The Two Real Life Dramas At Cap Cities/Abc

Tom Murphy was playing to a tough crowd. The chairman of Capital Cities/ABC had been invited to speak at a media conference sponsored by investment bank Allen & Co. in Sun Valley, Idaho. But the talk of the meeting was Barry Diller, who had announced a dazzling merger of QVC and CBS, only to see it scuttled two days before Murphy's July 14 speech. How could Murphy possibly top that?

Simple. He told the group that Cap Cities planned to make a bid for General Electric Co. Because federal regulations would prohibit ABC from owning a second network, Murphy said he intended to spin off GE's subsidiary, NBC. And he was talking to Diller about selling it to him. The announcement was an elaborate joke, of course, designed to tickle this deal-crazed audience.

PLENTY OF CASH. Such a soft-shoe comes naturally to Thomas S. Murphy. But Murphy knows he can't deflect more sober questions about his company's future. The affable 69-year-old has been grappling with who should succeed him ever since his longtime partner, Daniel B. Burke, retired as CEO last February. With no clear choice, analysts and rivals believe Murphy will pursue a deal that would bring Cap Cities a new leader--much as CBS Chairman Laurence A. Tisch tried to do with Diller.

Now, though, Murphy is moving forcefully to quash such thinking. In an interview with BUSINESS WEEK, he insisted that Cap Cities won't have to go outside for his replacement. And he pledges to resolve the succession issue soon: "Just give us time." In fact, insiders say Murphy plans to elevate his top division manager, Robert A. Iger, to chief operating officer by the end of 1994. In effect, Iger will replace Burke in the duumvirate that rules Cap Cities.

Promoting Iger may not silence the whispering on Wall Street, though. As president of the ABC Television Network Group, Iger has won praise as a surefooted broadcaster. But some observers question whether he has the strategic breadth to steer Cap Cities through a roiling media landscape. In addition to ABC, Cap Cities owns cable networks such as ESPN; magazines such as W and Los Angeles; and eight daily newspapers, including the Kansas City Star and the Fort Worth Star-Telegram. "Murphy is genuine about Iger," says one former executive. "But they still have a serious management problem."

Certainly, Iger is taking steps to be ready. The 43-year-old former programmer says he has worked hard to master the argot of Wall Street. He consults periodically with Warren E. Buffett, who is Cap Cities' largest single shareholder, with a 13% stake. And he meets with other major shareholders. "I've got a lot of learning to do," Iger acknowledges. "That's what I'm doing."

If Iger doesn't learn fast enough, Murphy has plenty of alternatives. In the wake of the near-merger of CBS, broadcast networks have become tempting partners in the media mating dance (table). ABC is particularly attractive: The network is poised to overtake CBS as No.1 in the prime-time ratings next season, while its parent company is racking up record profits. "Because they generate so much cash flow," says John S. Reidy, a media analyst at Smith Barney Shearson, "there are many things they could do."

Fortunately for Iger, Cap Cities owes much of its recent success to ABC's resurgence. Under his command, the network's prospects are brighter now than at any time since Cap Cities took it over in 1985. ABC still lags behind CBS in overall household ratings, but it is quickly closing the gap. Durable hits such as Home Improvement and more recent successes such as NYPD Blue have made ABC dominant among viewers aged 18 to 49. And media buyers figure that splashy events such as the Super Bowl and the Academy Awards telecast will vault it to first place.

Nowhere is ABC's momentum more apparent than on Madison Avenue. The network sold $1.37 billion worth of time in the recently completed ad sales season--$125 million more than any other network, and 26% more than last year. As a result, Smith Barney's Reidy predicts ABC's 1994 operating profit will jump 41%, to $260 million, on revenues of $2.9 billion. All told, he says, Cap Cities' operating profit should rise 20%, to $1.1 billion, in 1994, on revenues of $6.1 billion.

FRIENDLY TIES. ABC hopes to torque its already strong profits by developing more programming that it owns. The Federal Communications Commission will allow networks to retain syndication fees from in-house shows by 1995. Anticipating this, ABC will own 8 of its 22 hours of prime-time programming next season. Iger and his chief programmer, Ted Harbert, have struck an array of deals with Hollywood producers for stakes in shows such as Thunder Alley and Blue Skies.

Iger has also improved ABC's once-rocky relationship with its affiliates. He recently signed 10-year agreements with two powerful station groups, Scripps Howard Broadcasting Co. and Hearst Broadcasting. Says Peter B. Desnoes, former chairman of the ABC Television Affiliate Assn.: "Before Bob came along, Cap Cities was closer in attitude" to CBS or NBC--networks that are hardly known for their warm affiliate relationships. Such ties are increasingly important in an era of eroding loyalty.

Iger hasn't solved every problem. Advertisers remain wary of producer Steven Bochco's acclaimed but controversial drama NYPD Blue. Despite its popularity, ABC is still selling ads on the show at a discount. The brouhaha over Blue's occasional nudity and profanity may even have put Iger's life in danger. Cap Cities suspects that two letter bombs addressed to him were mailed by a viewer outraged by the program. Police defused both bombs without incident. But Iger now travels with a round-the-clock bodyguard.

If Iger has made some dangerous enemies outside ABC, he also has powerful champions inside. Ted Koppel says he is grateful for Iger's efforts to gain live airtimes for Nightline in markets where it was being delayed until late at night. Of Iger as a prospective CEO, Koppel says: "I would certainly love to see that happen. He is smart, tough, and a decent man."

JUST LISTENING? For now, Iger may need patience more than any other virtue. Murphy has left no doubt that he still plans to call the important shots. Last March, for example, he set up a finance committee on the Cap Cities board-- consisting of him, Burke, and Buffett--to consider any proposed deals. Iger is not yet a board member.

Murphy says his goal in making any deal would be to expand ABC's role as a programming provider. With only $620 million in long-term debt, analysts figure Cap Cities could pull off a $5 billion to $10 billion acquisition. Investment bankers say Cap Cities has listened to proposals from companies such as Walt Disney, Turner Broadcasting System, and Paramount Communications. Insiders have also pressed Murphy to consider buying King World, which syndicates such hit programs as the Oprah Winfrey Show and Wheel of Fortune. At the moment, though, Murphy is playing down the likelihood of a major deal. "We always thought we were better buyers than sellers," he says, "but we haven't seen anything we really want to buy."

Murphy's rivals take him at his word. But as he himself points out, Cap Cities hasn't stopped building since it bought its first UHF television station in Albany, N.Y., 40 years ago. With business booming and his line of succession still shaky, Murphy's final play may be the biggest of his career.


With its thriving network and strong balance sheet, Cap Cities/ABC says it's open to a major deal. Among the most-discussed partners:

WALT DISNEY CO. A merger would give Cap Cities programming muscle, while Disney would get a distribution system. Disney Chairman

Michael Eisner began his career at ABC.

TURNER BROADCASTING Ted Turner badly wants a network. And Cap Cities' ESPN would complement Turner's CNN overseas.

KING WORLD Buying the syndicator would

help ABC syndicate the growing number of shows it owns--though Cap Cities CEO Tom Murphy is leery of getting into that business.

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