In Media, Size Does Matter

Because with it comes synergy, it drives industry moguls to keep acquiring. So why does Sumner Redstone want to split up Viacom?

By Ronald Grover

They're the lions of the media world -- Rupert Murdoch, 74, and Sumner Redstone, 82. Each built multibillion-dollar media empires out of considerably smaller assets that had belonged to his father. Each holds a controlling interest in his empire, rules with an iron fist, and is accustomed to getting what he wants.

In recent weeks though, these moguls who have so much in common have made it clear how differently they see the future of the media world. In March, Redstone pushed the Viacom (VIA ) board to contemplate splitting his media company into two pieces: A growth-oriented unit that would include MTV, the Paramount studios, and Nickelodeon, and a "value" company with slower growing assets like CBS and Viacom's Infinity radio chain that generate cash flow for buying back shares and issuing dividends.

The ever-acquisitive Murdoch, who's planning to launch a new reality-TV channel, is looking for partners to build a national sports channel to take on ESPN. The News Corp. (NWS ) honcho recently added to his asset base by taking full control of sports channels in Ohio and Florida and hiking his stake in the Fox studio and TV group to 98.8%, from 82%.


  The issue isn't just how big a media outfit needs to be, but the question of synergy. Media executives all profess to hate the word, but for years the principle has guided consolidation in the industry. Murdoch, with both a globe-girdling collection of satellites and the TV properties to feed them, is a firm believer that size brings synergy, and this is a key weapon in his continued fight for world domination.

While a spokesman argues that synergy is still alive and well in Redstone's empire, by dividing his company into two pieces he's cutting down on the opportunities for one part to benefit from the other.

As Murdoch beefs up plans for his newly acquired DirecTV (DTV ) satellite service, he's expected to roll out personalized video-on-demand services that will provide downloads of Fox movies, games from Fox Sports Net, or programming from the Fox News channel.

Viacom has also long been a charter member of the synergy club, using reports from its CBS news operation to provide feeds to MTV and the Black Entertainment Television channels. When Viacom converted its Nashville Network into the hot Spike TV cable channel, it boosted ratings growth by airing two of Viacom's hit CSI shows -- which air on CBS. Granted, the prices Spike paid were steep -- an estimated $1.9 million per episode for CSI: New York last year -- but having negotiators from within the group on both sides of the table no doubt helped keep the show in the family.


  So is Redstone really turning his back on the kind of synergy that Viacom has so proudly trumpeted in the past (remember Janet Jackson's boobgate halftime Super Bowl show, which MTV produced and CBS aired)? Certainly that's what some folks on Wall Street figure. "It's unclear to us that a breakup would drive significant growth," wrote Guzman & Co. analyst Jake Balzer, who follows Viacom. That seems to be the prevailing wisdom: After a bump upward in the wake of Redstone's split-up announcement in mid-March, the stock has fallen back to its pre-announcement levels.

Why is Redstone doing it then? For starters, he has always been a nervous investor. Last year, he jettisoned Viacom's 81% stake in the Blockbuster (BBI ) video chain when it started losing market share to Netflix (NFLX ) and Wal-Mart (WMT ). Now, with Viacom's stock down by 17% over the last year, he wants to get some value for his faster-growing cable channels (which include MTV, Nickelodeon, and Noggin), while allowing his more traditional assets to weather the smirks of Wall Street investors who think the radio market has seen better days.

Still, that unit produces hefty cash flow -- the radio stations alone mint some $1 billion a year -- and Redstone figures it could use that cash to buy up shares or increase dividends. That could allow both stocks to lure investors, Redstone believes. "Shakespeare said a rose by any other name smells as sweet, and I've now got two roses," the Viacom chairman has said.


  But his plan has risks. Once the companies are separate, a hot CBS show that's up for grabs may go to Time Warner-owned (TWX ) TBS, instead of a Viacom channel. And if CBS wants a hot Paramount movie -- like this summer's War of the Worlds from Steven Spielberg -- it could be outbid by another network. A Viacom spokesman says bidding wars would be great for investors of both companies, and that even now the company has to bid competitively or face the prospect of legal fights from producers, directors, or production outfits that might feel cheated.

Perhaps, but you can't help wondering what impact the split will have on have on either of the companies' longer-term growth ambitions.

News Corp. has no plans to split itself up, according to President Peter Chernin. "We don't believe synergy is dead," he said at a recent cable conference. And Wall Street seems to like Murdoch's approach better than Redstone's. News Corp.'s stock has dropped 7% in the last year, half as much as Viacom's.

"Rupert and his team have put themselves in the best shape for the long term, and we think they're the media industry's best management team, too," Liberty Media (L ) Chairman John Malone said at a recent investor conference. Malone has put his money where his mouth is, having taken an 18% stake in News Corp. since last fall.


  Murdoch is expected to soon begin talks with Malone about buying out part of his stake, but even if the two moguls can't agree on a deal, Malone says he's willing to continue taking a ride with Murdoch. "We would be very happy investors just to stay where we are," he says.

Indeed, it looks like Redstone will zig while the rest of the media giants seem to be zagging. GE's (GE ) NBC unit bought Universal Studios, eager to feed its NBC shows to Universal's stable of cable channels. Same for Time Warner, which continues to buy cable-TV systems so it can have a home for new cable channels and Internet properties. Disney (DIS ) has no plans to separate its holdings either, says incoming CEO Robert Iger.

It seems that Redstone may be the only guy in Hollywood who doesn't believe that bigger is better.

Grover is Los Angeles bureau chief for BusinessWeek

Edited by Patricia O'Connell

    Before it's here, it's on the Bloomberg Terminal.