The IPO is not the end of the asset restructuring / reorganization at CBS. Take that to the bank. As the article below supports, the network is valuable for distribution to content producers.
LA Times Business
Tuesday, November 3, 1998
Is a CBS-Sony Alliance Still a Possibility With Jordan's Retirement?
By SALLIE HOFMEISTER, CLAUDIA ELLER
For several months, outgoing CBS Chairman Michael Jordan and Sony Pictures Entertainment Chairman Howard Stringer had discussed a possible alliance between the two companies. Now, with the announcement last week of Jordan's early retirement, the question is whether his successor and CBS' largest shareholder, Mel Karmazin, will keep those talks alive. Sources say he opposed the idea,
which is curious considering he was shopping the network and dreaming up strategies aimed at reducing its losses.
On the surface, a Sony-CBS alliance makes some
sense. Sony, unlike Disney, Fox, Paramount and
Warner Bros., is one of the few Hollywood studios
that doesn't own a broadcast outlet, meaning it has
less leverage than it used to for getting its movies and
television shows on the air. Of the networks, only
CBS and NBC remain unaffiliated with a
studio--making it ever more difficult for them to secure
top programming at a time when all networks are
desperate for hits.
Both Sony, which is owned by the Japanese
electronics giant, and Universal Studios(),
controlled by the Canadian beverage company
Seagram, are prevented by federal law from owning
more than a 25% interest in any U.S. TV station.
There's no prohibition against foreign companies
owning U.S. networks, but it's the stations owned by
the major networks that generate most, if not all, of the
profits.
CBS could lose $100 million or more this year on
the network side, which would be offset by the
strength of the radio and TV station group.
Sony figured out a way to get around the
foreign-ownership restrictions. The studio recently
bought 50% of Spanish-language broadcaster
Telemundo's network while taking just under 25% of
its station group. Industry analysts suggest that Sony
might follow the Telemundo model in structuring a
deal with CBS.
Neither CBS nor Sony officials would comment on
speculation about talks.
Sources said Stringer, the former president of
CBS, had been pushing to make a deal with the
network and that talks with Jordan had heated up in
recent weeks. The discussions apparently grew out of
months of conversations between Stringer and Jordan
involving Sony's plan to underwrite CBS' launch of
high-definition television. Sony is providing cameras
and production equipment for several programs,
including some NFL games, to be shot in the HDTV
format.
Sources say Karmazin, CBS' chief operating
officer, was cool to Jordan and Stringer's idea of Sony
buying the CBS network, but his objection might have
stemmed from mounting friction with Jordan rather
than from any deal itself. Sources say that with Jordan
stepping out of the picture, Karmazin might now pick
up the ball.
After all, Karmazin has been the biggest proponent
inside CBS for selling or leasing the network to a
programmer to get the money-losing operation off
CBS' balance sheet. He has had conversations with,
among others, USA Networks Chairman Barry Diller,
Time Warner() and Viacom(
). Wall Street sources said Karmazin was hoping
to sell the network for about $5 billion, widely
regarded as a ridiculously inflated price. Westinghouse
Electric Corp. bought CBS' network and its profitable
radio and station group for $5.4 billion in 1995.
Sources say Diller was only interested in taking the
network if CBS' stations agreed to pay USA for the
use of programming. Rather than paying stations
compensation to carry network programming, Diller
wanted the CBS stations to pay USA $175 million for
providing it. That would have been a first for a major
network.
Last week, in an interview about Jordan's
retirement, Karmazin suggested that such a deal would
be crazy: "I could easily give the network away as a
gift this weekend if I wanted to. I'm going to a bar
mitzvah party."
Publicly, Karmazin has been adamant about his
support of the network business. He lobbied hard in
recent months to get regulators to allow broadcasters
to own more than one network to spread out overhead
costs.
Last week, Karmazin said his company is not
interested in turning over its network "to a Diller or a
Sony" and that there is no evidence yet that networks
owned by studios--i.e., ABC and Fox--have any
advantage over those that aren't.
So far this season, the CBS network has
maintained its audience, while ABC, NBC and Fox
have all experienced declines. CBS' recent momentum
may have dampened Karmazin's desire to unload the
network.
Analysts believe Sony should make some kind of
move into domestic television distribution. The
company has contemplated a public offering of its
entertainment assets for at least three years, which
might make it possible to get around the
foreign-ownership rules.
Sony, whose long cold streak in movies was
greatly relieved last year by such hits as "Jerry
Maguire," "My Best Friend's Wedding" and "Air
Force One," was waiting for sustained quarterly profit.
But some argue that the studio missed the market's
peak and is now distracted by problems in Asia that
have dragged down the world economy.
Sony's core electronics business has been
pummeled. Sources say Sony is more eager than ever
to expand on the content side in television as well as
on the Internet to compensate for problems on the
hardware side.
Sony's TV business--one of its best-performing
units--is in jeopardy because of the company's lack of
distribution leverage. While the company has launched
several overseas channels, it operates only the Game
Show Network in this country. The deal with
Telemundo gives Sony an additional outlet, but that
network reaches a limited audience compared with the
major broadcasters.
In the last two years, as federal rules have allowed
networks to own more of their own programming,
Sony has been forced to relinquish significant stakes in
its prime-time TV shows to the networks in exchange
for air time. CBS' recent renewal of Sony's program
"Early Edition" gives the network rights to sell the
sitcom in the United States in reruns, dramatically
reducing Sony's potential profit.
"If you're a company creating copyrights on a
global basis, you'll be out of business if you don't own
the front window," one media investor said.
Copyright 1998 Los Angeles Times. All Rights Reserved
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