It's been about three years since CBS Corp. merged with Viacom Inc., creating a programming powerhouse with some of the most attractive broadcast and cable properties in the media universe and nearly $25 billion in 2002 revenue. Since then, Viacom has proved critics of big media mergers wrong — it has strong, consistent free cash flow and is actively looking for more media properties to acquire. But the cable landscape has also changed: Consolidation has honed the number of major cable operators to a handful and several have openly criticized networks of price gouging, with Washington even considering a federal mandate to tier cable networks. Viacom president and COO Mel Karmazin recently sat down to talk about those and other issues with Multichannel News senior finance editor Mike Farrell and editor-at-large Linda Moss. An edited transcript follows.
MCN: Let's talk about acquisitions. There's been a lot of talk about Vivendi Universal Entertainment. What do you think about those assets and the recent news that Cablevision Systems Corp. would possibly be involved in a bid?
Mel Karmazin: We had our shareholders meeting yesterday [May 21], and one of the things that we put up was a slide which basically showed how well we're doing in our cable segment — and it basically aggregates MTV Networks, BET [Black Entertainment Television] and Showtime [Networks Inc.] — and it shows that by a very large margin, we are the No. 1 company in the United States in the cable-network business.
Not only were we No. 1 in size, but we had the best margins. So, that leads us to like that industry and like that sector a lot. So, whenever an acquisition opportunity comes up in that area, we tend to be very interested.
We have great management throughout the organization. We have digested everything that they own to date, so we feel very comfortable with our ability to expand in that area. My guess is that sometime today [May 22], we're going to close on Comedy Central. So, that deal will be completed and again, that's a perfect fit for us. It shows how aggressive we are in that area.
But, in order for us to do it, it would have to make sense from two points of view — one would be the price and the other one would be the growth rate. Because, again, our company is a growth company and we like to buy assets that are growing.
So it's not just buying an asset in the cable business. It's buying an asset that we feel really good that once we take it over, we can grow.
MCN: Does Court TV fit that?
Karmazin: Sure, Court TV is a great cable asset. Again, I can't speak for the price, can't speak for whether or not either of the partners want to sell it. But, again, Court TV would be a cable asset that has the potential of growing, and, again, would have to be determined about the price.
So, the same thing would exist if, in fact, Vivendi were interested in selling just their cable assets. I have no information to that effect.
But, if, in fact, they were, we would certainly be interested in looking at it. I can't tell you we'd be the buyer, because of the price, but we would certainly be interested.
MCN: How would USA Network fit into your portfolio?
Karmazin: I think the question on USA would be, we like niche cable networks a lot. So, a general-entertainment network is something that we have not gravitated toward. But, again, it's a great brand and they do great things. So, the question would be, what the growth rate going forward, would be for USA Network, and what price would you pay?
MCN: And how about Sci Fi Channel? How does that fit?
Karmazin: Sci Fi probably fits better, conceptually, for what we're looking for, because it's in a targeted niche and has an awful lot of growth ahead of it, probably. You can buy a cable network, which we've done, or you can start a cable network, which we have also done.
TV Land, obviously, is a great example of a cable network that the company started. If, in fact, we were unable to acquire something like the Sci Fi Channel — and if we thought that that was a good segment of the business to be in, between the Paramount library and all of the content that's there — we would have the ability to start, potentially, a new cable network.
MCN: You've talked about that in the past. Is that something that's still on the radar screen?
Karmazin: Sure. As digital cable is rolled out, and as you have the opportunity to get more distribution, and as opportunities present themselves — sure, we would definitely be interested in expanding.
We love the business, it's well within our core of competency and we do well in it, so why wouldn't we want to expand, either through acquisition or creating new [networks]?
MCN: Viacom had talked about starting a gay network with Showtime and MTV. Where does that stand?
Karmazin: Still there, still of interest. Matt Blank and the team over at Showtime would like to do it. Some of the issues are timing and the economy, and whether or not you are ready, this year, to deal with the start-up losses of a new channel, or whether or not we wanted to wait. It's something that we believe we will do.
But again, the issue of the [Iraq] war, the issue of the uncertainty of the economy, were all things that currently have it on hold, but it doesn't necessarily mean that it will be hold for the rest of this year. But we would very much like to do it.
People within our organization believe that it's an important market — a market that deserves to be served. We think we can do it, and nothing would make me happier than to be able to pull the trigger and to authorize it to go forward.
MCN: If Cablevision doesn't end up as part of a VUE deal, would Rainbow Media Holdings Inc. — minus Bravo — look good to you at all?
Karmazin: Let's assume [WE:] Women's Entertainment and AMC were available for sale – and we have no reason to believe they are or are not. We would again, say, it's in our core competency — cable network, we like that business, so we would certainly look at it.
Whether or not those assets would meet the price in growth rates we look at would have to be determined. If, in fact, they did, we'd be very interested. And, if, in fact they didn't, we would just not be a buyer.
MCN: As one of the biggest cable programmers out there —
Karmazin: Excuse me?
MCN: As the biggest cable programmer out there — sorry — what's your take on the whole debate that's going on now between programmers and operators and the possibility of tiering networks?
Karmazin: I have not been the long-term cable programming executive. We had a relatively small position in the CBS [Cable] area. But I can tell you that the consolidation that has taking place has, in my opinion, established closer relationships with the few people who are left in the business. We have very strong cable networks that are very dependent upon the people who are distributing — the MSOs and the satellite operators.
We're constantly working with them. I believe that we have great relationships with them, collectively. I can tell you every time we sit down with one to negotiate, it's contentious. Nothing has changed in that regard.
We're both on opposite ends of the table, very often, on the issues. But, we've managed this long to keep growing our company, while they keep growing theirs, and it's been, in my opinion, a good partnership.
We have very widely distributed cable networks, plus we have some new cable networks that we're rolling out in the digital tier. We are not — by most people we talk to — egregious in our pricing. I've seen various numbers your publication has printed on what the fees are — the affiliate fees that we get. It's sort of hard to look at what we're getting paid and for somebody to say we're not offering value at those prices.
We just concluded, what, I think, [Comcast Corp. CEO] Brian Roberts and [cable division president] Steve Burke described as a win-win new affiliation agreement with Showtime that was done post [Comcast-AT&T Broadband] merger. And I would characterize it the same way.
I think that we understand the new reality. The world has consolidated; our advertisers have consolidated; the advertising agencies have consolidated; the media companies have consolidated and the MSOs have consolidated as well.
MCN: There's been a lot of buzz from broadcasters about demanding cash for new retransmission consent. What's Viacom's position on that?
Karmazin: We think that an awful lot of the consumers are watching our television stations. We don't want to demand anything. Our sense is that we believe that we ought to be compensated for — that our preference would be to not tie it into anything else. Our preference would be for somebody to sit down with CBS and to negotiate a retransmission-consent arrangement with CBS. And we're very comfortable with that.
And, again, when negotiating, we tend to not say we're demanding anything. The government required retransmission consent, and therefore, in order to get our consent for the retransmission, we need to talk and we're happy to deal any way the MSO or satellite operator wants to deal.
MCN: Obviously, you wear a bunch of hats: Broadcast, cable, and I'm sure in the past years, you could have talked about cable not getting its "fair share" of TV dollars in the upfront. Do you want them to get their fair share, because isn't that money out of the pocket of CBS?
Karmazin: No, the reason that NBC, ABC and Fox exist, is so that our cable network can take dollars from them.
MCN: Or try, anyway.
Karmazin: That is their role. So, when we are, as we are involved right now, involved in the upfront, we expect that CBS can take care of themselves, and we suspect that our cable networks can take care of itself, and at the end of the day, I'm convinced that Viacom shareholders benefit from the jump ball.
But, I do think, that there is the opportunity for cable — which is currently still only getting about 6% of the advertising pie overall — where the CPMs of cable networks are dramatically lower than the CPMs of the broadcast networks, and I do believe that there are opportunities for growth there.
One of the reasons we like this business so much is that the pie is so small, it can get bigger; the CPM's are relatively low, they could get bigger. And, as more and more audience shifts to these cable networks, we think that the growth prospects are better than they've ever been before.
Now, having said that, when we sit and talk about CBS, we believe that CBS — as compared to NBC, as an example — is not getting its fair share and we expect that that business is going to grow.
We also are seeing, interestingly enough, that as fragmentation has occurred, advertisers seem to be more than ever gravitating toward network television, because it still has the biggest audience. So as cable has continued to fragment itself, still the biggest audience remains on a Thursday night on the broadcast networks, and the advertisers still feel the importance of reaching that large a number of people all at once.
So we're seeing, in 2003-2004, growth coming in cable networks, but it doesn't appear to be at the expense of the broadcast networks.
MCN: In the wake of the News Corp. deal with DirecTV Inc., does Viacom feel that there is any reason at all to own distribution?
Karmazin: The reason to own distribution is because you think it's a good business. In other words, it's not like we feel that there's a reason to own it because if we didn't own it, we would not be able to get our television assets exposed.
Viacom, as you may know — long before I came — was in the cable distribution business, and they got out of the cable distribution business. So, we don't feel that News Corp. or Fox, actually, because that's where it's going to wind up — acquiring [DirecTV] changes our viewpoint. We certainly wish [News Corp. chairman] Rupert [Murdoch] well. We certainly have no interest in even attempting to be against the merger.
If anything, we would support it. We tend to be very supportive of deregulatory things. So, you know, you can't go to Washington to complain about something when it serves your purpose. I can't be a hypocrite about it.
MCN: Aren't you nervous about the fact there will be all that firepower in one company?
Karmazin: Let's take another viewpoint for a second. Do we think that DirecTV is not going to want to carry MTV, or not going to want to carry CBS, or not going to want to carry Nickelodeon? Or do we think that the negotiation will be difficult? The negotiation with DirecTV is difficult today.
I often get asked about what I think the AT&T-Comcast merger is going to do to the negotiation process. If you were to speak with anybody who negotiated with Comcast when Comcast was much smaller, nobody looked forward to going into the room with Brian [Roberts] to negotiate at any point. It was always a very difficult negotiation, as it is with everybody.
I think the fact that they've consolidated is good for them, from a point of view of giving them a bigger platform, and giving them cost advantages.
But, from our point of view, I don't anticipate that a meeting with Brian and his team will be any more difficult than it's always been.
MCN: Even when now they have 22 million subs and can basically make or break a network?
Karmazin: Absolutely. Let's go back to the day when all they had was Philadelphia. How could you not be in Philadelphia? Take every one of our channels, you need to be in Philadelphia.
So, whether Comcast has beyond Philadelphia, you're still negotiating for Philadelphia. One of the always-difficult negotiations is with Cablevision. Cablevision has 3 million subscribers. They don't have as big a footprint as others do, but it doesn't mean that when you're negotiating with Cablevision, it's any easier than it is in negotiating with DirecTV, which has more distribution, or Dish [EchoStar Communications Corp.] or Comcast — they're all difficult, because you need to be a fully distributed — or you want to be a fully distributed — cable network.
MCN: And Cablevision has New York.
Karmazin: And Comcast had Philadelphia. But, I could say the same thing about — what city don't you want to be in?
MCN: But without Comcast distribution, what's the use of having a network?
Karmazin: You want to have all of it. And, again, we've managed to do that. And, you know, it would be the same way — and this isn't a fair equation — how would [Roberts's] 22% be, if it didn't have all of our programming content? We would think that he would miss our content as much as we would miss his distribution.
There's an awful lot of people out there that like CBS programming and that like MTV programming or Nickelodeon. I think to deprive people of the combination of SpongeBob and Ozzy Osbourne is un-American.
MCN: A lot of people say you're not a real easy guy to work for.
Karmazin: I absolutely refuse — I'll bet it's an anonymous person.
MCN: I mean that in a good way. You demand results from you executives, and you get them.
Karmazin: Sounds right to me. If you went up to my office, you'd see a 'No Excuses' sign — you know those 'No Bozos' signs? — in my office you'd see no excuses. Absolutely our investors expect excellence, and we have great executives and we expect them to perform. We want to go to the Super Bowl every year, and not just go, but win. Every year.
That's the culture. We think that we've demonstrated that it is possible to do things that are good for the long run and also, at the same time, deliver each quarter. I don't think that those two are in conflict.
And, I know a lot of people say, you can't invest in the future. I can tell you that we've never spent more money in development than we have this year, in particular our cable networks, as well as our broadcast network.
We're spending more money on programming development and it will financially be the best year in our history. So it doesn't mean that in order for us to hit our financial numbers that we can't be investing in the future. We are. In spite of me.
MCN: A year ago, there was a lot of talk about you leaving. While that was going on, there didn't seem to be a jockeying for position for your job …
Karmazin: I wouldn't want my job. They have the best jobs.
I keep trying to jockey for [MTV Networks chairman] Tom Freston's job. You're asking me whether or not there's jockeying for position in Viacom, the answer is yes — it's Mel jockeying for [CBS president] Les's [Moonves] job and Mel jockeying for Tom's job.
MCN: You managed to clear that all up by signing a new contract, which seemed to be good for both sides.
Karmazin: I'm happy. I think the sense was for me — there was no place that I could think of, inside the industry or outside the industry, that I would rather be for the future prospects of the company. So, at one point —
MCN: Not even The Walt Disney Co.? Disney, apparently, really was very sad that you reupped your deal.
Karmazin: At one point, I sat down with the Fortune 500 issue with an eye toward making a list — forget whether anybody would have me — I mean, I'm not suggesting I could get a job. But, let's assume I had a choice of anything. So, I looked at Wal-Mart — went down the list. Would I rather be — my fantasy — would I rather be at Wal-Mart? Would I rather be at Exxon? Would I rather be at GE? And, I legitimately, for me, could not come up with a better place to be than Viacom.
And, I knew the company would do well with me or without me. The company's extraordinary — assets, extraordinary management — and I was enjoying myself. I felt I was adding value, and I couldn't find a place that I would rather be.
Now, it didn't mean that if, in fact, things didn't work out, there aren't other good places. Obviously, there's a lot of great companies in America, but for me, this is where I wanted to be and I'm happy I'm here.