that. In recent months, he has been working on a plan to increase CNN's audience with new programs and to hire well-known anchors from the competition. But there hasn't been much time to fine-tune this strategy. The network's new president reported for work on Aug. 1--the day before Iraq invaded Kuwait. Next, he had his hands full with the flap over the broadcast of Manuel Noriega's prison tapes, a dispute resolved when CNN finally surrendered the tapes to federal court in Miami.

In addition to the programming questions, Johnson has been struggling with cost problems. CNN says it was $12 million over budget from the time of Iraq's invasion of Kuwait in August through the end of 1990. Full-year results aren't out yet, but Turner Broadcasting disclosed in its most recent public filing that expenses for its news division surged 42% in the third quarter, ended Sept. 30. As a result, operating profits fell to $ 24.1 million for the quarter--down $4.5 million from the same period a year earlier. Analysts estimate that CNN is now spending anywhere from $500,000 to $1.5 million a day on war coverage. That is sure to crimp first-quarter results--especially since CNN lost revenue in the war's first hours by preempting ads in order to provide nonstop coverage.

CRUCIAL COMPONENT. No one denies that good coverage costs money. But at debt-laden TBS, those costs hit hard. CNN and sister network Headline News accounted for about a third of TBS's $1.1 billion in overall revenues in 1989. Yet it was responsible for a disproportionate 47% of the parent's $266 million in operating income before interest, dividends, and corporate expenses. Indeed, high margins on news are crucial to TBS's plan for managing its hefty $1.8 billion debt load.

A 1989 recapitalization took some of the pressure off CNN and other TBS operating units. In one of the last underwritings by Drexel Burnham Lambert Inc., the investment bank helped TBS restructure $1.6 billion in high-cost debt. In its place, TBS ended up with $900 million in bank debt and $700 million in senior subordinated debentures and zero-coupon bonds. Since then, TBS has cut bank borrowing to $750 million and tapped commercial paper markets for $85 million in lower-cost funds. The new structure gives TBS at least seven years to boost cash flow without banks breathing down its neck (charts).

The recap also permitted Ted Turner to keep control of the company he founded in 1965. In 1987, Turner raised $561 million by selling big equity stakes to Time Warner, Tele-Communications, and other cable companies after his 1986 takeover of MGM/UA Entertainment Co. put him in a debt crunch. A year later, he replaced a portion of his most expensive debt by tapping CNN's borrowing power to raise $150 million. The only problem was that if the CNN-secured debt wasn't paid back by this year, he could have had to convert that debt into new TBS Class B shares--which could have lowered his voting stake substantially. Now, with the recap, Turner has about a 36% equity stake, with 60% voting control.

He may still be in charge, but even Turner acknowledges that his buccaneering days of one-man rule are over. The cable companies that bailed him out now have 7 of the 15 seats on TBS's board, and they used their veto power to overrule his attempt to buy Financial News Network in 1990. On the other hand, when it was time to find a replacement for Burton Reinhardt, who was retiring as president of CNN, Turner passed over several insiders vying for the job and chose Johnson.

Tom Johnson clearly has a knack for finding powerful mentors. After working on President Lyndon B. Johnson's press staff, he became deputy general manager of LBJ's Texas TV station, KTCB. When Times Mirror bought the station in 1973, he caught the attention of Chairman Otis Chandler and quickly rose through the ranks. Former bosses and colleagues say Johnson is perfect for CNN's frantic pace. "He's in his element now," says Chandler, now chairman of Times Mirror's executive committee. But Johnson's track record as publisher of the Los Angeles Times suggests that he might not be the perfect person to rein in runaway costs.

Starting in the mid-1980s, Johnson oversaw a costly expansion project to increase the Times ' presence throughout the West Coast. In the process, according to former colleagues, Johnson lost track of what was happening right in his own backyard. Competing Los Angeles-area papers racked up valuable circulation gains in Orange County and the San Fernando Valley. Soon afterward, Johnson was moved over to the corporate staff as a Times Mirror vice-chairman. Unhappy in that position, he was ready to move on when Turner came calling.

Since the crisis in the gulf began, it has been clear that Johnson is firmly in control of CNN. And with Ted Turner spending more and more time on philanthropy and socializing with actress Jane Fonda, speculation continues to grow that he may sell his controlling interest to Time Warner Inc. or another buyer. In January, Time Warner upped its voting stake from 8.5% to 8.9%, putting its equity stake at around 19%. It explains that Turner simply wanted to cash out some shares. Turner isn't talking. But the worth of his stake will depend greatly on how well his new management star handles the spotlight at CNN.