Viacom's Shortsighted Search for Synergy

Feb. 13 1998 3:30 AM

Viacom's Shortsighted Search for Synergy

Amassing media properties doesn't build value--especially when the entertainment field itself is in decline.

Visions of multimedia synergy dance in Sumner Redstone's head. Redstone is CEO of media conglomerate Viacom. Film (Paramount), television (MTV and Nickelodeon), video (Blockbuster), books (Simon & Schuster): Viacom owns them all, and Redstone keeps believing that someday they will all work as one. Imagine a best-selling novelization of a hit film based on the MTV series The Real World, a film that then becomes the No. 1-selling videotape at Blockbuster, and you get some sense of the oasis that Redstone keeps glimpsing just over the next sand dune.

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In the past, Viacom's dogged pursuit of media synergy led it to overpay for everything from Paramount Studios to Blockbuster, and burdened it with a debt load worthy of a small nation. It also led Viacom--at a time when corporate America was casting doubt on the conglomerate model and stressing the virtues of playing to core strengths--to cling to the things it bought with a discomfiting tenacity.

The announcement that Viacom wanted to sell S & S's educational and professional divisions--textbooks, computer books, professional books, and reference books--then, came as something of a welcome surprise, at least to Viacom stockholders. Although the divisions were profitable (more profitable, in fact, than S & S's trade division), they didn't fit very well with Redstone's idea of the company. More importantly, when Viacom started talking about getting as much as $4.5 billion for the divisions and using the money to cut its debt in half, the words "fiscal responsibility" suddenly sounded less improbable than they once had. There remains a great deal of skepticism in the media about whether Viacom can get its price, but S & S's educational and professional divisions are the largest in the world, and the divisions have done adequately under a company for which they were but an afterthought. In the hands of a company with a real investment in publishing, like Reed Elsevier or McGraw-Hill, they have the potential to be cash cows.

Potentially a win-win deal all around? Perhaps. Still, it's odd that Viacom went public with its plans before lining up a prospective buyer. As one company source points out, saying "I'm really anxious to sell. Make me an offer" is hardly the best strategy if you're looking to drive a hard bargain. It's also a little surprising that Viacom has chosen to sell in 1998, rather than taking advantage of the big tax savings that the law provides had the company waited a year and then spun off the publishing assets into a separate company. But Redstone's desire to remake the company--and to placate shareholders, who have been disenchanted with Viacom for two years now--outweighed tax considerations.

What's most interesting about the deal is that Viacom will be holding on to the rest of S & S. Book publishing is not generally a high-profit-margin business, and it's also not as jazzy as television or the movies. The decision to keep S & S only makes sense, then, in the context of Redstone's synergistic hopes. Viacom, he says, is now going to "focus on software-driven entertainment," which is the inelegant 1990s way of saying that Viacom wants all its divisions to be oriented toward mass-market entertainment. And he points to the success of the new MTV and Nickelodeon book imprints and of books tied to Paramount film releases as evidence that the company's parts add up to a stronger whole.

But the fact that S & S publishes books based on MTV series--like the dreaded Real World books--isn't, in and of itself, evidence of any real synergy. After all, even if some other house published these books, MTV would reap the benefits of licensing, royalties, etc. And Viacom wouldn't have to worry about what happens when that next Road Rules book tanks. Similarly, publishing books based on your own movies is a great idea when the movies are doing well. But if you put out a few box-office duds, publishing books based on those duds means you pay for the failures twice.

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R eal synergy, in other words, only happens when you are able to take lessons from one business and apply them to another. If Viacom were using its Nickelodeon-induced expertise in appealing to the 9-year-olds market to sell children's books better, or taking what it's learned from MTV to make readers out of disgruntled teen-agers, the idea of synergy would make more sense. Now, it's possible that this is, in fact, happening behind the scenes. But if it is, no one at S & S seems aware of it.

Actually, at this point no one at S & S is sure that they're aware of anything. Viacom got S & S when it bought Paramount, but it wanted Paramount, not a book company. And even though S & S is probably the most profitable trade publisher in America, the book market is essentially a stagnant one, at least in terms of profits. Many people there imagine that the trade division will be the next to go. The joke going around S & S these days is that Morgan Stanley, which is handling the sale for Viacom, told Viacom that it could get $4 billion to $4.5 billion if the trade division were included and ... well, $4 billion to $4.5 billion if the trade division weren't included.

The problem with this analysis is that it assumes that the book industry is somehow in worse shape than the rest of the entertainment industry. This assumption seems intuitively right--we no longer live in a print culture, right?--but there's actually very little evidence to back it up. The weird thing about the American economy, in fact, is that at a time when mass-marketed leisure and entertainment are supposedly more and more important to our economic well-being, the entertainment industry as a whole is barely growing at all. If, as The X-Files would have it, we're now ruled by a military-industrial-entertainment complex, the "entertainment" part of that complex needs to take some quick lessons in management and profit growth from its two partners.

On the face of it, this seems crazy. David Geffen, Michael Eisner, Steven Spielberg, Sumner Redstone: These are among the most prominent faces of the New Economy. They end up on the cover of Vanity Fair and Wired. They foreshadow the world in which we're all either symbolic analysts or hamburger flippers. But look at the numbers. Last year, the music industry saw sales decline slightly. Movie attendance was down. Trade publishers sold 5 percent fewer books than they did the year before. And the audience for cable television seems to have plateaued at around 70 percent of all U.S. households, while viewership of the major networks has, of course, continued to drop. Is everyone watching videos instead? Hardly. Video rentals dropped 4 percent in 1997, which is part of the reason that Blockbuster is only worth about half today of what Viacom paid for it in 1994.

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