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Left Coast Bias: All Eyes on CBS

Despite Les Moonves' optimism, CBS's relative lack of revenue diversification is increasingly troubling to investors in this marketplace. 2/21/2009 02:00:00 AM Eastern

When CBS took its turn in the earnings barrel last week, the announcement went as well as it could have for the most part, considering the company was reporting a major drop in profit and the slashing of its once-prominent dividend.

And many industry insiders gave credit to company chief Les Moonves for his relatively optimistic outlook in front of analysts.

Moonves has always had a knack for handling the press. The coverage of his company's under-siege financials was positive enough that I have to believe had Alex Rodriguez hired Moonves as his PR adviser, none of us would be laughing about the most famous cousin since Joe Pesci's Vinny Gambini.

But behind all of that talk is a portfolio that still gets about two-thirds of its revenue from a devastated advertising market (compared to, say, 40% for an outfit like NBC Universal), a model that many believe may never bounce back to previous levels. And while the dividend cut was lauded as wise, CBS's relative lack of revenue diversification is, for obvious reasons, increasingly troubling to investors in this marketplace.

So last week, after CBS released earnings, I called a bunch of big media execs and chatted about what we would do if we ran CBS. Most praised Moonves for his handling of the report as well as the trend-bucking strength of his broadcast network. But all agreed with Wall Street that he has his work cut out for him. A number of other ideas arose from these chats.

THE COMPANY: While it may be a pipe dream—and inspiration for a massive Les Moonves-Philippe Dauman standoff—everyone to a person believes the ideal move would be to put CBS and Viacom back together. Or go the other way and take CBS private. Another topic that came up often, though one significantly less important, was that it is time to formalize the combination of the network and the studio, and reap the cost savings from the positions that are duplicated in the current structure.

THE NETWORK: Clearly the strength of the company, CBS's broadcast network is on fire right now from a traditional metric standpoint. They are developing hits (The Mentalist, Big Bang Theory) as some of their other assets get long in the tooth. Some advertising execs have noted that CBS programming is very static (like “vanilla ice cream,” one ad exec said), but outside of Fox, find me another network that wouldn't love to have its lineup now.

Moonves says CBS will get a big chunk of the next upfront and he is absolutely right, as the network is humming on pretty much all cylinders. But the question that troubles many is, how big will that overall upfront pie be? On a related note, a common theme in these chats was the question of whether CBS should still be involved in The CW network at all.

DIGITAL: While some like to question the $1.8 billion price tag on CNET, let's be honest: No one in big media has figured digital out. And if I had any clue, I wouldn't be making minimum wage as a journalist.

CABLE: If NBCU, Disney and News Corp. can offset their network challenges with cable, it stands to reason CBS should go deeper into this game if the opportunities present themselves.

Several people brought up going after the Scripps cable networks to diversify the portfolio. One potential drawback to that plan would be the retransmission money CBS is chasing. The company will get its retrans money, even if it's closer to the 30 cents per sub many expect than the 50 cents CBS would love to nab.

But a wider cable portfolio for CBS could be a challenge because if you are playing hardball with the cable operators on retrans money, as one exec said, “they will line up your cable networks and shoot them as hostages”—meaning they'd hardball CBS right back on sub fees. That said, the cable model is working right now and Wall Street agrees. So if the price were right for a cable property that makes sense and the company could come up with the cash, the CBS portfolio could use it.

STATIONS: Assuming there are some contrarians out there controlling private equity money, many think CBS needs to dump all but its top four or five owned stations.

CBS FILMS: A minor point, but everyone I talked to believes CBS should jettison this immediately. And no one I talked to thought Moonves would actually do this.

We all know everyone is an expert on everyone else's business. But one of the great things about being both a journalist and a fan of the business is the chance to talk to execs and play this kind of fantasy football with other people's money.

CBS is as fascinating a case study as there is right now. By the metrics on which big media used to get judged—namely, ratings—the CBS network is absolutely standing out from the pack, the immortal American Idol aside.

But while I loved Moonves' optimism that things will get better in the second half of the year—by whatever metric—few of us are expecting that, much less betting our budget forecasts on it.

The big question is whether or not CBS's challenges are mainly economy-driven (leaving one to wonder if revenue will bounce back), or are we really seeing a fundamental shift in the advertising marketplace? The network model is not totally broken as some execs like to claim, so the true answer has to be somewhere in the middle.

And for CBS, just like every other company in our business, the race is on to find the answer sooner rather than later.

E-mail comments to ben.grossman@reedbusiness.com

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