On the back of the envelope, the numbers simply didn’t add up. CBS seemed destined to lose at least $100 million a year, maybe as much as $200 million. And now the deal-makers were going to face the cameras and try to convince a skeptical press that this apparent disaster was really a triumph, that by paying an astonishing $500 million a year for the rights to televise the American Football Conference – $283 million more than NBC had paid the year before – CBS had somehow made a shrewd move.
Seated at the dais, with an official NFL football in front of him, CBS chairman Michael Jordan looked surprisingly withdrawn, and his slow midwestern drawl and at times uncertain delivery did little to inspire confidence. Bearing the same name as the basketball star used to have its advantages: securities analysts said things like “Michael Jordan is the Michael Jordan of business.” But ever since his rusting, old-line manufacturing company, Westinghouse, had bought the tarnished Tiffany Network in 1995, Jordan’s fans on Wall Street had forsaken him. He had traded one struggling industry for another: broadcast television. CBS’s stock sagged, and one financial pundit maliciously redubbed him “Hot Air” Jordan.
“We think this is a good economic deal,” Jordan told the skeptical reporters at Black Rock, CBS’s Sixth Avenue headquarters. Later he added that the NFL deal “wasn’t what I would call a fall-on-your-sword kind of issue,” which only made the crowd think it probably was.
The mood wasn’t improved by the second panelist, Sean McManus, the earnest and youthful head of CBS Sports, who insisted unconvincingly, “We are not going to lose money on this deal.” Before hand-delivering the CBS bid to the NFL offices, McManus had stopped to pray at St. Patrick’s, though it turned out that divine intervention was hardly necessary: CBS’s offer was $170 million more than NBC was reportedly willing to pay. As Jordan and McManus spoke, a third man sat by their side, shifting impatiently. He didn’t look like the typical executive, what with his intense, mischievous eyes peering out from beneath remarkably oversize and intimidating black brows. Unlike Jordan, he hadn’t studied at Princeton and Yale – he’d worked his way through night school. And at 54, he still suffered the indignity of hearing people badly mispronounce his immigrant family’s name. He had been in the TV business for only eight months, yet this was the one man whom financial writers and CBS’s nervous investors were most eager to hear, the one whose opinions they actually trusted.
Mel said it was a good deal. And they believed in Mel.
Mel Karmazin runs the 77 radio stations and the fourteen TV stations owned and operated by the company (the “O-and-Os,” in broadcaster’s lingo), but his unofficial job description is CBS’s would-be savior. He had the easy self-assurance and natural chutzpa to joke freely about the football deal and get away with it. “Through Sean and the sports department, we have access to tickets,” he said, openly acknowledging the much-whispered joke that the real reason CBS committed billions for the NFL rights was just so its execs could get free seats at games. The crowd smiled as if on cue. Then he pointed out the dozens of giveaway baseball hats emblazoned nfl on cbs. “We had the hats ordered six months ago,” he deadpanned. “You can’t get hats quickly. So we had all the confidence in the world that we’d be back with the NFL.”
By the end of the week, CBS’s stock price was up more than $2, or 8 percent, to nearly $30 a share, meaning that the company’s overall market valuation had risen by $1.75 billion – despite a deal that looked like a huge money loser. But Mel said it was good, and Wall Street absolutely loves Mel.
“The stock went up, and that’s incredible,” said Jessica Reif Cohen of Merrill Lynch, one of the most powerful analysts on the media and entertainment beats. “It shows how good Mel is and how much people believe in him.”
Don Imus is at his studio at WFAN in Astoria, just after finishing his show. He fires off a list of the men he considers the top echelon of corporate moguls. He names Lou Gerstner, who turned IBM around. Jack Welch, the mastermind of General Electric. Sumner Redstone of Viacom. Michael Eisner at Disney. And Mel Karmazin. “He’s of that ilk,” says Imus. “He’s one of the few people in that sort of position who’s genuinely interested in the shareholders as opposed to his own interests.” The I-Man is biased, of course. Karmazin’s the guy who pays him well over $2 million a year, the guy who took his local show to more than 100 stations nationwide. Still, Imus’s view reflects the conventional wisdom on Wall Street, which is thoroughly caught up in what Cohen calls “Mel Fever.”
Only two years ago, Melvin Karmazin (pronounced KARma-zinn) was virtually unknown in the television industry, let alone considered the peer of the global media overlords who don their khakis to scheme about the great digital convergence at Herb Allen’s annual summer mogulfest in Sun Valley. Karmazin was a radio guy, and even though his company, Infinity Broadcasting, owned 44 stations, even though he was the impresario behind profit-raking shock jocks like Imus and Howard Stern, radio was seen as passé. It was antiquated and local at a time when the media megalomaniacs were infatuated with the futuristic and the global.
Karmazin’s real media glory didn’t begin until he sold Infinity to CBS for $4.9 billion in stock in June 1996 and assumed leadership of CBS Radio. He immediately began agglomerating responsibilities and discarding rivals, and today there is no doubt that Karmazin is the de facto power at CBS, even though Jordan holds the titles of chairman and chief executive and Karmazin is supposed to be on the same sub-level as Leslie Moonves, the network’s Hollywood-programming chief. Wall Streeters think it’s only a matter of time before Karmazin is the de jure ruler as well. “Mel will not tolerate sharing the power. Michael Jordan will be eaten alive by him,” says Porter Bibb, an investment banker at Ladenburg, Thalmann who specializes in media deals.
While Karmazin is known as an intimidating, imperious manager, widely feared by CBS employees, he seems to have the full support of the network’s top talent. “Mel is one of the few executives today who has broadcasting in his blood,” says Don Hewitt, executive producer of 60 Minutes and a 50-year CBS veteran. “Paley did, Sarnoff did, Goldenson did. Ted Turner does. There’s another one, and his name is Mel Karmazin.” Dan Rather adds: “I admire Mel tremendously.” Rather has rhapsodized about Karmazin on the radio with Imus, who seems to compete with Howard Stern in lavishing on-air praise for the executive. Stern recently boasted that his “friend” Mel would “wreck” NBC and joked that Karmazin had paid off Jerry Seinfeld to kill his own show on the rival network.
Karmazin has a similarly hypnotic influence over CBS investors, partly because he’s one of them. His personal stash of 11 million CBS shares – about 1.6 percent of the company’s equity – makes him one of the biggest individual stockholders. Wall Street’s money masters take comfort in the fact that Karmazin’s own fortune is tied up in his $350 million worth of CBS stock, and they’re confident that he’ll do whatever it takes to keep the share price rising. What’s more, they know his extraordinary record for producing windfall profits. This is a guy who took his company public in 1992 for $17.50 a share and sold it only three years later for $170 a share, a runup that clinched his legendary status on the Street.
Investors are well aware that Karmazin is a maniac about making money for them. He’s an obsessed, divorced workaholic with a hyperaggressive, bullying, in-your-face style, a fearsome, tightfisted micromanager who even scrutinizes his underlings’ long-distance phone bills and overnight-mail receipts. (Until recently, Karmazin claimed that he personally signed off on any outlays of more than $500 for his thousands of employees, from travel expenses to salary raises to trivial office purchases; now the figure is up to a still-measly $2,000.) Stockholders love that Karmazin lives across the street from his austere office and once bragged that he had no life outside of work. They might not want to work for him, but this is exactly the breed of manager to whom they’d want to entrust their life savings.
In certain ways, Karmazin fits neatly into the stereotype of the entertainment mogul. Like Time Warner’s Gerald Levin, he’s a media boss who has the ironic habit of turning down nearly all interviews with the media (including this magazine), and he remains intensely private in the midst of an extremely high-profile industry. Like Levin’s vice-chairman, Ted Turner, he is a wired, charismatic No. 2 executive with a slight tendency to bombast and a penchant for driving underlings crazy. Finally, like the late Steve Ross, the legendary former head of Time Warner, Karmazin is the charismatic Jewish striver from the outer boroughs, the self-made man who rose to the highest heights.
He did indeed grow up on the wrong side of the tracks. He had a nice view of the 59th Street bridge, but it was from a low-rise public housing project on the Queens side rather than a high-rise private condo on the Manhattan side. His family could hardly have been more stereotypically blue-collar: His father drove a taxicab; his mother worked in a curtain-rod factory.
Karmazin launched his career in the mail room of the small Zlowe advertising firm while he was still in high school. After stints as a mail clerk and a typist, he worked as a media buyer while earning a B.A. in business at night from Pace College.
At 23, he went to work at Black Rock – the building he would later come to terrorize – in a decidedly plebeian role: cold-calling small-business owners, such as grocers, as an ad salesman for the WCBS-AM radio station. He sold so many ads that before long he was making $70,000 a year, an amazing sum for someone that young in the late sixties. The station manager tried cutting his commission rates, complaining that the kid was making too much money, so Karmazin quit in 1970 and moved to Metromedia’s WNEW-AM. He was such a persuasive salesman that he managed to push clients to pay higher rates to advertise during broadcasts of New York Giants games, even though at that time the team was pitiful. From there, Karmazin rose swiftly. At 31, he entered the executive ranks as general manager of WNEW-FM, which flourished with a rock format. Later he took over WNEW-AM as well.
In 1981, at the age of 38, karmazin was recruited by two former Metromedia executives who offered him a $125,000 salary to run six radio stations for their new company, Infinity Broadcasting. At the new venture, Karmazin perfected his modus operandi, which he still follows at CBS. He would pay eyebrow-raising prices to buy stations in major markets, what he liked to call “oceanfront properties.” Then he would slash administrative staffs and costs, running the tightest of tight ships, while doubling or tripling the number of commissioned salespeople in an effort to raise revenues.
For programming, Karmazin hit on two successful formulas: football and shock jocks. Early on he saw the value of sports, buying the radio rights to almost all the New York teams – the Mets, Knicks, Rangers, Giants, Jets – as well as strong franchises such as the Dallas Cowboys. In 1985, soon after NBC fired Howard Stern for ridiculing the network’s executives, Karmazin hired him for WXRK, better known as K-Rock, and proceeded to take Stern national, putting the King of All Media on 30 stations. That may seem like a no-brainer now, but the strategy was unprecedented at the time, when radio honchos believed naïvely that talent wouldn’t travel. After Infinity bought WFAN in 1992, Karmazin gave Don Imus a rich five-year contract and took his show from one station to 100.
“Everything Mel does revolves around the business,” says his friend Norm Pattiz, the founder of Westwood One, a national syndicator of radio shows (Larry King, Casey Kasem) that Karmazin bought years ago. Even when Karmazin goes to sporting events – the Super Bowl, the Nagano Olympics – his overriding purpose is work, says Pattiz. Friends of Karmazin’s ex-wife, Sharon, complain that he spent too many evenings and weekends at his 57th Street office rather than at home in the comfortable but unglamorous suburb of North Brunswick, New Jersey.
Sharon still runs a local public library with an iron will reminiscent of her former husband’s style. Like Mel, she comes from a modest background and is reputedly very smart, unostentatious, and extremely averse to publicity. Mel remains close to his two grown children, both of whom may be preparing to carry on the Karmazin legacy. His son, Craig, bought three radio stations in Wisconsin with Mel’s help, and his daughter, Dina, recently worked for E! Entertainment Television.
Karmazin approached Michael Jordan in 1996 with a proposal to buy CBS’s radio stations. Jordan countered with a lucrative offer for CBS to take over Infinity for $4.9 billion, not much less than Jordan had paid for all of CBS the year earlier – networks, TV stations, and radio. As part of the deal, Karmazin would run all the radio stations in the merged companies. When the acquisition was announced in June 1996, Don Imus told his radio audience about his friend Mel: “It will occur to someone over there at CBS that maybe he should run everything.”
After the deal closed, on New Year’s Eve, Karmazin went stalking through Black Rock, hunting for wasteful spending, much as Ted Turner did at Time Warner’s headquarters when he signed on as its biggest shareholder. Last May, with CBS’s stock still mired in a slump, Karmazin – famously impatient for results and intolerant of rivals – took action. In what looked like a boardroom coup executed with remarkable speed and surprise, CBS announced the retirement of Peter Lund, the well-liked twenty-year veteran who was head of CBS’s fourteen owned-and-operated TV stations and the television network. Mel then added the O-and-Os to his own fiefdom and assumed the title of president and CEO of the CBS Station Group.
The coup came the very day that CBS was announcing its fall lineup, upstaging programming boss Les Moonves’s event at Carnegie Hall. This couldn’t have endeared Mel to Moonves, the onetime actor turned network honcho, and it may have started the two men on a collision course.
“Les and Mel are two 8,000-pound gorillas – big personalities, bullies,” says a highly placed CBS source. “At the moment, the law of the jungle persists and they get along, but at a certain point Les’s performance will come under scrutiny.” Moonves, who had a strong track record in his previous job at Warner Bros., has yet to come up with a hit show on his watch, despite having shelled out large sums for aging stars like Bill Cosby, Ted Danson, and Tom Selleck. “Mel needs to dominate people,” the source explains. “He loves to pick a fight. he picks fights all the time. Karmazin has no patience for anyone. How much patience will he have for Les?”
Thrilled with the news that their man was consolidating his power base, Wall Street traders bid up CBS’s market capitalization by more than $1 billion the day Karmazin took over from Lund. In his column at TheStreet.com, financial pundit James J. Cramer wrote, “Memo to Michael Jordan: Can you imagine how much Westinghouse will go up when Mel forces you out?”
From that point on, Wall Street’s fervor for the stock continued unabated, driven more by its unshakable confidence in Karmazin than by any specific changes or short-term results. By the end of the year, it had risen from $17 to $30, a market-cap increase of $9.1 billion. “Mel has been incredible for the stock and for the company,” says Merrill Lynch’s Cohen. “He can run circles around anyone. Wherever Mel is, whether it’s Infinity or CBS, the stock tends to trade at a huge premium, and he makes it worth it.”
Most people assume that running radio stations isn’t the same as running a national television network, but don’t tell that to Mel. Radio and television are “really not any different,” he told a broadcasting trade publication – you just “add a zero.”
If only it were that simple. the huge sums that the TV networks are paying for professional football are just the latest and most dramatic illustration of their increasingly desperate efforts to retain their once-broad audience. The Big Three’s share of prime-time viewership, which held at 91 percent as late as 1979, is down to 42 percent, pummeled by cable and Fox. More and more, the viewers who cling to broadcast TV are the ones who have no other options – people who are older, poorer, less educated, more rural. Those are exactly the eyeballs that advertisers want the least, and they are CBS’s home turf.
Paradoxically, even as ratings have gone down, advertising rates have been going up. “If you’re Procter & Gamble, you have to sell a certain number of boxes of Tide, and you have to buy as much TV as you need to do it,” says Nick Donatiello of Odyssey, a research firm that specializes in home entertainment and technology. “So these advertisers are like drug addicts: As ads are less effective, they have to get more and more to get the same fix. In a world where consumers can watch what they want, when they want to, there will be an incredible premium on live outcome-driven events. That means primarily sports, because how many awards shows can you have?”
Still, it’s uncertain whether advertisers are willing to pay the rate hikes that CBS’s salespeople will try to extract. A well-placed source at Black Rock says that Karmazin is counting on a 20 percent increase in ad revenue at the network level, meaning around $50 million. That may prove a dauntingly ambitious goal even for Karmazin, who has a long history of pushing painfully high targets on his sales forces and is described by one of his TV-station managers as a “sales animal.” But even with a 20 percent boost, it’s hard to see how they’ll come out ahead. If the affiliates contribute $50 million a year to the network, as has been proposed, and the NFL deal increases the number of ad spots from 56 to 59 per game (which could kick in another $35 million a year), how does that justify a $273 million price increase?
The network brass like to mention the other benefits that are harder to quantify. There’s the undeniable value of Sunday-afternoon football as a lead-in to 60 Minutes, which has fallen from a 30 share to a 22 share since CBS lost football four years ago. The networks also have an almost religious conviction that football telecasts are a great opportunity for promoting their prime-time lineups, though in 1990, CBS had the Super Bowl, the World Series, the NBA play-offs, and the NCAA Final Four – CBS brass called it “the dream season” – and the network’s new prime-time shows failed nonetheless.
The question remains: can he make it work? Karmazin’s strategy of cutting costs won’t compensate for a scarcity of hits; besides buying the NFL rights, his few attempts at programming have focused on lowbrow shows and have been received by the industry with bemused skepticism. He paid a conspicuously high price to the King World syndicate for a new version of The Hollywood Squares (which debuts this fall), and he is reportedly trying to create a new late-night TV show for Howard Stern designed to compete with NBC’s Saturday Night Live.
A well-placed source says that Les Moonves, who declined to be interviewed for this article, has trouble hiding his contempt for Karmazin’s programming skills. But even if Karmazin isn’t a genius at programming, investors suspect he has a hidden agenda. While CBS’s football deal is risky for the parent company, it’s clearly a boon to the TV stations that CBS owns, especially the seven that are in cities with AFC teams, such as New York’s WCBS, whose profitability has been lagging behind its local NBC and ABC rivals by $100 million a year, according to Karmazin’s own estimate. Since the TV stations are his personal fiefdom within CBS, the football deal has heightened suspicions on Wall Street and in Hollywood about Karmazin’s ultimate plans. The thinking is that he may be planning to separate and sell off the so-called “network” – the organization in New York and Hollywood that produces national news and sports and commissions the prime-time entertainment – while keeping the TV and radio stations that actually broadcast all this programming. The network is a pitiful money-loser, while the stations contribute 79 percent of the company’s cash flow.
Quite simply, owning a TV network has become a lousy business – at least from a purely financial perspective. It makes sense only if the network serves some grander plan for its owner. ABC provides a ready, captive outlet for the movies and series produced by Disney. The Fox Network does the same for Fox’s studio, and NBC fits into the grander scheme for GE, which is taking advantage of the brand to expand into cable ventures such as CNBC and MSNBC. CBS, on the other hand, has no studio to provide a strong pipeline to Hollywood talent and no major cable niche.
“It’s inevitable that CBS shouldn’t exist as a stand-alone TV network,” says investment banker Porter Bibb. “Karmazin would keep the O-and-Os and radio and become the biggest radio broadcaster. It’s basically his decision because he’s the most influential stockholder. Other stockholders, particularly institutional stockholders, will listen to him. If they can cash out at top dollar, what have they lost?”
But who would want to buy CBS, especially if Karmazin strips out the local TV and radio stations? Microsoft and Viacom were once rumored to be interested. Ted Turner, who has lusted after the network since his earlier failed takeover bid, could come courting again. But Bibb thinks that Barry Diller is the prime candidate. The Hollywood legend made a run at CBS in 1994 and, after losing, spent several precious years in the unglamorous wastelands of home-shopping channels and UHF stations. Recently, he teamed up with Seagram’s Edgar Bronfman Jr. to buy Universal’s TV operations and the USA cable network. “I think Diller and Seagram will put an offer on the table for CBS because they need a distribution channel for Universal TV,” says Bibb, who is writing a book on the Bronfman family. “Diller will be Bronfman’s stalking horse. CBS will legitimize Diller as a major broadcast player. It’s where he wants to be.
“You have to face the reality that networks are on a ticket to nowhere,” he continues. “The brand is a wasting asset.” He thinks it’s foolish to believe that CBS can actually earn money on football. The deal only makes sense because it makes CBS’s assets appear stronger to potential buyers. “It’s like having your old clunker waxed and polished before you sell it,” says Bibb. Karmazin has no emotional commitment to holding CBS together; he’s interested only in making money for the investors. And if the only way to do that is by dismantling the venerable old broadcast giant and selling off the pieces? Stay tuned.