Q&A: UPFRONT WITH KARMAZIN

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Mel Karmazin, Viacom's president-chief operating officer, is out on a limb with his predictions about this year's advertising market. Despite dire near-term economic forecasts for the media industry, Mr. Karmazin says Viacom's advertising business is good, and will continue to be this year. Industry detractors say it's just spin, noting he's the ultimate salesman, using optimism to rally his troops.

It's working. Overall, Viacom's businesses are outperforming the market in 2001. Company executives tell analysts Viacom will achieve 20% growth in cash flow to some $6.2 billion this year, a healthy take for a media giant ringing up $25 billion in annual revenue from companies such as CBS, MTV, Nickelodeon, BET, UPN, Paramount Pictures, King World Productions, Blockbuster Video and Infinity Broadcasting.

In the last couple of months, Mr. Karmazin made bold statements that Viacom may turn the TV advertising upfront on its ear. Concerning a weak ad market, he said if CBS, for instance, doesn't get its price, it may sell just 55% of inventory in the upfront, a big drop from networks' typical 75% to 80% rate. Mr. Karmazin spoke with Los Angeles Bureau Chief Wayne Friedman on the eve of the TV upfront season where advertisers buy time for the 2001-02 season. An edited transcript follows.

Advertising Age: You've been very optimistic as compared with other media executives regarding the economy and advertising this year. Why is that?

Mel Karmazin: That's because I know what's going on and they don't (laughs). If you take gross domestic product, probably the largest single component, [the one that] is growing the fastest, is the sector that advertising is included in. So I really see no reason not to be optimistic about advertising. There is nothing going on this year that is so unique from what has gone on in the past that wouldn't make advertising a great business.

My sense is that the only real difficulty that advertising faces is that last year was an aberration. We had an extraordinary amount of business from dot-coms that everybody believed was not sustainable. Were you to exclude that category of business, you would have assumed terrific growth this year.

I think this year advertising will be up. It won't be up as dramatically as a percentage comparable [with last year], but it will be up. In spite of everybody moaning, it will be the best year ever for advertising. So now, what is wrong with that?

AA: A couple of months ago you talked about how much inventory CBS might sell in the upfront--this concerning a possible weakness in the ad market. That CBS might sell only 55% to 60%. What's your view on that now?

Mr. Karmazin: I'm indifferent to when advertisers want to spend their money. Now, we have a price and we are spending an awful lot of money on content. We are on a roll and have some momentum, and we are not going to sell the inventory we have at unprofitable prices. So my belief is that the advertisers will probably think that the cheapest prices will be in the upfront. The upfront will be quite good because I think the advertisers will be concerned that if they wait for scatter [buying closer to the air date], the prices will be significantly higher. What exact percentage we sell, I'll leave for others to determine.

AA: Last year was an aberration in many different ways. At the end of August, $300 million to $400 million in "holds" [on orders] were dropped. This activity was never seen before for national television advertising. Some TV sellers complained. Would you go in and change the way business is now done?

Mr. Karmazin: Joe Abruzzese [president of advertising sales] at CBS, Mike Mandelker [exec VP-advertising sales] at UPN, and all our other heads of sales do their best to keep me out of the process. Because if it were up to me, I'd like to change a lot of how the upfront gets done. The concept of holds, the concepts of options are all things that the advertiser has when they participate in the upfront. Along with the idea that we give them guaranteed ratings. We put together a meeting with all our presidents and heads of sales for our businesses that participate in the upfront. I found that they have scheduled a number of [additional] meetings--but they don't want me in them. They think I'm too much of a radical. Since they are the ones who are responsible, they are going to do it their way. And that's what I've encouraged them to do. If I'm going to jump out of an airplane, I'm going to pack my own parachute.

AA: What about the lack of strength of the ad market? For instance, some of the automakers pulled back on their upfront buys in the first and second quarter.

Mr. Karmazin: I was noticing that in the first quarter our automotive spending was up. A lot of our increase came from imported cars. The media salespeople--some of them--tend to be more optimistic. And the media clients tend to take the other viewpoint with doom and gloom.

It's a negotiating strategy. Our salespeople have been instructed not to believe any of the stuff they read in Ad Age. As credible as Ad Age is, we believe that an awful lot of agencies are using the publication to exploit their point of view. And we can argue whether the money will be spent in syndication, cable, broadcast, but I don't really believe that companies [won't be spending on advertising]. If you believe in the future of advertising, then our assets are greatly positioned. About 50% of Viacom's revenue comes from advertising. We like that mix of 50/50 [50% from areas such as subscription and video rental]. We think the growth rate on the advertising piece can be more substantial than the growth rate on subscriptions or other types of businesses.

AA: What about the potential for strikes affecting your TV networks?

Mr. Karmazin: When we present our lineup, we are going to present the lineups that we expect to have on UPN and CBS in the fall--unless we have information that we aren't going to be able to present that lineup.

AA: And you'll sell that to advertisers? You won't offer, say, a separate strike schedule as well?

Mr. Karmazin: I don't see how we can do that. But realistically, by mid-May, I don't think we'll have a sense about how long the strike will be. It would be chaotic, in my opinion, for us to attempt to deal with advertisers with two different slates.

AA: Upfront could move slowly this year because of the softness in the market. What do you think?

Mr. Karmazin: I have no idea about how long or short it will be. A lot of advertisers, because they don't have their budgets set for 2002, are not able to buy in the upfront. [Generally] advertisers are not giving their agencies a lot of information [now]. I was up in an ad agency last week, and one guy told me, "What is happening is that they are spoon feeding me, it's trickling out money." They are saying, "Here's another $20 million." And then a week later they are saying, "Here's another $5 million." For the agencies it's a huge disadvantage. When the agencies are saying "It's gloom and doom," I don't believe they know.

AA: With the strike, it's more complicated.

Mr. Karmazin: That's easy. We sell guarantees. We sell "Everybody Loves Raymond" and we say it's going to do a 12 [rating, or percent of U.S. TV households], and they buy it at the price. Then if "Raymond" is not on [because of the strike] or it is a repeat and it does a 6, I have to makegood [that is, offer extra ads], so they have nothing to lose.

AA: But that would be a lot of makegoods.

Mr. Karmazin: Then I'll give them cash back.

AA: That would be extremely unusual for a network.

Mr. Karmazin: Well, it hasn't happened because there hasn't been a strike. But [advertisers] have nothing to lose. The only other argument would be, if there is a strike, would money shift from network to cable and syndication? And I'm happy there. I'm indifferent. Give it to me at MTV, Nickelodeon, give it to me at CBS.

AA: With a lot of these big media mergers, there's a lot of talk about cross-media ad deals. Your Viacom Plus, for instance, sells media from across divisions. People are estimating that cross-media ad money could bring in as much as 3% of total ad revenues in a couple of years. Do you have any similar forecasts?

Mr. Karmazin: When we created CBS Plus [forerunner of Viacom Plus], it wasn't ever done to cram something down [the throat of] an advertiser. If you have an interest in doing something across all of our platforms, then we are going to make it easier for you to do that. We have had some very good success, but as a percentage of the company's total revenues, it is very minimal. McCann-Erickson has just announced that they are forming a unit to deal with these cross-selling platforms [see AA, Feb. 12]. I believe in the future, more and more business will be done this way. It's not the principal reason for a [media] merger. It is one more thing to offer advertisers. There are a few people who are talking to us about doing pre-upfront deals that would be for substantial amounts of money.

AA: When some of these cross-media divisions first started out, it seems like media sellers were asking advertisers to buy all their stuff at a premium price.

Mr. Karmazin: We never said the purpose was to discount. We are not suggesting that we have changed that position. From our point of view, if we can sell our inventory individually at the prices that are better, why would we want to put it all together and sell it at a discount? The trick for us has been to make pricing not the issue.

AA: Is there any argument left that the media have too much leverage that can be unfair to advertising pricing?

Mr. Karmazin: It's just the reverse. The only reasons we did these mergers is because the advertising agencies merged. We would have been very happy being this little company, but these big bad advertisers all got together and decided they are going to merge. And the advertising agencies then decided they were going to merge. So the poor media was forced to get together and merge just so that they could compete--to not have an agency put the media in the penalty box because of the leverage the agency would have over it. We certainly are in business not to make it difficult for people to buy us. We endeavor to have strong relationships with the agencies and the advertisers, not to be adversarial.

AA: What medium is Viacom targeting for its own growth?

Mr. Karmazin: If you take a look at the amount of money that national advertisers spend in magazines, it's unconscionable. I can tell you from a network television point of view and the cable television point of view, our biggest target--who we are trying to take share away from--is national magazines. They have far more clutter [than other media]. [Editor's note: CBS sold its magazine group in the late '80s.]

AA: And some were already hit hard last year.

Mr. Karmazin: Deservedly so. So we are going after magazines on a national level. One of the advantages of our medium is that network television is far more efficient than magazines. On a local level, our TV stations and our radio stations are focusing on the newspapers for the same kind of reasons. If you take the newspaper business and the magazine business, they are getting well over a third of all the advertising dollars spent. So we believe even if the advertising growth rates aren't so great, the dollars will shift from newspaper and magazine to radio and television. Viacom will be significantly better off. So an advertiser doesn't have to increase their budgets to deal with our pricing.

AA: BET has voiced its concern in the past that it wasn't getting its fair advertising share. But media buyers say its back office can be sloppy--and that is the reason for its advertising share being down. There was the hope BET would be included with MTV to take care of this.

Mr. Karmazin: We have owned BET for about three months. There were growth pains that affected some of the back-office areas that we are absolutely addressing, and that BET is addressing. We think advertisers will find it easier to buy them. We won't put MTV together with BET. They are located in Washington, D.C. The agreement was that when we acquired it, we were going to respect their unique capabilities. They should be making their own decisions.

AA: There is a concern in Washington over content. As it concerns MTV, it seems like you have come up with edgier programming to attract viewers. Some say it pushes the envelope too far.

Mr. Karmazin: I don't think so. It's our responsibility to program our networks. We are obviously troubled by what goes on in society, but we don't believe we are responsible for what goes on in society. We think there are other issues. There are parents. There are guns. We put on programming that we believe the audience will like, that advertisers will buy. Advertisers try to not buy controversial, very "out there" kinds of programming.

AA: So they are not buying MTV's [extreme sports show] "Jackass"?

Mr. Karmazin: They are buying "Jackass," because "Jackass" is not "out there." It is a program that is designed for adults. It has all these disclaimers that you shouldn't try these things. It is a funny show. I believe that you don't want a society where the only programming on television is programming that is only acceptable for kids. I don't think internally we are pushing things to the edge. The government should not get involved in content--whether that is what [Infinity's] Howard Stern says on the radio, [Infinity's] Don Imus says on the radio, or what MTV says on cable, or CBS says on its network.

AA: Is Paramount Pictures abiding by new guidelines when it comes to R-rated movies and advertising?

Mr. Karmazin: Absolutely. Paramount has set out guidelines as to how it will market. But that is very difficult. There was criticism, for instance, of the movie companies which advertised on the Super Bowl because they said there was a lot of young people who were watching the Super Bowl.

AA: The guideline being that you should avoid programs in advertising for R movies where the under-17 viewers account for no more than 35% of its total audience.

Mr. Karmazin: To me, that's a game that Washington is playing. Because there are more young people watching [CBS's] "Touched By an Angel" [in actual numbers] than there are watching MTV. If you are looking at stopping this content from being exposed to young people, you really can't play a percentage game. You play a numbers game. There are more young people watching "Monday Night Football" than are watching MTV. So why should a studio be allowed to advertise commercials on ["Monday Night Football"] and reach more people under 17, but not MTV. We in no way market [R-rated movies] to young people. We don't put them in our focus groups--we don't target them. But there's no way you are not going to reach them.

AA: Radio and outdoor had a tough time recently.

Mr. Karmazin: The growth rate is adversely affected because of all the [lost] dot-com advertising. Radio advertising will be up again in the second half of the year. And it won't be up as much because it's comparing itself to a tough comparable. Radio, outdoor and cable will have record years. You are going to see the radio business--which in the first quarter last year was up about 24%--down 7% for this quarter. What will happen is that 24% up and 7% down gives you a compound growth rate over two years of over 8%. Now, 8% revenue growth is extraordinary. The economy is growing historically at 3% to 4%. The advertising pie is growing 5%. So if the radio business grows at 8%, that's a good business.

AA: With the merger of CBS and Viacom, has there been any thought to combining some of your advertising or media agencies?

Mr. Karmazin: We are a very large advertiser, and probably spend about $1 billion a year. Our advertising budgets are up in 2001; I think it's up double digit. Paramount, Blockbuster, Show-time are all spending more money. The way we run the company, we tend to put the decision like that in the hands of the operating people. I don't think it's my responsibility to tell Paramount who their advertising agency might be. Now, I understand there may be an opportunity to save money, and we look at all the opportunities that way. So we suggested to them that maybe you ought to look at the media on a consolidated basis and maybe you ought to negotiate using some leverage. If someone has a good feeling about their ad agency because they like the creative, or like the media buying, [that's fine], even if it is going to cost us something on efficiency. Everything always isn't about efficiency.

AA: Any prediction as to where U.S. advertising will be by the end of the year?

Mr. Karmazin: I think it will be up 3% to 5% vs. last year where it was up 8% to 9%. Over the two years, that's [an average of] 5% or 6%. I think over the next three or four years, the economy would grow 3% to 4% [a year], advertising will be 5% to 6%, and we'll grow more than that. That's the general sense. I don't think that's being real bullish.

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