The Company That Would Be King   

Will the Viacom-CBS merger lead to better and cheaper programming?

JUST AFTER LABOR DAY , Viacom, a Hollywood company many people had never heard of, struck a deal to take over CBS, the most popular TV network in the country. The move--if sanctioned by regulators--will allow Viacom to enlarge its media conglomerate and produce, promote, distribute and present all forms of mass entertainment, from TV news and sports to movies and music. (See "How Bad Is Big?")
With Viacom's portfolio of some of the world's most recognizable brands--including MTV, Nickelodeon and now CBS, plus a growing set of Internet ventures--media critics ought to pay close attention.
When announcing the deal, Sumner Redstone, Viacom's chairman and chief executive officer, proclaimed his goals for an operation conservatively worth $35 billion: "Our union will be king--not just in content, but in its distribution, marketing and packaging.
"We will be global leaders in every facet of the media and entertainment industry, financially strong from day one, with an enviable stable of global brands. With Viacom and CBS performing at the top of their games, the timing for this could not be better."
The union of the two companies offers a dramatic opportunity to test one economic theory: owning significant stakes in many forms of mass media can provide synergy, enabling the joined parts to produce more profits than if they had operated individually. When all the ink dries on the legal documents this spring, CBS-TV and all those Viacom cable networks plan to cross-promote each other as much as possible. CBS' Infinity Broadcasting (and its 163 radio stations) will tout Viacom's cable music channels (MTV, VH1 and TNN)--and vice versa.
And all these parts will seek to expand the new Viacom's presence as an Internet company with sites including cbs.sportsline.com, cbs.marketwatch.com, mtv.com, vh1.com and iWon.com, CBS's new portal. Significant hurdles do stand in the way before the Viacom-CBS merger can formally close. There are the regulators. When the deal was announced, Viacom controlled 19 TV stations plus the United Paramount Network, while CBS owned a far more famous network and 15 television stations. (A 16th was added in October.)
The Federal Communications Commission limits one network per company and has a cap on broadcast-station ownership reach that the 35 Viacom and CBS stations would surpass. So no one was surprised that immediately after they announced the merger, Redstone and Mel Karmazin, CBS' president and CEO, traveled to FCC headquarters in Washington, D.C., to negotiate a waiver to current limits.
They have help. A week later, Republican presidential candidate Sen. John McCain of Arizona called for the FCC to raise its ownership limits on stations. McCain, chairman of the Senate Commerce Committee, introduced a bill to formalize his proposal.
More difficult to overcome may be the FCC's ban on a single entity's owning two TV networks. It would seem that if Redstone and Karmazin had to choose, they would keep CBS and spin off the far smaller UPN. But with UPN's surging ratings, I predict Chris-Craft, Viacom's partner in UPN, will restructure ownership. And after those negotiations end, the new Viacom will emerge as a minor partner in UPN, and the FCC will be satisfied.
At the heart of this merger lies a multibillion-dollar bet that integrating Viacom's Hollywood studio (Paramount) and the CBS television network will lead to better-designed and cheaper programming, so both units can grow and prosper. But this wager should be seen as one with sizable risk. Hollywood's Disney studio took over the ABC television network in 1995, and since then has failed to exploit its ties.
Facing these and a myriad of other issues, Karmazin will surely be tested as he takes over the new company's day-to-day operations. Redstone, who will run the two companies if the deal goes through, has a reputation as no easy guy to work for. But the fine print in the proposed merger obligates Redstone to stick with Karmazin for at least three years, according to a report in the Wall Street Journal.
Thus, while the deal should be final sometime early next year, it will be a couple of years into the next century before we know whether this new corporate giant will redefine the basic tenets of the media business, from exploiting multimedia synergy to using its Hollywood studio to produce and distribute TV series for CBS.