Assessing the Houses That Viacom Built

Did Sumner M. Redstone, the chairman of Viacom, wait too long to break his media conglomerate in two?

To hear Viacom executives tell it, investors these days are flocking to media companies built on a carefully defined strategy, not media giants with a jumble of sundry businesses.

So under a plan Mr. Redstone disclosed last week, Viacom would divide into two new public companies, with its broadcast TV and radio units housed in one and its cable networks and film studio in the other. Mr. Redstone has suggested that the split would finally provide Viacom's flashy and fast-rising cable channels -- which include media powerhouses like MTV and Nickelodeon -- a chance to perform without the drag of the slower broadcast businesses.

But any way the company slices it, Viacom may already have missed the best moment for a big payday from the cable unit, which for years has posted double-digit sales increases and produced hits from "The Osbournes" to "Rugrats." Wall Street analysts are forecasting that the company's cable division, where revenue rose 17 percent last year to more than $6.5 billion, will be cooling off in the next several years.

"It's a mathematical certainty that cable's going to slow down," said Michael Nathanson, a media analyst who tracks Viacom for Sanford C. Bernstein & Company. "The notion of watching TV in a linear fashion is going to be turned on its head."

Viacom's clutch of cable channels faces a range of problems as it tries to keep up with shifts in audience habits and in the broader television landscape. The cable unit already is grappling with how to keep its hold on fickle young viewers who spend increasing amounts of time instant-messaging online, chatting on cellular phones or playing video games. The advent of devices like TiVo is jeopardizing ratings and advertising dollars for cable and broadcast outlets alike. And the company's newer channels will gradually run out of room to expand as they reach the limits of household penetration, analysts say.

Sanford Bernstein analysts project that sales at Viacom's cable division -- which also includes channels like VH1, Comedy Central, BET and Showtime -- will rise at an annualized rate of 7 percent for the next five years, compared with roughly 17 percent for the last five. Even at that rate, sales at the cable division are expected to rise roughly twice as fast as in the broadcast TV unit. Executives at Viacom's MTV Networks -- the core of the cable division -- dismiss suggestions of a slowdown, however.

"The cable TV business is robust and healthy and will continue to grow," said Van Toffler, president of MTV Networks' music unit, which includes channels like MTV, MTV2 and VH1.

MTV, Mr. Toffler added, "is a brand that's got such a strong connection to young people, you can extend that brand in very organic ways, on satellite radio, wireless platforms, video on demand. The sky's the limit."

Indeed, MTV, which will turn 25 next year, has known few limits as it developed into a touchstone for youth culture and a roaring profit engine. The channel managed to sustain its hot streak with innovative -- and typically inexpensive -- programming and a position as one of the only channels that aims directly at the capricious 12- to 24-year-old audience. The company's more established channels, like VH1, have continued to register double-digit sales increases long since their expansion into United States households maxed out, MTV executives note. (MTV and VH1 each reach roughly 87 million households.)

Behind the scenes, MTV has fostered a climate of constant reinvention, "a culture of restlessness," as Judy McGrath, MTV Networks chairwoman and chief executive, puts it. The result is that the channel has remained on the cutting edge of television: its creation of "The Real World" series more than a decade ago presaged today's reality-show craze; edgy animated fare like "Beavis and Butthead" helped open the way for broadcasters to air cartoon programs like "King of the Hill."

Still, in developing fresh programs, the channel has kept a zealous devotion to low costs. "The Real World," for example, which follows the real lives of a set of young strangers who must reside together, requires little more than a camera crew. Talent costs are minimal, and the producers of the series pad their bottom line by offering product placement deals to advertisers.

Moreover, the cost of licensing music videos -- which runs to several million dollars a year to each of the four major music corporations -- have risen relatively slowly because Viacom has maintained a near-monopoly on the music television field, record executives say. In contrast, competition for distribution rights to major sports events has driven programming costs for ESPN and similar outlets skyward.

For MTV, the payoff is represented by some of the biggest profit margins in the media industry. The flagship music channel earned cash flow of roughly $620 million last year on sales of $1.09 billion, a margin of roughly 57 percent, according to estimates by Kagan Research in Monterey, Calif.

Some analysts say it is unlikely that Viacom's cable channels will be able to maintain such wide margins because of the money that will have to be poured into nurturing international expansion, properties like Spike and developing original programming for Web sites and wireless services. But that investment may be needed to keep viewers from drifting off to competing pastimes.

Mr. Toffler of MTV says he has "many sleepless nights" worrying about emerging competitors, who are no longer restricted to the television dial.

"Our competition is as much Launch and MySpace and the WB and UPN as it is another music network," he said, referring to Web sites and television channels that target young music fans. "It's all about whoever's going after mind share of young people."

Viacom has also proved to be territorial when it comes to music and youth culture. Over the years the media giant has purchased a string of rival channels that bolstered revenue and effectively blocked any attempts to outflank MTV. In 1999, it purchased The Box, a small music network, and used it to expand distribution of its own fledgling MTV2. Last year, it paid about $394 million to acquire Viva Media, which controlled an MTV rival in Germany.

In the United States, MTV's only direct rival of any size is Cablevision's Fuse channel, though distribution is limited to about 37 million households, well behind MTV2. Universal Music Group, a unit of Vivendi Universal, has also been developing a satellite-based music channel.

Looking forward, the company says it is drawing up plans to sell an array of new offerings -- everything from video programming for mobile phones to song downloads -- as the television audience fragments. The cable division has already become a power in consumer products: toys and other products from Nickelodeon racked up retail sales of roughly $4 billion last year, company sources estimate.

But splitting up the company could also take away one critical weapon for Viacom's cable properties: the leverage of a broadcast channel when it comes time to raise fees or add new channels with cable and satellite-TV systems. When Viacom reached an impasse in talks with the satellite provider EchoStar Communications last year, for example, it gained an edge by threatening to withhold a critical signal: CBS.