Mel sees red-hot upfront

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It's still not clear whether he will be at the company long enough to reap the rewards, but Viacom Chief Operating Officer Mel Karmazin predicts a record upfront for the broadcast networks.

Mr. Karmazin said he expects upfront pricing to jump 12% to 15% or more, resulting in a total likely to exceed last year's $8 billion take. For the past month, General Electric Co.'s NBC, rival to Viacom's CBS, has signaled it could raise prices 15% to 20%.

"Realistically, I think it would be very weird to think there would be an upfront that would be up 20%," said Mr. Karmazin, who is embroiled in a well-publicized contract negotiation on which he declines to comment.

Depending upon price and demand, he expects the company to sell an aggressive 80% to 85% of its upfront time. Two years ago, CBS sold less time in the upfront because of weak demand and held back more inventory for the scatter market. The gamble paid off, but with demand strong last year CBS sold more than 75% of its inventory during the upfront.

strong demand

"Based on the last upfront, what we're seeing in scatter and the fact that demand is so strong and there is so little inventory, I would expect advertisers to spend in record amounts," Mr. Karmazin said.

He credited automakers' plans to launch 25 models this year and the reality programming craze as factors likely to fuel advertiser spending. Since some advertisers shy away from reality shows because of their edgy content, he believes there will be higher demand and premium pricing for scripted comedy and drama series.

Mr. Karmazin expects scatter sales in the second half to remain strong, with inventory tight and cancellations low. "We think the upfront will be very, very strong because the people who waited for scatter did not get the bargains they were hoping to get. Many of them got shut out," he said.

Although the war is an uncertainty for which Viacom has tried to budget, Mr. Karmazin sees more upside than potential downside in the year ahead, with 46% of Viacom's revenues coming from ads. Although Mr. Karmazin declined to be specific, Morgan Stanley analyst Richard Bilotti estimated the initial cost of war coverage and the loss of ads at $75 million for Viacom.

In fact, Mr. Karmazin said based on the ratings and ad pricing success, and prudent cost structure, he estimates that CBS has the most profitable prime-time schedule, even though NBC overall continues to generate more profits. "We know what NBC is paying for shows like `Friends' or `ER,' according to published reports. When we take a look at the cost-per-spot differential that NBC gets on Thursday night and we use that public information about the per-episode cost of shows on NBC, we conclude CBS has far more profitable nights of television than NBC," he said.

cash flow growth

Viacom TV networks' and stations' cash flow grew 25% last year to about $800 million on a 4% rise in revenues to $5.3 billion, Mr. Bilotti said. He expects CBS's network ad revenue to rise by some 8% in 2003, and by as much as 11% next year. He forecasts up to 5% growth for CBS and UPN TV stations in the first half of 2003, up to 5% growth in the second half of the year, and up to 10% advertising growth for Viacom's MTV cable networks.

Wall Street experts believe there is a 50/50 chance Mr. Karmazin will leave. The outcome of the negotiations could be known as early as March. Despite published reports of strain, he and Viacom Chairman Sumner Redstone are major shareholders who have most of their personal wealth tied up in Viacom stock.

strength beyond street

"I think the strength I bring Viacom is beyond Wall Street. I have for my entire career been an operator. I enjoy operating companies. I am very proud of the great team we have assembled and the operations that are the best in the business," Mr. Karmazin said.

He said he is prepared to put some of Viacom's $3 billion annual free cash flow, strong balance sheet and borrowing power to work making acquisitions that could include some Vivendi Universal cable network assets, TV stations and station groups, radio stations and possibly even CNN, since its merger talks with ABC News have been terminated. CNN is valued at upwards of $8 billion. "I can't tell you what the price would be, but it certainly would be an asset we would be interested in if it were available."

Mr. Karmazin, however, said he has not talked to AOL Time Warner about buying CNN lately, and was refused when he inquired more than a year ago. Discussions that CNN and CBS once had about a cooperative news-gathering arrangement broke down over control issues.

Diane Mermigas is the editor of Crain Communications' email newsletter Mermigas on Media.

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