Here you go Michael, I subscribe
.
One of the great puzzlers of business, and a question much on the minds of CEOs today, is
how to shift capital smoothly out of a declining industry and into a rising one.
Mel Karmazin, head of CBS and author of last week's $37 billion merger with Viacom, has
come up with the best answer yet from anyone in the declining business of network television.
First, let us recall why things are so bad. Last year, for the first
time, none of the majors managed to capture even 10% of the
prime-time audience. Yet they demand higher and higher ad rates
for a shrinking viewership, claiming network airtime has only
become more valuable as big audiences become harder to find.
Such paradoxes aren't built to last, and the cracks are showing.
NBC is the only network that really makes any money. At ABC,
Disney is chipping another 60 seconds out of every prime-time
hour for another commercial. Ads already soak up 16 minutes
and 30 seconds an hour compared to 11 minutes a decade ago.
That can only drive the audience away faster.
Nor are big advertisers as gullible as they seem. New research is
showing that reach is more important than frequency--you don't
need to pummel people over and over. And often it can be
cheaper to combine smaller audiences than aim for big ones. The
day is coming when broadband will allow advertisers to zap
specific packages of ads at designated viewers.
P&G got a 20% click-through with its Scope mouthwash "kiss" sent out over AOL on
Valentine's Day, allowing recipients to e-mail a pair of dancing lips to a friend. It may not be
time to blow taps for network television, but it would be a bad idea to stop making payments
on the life insurance.
What to do? In this column, we have been at pains to ponder the cannibalization dilemma. The
large network audience may be a wasting asset, but it's still an asset.
In a stroke of perhaps accidental genius almost two years ago, Mr. Karmazin hit upon a
solution when he bought equity stakes in two Web properties, Marketwatch.com and
Sportsline, and paid with commercial airtime on CBS instead of cash. The sites were rebranded
with the CBS logo, and thanks to the network's promotional efforts, both have climbed the
ranks of the most-visited sites on the Web. CBS's stakes are now worth over $400 million.
In effect, Mr. Karmazin was cashing out of CBS's television audience for a piece of the web
audience of the future.
And he has kept doing it. In April, he doled out $200 million in "branding and promotional
time" (as the inevitable CBS press release puts it) for a stakes in Hollywood.com and
storerunner.com (an online mall), plus another $42 million for a piece of Office.com (a small
business site).
After this spasm, he rested for a few weeks, then dished up $472 million in promotional
consideration for stakes in Medscape.com, Rx.com, Wrenchhead.com ("a site for automotive
enthusiasts"), Jobs.com, ThirdAge.com (a baby boomer site), and switchboard.com (a
directory of names, addresses, phone numbers and maps).
This is a performance that shames many old media companies, which had the same
opportunities and waved them off out of nervousness. But that's par for the course. Fortune
favors the non-chicken.
The proper way to think of any business is that all assets are liquid if you have enough
imagination. Barry Diller tried and failed to exchange shares in his old media empire, which
includes the USA Network and other cable stations, for control of the popular Lycos site.
Lycos's shareholder balked at giving up their undiluted web dreams for something with too
much of the past stirred in.
Mr. Karmazin found a nifty way around this problem of the, ahem, unique valuations accorded
to web properties, which makes them too expensive to acquire with cash or the shares of
old-style industries. Remember that all the money flowing into Internet IPOs the last two years
has been flowing right back out into advertising anyway. Mr. Karmazin merely cut the IPO
bankers out of their fees, exchanging air time directly for an ownership stake in selected web
sites.
These dealings may shed light another Karmazin coup, his $4 billion splurge last year to bring
the NFL back to the network.
The visor-headed guys at NBC dropped out of the bidding at $2.4 billion. They have claimed
the deal struck by Mr. Karmazin would be a money loser to the tune of $150 million a year. So
far, CBS claims to have covered its costs after the first season. The network is even reporting
overall profits for the year after three years in the red.
But an asterisk needs to be affixed to all this: Under the deal, the NFL agreed to defer a hefty
sum as a balloon payment due in the fifth year. By then, we surmise, CBS may not mind
taking a huge write-off for the football contract. With any luck, the charge would be more than
offset by the soaring profits and valuations for CBS's other media properties. Football helps to
gather up the otherwise hard-to-reach young males who can be found Budweisering
themselves in front of the TV during football season, directing them to CBS's web sites.
This doesn't mean Mr. Karmazin will someday throw out the network as an empty husk. He
talks a good game about squeezing more money out of advertisers by offering them a package
of network time combined with billboards, website banners, local TV ads, and airtime on his
infinity of radio stations. But if you estimate the value of these other properties, the network
was probably not accorded a king's ransom in the $37 billion pricetag. Of all the people
owning networks, Mr. Karmazin and his Viacom partner, Sumner Redstone, are probably the
first to truly accept the sunset nature of the business.
Back 14 years ago, when General Electric bought NBC, NBC was a nice little business, and
GE figured it could bring its financial discipline to bear and make it even nicer. Last year,
though, NBC faced a sickening 20% drop in its prized yuppie viewership.
When Disney bought ABC in 1995, a network had stopped being an attractive business. Now
it was a strategic piece, like buying shelf space on which to place Disney's other
wares--movies, TV shows. The programs might not be profitable on first run, but they could
make a bundle in syndication. The hitch was you had to create hit shows, which Disney has
failed to do.
Sadly, CBS, NBC and ABC are resolutely domestic brands in an increasingly global age. At
some point each will become just another number on the dial, but not all the audience has left
the room just yet. And cannibalization is the highest form of synergy. |
