Viacom's Shortsighted Search for Synergy
Visions of multimedia
synergy dance in Sumner Redstone's head. Redstone is CEO of media conglomerate
Viacom. Film (Paramount), television (MTV and Nickelodeon), video
(Blockbuster), books (Simon & Schuster): Viacom owns them all, and Redstone
keeps believing that someday they will all work as one. Imagine a best-selling
novelization of a hit film based on the MTV series The Real World , a
film that then becomes the No. 1-selling videotape at Blockbuster, and you get
some sense of the oasis that Redstone keeps glimpsing just over the next sand
dune.
In the
past, Viacom's dogged pursuit of media synergy led it to overpay for everything
from Paramount Studios to Blockbuster, and burdened it with a debt load worthy
of a small nation. It also led Viacom--at a time when corporate America was
casting doubt on the conglomerate model and stressing the virtues of playing to
core strengths--to cling to the things it bought with a discomfiting
tenacity.
The announcement that Viacom wanted to sell S & S's
educational and professional divisions--textbooks, computer books, professional
books, and reference books--then, came as something of a welcome surprise, at
least to Viacom stockholders. Although the divisions were profitable (more
profitable, in fact, than S & S's trade division), they didn't fit very
well with Redstone's idea of the company. More importantly, when Viacom started
talking about getting as much as $4.5 billion for the divisions and using the
money to cut its debt in half, the words "fiscal responsibility" suddenly
sounded less improbable than they once had. There remains a great deal of
skepticism in the media about whether Viacom can get its price, but S & S's
educational and professional divisions are the largest in the world, and the
divisions have done adequately under a company for which they were but an
afterthought. In the hands of a company with a real investment in publishing,
like Reed Elsevier or McGraw-Hill, they have the potential to be cash cows.
Potentially a win-win deal all around? Perhaps. Still, it's odd that Viacom
went public with its plans before lining up a prospective buyer. As one company
source points out, saying "I'm really anxious to sell. Make me an offer" is
hardly the best strategy if you're looking to drive a hard bargain. It's also a
little surprising that Viacom has chosen to sell in 1998, rather than taking
advantage of the big tax savings that the law provides had the company waited a
year and then spun off the publishing assets into a separate company. But
Redstone's desire to remake the company--and to placate shareholders, who have
been disenchanted with Viacom for two years now--outweighed tax
considerations.
What's most interesting about the deal is that
Viacom will be holding on to the rest of S & S. Book publishing is not
generally a high-profit-margin business, and it's also not as jazzy as
television or the movies. The decision to keep S & S only makes sense,
then, in the context of Redstone's synergistic hopes. Viacom, he says, is now
going to "focus on software-driven entertainment," which is the inelegant 1990s
way of saying that Viacom wants all its divisions to be oriented toward
mass-market entertainment. And he points to the success of the new MTV and
Nickelodeon book imprints and of books tied to Paramount film releases as
evidence that the company's parts add up to a stronger whole.
But the
fact that S & S publishes books based on MTV series--like the dreaded
Real World books--isn't, in and of itself, evidence of any real synergy.
After all, even if some other house published these books, MTV would reap the
benefits of licensing, royalties, etc. And Viacom wouldn't have to worry about
what happens when that next Road Rules book tanks. Similarly, publishing
books based on your own movies is a great idea when the movies are doing well.
But if you put out a few box-office duds, publishing books based on those duds
means you pay for the failures twice.
Real synergy, in other words, only happens when you are
able to take lessons from one business and apply them to another. If Viacom
were using its Nickelodeon-induced expertise in appealing to the 9-year-olds
market to sell children's books better, or taking what it's learned from MTV to
make readers out of disgruntled teen-agers, the idea of synergy would make more
sense. Now, it's possible that this is, in fact, happening behind the scenes.
But if it is, no one at S & S seems aware of it.
Actually,
at this point no one at S & S is sure that they're aware of anything.
Viacom got S & S when it bought Paramount, but it wanted Paramount, not a
book company. And even though S & S is probably the most profitable trade
publisher in America, the book market is essentially a stagnant one, at least
in terms of profits. Many people there imagine that the trade division will be
the next to go. The joke going around S & S these days is that Morgan
Stanley, which is handling the sale for Viacom, told Viacom that it could get
$4 billion to $4.5 billion if the trade division were included and ... well, $4
billion to $4.5 billion if the trade division weren't included.
The problem with this analysis is that it
assumes that the book industry is somehow in worse shape than the rest of the
entertainment industry. This assumption seems intuitively right--we no longer
live in a print culture, right?--but there's actually very little evidence to
back it up. The weird thing about the American economy, in fact, is that at a
time when mass-marketed leisure and entertainment are supposedly more and more
important to our economic well-being, the entertainment industry as a whole is
barely growing at all. If, as The X-Files would have it, we're now ruled
by a military-industrial-entertainment complex, the "entertainment" part of
that complex needs to take some quick lessons in management and profit growth
from its two partners.
On the
face of it, this seems crazy. David Geffen, Michael Eisner, Steven Spielberg,
Sumner Redstone: These are among the most prominent faces of the New Economy.
They end up on the cover of Vanity Fair and Wired . They
foreshadow the world in which we're all either symbolic analysts or hamburger
flippers. But look at the numbers. Last year, the music industry saw sales
decline slightly. Movie attendance was down. Trade publishers sold 5 percent
fewer books than they did the year before. And the audience for cable
television seems to have plateaued at around 70 percent of all U.S. households,
while viewership of the major networks has, of course, continued to drop. Is
everyone watching videos instead? Hardly. Video rentals dropped 4 percent in
1997, which is part of the reason that Blockbuster is only worth about half
today of what Viacom paid for it in 1994.
None of this is to say that there aren't successful
entertainment companies, although the short list would probably include only
Disney, Si Newhouse Jr.'s Advance Publications, and perhaps CBS (because of its
radio business). But these individual successes can't disguise the very curious
reality that we're living in a world that is somehow saturated by the media
without actually paying all that much attention to it. For most American
companies today, success depends on selling more of your product next year than
you did this year. But if American entertainment companies can sell as much of
their product next year as they did this year, they should count themselves
lucky. If you want to know what a real myth is, don't bother with synergy. Just
look at the entertainment industry's self-image instead.
