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Now and in the future, our intention is simple: to collaborate throughout the corporation and flourish in every medium, in every language, in every region of the planet--on movie screens and computer screens, by air and by wire, on paper and bytes in cyberspace. Look at our balance sheet, our brand list, and our business strategies, and you'll see a 29 billion dollar enterprise with a dynamic record of growth, an exceptional portfolio of assets, a management team with an uncanny grasp of today's opportunities and a keen eye on the horizon. Look at our people and our products, and we hope you see something different: a media giant that blends the instincts of an entrepreneur with the soul of an entertainer.
One of the largest entertainment and publishing companies in the world, Viacom Inc. operates numerous subsidiaries in four main groups: networks and broadcasting; entertainment; video and music/theme parks; and publishing. Its best-known television networks include MTV, Nickelodeon, VH1, Showtime, The Movie Channel, and Paramount Television, which produces such popular television series as Star Trek and Frasier. The company's entertainment segment is led by Paramount Pictures, which has produced and distributed motion pictures since 1912. The Blockbuster group of subsidiaries, which comprises over 6,000 video and music stores, and Paramount Parks, which owns and operates five theme parks and one water park, form the body of Viacom's video and music/theme park segment. The company's publishing group includes such venerable publishers as Simon & Schuster, Macmillan, and Prentice Hall.
1970s Formation
Viacom was formed by the Central Broadcasting System (CBS) in the summer of 1970 to comply with regulations by the U.S. Federal Communications Commission barring television networks from owning cable TV systems or from syndicating their own programs in the United States. It formally became a separate company in 1971 when CBS distributed Viacom's stock to its stockholders at the rate of one share for every seven shares of CBS stock.
Viacom began with 70,000 stockholders and yearly sales of $19.8 million. It had about 90,000 cable subscribers, making it one of the largest cable operators in the United States. It also had an enviable stable of popular, previously-run CBS television series, including I Love Lucy, available for syndication, which accounted for a sizable percentage of Viacom's income.
By 1973 there were about 2,800 cable systems in the United States, with about 7.5 million subscribers. This market fragmentation, along with the lack of an infrastructure in many communities and tough federal regulations, slowed the development of cable television. In 1973, Viacom had 47,000 subscribers on Long Island, New York, but a drive to find 2,000 more added only 250.
In 1976, to compete with Home Box Office (HBO), the leading outlet for films in cable, Viacom established the Showtime movie network, which sought to provide its audience with feature films recently released in theaters. Viacom retained half interest in the network while Warner Amex owned the other half. Despite a federal ruling that removed many restrictions on the choice of movies and sports available on pay-TV during this time that allowed a wider variety of programming, Showtime lost $825,000 in 1977. Nevertheless, Viacom earned $5.5 million that year on sales of $58.5 million. Most of the company's earnings represented sales of television series, but it also reflected the growth of its own cable systems, which at this time had about 350,000 subscribers.
Showtime continued to compete aggressively with HBO. In 1977 it began transmitting its programming to local cable stations via satellite, at a cost of $1.2 million a year. The following year it worked out a deal with Teleprompter Corp., then the largest cable systems operator in the United States, with the result that Teleprompter offered its customers Showtime rather than HBO. Showtime also began offering a service channel called Front Row. Dedicated to family programming, including classic movies and children's shows, Front Row cost consumers less than $5 a month and was aimed at smaller cable systems where subscribers could not afford a full-time pay-TV service.
Viacom's forays into the production of original programming in the late 1970s and early 1980s had mixed results. Competition was stiff, the odds of producing a successful television series or film were long, and Viacom experienced several failures. The Lazarus Syndrome and Dear Detective series were failures, and CBS canceled Nurse after 14 episodes.
Growth through Acquisition in the 1980s
Cable systems were a capital-intensive business, and Viacom constantly invested money in building its cable infrastructure--spending $65 million in 1981 alone, for example. In the early 1980s Viacom started on a program of rapid growth across a range of media categories. Company President Terrence A. Elkes told Business Week that Viacom hoped to become a billion dollar company in three to five years. Because management felt that cable operations were not a strong enough engine for that growth, Viacom looked to communications and entertainment. In 1981 it bought Chicago radio station WLAK-FM for $8 million and disclosed its minority stake in Cable Health Network, a new advertiser-supported cable service. It also bought Video Corp. of America for $16 million. That firm's video production equipment stood to save Viacom a great deal of money on production costs.
While its increased size would give Viacom clout with advertisers and advertising agencies, some industry analysts believed that the acquisitions were partly intended to discourage takeover attempts. Buying radio and TV stations increased the firm's debt, and added broadcast licenses to Viacom's portfolio. The transfer of such licenses was a laborious process overseen by the FCC, thereby slowing down attempts to act quickly in taking over a company.
By 1982 Showtime had 3.4 million subscribers, earning about $10 million on sales of $140 million, and was seeking to distinguish itself from other pay-TV sources by offering its own series of programs. While Viacom had sales of about $210 million, syndication still accounted for a large percentage of Viacom's profits, 45 percent in 1982. The growth rate of syndication had declined, however, while that for cable had increased, and by 1982 Viacom had added 450,000 subscribers to the 90,000 it inherited from CBS, making it the ninth-largest cable operator in the United States.
However, a decline in pay-TV's popularity began in 1984, and growth in the industry was virtually halted. In early 1984, Showtime became a sister station to Warner Amex's The Movie Channel in a move calculated to increase sales for both of them. HBO and its sister channel Cinemax were being offered on 5,000 of the 5,800 cable systems in the United States, while Showtime or The Movie Channel were available on 2,700. Besides having a far larger share of the market, HBO already featured many of the films shown by Showtime and The Movie Channel, removing some of the incentive for subscribing to both groups of services. That year Viacom earned $30.9 million on revenue of $320 million.
In September 1985, Viacom purchased the MTV Networks and the other half interest in Showtime from Warner Communications, a company that needed cash because its cable interests were suffering in the unfavorable market. As part of the deal Viacom paid Warner $500 million in cash and $18 million in stock warrants. Viacom also offered $33.50 a share for the one-third of MTV stock that was publicly held. The year before Viacom bought it, MTV had made $11.9 million on sales on $109.5 million. Again, these purchases increased Viacom's debt load, making it less attractive for a takeover.
The MTV Networks included MTV, a popular music video channel, Nickelodeon, a channel geared towards children, and VH-1, a music video channel geared toward an older audience than that of MTV. The most valuable property in the MTV Network was MTV itself. Its quick pace and flashy graphics were becoming popular and highly influential in the media, and its young audience was a chief target of advertisers.
Established by Warner Amex in 1979 in response to a need for children's cable programming, Nickelodeon had not achieved any notable success until acquired by Viacom. Viacom quickly revamped Nickelodeon, giving it the slick, flashy look of MTV and unique programming that both appealed to children and distinguished the network from such competitors as The Disney Channel. Viacom also introduced "Nick at Night," a block of classic sitcoms aired late in the evening, popular among an adult audience. In the next few years Nickelodeon went from being the least popular channel on basic cable to the most popular.
However, Showtime lost about 300,000 customers between March 1985 and March 1986, and cash flow dropped dramatically. In 1986 Showtime embarked on an expensive and risky attempt to gain market share. While Showtime and arch-rival HBO had each featured exclusive presentations of some films, many films were shown on both networks. In order to eliminate this duplication, Showtime gained exclusive rights to several popular films and guaranteed its customers a new film, unavailable on other movie channels, every week. However, Showtime's move increased the price of acquiring even limited rights to a film at a time when many industry observers felt that the price of buying films for pay-TV should be decreasing since the popularity of video cassette recorders had lowered their worth. Consequently, the cost of programming was raised, and Showtime was forced to increase marketing expenditures to make certain potential viewers were aware of the new policy.
Weakened by the $2 billion debt load it incurred, in part, to scare off unfriendly buyers, Viacom lost $9.9 million on sales of $919.2 million in 1986 and, ironically, became a takeover target. First Carl Icahn made an attempt to buy the company, and then a management buyout led by Terrence Elkes failed. Finally, after a six-month battle, Sumner M. Redstone, president of the National Amusements Inc. movie theater chain, bought Viacom for about $3.4 billion in March 1986. Some industry analysts felt that he had vastly overpaid, but Redstone believed Viacom had strong growth potential. Aside from its cable properties and syndication rights that now included the popular series The Cosby Show, Viacom owned five television and eight radio stations in major markets.
Redstone had already built National Amusements, the family business, from 50 drive-in movie theaters to a modern chain with 350 screens. Now faced with the task of turning Showtime around, he brought in Frank Biondi, former chief executive of HBO, who began organizing the company's many units into a cooperative work force. Biondi in turn brought in HBO executive Winston Cox to run the network, and Cox immediately doubled Showtime's marketing budget. Showtime also obtained exclusive contracts with Paramount Pictures and Walt Disney films, which included the rights to air seven of the top ten films of 1986.
Turning Viacom Around in the Late 1980s
Redstone's banks were demanding $450 million in interest in the first two years following the takeover, but several fortuitous events aided him in paying off this debt. Shortly after the buyout Viacom began to earn millions from television stations wanting to show reruns of The Cosby Show. Furthermore, when Congress deregulated cable in 1987, prices for cable franchises soared. So when Redstone sold some of Viacom's assets to help pay off its debt, he was able to get large sums for them. In February 1989 Viacom's Long Island and suburban Cleveland cable systems were sold to Cablevision Systems Corp. for $545 million, or about 20 times their annual cash flow. Cablevision also bought a five percent stake in Showtime for $25 million, giving it a tangible interest in the channel's success. Further, after Redstone restructured MTV and installed a more aggressive advertising-sales staff, MTV experienced continued growth, against the expectations of many industry analysts. In 1989, for example, the MTV Networks won 15 percent of all dollars spent on cable advertising. MTV was expanding throughout the world, broadcasting to western Europe, Japan, Australia, and large portions of Latin America, with plans to further expand into eastern Europe, Poland, Brazil, Israel, and New Zealand.
These successes enabled Redstone and Biondi to significantly cut Viacom's debt by September 1989 and negotiate more favorable terms on its loans. Even so, it was rough going at first, and Viacom lost $154.4 million in 1987, though its sales increased to about $1 billion.
Under its new leadership Viacom branched out. Along with Hearst Corp. and Capital Cities/ABC Inc. it introduced Lifetime, a channel geared towards women. It also started its own production operations in 1989, Viacom Pictures, which produced about ten feature films in 1989 at a cost of about $4 million a film. These films first appeared on Showtime. Viacom's television productions also achieved success after years of mixed results. Viacom produced the hit series Matlock for NBC and Jake and the Fatman for CBS. It also added the rights for A Different World and Roseanne to its rerun stable. In addition, Viacom continued to spend heavily on new and acquired productions for Nickelodeon and MTV.
In October 1989, Viacom sold 50 percent of Showtime to TCI, a cable systems operator, for $225 million. TCI had six million subscribers, and Viacom hoped the purchase would give TCI increased incentive to market Showtime, thus giving the network a wider distribution.
By 1989 Viacom owned five television stations, 14 cable franchises, and nine radio stations. In November of that year the company bought five more radio stations for $121 million. Sales for the year were about $1.4 billion, with profits of $369 million. In 1990, Viacom introduced a plan that halved the cost of Showtime, but forced cable operators to dramatically increase the number of subscriptions to it. This strategy was designed to increase Showtime's market share at a time when many consumers were starting to feel that pay-TV channels were no longer worth their price.
Several months after HBO introduced its Comedy Channel in 1989, Viacom began transmitting HA!, a channel similar in format. Both channels provided comedy programs, but HA! primarily showed episodes of old sitcoms, while the Comedy Channel showed excerpts from sitcoms, movies, and stand-up comedy routines. Both channels started with subscriber bases in the low millions, and most industry analysts believed that only one of them would survive; Viacom management expected to lose as much as $100 million over a three-year period before HA! broke even. The two companies considered merging their comedy offerings, but HBO parent Time Warner would only move forward with the idea if Viacom agreed to settle its $2.4 billion antitrust suit against HBO.
Showtime had filed the lawsuit in 1989, alleging that HBO was trying to put Showtime out of business by intimidating cable systems that carried Showtime and by trying to corner the market on Hollywood films to prevent competitors from airing them. The suit attracted wide attention and generated much negative publicity for the cable industry.
In August 1992 the suit was finally settled out of court, after having cost both sides tens of millions of dollars in legal fees. Time Warner agreed to pay Viacom $75 million and buy a Viacom cable system in Milwaukee for $95 million, about $10 million more than its estimated worth at the time. Time Warner also agreed to more widely distribute Showtime and The Movie Channel on Time Warner's cable systems, the second-largest in the United States. Furthermore, the two sides also agreed to a joint marketing campaign to try and revive the image of cable, which had suffered since deregulation. Also during this time, in a move that surprised many industry analysts, HBO and Viacom agreed to merge their struggling comedy networks, HA! and the Comedy Channel, into one network, Comedy Central, which ultimately experienced great success.
Overall, Viacom appeared to be thriving. In 1993 the company's net income reached $66 million, earned on revenues of $1.9 billion. Nickelodeon, meanwhile, was going to 57.4 million homes, and was watched by more children between ages two and 11 than the children's programming on all four major networks combined. While Nickelodeon's earnings were not reported separately, the Wall Street Journal estimated its profits as $76 million in 1992 on sales of $190 million. However, by the mid-1990s, Redstone was ready for a new challenge. The 70-year-old media mogul found it by expanding Viacom into the motion picture and video rental markets.
In July 1994 Viacom purchased Paramount Communications Inc., one of the world's largest and oldest producers of motion pictures and television shows. The deal, which cost approximately $8 billion, elevated Viacom to the fifth-largest media company in the world. The acquisition vastly expanded the company's presence in the entertainment business, giving it a motion picture library that included the classics The Ten Commandments and The Godfather and an entre into the premier movie market. Moreover, in the Paramount deal Viacom gained ownership of Simon & Shuster, Inc., one of the world's largest book publishers.
Later that same year, the company again expanded into a new segment of the entertainment industry by acquiring Blockbuster, the owner, operator, and franchiser of thousands of video and music stores. The Blockbuster group of subsidiaries was one of Viacom's most quickly growing enterprises; by 1997, Blockbuster boasted 60 million cardholders worldwide and over 6,000 music and video stores.
Viacom's acquisition of Paramount and Blockbuster gave the company thriving new enterprises, but left the company in significant debt. To both relieve that debt and focus the company's energies, Viacom divested itself of several segments of its business. In 1995 the company sold the operations of Madison Square Garden to a partnership of ITT Corp. and Cablevision Systems Corp. for $1.07 billion. In 1996, the company spun off its cable systems in a deal with TCI. Although the split-off represented a break with Viacom's origins as a cable provider, the deal relieved the company of $1.7 billion in debt. The following year, Viacom left the radio broadcasting business by selling its ten radio stations to Evergreen Media Corporation. The approximately $1.1 billion deal reduced Viacom's debt even further.
Although Viacom was no longer a cable service provider, and it had expanded into the motion picture and video rental market, its cable networks remained a significant portion of its business. MTV Networks, which included MTV, Nickelodeon, and VH1, accounted for almost $625 million in operating profits in 1997, approximately 32 percent of Viacom's estimated earnings for the year.
Principal Subsidiaries: Blockbuster Videos, Inc.; Paramount Pictures Corporation; Paramount Television Limited; Paramount Home Video, Inc.; Simon & Schuster, Inc.; Macmillan, Inc.; Prentice Hall, Inc.; MTV Networks Company; Showtime Networks Inc.; VH1 Inc.; Spelling Entertainment Group Inc. (75%).
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