Viacom: A Surprise Fall Replacement

Redstone's ouster of a popular CEO could further divide the ''creatives'' and ''suits''

During a retreat last January in Miami's South Beach, members of the ad sales team of MTV Networks were pumped about a new era for corporate parent Viacom Inc. (VIA ), freshly split from CBS (CBS ). As they munched on chicken wings and sipped gin and tonics poolside, longtime staffers joked that the new name for Viacom should be ``TomCo,'' a reference to the popular Tom Freston. A founder of MTV, he was picked 25 years later by Viacom's chairman and controlling shareholder, Sumner M. Redstone, to be chief executive officer of the cleaved Viacom. The 60-year-old Freston would now bring his MTV chops to the bigger entertainment company.

Less than nine months later, TomCo is TomGo. Freston is out, pushed aside by Redstone, who had lost patience with Viacom's stumbling stock price. The Sept. 5 announcement that Freston had resigned under pressure left many shocked that the new CEO had not been given more time to prove himself. Redstone, who controls 72% of the voting shares, had tired of other executives in the past and shown them the door, including Frank J. Biondi Jr. and Mel Karmazin. But neither had been as much a part of the fabric of the company as Freston. Rank-and-file workers at Viacom's Times Square headquarters, coming off the high of Aug. 31's widely distributed MTV Music Video Awards, were stunned when they returned after Labor Day to discover Freston was out, say insiders, leaving some in tears.

Those emotions may portend more tumult and perhaps more high-level departures at Viacom, particularly at MTV Networks, which accounts for about 85% of the parent's operating profits. At a company historically divided between the ``creatives'' and the ``suits,'' Freston was always a willing buffer between those camps. Booting him could very well spark a cultural crisis for Redstone and Freston's successor, the octogenarian's longtime associate Philippe P. Dauman. Management of top talent could even get messy. (MTVN's Comedy Central star Jon Stewart is a good friend of Freston's.) As a Viacom director and former vice-chairman, Dauman, 52, has worked with many of the senior staff there before and largely received good reviews. Still, some insiders are concerned that in this new role and under Redstone's constant scrutiny, relationships could be tested.

The change in leadership, for one, puts enormous new pressure on MTVN CEO Judy McGrath, who could be exposed even more to the full brunt of Redstone's ire over the stock price. Hired 25 years ago, McGrath was one of Freston's closest allies at Viacom. If McGrath were to quit or be forced out, speculation is that another MTV veteran, Van Toffler, would be in line to get the top spot. Toffler, a lawyer, has had good relationships with such MTV business partners as Microsoft Corp. (MSFT ). The regime change also raises questions about the future of MTVN Chief Operating Officer Michael Wolf, a high-profile media consultant recruited as a rare outsider to the company last November. Even before the bomb dropped on Freston, Wolf, who had no operating experience before he arrived, got off to a rocky start after knocking heads with staffers, say Viacom executives. An MTVN spokeswoman declined to comment.

Redstone downplayed the impact of Freston's departure in an interview on Sept. 5. He says he quickly placed phone calls to several of Freston's top lieutenants, including McGrath and Paramount studio chief Brad Grey, and both told him they intended to stay on the job. Even if either is thinking of leaving now, Redstone says, ``they have contracts with us. Both said that they wanted to continue to build on what they had started.''

Any regrets about splitting his company in two? No way, insists Redstone. But it could be that a creative enterprise like MTVN, now a more central piece of Viacom, needs a little insulation against the demands of the larger company. In the Dauman era, executives still need to persuade Wall Street that Redstone made the right choice in January -- and also in September.

By Tom Lowry and Ronald Grover

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