Viacom Shines in a Business That’s Getting Bad Reviews

Is it Hooray for Hollywood or is it curtains?

Increasingly, it seems that chaos reigns in the entertainment industry. Top executive Paul Pressler left Walt Disney Co. last week, the latest in a long line of senior managers to walk out on the company. Disney’s board of directors is putting pressure on Chief Executive Michael Eisner to put some lift in the company’s sagging earnings. Meanwhile, Vivendi Universal flirted with unloading Universal Studios, but it got no decent offers and apparently is resigned to holding on to the movie and television production business.

A quick glance at the stock market also shows how sickly the show-biz sector has become. The shares of Disney, AOL Time Warner Inc. and News Corp.--owner of Fox film studios and television and cable networks--are all down sharply this year and selling at less than half their prices of two years ago.

But one company--Viacom Inc.--is holding up better than its competitors, and its performance underscores an easy-to-overlook point: This is still a business in which money can be made. It just has to be managed right.

Viacom owns Paramount Pictures, CBS Television and MTV, Nickelodeon and other cable networks. Last year, the company posted $4.6 billion in operating cash flow before taxes and depreciation, almost 20% of its total revenue--an extraordinarily high level compared with most industries. Its earnings this year are still rising, following stringent cost-cutting during the economy’s two-year downturn.

Viacom stock, at $42.48 Friday, barely has declined for 2002, while the broad market indexes are down 16% to 20%. And Sumner Redstone, the company’s founder, chairman and chief executive, is as bullish as ever about what lies before him.

“We have as much growth ahead of us,” he said last week, “as we have achieved so far.”

Redstone, whose company’s headquarters are in New York, was enjoying one of his frequent stays in a garden suite at the Bel Air Hotel, expounding on matters including MTV’s expansion in China and future implications of feature films and TV shows being distributed on the Internet.

Though weathered at age 78, Redstone is as tough a competitor as when he started out four decades ago--a lawyer turned theater owner who argued over every dollar of box office receipts with movie studios.

Viacom has expanded in the last decade from a company with $2 billion in annual revenue to a giant with about $24 billion this year. Mergers and acquisitions account for most of the increase. The onetime syndicator of TV shows, spun off from CBS in 1970, has gobbled up Paramount, video-rental chain Blockbuster Entertainment and finally CBS itself two years ago.

Its explosive growth has been mirrored throughout the entertainment industry, as movie companies that were dependent on U.S. box-office receipts have become vast corporations distributing films and TV shows around the world over television and cable lines, as well as in theaters and through home videotapes and now DVDs.

These new distribution outlets have multiplied sources of revenue. Viacom’s cable networks, for example, bring in more than $4 billion a year, its television network and stations $7 billion and its movie business around $3 billion. Its products can be sold again and again--”re-released” in the industry’s term, as Viacom is about to do with classic episodes of the “Star Trek” television series on DVD.

But for all that, entertainment remains a tough business in which quick reflexes are required. Settling back into a rose-patterned chair, Redstone told a story about one of his sharpest maneuvers.

It was the mid-1990s, just after Viacom had bought Paramount and Blockbuster, and the movie studios were selling films to rental stores at $65 a pop. At that price, Redstone says, “I was going broke.” The high cost meant there were never enough tapes of hit films in stock because Blockbuster couldn’t afford much inventory. For customers it was “managed dissatisfaction,” he says.

So Redstone says he went to the studios with a plan: revenue- sharing. The studios would sell Blockbuster the rights to the films at $6 to $8 each. Blockbuster, in turn, would offer customers a huge selection of tapes and guarantee to keep hit movies in stock. The studios and stores would share the revenue.

It was a variation on the traditional sharing of the take between movie studios and theater owners that Redstone had grown up with. “It worked, and it saved the studios,” Redstone declares with no hint of modesty. (Some question whether Redstone is really the one who came up with the revenue-sharing idea.)

Today, home-video rentals typically account for 50% of revenue generated by a motion picture. And international distribution now brings in more money than domestic exhibition (though it often takes years for the dollars to show up).

Managing cash flows in Holly- wood, where the average film costs about $80 million to produce, market and distribute, also is criti- cal. And Viacom is a star here too. Its Paramount studio pioneered the concept of bringing in other studios to co-finance movies. “We are risk averse,” Redstone says, “and we make a film for $20 million less than other studios do.”

Global entertainment is an ever-evolving business. Viacom has been investing to build up the market for MTV and Nickelodeon and other entertainment properties in Asia, which will have the majority of the world’s 18-to- 35-year-olds in the next 20 years. Meantime, Redstone is glorying in his status as a global entertain- ment impresario.

“The president of China, Jiang Zemin, traveled 5 1/2 hours to see me” during a recent trip to Beijing, Redstone recalls. “He called me

a musical ambassador” because

MTV beams Chinese popular music to 400 million homes in that country and to millions more in other Asian nations and around the world.

But for all the grand reception of Redstone, Viacom still hasn’t made any money in Asia. And therein lie the promise and the challenges of today’s entertainment industry. The laying out of vast investments--while waiting years for returns--creates tremendous volatility.

A year or two of hit films or a surge of TV advertising can make entertainment companies look golden. However, a few failed films or a low-rated TV series can make companies look dismal.

The future will be even more complicated. Greater availability of broadband Internet distribution of entertainment is a certainty in the next five years, promising to speed the availability of films through all media instantly. That would mean even greater surges of cash flow, a development that moguls such as Redstone welcome.

But the Internet also poses a danger: the specter of piracy, which already has devastated the music industry.

Redstone, for one, doesn’t fear it. “We will find a way,” he vows, “to distribute our product legally to customers and to be paid for it.”

In entertainment, as in all businesses, adapting to change is the real glamour.

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James Flanigan can be reached at [email protected].