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Dealing with Sumner

9/08/2006 8:06 PM Eastern

Tom Freston’s ouster as CEO of Viacom Inc. last week shocked entertainment executives and his cable colleagues. Now it remains to be seen if any of Freston’s longtime lieutenants at MTV Networks follow him out the door.

Viacom chairman Sumner Redstone solidified his reputation as a terminator of talented CEOs with his unexpected dispatch of Freston, who once was considered the 83-year-old’s heir apparent. The last “resignation” involved Freston’s predecessor, Mel Karmazin, two years ago.

Wall Street, which doesn’t like surprises, immediately expressed concern that there will be more management upheaval as a repercussion of Freston’s exit. MTV Networks and several of its channels are run by executives who have worked loyally with Freston for decades, since the early heyday of flagship service MTV. Viacom’s stock price got a small pop on the day of the announcement, but by midday Friday, it was trading at $34.50, off almost $1.

Topping the list of executives whose departure might increase worries about the future direction of Viacom is MTV Networks CEO Judy McGrath, who has been with the company for 25 years.

Close behind her is Doug Herzog, now president of the MTV Networks entertainment group, which includes Comedy Central, Spike TV and TV Land. In the 1980s, McGrath and Herzog worked side by side at MTV, with McGrath in charge of on-air promotion and Herzog heading production.

Both Redstone and Philippe Dauman, who succeeded Freston as CEO, have said that they have reached out to McGrath — and that they want her to stay.

“They don’t want to lose their creative leaders, especially when they don’t have creative backgrounds themselves,” one programming executive said.

In addition to McGrath, there are other shoes that could drop, in terms of turnover, in Viacom’s executive suites.

“Sumner’s companies have always looked like a revolving door,” said Jefferies & Co. analyst Robert Routh. “It’s almost like a bull-riding contest — let’s see who can hang on the longest.”

INSIDE THE DOORS

MTV Networks has long been the crown jewel for its parent Viacom, with its collection of globally strong TV brands. It’s also a profit machine. Cable networks accounted for $1.75 billion of Viacom’s second-quarter revenue of $2.5 billion and, essentially all of the company’s $663.2 million in operating income.

But MTV Networks has come under pressure of late, facing a difficult ad market, soft ratings at some of its networks and an assault from the media sector generating all the current buzz: the Internet.

McGrath, before her promotion to head Viacom’s cable empire, led the flagship channel MTV for years, establishing its once-unassailable status as a youth-culture icon.

The extent to which MTV has lost that crown to social-networking outlets like MySpace.com may be part of what paved the way for Freston’s downfall. Rupert Murdoch’s News Corp. paid $580 million for the nascent, fast-growing “friends” site last year. The only other media giant known to be bidding, at the time: Viacom, via Freston.

Apart from McGrath, Herzog has established a strong track record at MTV Networks, enjoying remarkable success with Comedy Central, on both the video and online side.

Freston’s firing is “going to have ramifications, because everyone is so closely aligned in that company with Tom,” said Jarl Mohn, who (when known as Lee Masters) was MTV’s general manager in the mid-1980s, working for Freston. “And I think, particularly if someone attempts to run that organization in a top-down, bureaucratic manner, it’s going to be very difficult. They’ll really, as the saying goes, screw the pooch.”

The upheaval at Viacom has some analysts worried.

“We still believe the company’s long-term prospects are relatively strong, but are concerned about the impact of management turnover on operations and therefore see limited near-term upside,” Merrill Lynch’s Jessica Reif Cohen wrote in a report last week.

She noted that Viacom management “hopes to keep most, if not all, of the current senior executives in place.” But she said “at a minimum, [chief financial officer] Michael Dolan is likely to exit Viacom.”

That’s because Tom Dooley, who last week was named Viacom senior executive vice president and chief administrative officer, will likely assume Dolan’s role, according to Reif Cohen.

There’s also been speculation that MTV Networks president and chief operating officer Michael Wolf will become a casualty in the wake of Freston’s exit. The departure came just eight months after Viacom split itself in two, creating CBS Corp., with TV and radio broadcasting operations, the Paramount television studio, billboards, theme parks and pay TV stable Showtime Networks Inc.; and the present Viacom, with MTV Networks, Black Entertainment Television, a video-games unit and Paramount’s theatrical movie studio. Wolf, a McKinsey & Co. managing director, was hired to fill the vacancy left when Mark Rosenthal left the company in mid-2004.

CREATIVE CODE

Freston, who spent 26 years at Viacom, “cracked the code for running an entertainment organization by naming super-creative people to set the strategy, and partnering these creative executives” with finance-oriented types “to make sure that all the boxes got checked and the trains ran on time,” according to Mohn.

“That’s what’s made that company such a juggernaut: Total respect for the creative process and for creative executives and building the organization around them,” Mohn said.

That’s the kind of corporate culture that McGrath and other MTV Networks executives have thrived in for years.

“She’s just intoxicated by good ideas, and that kind of enthusiasm spreads throughout an organization,” said Oxygen Media chairman and former Nickelodeon chief Geraldine Laybourne.

Freston and McGrath have been a close and successful team for several decades. In a Feb. 20 Business Week story, Freston joked that his relationship with McGrath was the most enduring he’s ever had with a woman.

While MTV Networks higher-ups may be upset about Freston’s exit, they won’t make any rash moves, according to several network executives.

“Both Judy and Doug love what they do, and they love their brands,” Laybourne said. “Even though they had great affection for Tom, this is their daily work. I don’t think they’re going to go bolting.

“And I hope that Judy stays and takes the challenge. … She’s a remarkable person. She’s kept her finger on the pulse of the youth culture for 25 years, and it’s not the easiest thing in the world.”

According to Mohn, “She’s not going to do anything that is not in her best interest. She just is not.”

McGrath and Herzog could not be reached for comment.

In addition, MTV Networks executives like McGrath know Dauman and Dooley from both officials’ prior stints at Viacom. Both men are well-regarded, and considered not only financially smart but personable.

“There’s every indication that Philippe and Tom [Dooley] will try to preserve the culture,” said Laybourne, who knows them from her days at Nick. “They were terrific, and they did a very good job of letting MTV Networks be MTV Networks: no micromanaging.”

TOUGH TIMES

Like the entire cable industry, this year MTV Networks faces a tough ad market (see story, below). And its cable networks have seen some declines in viewership. While basic cable overall was up in viewing this summer, primetime-household ratings was down or flat for a host of MTV Networks’ channels. For example, TV Land dropped 11%, Spike TV was down 23%, Nick at Nite dropped 24% and CMT was flat, according to a Disney ABC Cable Networks analysis of Nielsen Media Research data. Comedy Central saw a 13% gain.

To add insult to injury, on Aug. 31, MTV’s signature event, the Video Music Awards, averaged only 5.7 million viewers, down 28% from last year.

Nonetheless, MTV Networks remains a huge contributor to Viacom’s growth, making up more than half of the parent’s $2.85 billion in revenue in the second quarter. Viacom’s total cable-network revenue increased 8%, to $1.75 billion; Domestic ad revenue was up 10%, to $969.1 million, and affiliate fees increased 11%, to $501.8 million.

But in these tough ad times, several programming executives that Viacom may have to set more realistic goals for MTV Networks.

“It’s tough, when these companies get big, to keep churning out 20% growth, but they have the best brands imaginable and I have every faith in them,” Laybourne said. “And I certainly don’t agree that MTV has lost its way.”

September