A funny thing happened after this year's breakup of entertainment giant Viacom Inc. The CBS half, which housed the broadcast-network and film divisions, was seen as a slower-growing unit, a tortoise. The Viacom half, which housed the sexier and faster-growing MTV Networks, cable channels and Paramount Studios, was the hare.
These days, the hare is struggling to keep pace. Since the split, the market has chiseled nearly $7 billion in value out of the company as investors grow anxious over expectations for its engine, MTV Networks (MTVN).
MTVN's record of stunning double-digit–percentage cash-flow growth is in trouble. Ad dollars started slowing earlier this year for the unit, which goes forward facing a much softer market for cable advertising. Nielsen ratings are mixed. Top executives are urgently scrutinizing every cost, right down to curtailing bottled-water deliveries.
Moreover, investors worry that MTVN is floundering in an effort to profit from its myriad Internet ventures, underscored by the abrupt exit of its chief digital officer, Jason Hirschhorn. Plenty of networks aren't even close to MTVN on the Web, but Wall Street has a much higher standard for a company that has for so long kept a steady pulse on American kids and teens.
For years, Viacom President/CEO Tom Freston was as much a rock star on Wall Street as in the halls of MTVN, which he ran for 17 years before ascending at Viacom.
Now, for the first time, some investors are starting to say that maybe Freston isn't the right guy to be CEO. And many are sniping about the company's performance in the press, putting a brighter spotlight on Freston and his handpicked successor, Judith McGrath. Viacom says the criticism is way overblown.
Perhaps it's time to make a more accurate diagnosis: MTVN has fallen, but it can get up.
Several major Wall Street media analysts agree and are eager to see the company's second-quarter numbers on Aug. 9. Even as they fret about the numbers, analysts such as Merrill Lynch's Jessica Reif Cohen and Sanford Bernstein's Michael Nathanson are recommending the stock as a “buy.” Pali Capital's Rich Greenfield has shouted for CEO Sumner Redstone to thumb his nose at the stock market and take Viacom private. Says Morgan Stanley's Richard Bilotti, “Will they be fine? I think they'll be more than fine.”
As MTV celebrates its 25th anniversary, a consensus has emerged among current and former executives of Viacom, investors, and Wall Street analysts on how MTVN can get its groove back:
1. MEMO TO FRESTON: SPEND LESS TIME IN HOLLYWOOD
Last week, MTVN executives were scarce in New York because they were headed to a board meeting in Los Angeles. Why there? Redstone spends virtually all of his time there, drawing New York executives west.
MTVN executives often note that Freston is perceived to be less visible on the East Coast, where Viacom and MTVN are actually headquartered in New York's Times Square. That perception stems largely from the months he spent in Los Angeles last year to ride herd at Paramount, which has had a complete management overhaul and acquired DreamWorks. Although that phase is over, lately, Freston has been spending around 40% of his time out West.
Freston's experience and eye for detail will be sorely needed as the digital landscape becomes even more competitive. In his years running MTV Networks, Freston proved to be one of the strongest leaders of employees in media. They need to feel him in the building.
2. INJECT MORE MANAGEMENT EXPERIENCE INTO THE MIX
It is notable that the top two executives have little experience in key parts of the company's operations. McGrath is known as a creative executive, with her best skills being in marketing and leading employees in creative ventures. However, she has little background in key areas, such as affiliate and ad sales.
That's not unusual. Ordinarily, any slack would be taken up by the COO. When Freston ran MTVN, he had a seasoned salesman, Mark Rosenthal, in charge of operations; Rosenthal left the company in 2004.
Today, MTVN's president/COO is Michael Wolf, in his first job as a corporate executive. Until joining MTVN last November, he was a respected management consultant at McKinsey & Co. and Booz Allen. He is first and foremost a strategist, trained to look where the company needs to be and then organize divisions to get there.
Since Wolf long counted MTVN as a client, he has insight into its worldwide operations. But he lacks real-world managing.
It is perhaps no accident that MTVN snags follow the departure of a string of key veterans. When Freston left his job as chairman of MTVN for Viacom's corporate suites, longtime executives such as McGrath and MTVN Music Group President Van Toffler received promotions. The internal politics of the shuffle in turn drove equally seasoned players out the door, including Rosenthal, ex-Nickelodeon Networks Chairman Herb Scannell, Nick licensing and business development chief Jeff Dunn, and veteran research chief Betsy Frank (who was first promoted to Viacom and then left).
3. DELIVER ON DIGITAL
Just one year ago, MTV licensed TV rights to the global Live 8 concert but didn't bother to grab the Web video rights. Instead, AOL stole MTV's thunder by drawing millions of surfers to its online feed of the event.
Today, no TV programmer is pushing onto the Web harder than MTV, whose major networks have established separate online programming groups so the Web won't be the afterthought it is at other networks.
No TV network is yet making big money in broadband, but Freston has boldly promised Wall Street that MTVN will deliver $500 million in annual revenues within three years. By comparison, that would exceed the estimated revenues of 15-year-old Comedy Central.
Freston doesn't talk about how profitable that $500 million in digital sales might be, but the sales alone would impress Wall Street. That's also the kind of promise investors will remember and hold Viacom to account on.
Why isn't Wall Street already impressed? MTVN executives boast of controlling 100 Websites and broadband networks worldwide, including MTV Overdrive and TurboNick. They recently partnered for a new digital music service, URGE. They've been on a shopping spree for small, youth-skewing sites, grabbing up Neopets, IFILM, GameTrailers.com and XFire.
But to Wall Street, it's all a blur. Investors look longingly at News Corp.'s MySpace, whose meteoric rise has made it the second-most-visited site on the Internet, behind Yahoo!. Acquired for $600 million a year ago (MTVN looked but didn't formally bid), MySpace is becoming News Corp.'s home for the Internet efforts of all sorts of its properties, notably its U.S. broadcast and cable networks.
That's a strategy investors can readily grasp. At MTVN, they see lots of activity but not necessarily a concrete strategy.
Wolf wouldn't specifically discuss MySpace but says, “If you think this company or any other is going to depend on one acquisition, that's just not the case.”
MTVN's success in television stems from targeting specific programming niches, not any single broad channel. McGrath and Wolf are approaching the Web the same way, combining Websites grown by individual networks with modest acquisitions of properties aimed at young kids or teens.
“We've created a business, organically, that's substantial,” Wolf says. “It's very sticky, people come visit our site, it's created revenue, and it's sustainable.”
MTVN's success with the young folks is both a blessing and a curse. McGrath brags that, since their audiences are early adopters of new technologies, MTV, Nick and Comedy Central are wonderfully positioned to exploit broadband and cellphone TV.
There is also a downside to eternal youth. As YouTube and Google video cannibalize linear TV, MTVN's conventional channels could suffer the first and most severe damage.
4. RETHINK PROGRAMMING
MTVN isn't suffering a dramatic downturn in ratings, but there are some hiccups. So far this year, the average primetime Nielsen score for all of the company's networks is up just 1% among all viewers and down 4% among adults 18-49.
MTV's ratings are mixed. According to Nielsen Media Research, MTV's total primetime audience dropped 7% during the first two quarters of 2006. In the key 12-24 demo, ratings dropped 3%. The network counters that it sells only on total-day demos, which rose 3%. Still, the decline of the other measure is hardly a good sign.
At Nickelodeon, a weak first quarter was offset by a strong second quarter, leaving the network up around 2% in total-day kids demos.
The solution to ratings growth, of course, is obvious. McGrath revealed the secret to success in television while speaking at a trade show two weeks ago: “More hits!” Her point, of course, is that the obvious solution is not simple to achieve.
One avenue is to stop relying so heavily on retreads. MTV spent a few years on a strong creative streak. Lately, however, the network seems to be treading water creatively. MTV appears to be strip-mining Laguna Beach—its best recent inspiration—for newer shows 8th & Ocean and The Hills. The premise of hit Run's House mirrors that of The Osbornes, Jessica Simpson's Newlyweds and countless VH1 shows.
Other networks are just fine. Despite Dave Chappelle problems, Comedy Central's primetime audience rose 6% in the first half; VH1 jumped 12.5%.
The main trouble spot is Nick At Nite, whose primetime audience plunged 21% in the first half. Another is Spike, where ratings have shrunk 17%, in part because it lost rights to World Wrestling Entertainment matches. But the network simply hasn't found its way in developing original programming and, with CSI reruns and the new Blade, looks increasingly like USA Network.
5. STOP BLAMING THE EASTER BUNNY
The most painfully obvious problem is the dramatic slowdown in ad sales. During each of the past three years, Viacom's basic ad revenues have zoomed 15%-25%, a huge pace that could make a broadcast-ad sales rep cry. But in first quarter 2006, the basic networks' growth hit a wall, slowing to an alarmingly low 4%. Part of that stemmed from problems at the overseas networks, but domestic ad sales alone increased a mere 6%.
At the time of the earnings release, Viacom executives minimized the slowdown, blaming it largely on the timing of Easter. The holiday falls in the second quarter this year versus first quarter last year. That means an ad-spending burst that Nickelodeon enjoys each year wasn't included in the first-quarter report.
The first quarter proved an omen of worse things to come. MTVN faces an overall cable-ad market that is suddenly softening, and upfront negotiations don't seem to be going well for any cable network.
Viacom executives didn't buy any credibility by minimizing the problem. There's not much MTVN can do to thrive in a soft ad market. The programmer is one of the biggest players, with 25% market share. MTVN can't fight the trend much. Says Merrill Lynch's Reif Cohen, “While we expect Viacom's cable networks to outperform the total market, we believe Viacom cannot avoid the consequences of a slow market, given their market share.”
Adding inventory is no solution, particularly at MTV, which has the most commercial and promo breaks in cable. (Ad buyer MindShare estimates them at 16 minutes per hour. By comparison, ESPN has just 12 minutes.)
Freston should take note. When Sirus Radio chief Mel Karmazin was Viacom's president, he personally made the rounds of ad-buying agencies, holding hands and saying, “What can I do for you?” This jaded, arrogant crowd, in charge of tens of billions of dollars, still talks fondly about how Mel courted them.
6. IGNORE THE HEDGE FUNDS
Wall Street is dominated these days by hedge funds that are great at two things: short-term trades and squeezing astronomical fees from their clients. Most of the ones holding Viacom shares today are riveted on how Viacom will look six weeks from now. Perhaps some of them will be around six months from now. Six years? Not their concern.
One of the hardest things for any CEO—much less one who, like Freston, hasn't had to deal with Wall Street much—is coping with the unceasing cries of the hedge funds: Sell assets, buy back stock, try a leveraged recapitalization, go private—any maneuver that will give them a quick boost in time for the next quarterly report to clients (although weeding out unprofitable digital-cable and international ventures might not be a bad idea).
As the hedge funds punish Viacom's stock, they crunch the wealth of Freston, Redstone and the employees around them with stock options. Pleasing them for a quick rally can be tempting.
Freston should ignore the voices. He instead should trust to the thing that made MTV Networks what it is today: his gut.