Anybody who bumped into Mel Karmazin around town these past few months knew that he carried the lagging Viacom stock price on his back like a steamer trunk. He cared. He cared so much that it pained him. He blamed himself, whether because radio had failed to deliver the numbers or because he had committed the unforgivable sin of overpromising and underdelivering on the earnings estimates to the Street. You couldn’t reassure the guy—and believe me, I tried, because despite anything you’ve heard, there is no nicer, finer exec in town—no matter how much you told him the darned stock would eventually find a level where it was loved again.
Now that trunk’s off his back. Now he can breathe again. Now Viacom’s stock price—down 20 percent year over year, the worst performer of the major entertainment stocks—is someone else’s problem.
The papers wanted to portray the Karmazin departure as an ouster; he wasn’t on Sumner Redstone’s short list to take over as CEO. The veiled innuendo: Mel was just a radio ad guy, a glorified salesman who, in the end, couldn’t exhort the team to make the numbers and therefore didn’t deserve the top job. That’s why the stock was lagging, they said. Get someone else in there. Put Les Moonves and Tom Freston, the golden boys from TV and cable, up top, and the direction of Viacom’s stock will change.
As usual, the papers were wrong. Karmazin wasn’t doomed by the sales figures. He was doomed by the business model. When Karmazin and Redstone combined CBS and Viacom in 1999, they created the ultimate media battleship, a magnificent warship fueled by advertising. But five years later, that battleship feels like an irrelevance, a slow-moving, easy-to-sink dreadnought, with spent fuel, limping into port in need of an overhaul, tortured by nimbler, more agile, and more powerful competitors. And not the ones you think, not NBC or ABC or even Fox. They’re all struggling with a stagnant pie, too, or why else would Viacom’s stock not rally after it won the fabled upfront wars hands down last week?
No, to find out why Viacom’s stock sank to the 52-week-low list, all you need to do is look to the 52-week-high list, where the winners are: video games, satellite radio, video-on-demand, and Internet search engines. Those are the companies with the better models, the better technology that has, in an incredibly short period of time, stolen massive amounts of the fuel that powered Battleship Viacom: the viewers themselves.
Consider Yahoo, the quintessential 52-week-high denizen. While it’s a big deal when network-TV ad rates go up, Yahoo is continually raising its rates as its unique viewers increase (and it’s already got 274 million unique viewers). Sophisticated advertisers are discovering that both Yahoo and Google can offer paid search technology that makes it possible, for the first time in advertising history, to reach only those whom you want to reach (with no money wasted on anyone who’s not interested in your product). With that kind of precision targeting, Yahoo’s and Google’s current rates could end up being a steal compared with what they’ll be able to charge in the future. Viacom’s Internet offerings (CBS Marketwatch and CBS Sportsline), by contrast, simply can’t have the size or scale they need to get big ad dollars because Viacom’s Internet strategy was built on the cheap and without thought—there’s no unifying paid search game going on.
Or consider TiVo or any of the other digital video recorders that the Comcasts of the world are now rolling out directly to TV viewers. The ability to zap the commercials is so great and is growing so quickly that to bank on traditional television advertising, as Viacom does, seems almost foolhardy. Or consider the astronomical growth of satellite radio. Both XM Satellite and Sirius have uptake rates that could logically suggest that 10 million people might be listening to their favorite programs without commercials. Until three years ago, these companies seemed like pipe dreams, doomed to fail, after investors lost billions. Viacom’s Infinity unit, meanwhile, was riding high and raising rates routinely. But in the past year, satellite’s turned the corner, perhaps to the point where XM is worth more than Viacom’s radio division altogether.
“Viacom was the ultimate media battleship. Now it’s a slow-moving dreadnought.”
And then there’s Blockbuster. Viacom must have felt it was safe in the past decade to move into this business with the cable companies’ having so many problems producing a credible video-on-demand product. But Viacom didn’t count on Netflix, one of the fastest-growing companies out there, which for a fraction of Blockbuster’s costs is eating up Blockbuster’s voluminous customer base. Viacom’s about to take a huge loss on Blockbuster—if it can find someone willing to buy the darned thing.
Finally, there’s the case of the missing demo, the 18-to-28-year-old-male crowd that’s disappeared from the TV box. A disproportionate chunk of them has fled to video games, to the fare created by Electronic Arts and Nintendo and Sony PlayStation. These pastimes have hijacked the eyeballs of the most sought-after customers, the ones who used to watch sports and sitcoms and action shows on television. This spring, while Karmazin debated publicly whether he would leave the conglomerate he helped build, Redstone was quietly buying up stock in Midway Games for his personal account. At least someone at Viacom knows where the pay-dirt viewers have gone.
How did Viacom miss all these opportunities? For one, it prided itself on sticking to its knitting, selling ads against good content delivered via cable and broadcast, and not innovating (Remember Karmazin’s T-shirt: we will not do anything stupid on the internet?). But perhaps more important, nobody at Viacom had the predilection for technology that you find routinely in Silicon Valley. Nobody thought about what Intel’s Andy Grove calls “Ten X” technologies—the kind that can destroy current ways of doing things.
Viacom was and is run by moguls, people who want to make deals and who aspire to be machers. Machers aren’t geeks; they laugh at geeks. They even make movies and TV shows poking fun at them. Machers like to be seen, preferably with other machers, usually with a martini in hand at a big conference or in the Grill Room at The Four Seasons, not home studying the next big thing or checking out new stuff on the PC.
Yet in the end, every one of the challenges that have sprung up for Viacom since its merger with CBS was the product of pure geekdom, and unless you were a geek, you couldn’t see the tech two-by-four that hit you until you went to the videotape.
Mel Karmazin’s legacy is that he kept Viacom’s numbers from falling apart despite the company’s outdated business model. Now his departure will stop masking Viacom’s real weaknesses, and Redstone and company will have to face them head on. Maybe that’s a good thing. Maybe they’ll call in the geeks.
James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owned stock in Comcast. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.