Here is a balanced look at company from today's New York Times
New York Times (Business)
Building a New Empire in Thin Air
January 5, 1997
By MARK LANDLER
When John Kluge was a sophomore at Columbia University in 1935, he flirted with the idea of moving to China to start a competitor to the British East India Company.
A scholarship student, Kluge was earning extra money by working as a private secretary
for a classmate, the son of the president of China, Lin Sen.
With his pluck, his classmate's contacts and China's bountiful supply of tea, Kluge
20, imagined putting the world's most powerful trading company out of business. But
in 1937 the Japanese bombed Shanghai, and the ensuing war between China and Japan
dashed the young man's fantasy.
Now, six decades older and $7 billion richer, Kluge is finally making his foray into
China -- bringing wireless telephone service to a country where tea is common but
talking on the telephone is not. The venture, he contends, is far more than an aging
man's fantasy.
"Every country needs two things to develop economically: transportation and
communications," Kluge said recently in a rare interview at the New York offices
of his publicly traded telecommunications and entertainment company, Metromedia
International Group. "Communications is not a luxury in emerging markets; it is
a necessity."
At the age of 82, when even the most restless of tycoons are ready for a silk-lined
retirement, John Werner Kluge is starting his most ambitious enterprise. Having
amassed one of the world's great fortunes in television and cellular communications
in the United States, Kluge is busy constructing wireless cable television and
telephone networks throughout Russia, the Baltic states, Eastern Europe and China
Metromedia is still a bantam in a world of communications heavyweights. The company
has fewer than 200,000 customers for its grab bag of services, which range from
wireless cable TV and telephone to paging.
Frederick W. Moran, a media analyst at Furman Selz, estimates that the company's
overseas wireless operations will generate just $6 million in operating cash flow
this year, on $100 million in revenues.
Kluge is better known for Metromedia's other major asset, Orion Pictures, the
respected Hollywood studio with a troubled financial past. His personal holdings
also include the Ponderosa and Bonanza restaurant chains; two Manhattan hotels, the
Barbizon and the Radisson Empire, and even a professional soccer team, the
MetroStars.
Clearly, though, Metromedia's communications division is the crown jewel in Kluge's
empire, and he wants to polish it to a fine luster. Its wireless networks are capable
of reaching roughly 100 million people in cities like Moscow and St. Petersburg in
Russia; Tbilisi, Georgia, and Riga, Latvia. Metromedia's newest joint venture --
with a Chinese phone company called Golden Cellular -- will enable Kluge to reach
another 70 million potential customers in several major Chinese cities, including
Tianjin and Nanning.
Kluge's strategy rests on a beguilingly simple premise: More than half the people in
the world have not yet made their first telephone call. In China, only 4 people in 100
have their own phones; in the United States, 6 of every 10 do.
By getting into these embryonic markets and by using wireless technology, Kluge
believes he can establish a valuable beachhead -- before mightier players like AT&T
or Deutsche Telekom.
"This is like the United States in the 1800s, when people were staking their claims to
land," said Richard J. Sherwin, a bluff, chain-smoking cellular-telephone
executive whom Kluge hired to cobble together his network. "The difference is, you
don't mine under the ground," he said, "you mine the airwaves."
Of course, exporting communications to these countries is not as simple as putting
up microwave towers and handing out portable phones. In addition to the usual
cultural hurdles, there are significant political barriers.
In Russia and Eastern Europe, the governments require foreign companies to own
communications networks in partnership with local companies. In China, foreign
companies must limit their involvement even further, by owning stakes in joint
ventures that provide services to locally owned network operators.
Nor is it clear how many people will clamor for Metromedia's services. Signing up
just 1 percent of potential customers, Sherwin acknowledged, would constitute great
success. And while Kluge has sought out less competitive corners of the
communications business, he still faces some hefty rivals in those markets,
including France Telecom in paging and Motorola in wireless local telephone
service.
So far, Wall Street has treated Kluge's venture with the skepticism it might have
shown him had he taken on the British East India Co. more than 60 years ago.
Metromedia's stock languished in the mid-teens for most of 1996 and closed at
$10.625 on Friday, giving it a market capitalization of $702 million.
Signaling how serious he is about the company, Kluge recently turned over day-to-day
control to Stuart Subotnick, 54, the former tax lawyer who is his partner and most
trusted adviser. That prompted the resignation of Metromedia's chief executive,
John D. Phillips.
"If Stuart is the chief executive, it means that this is where they want to make a
public stand," said David J. Londoner, an analyst at Schroder Wertheim & Co.
But the question remains: Why would one of the world's richest men choose this
forbidding business landscape for what is very likely to be the last stand of his
career?
Colleagues say Kluge is perpetually driven to devise new challenges and then to
surmount them. Sumner M. Redstone, a fellow billionaire who became the chief
executive of Viacom last year at 72, said, "You can't measure these things
chronologically."
The compact, laconic Kluge, however, offered a more prosaic explanation: he said he
was merely a businessman on the prowl for a good opportunity. Speaking in his
characteristically slow, soft cadences even when indulging in a bit of
salesmanship, he said, "We don't want to just make progress; we want to make
geometric progress."
Subotnick, who has made an estimated $500 million by investing with Kluge, puts it
another way. "We've never gone where the herd goes," he said. "By the time the herd
shows up, it's too expensive."
Zigging when the crowd zags has served Kluge well ever since he came to the United
States as a poor immigrant from Germany in 1922. After serving in military intelligence in World War II and working as a salesman for a paper company, Kluge
name means "clever" in German) bought his first media property, an AM radio station
in Silver Spring, Md., for $15,000 in 1946.
At the time, many experts were predicting that radio would soon be eclipsed by
television. But Kluge acquired more radio stations and used the cash they generated
to diversify into TV -- not by buying glamorous affiliates of the Big Three networks,
but by buying a string of independent stations.
Kluge's radio and television outlets became the core of his first publicly traded
company, Metromedia Inc., and occupied his attention for more than three decades.
From 1959 to 1981, the company's stock rose from 69 cents a share to $569, when
adjusted for stock splits.
In the early 1980s, Kluge expanded into cellular phones. But he did it through the
back door: Metromedia spent $300 million to buy radio paging companies in major
markets like Boston and New York. The paging companies were then applying for
cellular telephone licenses. When the companies got them, Kluge suddenly owned a
fistful of the most valuable cellular licenses in the country for a fraction of what
he would have paid if he had pursued the licenses directly.
But Metromedia's stockholders balked at his expansion and fled, pummeling the share
price. So in 1983, he borrowed heavily to buy the entire company himself for $1.2 billion.
A few years later, when the demand for TV stations and cellular franchises drove up
their value, he began methodically selling them off: Rupert Murdoch acquired the
stations for $2 billion to form the backbone of his Fox network, while Kluge sold the
cellular franchises to a variety of companies for more than $4 billion.
By the time he finished his gargantuan garage sale, Kluge was sitting on about $6.5
billion in cash -- enough to catapult him to the top of Forbes magazine's ranking
the 400 wealthiest Americans. (He has since dropped to fourth, after Microsoft
founders Bill Gates and Paul Allen at No. 1 and No. 3, and the investor Warren E
Buffett at No. 2).
Though Kluge has the properties and perquisites of the superrich -- a 10,000-acre
estate with private chapel in Charlottesville, Va., a sumptuous duplex apartment on
the Upper East Side of Manhattan, a 206-foot yacht and a just-completed $30 million
mansion in Palm Beach, Fla. -- colleagues say he is a notorious skinflint when it
comes to business deals.
In 1988, he waged a fierce battle with Redstone in negotiating to buy Redstone's
shares in the Orion film studio. People familiar with the talks said the two men had
narrowed the price to within 25 cents a share, but spent a whole afternoon haggling
over the last quarter. Splitting the difference, Redstone finally agreed to sell his
shares to Kluge for $18 each.
Given his thrift, it is not surprising that Kluge was put off by several of the
hottest new communications businesses of the early 1990s. He said that
direct-broadcast satellite television and personal communications services were
exciting. But the costs of entering these businesses were steep, and legions of
companies had already entered the field.
Instead, Kluge focused on wireless cable, a rather unglamorous technology that got
its start two decades ago as a way to bring pay TV to rural areas. The technology works
by beaming signals from a central microwave tower to dishes clamped to the roofs of
houses or apartment buildings. But what Kluge liked most about it was that it was that it was
cheaper than ripping up streets to lay wires.
Rather than focus on the crowded American market -- where the government was
auctioning off wireless licenses for billions of dollars -- Kluge zeroed in on
virgin markets like Eastern Europe and China. With their pancake-flat geography and
their tall apartment towers, many Eastern European cities are also particularly
well suited to wireless transmission.
Using Sherwin as his advance man, Kluge scooped up licenses overseas for wireless
cable, paging and international toll calling. In all, he collected licenses for 27
cities across 15 countries -- from Moscow to Almaty, Kazakhstan. Other players like
U S West Inc. also went after licenses, but they focused on cellular telephone.
Winning licenses in emerging markets is largely a matter of knowing the right
politicians. As Frank Miller, a telecommunications entrepreneur with broad
experience in the Russian market, puts it: "You've either got to have ties with the
Kremlin or to regional strongmen."
Kluge has invested considerable time in developing those ties and has not hesitated
to use his money as an extra lure. His approach to the Republic of Georgia is a
study in mixing diplomacy and financial largess.
Sherwin, who is 53, began promoting wireless communications to Georgian government
officials in 1991, when the country was in the throes of a civil war. During one early
visit, he recalled, a sniper's bullet whizzed through the lobby of his hotel,
narrowly missing him.
To demonstrate his commitment to the country, Kluge donated $250,000 to fuel planes
that were flying food and medical supplies to Georgia.
By the time the first round of fighting subsided, in 1992, the government had awarded
Metromedia national licenses for paging and international toll calling, plus a
license to offer wireless cable in Tbilisi.
Then last summer, Kluge traveled to Georgia for a private meeting with President
Eduard A. Shevardnadze. Shortly thereafter, Kluge and the Georgian Ministry of
Communication signed a deal granting Metromedia a license for its nationwide
cellular phone business.
"We don't want to do things through third parties," Kluge explained. "We want to see
the whites of their eyes, and they want to see the whites of our eyes."
In Georgia and other markets, Metromedia's cable customers receive a mix of channels
similar to a basic cable lineup in the United States: a handful of local broadcast
channels, plus cable channels like CNN, BBC and the Discovery Channel.
Metromedia programs a local channel in most markets, according to Sherwin, and
subscribers pay an average of $15 a month.
Now, Kluge also hopes to offer a new form of local telephone service, called wireless
local loop. Like wireless cable, local loop beams a signal from a tower to a rooftop
dish. But unlike cellular service, in which the call signal bounces from tower to
tower as the caller moves, wireless local loop signals are transmitted to a fixed
site.
Wireless local loop is intended to compete with regular local phone service in
markets where the wired network is not fully developed. Metromedia is testing it in
two Chinese cities, Tianjin, near Beijing, and Nanning, the capital of Guangxi
Province.
Despite a wave of early publicity, however, the technology has not caught on among many other telecommunications companies because of concerns about voice quality,
said Alexander Kabanovsky, an analyst at Pyramid Research, a
telecommunication research firm in Cambridge, Mass.
Metromedia is hitting other bumps, too. The company's joint venture with Golden
Cellular has been dogged by misunderstandings between the two companies. On a recent
morning, Sherwin was on the phone with a Metromedia colleague, worriedly discussing
the company's relationship with a senior executive at Golden Cellular.
In Russia, Metromedia must battle the perception that foreign companies make lofty
promises and fail to deliver. In 1989, U S West was among several big phone companies
that teamed up to build a fiber-optic cable in Russia. The project foundered because
it ran afoul of laws limiting the export of technology to that country.
But Metromedia's bigger image problem is on Wall Street, where the company is
regarded as a hodgepodge of businesses with little obvious connection to each other.
In addition to its telecommunications assets, Metromedia owns three film studios:
Orion Pictures, the company that Kluge gained control of in 1988 for $204 million but
that later filed for Chapter 11 after a string of money-losing films; the Samuel
Goldwyn Co., which Kluge purchased last year for $125 million, and the Motion
Picture Corporation of America, acquired in 1995 for $22 million. It is a producer of
low budget films including "Dumb and Dumber." Together, the three give Kluge the world's fourth-largest film library, with 2,200 titles.
Subotnick said the film studios provide Metromedia with a ready source of
programming for its wireless cable systems. But several analysts said they
contributed little to Kluge's broader strategy, and some argued that he ought to
sell them.
Moran of Furman Selz noted that Kirk Kerkorian paid $1.3 billion last year for MGM, a
once-sickly studio with a library roughly the same size as Metromedia's.
Kluge said he acquired Samuel Goldwyn to buttress his library and to make Metromedia
a more viable player in Hollywood. The studios plan to produce 12 to 14 low-budget
movies this year. But after shepherding Orion through a messy bankruptcy, Kluge
seems open to exiting the film business at the right price.
"If someone comes up with a figure for the whole company, we'd have to look at it." he
said.
Kluge said he was also anxious to sell some other odds and ends in Metromedia's
portfolio, including a maker of lawn and gardenequipment and a stake in a sporting
goods company.
As for Metromedia's anemic stock price, Kluge professes to be unconcerned. Although
he owns roughly 23 percent of the reconstituted company -- a stake worth $162 million--
Kluge's Metromedia shares represent a fraction of his total net worth.
And he predicted that investors would eventually put a higher value on the company
than its current premium of more than two times projected 1996 sales. "It will take
time to put flesh on the dream," he said, "It will take time for people to realize that
this is a business, not a plaything or a lark."
For Kluge to take the long view at 82 is testament to how much this new venture has
caught his imagination. But he also allowed himself a nostalgic, and
uncharacteristically personal, moment -- noting that his foray into China was
something of a bookend for a career that began with a college sophomore's Quixotic
dream.
"If I had gone there after college, I would have undoubtedly married a Chinese
woman," said Kluge, who divorced his third wife, Patricia, in 1990. "Maybe I would
have been a lot happier."
|
