Wall Street loves good stories, and media companies are in the business of telling them. So it's shocking when a company like Viacom loses control of its own narrative.
But that's what happened to Viacom CEO Tom Freston, who was succeeded in a post-Labor Day shakeup by former Viacom and private-equity executive Philippe Dauman. The irony was that CBS was initially pegged by Wall Street as the slow-growth company, and Viacom the rocket to a digital future. But the inability of Mr. Freston's camp to keep that storyline spinning ultimately proved his downfall.
The now-familiar ending: With Viacom's stock almost 20% below post-split highs, Chairman Sumner Redstone cited "deficient communications" with Wall Street and Viacom's failure to be more aggressive online for his decision to replace Mr. Freston. Mr. Dauman and another new executive, Tom Dooley, Mr. Redstone said, are "go-and-get-it kind of guys."
From a communications perspective, said one veteran PR executive, the positioning of the slow-growth and fast-growth companies was key. "The expectation for Les was that he was in charge of the slow company and he overperformed," he said. "It shows you how important expectations are."
Tellingly, the announcement about Viacom's new management team was made not by its own outside investor-relations agency, Abernathy MacGregor Group -- a company hired by Mr. Freston -- but by Citigate Sard Verbinnen, brought in by Sumner Redstone's office to work on the news. Citigate Sard Verbinnen also worked for Martha Stewart during her legal travails. Senior Viacom staffers were informed the night before the announcement.
Mr. Freston, well-liked and popular with Viacom management and employees as well as with Wall Street analysts, didn't seem to understand the need to feed expectations with well-timed announcements about digital initiatives the way Mr. Moonves and his team over at CBS did. Cushioned by its reputation as a youth-targeted, savvy marketing operation with enviable assets, the new Viacom seemed to assume its place was secure.
But the Street reacted very differently to the two companies' progress. CBS's first-quarter revenue as a public company grew 4% and free-cash flow -- expected to be a hallmark of the stand-alone CBS -- was up 12% to $585 million. In the next month it grew 3%. Viacom's revenue rose 12%, but net profit fell 9%. CBS's stock price dropped 1% on the earnings news, but in the following month grew 4%. Viacom's fell 2% the day of its earnings and continued to drop -- down 5% in the following month.
Second quarter was a different story: CBS Corp. reported a 1% decline in revenue and an increase in free-cash flow of 2%, while Viacom, whose stock was hovering at an all-time low, beat most analyst expectations with revenue and net profit both growing 24%, fueled by DreamWorks and cable-network gains. But while CBS's stock continued to grow, up 5% since then, even a strong second quarter that beat most anlaysts' expectations wasn't enough to lift Viacom's stock back to its initial price. After gaining a few dollars, its highest price in August was still down 6% -- and with the Labor Day news it's back to 20% off.
Lack of communication
Looking back, no one in Viacom's divisions ever seemed to grasp that it needed to act differently as a public company. A July survey by Abernathy MacGregor, for example, indicated analysts and investors wanted the company to communicate better -- especially regarding digital strategy.
Carole Robinson, Viacom's most senior PR executive as exec VP-corporate relations, declined to comment on Viacom's communication strategy.
It was no secret that Mr. Freston, 60, would rather be sitting around in an MTV staffer's office, cooking up the next big on-air hit than out chatting up the media and answering to investors at conferences. Much of that he left to Mike Dolan, the CEO Viacom snared away from Young & Rubicam a year and a half ago. Mr. Dolan, described by analysts as a "fiscally cautious" executive, explained to investors that Viacom didn't "see the need for any transforming deals" -- a sentiment echoed by CEO Mr. Dauman last week. Still, according to executives close to Viacom, the two new executives had not yet spoken to Mr. Dolan about his future at the company. Mr. Dolan declined to comment.
While Mr. Moonves and his team at CBS weren't necessarily in acquisition mode, they did manage to grow some digital chops -- and they milked the publicity out of it. The spring before the Viacom/CBS split Mr. Moonves hired Larry Kramer, a man with internet gravitas, to head CBS Digital. On Jan. 6, with the separation ink barely dry, CBS touted a deal with Google -- at the Consumer Electronics Show, no less. And in March, it launched the biggest TV-on-the-web play yet with its online and much-buzzed-about simulcast of the NCAA March Madness basketball tournament.
The tech-savvy brand
"CBS recast itself as a younger, tech-savvy brand," said Lee Westerfield, an analyst at BMO Capital Markets.
MTV Networks did a decent job communicating its digital properties to advertisers during the upfront, said media buyers, and that resulted in an early upfront deal with OMD that gave the Omnicom media agency first look at digital properties. But it still faces uncertainty in terms of how it will stay relevant in a MySpace world.
"Social networking to teens today is what MTV was to teens in the 1980s," said Gail Stein, client-communications director at OMD.
And that may point to the real trouble with Mr. Freston's management tenure, trouble that many inside Viacom suggest started even before the split -- when the company lost out on MySpace, the web's fastest-growing property last summer. As it stands, according to Nielsen NetRatings's July data, aggregate Viacom-owned sites rank 23rd in terms of unique web visitors. News Corp. has rocketed to No. 6.
When Rupert Murdoch bought the site, no one was sure exactly if and how he'd recoup the investment -- but a year later he has a $900 million revenue guarantee from Google and a reputation among investors as a smart internet opportunist.
Said a person close to the personnel changes at Viacom: "Philippe and Tom have an eye for opportunity ... they understand and can navigate the digital space." Just as importantly, they know how to put it in language that will appeal to Wall Street.
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A tale of two CEOs
June 2005: Viacom's board approves splitting the company into the fast-growth MTV Networks-anchored business helmed by Tom Freston and Leslie Moonves' CBS-anchored entity. The two CEOs head out on their respective roadshows. In the next six months, Mr. Moonves snags 1,417 mentions in major media; Mr. Freston reaps just 635.
July 2005: Viacom loses out on MySpace, the fastest-growing web property, after watching News Corp. bid it up to $580 million cash.
January 2006: Mr. Moonves merges money-losing UPN with Time Warner's WB to create the CW. Announces plan to sell theme parks.
February 2006: Stock hits a high and starts its slide. CFO Mike Dolan tells investors Viacom doesn't "see the need for any transforming deals."
February 2006: CBS strikes iTunes deal, which allows it to unlock a new profit stream and gives Wall Street a hint that content suppliers have a better story to tell.
March 2006: Analysts suggest cable's growth may eventually be slowing; MTV Networks dismisses the notion.
March 2006: CBS launches March Madness on Demand, gets kudos for savvy use of digital media.
June 2006: CBs wraps up broadcast upfront with $2.4 billion, the most of any network. Paramount Parks sells for $120 million, $40 million more than projections.
July 2006: A slow cable upfront. MTV Networks publicizes an early deal with OMD, giving it first look at digital. But that stalls deals with others.