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Thursday, September 07, 2006

On Freston, Redstone, and Viacom

From Gannon On Investing

On Monday, Sumner Redstone fired Viacom’s CEO, Tom Freston. Yesterday, Viacom announced that its Board of Directors had appointed Philippe Dauman President and CEO and Thomas Dooley Senior Executive V.P. and Chief Administrative Officer (a newly created position). Mr. Dooley’s role is expected to be similar to that of a Chief Operating Officer.

Both Dauman and Dooley are members of Viacom’s Board of Directors. They served in key positions within the previous incarnation of Viacom, which was split into two separate public corporations, Viacom (VIA) and CBS (CBS), approximately eight months ago. Sumner Redstone is the Chairman of each company. Viacom’s new CEO, Philippe Dauman, will report to Mr. Redstone. Thomas Dooley will report to Mr. Dauman.

Although The Financial Times went with the no nonsense headline “Freston Removed as Chief of Viacom”, I fear The Wall Street Journal may have had the more accurate headline: “Ouster of Viacom Chief Reflects Redstone’s Impatience for Results”. In fact, I couldn’t have said it better myself. Of course, I was planning on writing more of a personal opinion piece than a front page article (the story made the front page of both the FT and the WSJ). Still, I can’t fault The Wall Street Journal for putting the painfully obvious in big print.

The Journal article (which is a good outline of the whole affair) won’t encourage faith in Sumner Redstone among Viacom’s shareholders. It begins by quoting Mr. Redstone’s assurance (given just six weeks before) that he could imagine “no circumstance” under which he would fire Mr. Freston. Cut to Monday, at Sumner’s estate, where Tom Freston, a 26 year company veteran, is told he has managed to lose his job, just eight months after being given the helm of the new (CBS-less) Viacom.

The most obvious objection to Mr. Freston’s firing is simply that he wasn’t given enough time. There are billions of people on this planet and it took more than eight months to produce the majority of them; so, I imagine doing something truly remarkable, like steering a media company through troubled, transitional waters, takes quite a bit longer.

The other objection is that Freston had already proved himself a capable executive. He may not have been able to answer the question “What have you done for me lately?”. But, he had built up quite a reputation at MTV. Recent results have taken some of the shine off that golden boy (the channel, not Freston, who is no golden boy at age 60).

MTV is more than a golden boy; it’s Viacom’s crown jewel – accounting for about 70% of the company’s revenue and nearly all of its profits. The aforementioned Journal article fears “Mr. Freston’s departure could lead to a wider shake-up at the company, particularly within MTV networks, much of whose management has been with the company for years and is intensely loyal to Mr. Freston.”

Those fears are rational. Any time an executive this connected to a particular division is lost there is a danger others may follow – especially when such an unceremonious exit is forced upon a company vet by the powers that be. In this case, the (perceived) motives of those powers is also a cause for concern.

There’s no doubt many at Viacom now see the long, decrepit arm of Sumner Redstone reaching out from his Beverley Hills estate and reasserting his grip on the cable properties that were once buried deep within his corporate behemoth.

At the time of the CBS / Viacom split, I knew Viacom would trade at a price that would keep it well off my investment radar. If anything, I thought CBS would be the more likely opportunity. Right now, I’m not tempted in the least by either stock. But, I have found myself much more interested in Viacom as a business.

The one really exciting aspect of the CBS / Viacom split was the idea that an MTV native would be running the new company. Viacom’s properties are very different from those owned by CBS. There was (and still is) an opportunity here for Viacom to become a content focused company.

CBS really isn’t content focused – and it shouldn’t be. That company’s biggest competitive advantage is owning a U.S. TV network. There are only a handful of such networks and each is a franchise (albeit a waning one).

Simply controlling a network, regardless of the quality of its current programming, has value. The situation is analogous to owning a Major League Baseball team, which has some value regardless of the quality of the players currently under contact.

Broadcast networks are in a very different position from cable properties, where excluding a handful of properties (e.g., ESPN, Discovery, and the Food Network) competitors have no real advantage in attracting good programming. Many large media companies are built around delivery (though they have managed to delude themselves into thinking otherwise).

Content and delivery are two very different businesses that owe their marriage more to the egos of media moguls and the capital of the investors who buy their securities (both equity and debt) rather than to any natural economic synergy.

The origin of good content is always a choke point; the delivery of such content almost never is. It takes only two competing buyers to make a market. I’ve never been convinced that serving thousands of small customers is really a safer and more profitable business than serving a few big ones (except in high volume, low margin businesses where a large customer playing hardball can force you to eat your unused capacity). In cases where the product is unique and the right to use that product is exclusive (as is often the case in the media business), the number of different owners of the various delivery systems becomes an unimportant point.

The broadcast networks are an exception – a living relic of a bygone era. They have a competitive advantage that isn’t derived solely from controlling content. They have an established network, which acts much like a large installed base by providing a beachhead of access and familiarity from which an offensive of solid programming can be launched into millions of American homes.

Cable properties can’t emulate the networks. But, they can build finite competitive advantages through bits of good content that can be milked for a time. Changes in technology will never eliminate the choke point that accompanies good content. It will exist online and offline just as it has existed in print and pictures.

Maybe Viacom’s new management will be focused on providing good content – but, I doubt it. Somehow I suspect they will be more interested in doing deals and selling Wall Street on Viacom’s future prospects. Such actions would be consistent with both their own backgrounds and with Sumner Redstone’s expressed tendencies.

A Financial Times article entitled “Jumping Jack Crash: Digital Kills the Video Star” ends with a quote from Mr. Redstone: “We will seek out every sensible deal – whether in the digital space or otherwise…And…we are determined not to let it get out of our hands.”

Those are scary words for investors who have entrusted their capital to Viacom. When a public company convinces itself it can’t afford not to do a deal, it usually gets the deal – and shareholders pay the price.

There are real problems at MTV – and real challenges at Viacom. Both The Financial Times and The Wall Street Journal noted that ratings for the MTV Video Music Awards were down 30% this year. That’s on top of a decline in ratings the year before. The internet also presents challenges (and opportunities) for Viacom. But, are Dauman and Dooley really any better equipped to tackle these problems than Tom Freston was? For me, it’s difficult to imagine anyone better suited to run the new Viacom than Tom Freston.

This is a big step backwards for Viacom. The benefits of autonomy that might have been reaped under Mr. Freston are unlikely to flourish under Dauman and Dooley, who are, by all accounts, legates of Chairman Redstone. The leash has been tightened.

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