|BUSINESSWEEK ONLINE : APRIL 5, 1999 ISSUE|
CBS: Can Mel Karmazin Reinvent Network TV?
His recipe: The NFL; a focus on the Web; and some good old-fashioned radio-style cost-cutting
What does Mel Karmazin like least about being chief executive of CBS Corp., the media giant with $26 billion that he took charge of on Jan. 1? Articles like this. Although he now employs hundreds of journalists and oversees programming running the gamut from Howard Stern's tirades to the investigative reports of 60 Minutes, he bristles at the thought of seeing his face or name in print. And so it is with mixed feelings that Karmazin has allowed a journalist into his 35th-floor conference room at CBS's fabled Black Rock headquarters in Manhattan. ''I certainly will not like what you're going to say,'' he says, sipping coffee out of a styrofoam cup. ''So why am I now spending time talking to you about an article that I'm going to hate? It doesn't make sense. It's just the most illogical thing in the world.''
The fact that he is now the public face of a major public company is one explanation. Another may be that Melvin A. Karmazin is a master salesman, and a good salesman knows that selling himself is as important as pushing his wares. Karmazin has spent a career doing that, with impressive results. Starting as a hungry ad peddler at radio station WCBS in 1967, he is today, at 55, the boss and biggest individual shareholder of the company that owns the CBS Television Network (CBS), 14 major-market TV stations, 160 radio stations, cable-TV channels Country Music Television and the Nashville Network, and a slew of outdoor advertising assets.
To get there, Karmazin built a radio empire, ruffling feathers but making himself and investors lots of money. Wall Street is dazzled by him, employees are alternately inspired by and terrified of him, and rivals don't know what to make of this divorce broadcast mogul who shuns the party scene, has never screened a TV pilot, and has been known to challenge a station manager's $20 lunch expense.
Now, Karmazin's biggest sales drive is hitting high gear: He aims to convince Wall Street, advertisers, and consumers that what's now seen as the least-likely-to-succeed TV network, in an industry whose audience is shrinking, is in fact the earnings engine of a hot multimedia growth company.
Karmazin's ascension to TV moguldom comes at a time when the Web, digital technology, and shifting dynamics among cable, network, and studio players are creating vexing challenges even for old hands like Michael D. Eisner and Rupert Murdoch. That Karmazin has never operated on this scale and has only been in the TV business for two years does not faze him. ''If there were somebody who were better equipped to do the job, I would vote for thaT person,'' he says.
TOTALLY FOCUSED. Amazingly, there are few who doubt Karmazin can pull it off. A raft of Wall Street analysts have buys on CBS stock, now trading at $38, up 50% since October, when it was announced that Karmazin would become CEO. ''Mel is the kind of person who can do anything, because he has the energy and the drive,'' says John W. Kluge, the billionaire chairman of Metromedia Co., where Karmazin managed radio stations in the 1970s. (To back up that belief, Kluge bought ''a few million'' CBS shares after Karmazin joined.) ''He's just totally focused,'' says Robert C. WrigHt, president and CEO of NBC. ''He's a very aggressive guy whose work is his life.'' Adds America Online President Robert W. Pittman, with whom Karmazin recently negotiated a deal to make CBS AOL's exclusive broadcast news provider: ''He's not a guy you ever want to bet against. There are people out there who might disagree with his strategy, his tactics, or the culture he creates--but he always gets results.''
Since selling his Infinity Broadcasting Corp. to CBS in 1997, Karmazin has made his presence felt on the way to the CEO's suite. He turned up the heat on the company's sales force, cut costs with a vengeance, and took an expensive gamble on National Football League broadcasts last January. And even while he butted heads with some executives--notably former CEO Michael H. Jordan--he forged a smooth relationship with CBS Television Chief Executive Leslie Moonves, who has emerged as a hot programmer among the big networks (page 82).
LOOKING TO BUY. But to reinvent network television so that CBS comes out on top, the Super Salesman has to turn his empire into a money-spinning dealmaking machine. For starters, Karmazin wants advertisers to spread their money among the airwaves, billboards, and sectors of cyberspace he hopes increasingly to dominate. He aims to buy up as many TV and radio stations as he can, more outdoor advertising companies. He is said to be seriously looking at King World Productions Inc. (KWP), producer of The Oprah Winfrey Show and Wheel of Fortune and could announce that or another deal soon. And he even muses about snapping up NBC or the much bigger Viacom Inc. (VIA.B), if the law and fates allow.
At the same time, Karmazin wants nothing less than to rewrite the rules of the game. He's often on the stump, lobbying Congress to change the federal laws constricting ownership of TV outlets and networks. And he's waging a campaign with advertisers against the tyranny of demographics, which has penalized CBS for having the oldest audience among the networks.
Equally fixated on the Internet, he expects to announce four Web deals soon. Fueling these moves is his belief that investors undervalue broadcast networks' ability to drive viewers to Internet sites. Look what happened when CBS lent only its name and repeated mentions on CBS News--but no cash--to online business news service CBS Marketwatch.com in December, 1997, in exchange for a 38% stake. Since the service went public in January, that stake is suddenly worth $300 million.
Karmazin figures that same TV/Web formula can be replicated across CBS's lineup. ''TV is still the most powerful medium, and network TV is still the one that reaches the most people,'' says Karmazin. ''Combine it with Internet opportunities, and that's a very intriguing business for us.''
CBS subsidiary Infinity Broadcasting is also developing its own online radio network, where followers of its syndicated stars like Stern and Don Imus will spend their time and money. Once all that is done, he aims to sell part of CBS's Internet assets to the public, in search of a stock with a rich market valuation to do more Web deals. If it all works, the new CBS will meld a growing stable of healthy properties with an aggressive presence in new media--a far cry from the doom and gloom that has hung over the Tiffany Network for so long.
That Karmazin is able to draw up such ambitious plans at all is credit to his track record in radio and CBS's turnaround in television, spearheaded by Moonves and aided by a buoyant economy. At a time when viewership among all the big networks (NBC, ABC, CBS, and Fox (NWS)) is down, more people--some 13.2 million in all--are watching CBS each night. Shows like JAG and Everybody Loves Raymond may not be high on the hip lists but they routinely rank alongside 60 Minutes among Nielsen's top-rated shows.
LESS RED INK. With the return of the NFL to the network last year, viewership of its regular schedule among the key 18 to 49 age group that advertisers covet is up 1% in prime time this season, vs. a 22% decline for NBC and a 2% decrease for ABC. Karmazin says that after years of losses, the network--which accounts for nearly half of CBS's $6.8 billion in revenues--will make a slight profit in 1999. Sales at CBS as a whole were up 27% in 1998, while earnings before interest, tax, depreciation, and amortization (EBITDA)--a key measure of health among media companies--increased 42%, to $1.1 billion. The company is still in the red, but its net loss was trimmed to $12 million last year, from $131 million in 1997, en route to what Jessica Reif Cohen of Merrill Lynch & Co. predicts will be net income of $269 million this year (chart, page 77).
Although the network gets most of the attention, CBS's TV and radio stations are driving its operating profits. With its emphasis on big-city radio outlets, 82%-owned Infinity vacuums up 11% of all spending on U.S. radio advertising with just 1.5% of the country's stations. Meanwhile, with Karmazin's prodding, CBS's owned-and-operated TV stations upped their EBITDA by 43% in 1998 over the previous year.
Karmazin admits CBS is still ''at the 20-yard line with 80 yards to go.'' His lofty target: double-digit sales growth and 20%-plus growth in cash flow to chase acquisitions and buy back stock. That's a big goal in a business where fragmentation, due to the growth of cable and niche upstarts like WB Network, caused the share of households watching the big networks in prime time to drop to 56% in 1998 from 74% in 1985, according to Nielsen Media Research.
Moreover, CBS's resurgence may be little more than the result of a network that had no place to go but up. Under previous owner Laurence Tisch, CBS balked at investing in new cable channels in the era when multibillion-dollar franchises like ESPN Inc. and MTV were created. While NBC has a growing platform of cable channels and alliances, Fox has its sibling relationship with the 20th Century Fox studio and a range of cable channels, and ABC has been subsumed into Walt Disney Co. CBS, by contrast, has a minor presence in cable.
For now, many broadcast stocks are rising on the anticipation of a phenomenal 20% sales boost next year with a millennium, an Olympics, and a Presidential election all in the offing. But when the next recession hits, CBS could be most vulnerable among media companies because it relies more heavily on a single revenue stream--advertising--than the others. ''I think he's doing a good job with a difficult deck of cards,'' says one big investor.
CBS's toughest hurdle is its audience. At a pre-development meeting with advertisers at CBS's Television City in Los Angeles, Moonves jokes about the network's older demos--quipping that shows in development include Dawson's Parents' Creek and Party of 55. But it's no laughing matter. According to Nielsen, a 30-second spot on CBS prime time last fall fetched $92,000, while ABC brought in $171,000, and NBC commanded $176,000 (chart, page 78).
GUERRILLA WAR. Karmazin and his salesmen constantly press their case that the older age group has more purchasing power and that, age aside, reaching the most households counts for something in a fragmented world. But so far, Madison Avenue isn't buying it. For one thing, many advertisers figure young viewers are more swayable. More important, many more people over 50 are watching TV on all the networks, says media consultant Jack Myers, so why should advertisers pay more to reach an audience they'll be getting anyway? Adds Bill Croasdale, president of media buyer Western Media International: ''I don't look at CBS. Why should I? I can buy NBC's ER and get everyone--the 18 to 34 years, 25 to 54, and the over-50-year-olds--all in one buy.''
Karmazin isn't taking this lying down; instead, he's using the tactics he honed in the guerrilla warfare of the radio business. After taking over CBS's group of owned and operated TV stations in April, 1997, he axed a slew of station managers and top salespeople and replaced the stations' salary and compensation package with 100% commission. He then more than doubled the number of salespeople at the stations, from 160 to 340, looking to add people who did not come from TV sales and thus wouldn't have the ''order-taker'' mentality he deplores.
At a sales conference last year, he brought in motivational speaker Brian O'Malley, who had climbed Mt. Everest. At the end of O'Malley's speech, recalls Karmazin, ''people had tears in their eyes. I told them: 'Climbing Mt. Everest is hard. Selling advertising isn't hard. All I'm asking you to do is sell 10% more advertising per year.'''
As a result of Karmazin's moves, cash flow at the station group increased from $370 million in 1997 to $530 million last year, according to Andrew Marcus of B.T. Alex Brown Inc. This impresses Sony Corp. of America Chairman Howard Stringer, a former CBS Television chief. ''He's done a great job of turning conventional wisdom upside down,'' says Stringer.
Karmazin has spent his life cutting against the grain. The son of first-generation Americans, he was raised in a housing development in New York's Long Island City. His late father drove a taxi, while his mother labored in a curtain rod factory. After high school, he worked at the small Irwin Zlowe ad agency, working his way up to media buyer while enrolled part-time at Pace University en route to a marketing degree.
Karmazin worked for three years hawking ads at WCBS, leaving in 1970 when his bosses tried to scale back the $70,000 he was earning with commissions. Spending the next 11 years at John Kluge's WNEW, he rose to manage the lucrative AM and FM outlets and set a pattern of paying big bucks for popular on-air talent while maniacally watching operating costs. After his request to manage one of Metromedia's (MMG) TV properties was rejected, Karmazin again considered his options.
Two former Metromedia executives, Michael A. Wiener and Gerald Carrus, had founded Infinity, hoping to emulate Kluge's strategy of buying ''oceanfront'' radio stations in big markets. They needed someone to run them and offered to match Karmazin's salary of $125,000, plus give him 1% of the equity up front. A key clause in his contract: Infinity would provide him with a red Mercedes. The staunchly patriotic Kluge had always refused to buy Karmazin anything but a Cadillac.
STERN DEAL. At Infinity, Karmazin wowed Wall Street with his shrewd buying and operating skills, swelling the company from 6 stations in 1981 to 44 in 1996. When NBC fired ''shock jock'' Howard Stern in 1985, Karmazin gave him a national platform at Infinity, as he had for talk-radio star Don Imus. (Karmazin's only condition was that, for a time, both stars' contracts barred them from saying his name on the air. In return, he defended Stern against charges from the Federal Communications Commission that he was violating decency laws, ultimately agreeing to a $1.7 million settlement.)
With the help of Farid Suleman, a savvy numbers man he hired in 1986 and who is now CBS's treasurer, Karmazin took Infinity public, then private, then public again in 1992--each time at great profit. Shares issued in 1992 for $17.50 apiece were worth $170 when Infinity was acquired by CBS for stock. During this period, Karmazin, who had raised his two children in the modest suburb of North Brunswick, N.J., divorced and moved into a Manhattan apartment. Despite his financial success, a red Mercedes--he still drives one--is one of Karmazin's few indulgences. He says he made more money than he'll ever need on Metromedia stock options in the 1970s. ''He's very frugal about business and even in his own social life,'' says Kluge. Though Karmazin's stake in CBS is now worth close to $400 million, says Kluge, ''he acts like it's $40,000.''
Mel Karmazin was probably the last person on Michael Jordan's mind in November, 1995, when Westinghouse Electric Corp. bought CBS from Larry Tisch for $5.4 billion. When Jordan took over, the Tiffany Network was reeling from the loss of football and the defection of several affiliates to Rupert Murdoch's Fox Network. Its prime-time lineup was a mess. Just before selling CBS, Tisch had brought in Moonves, a former top Warner Brothers executive. Meanwhile, CBS's news division was floundering while CBS Sports executives joked privately that CBS stood for ''Currently Broadcasting Skating.''
COST SLASHER. With the relaxation of radio-ownership laws in 1996, Karmazin was keen to buy CBS's stations. When Jordan said no, Karmazin offered to sell Infinity to CBS.
The catch: Karmazin would run the radio group. In December, 1996, CBS paid $4.9 billion in stock for Infinity, adding him to the board and making him the largest individual shareholder. Within four months at CBS, Karmazin persuaded Jordan to give him responsibility for the TV stations--signaling to those who knew Karmazin that he would not stop there.
Karmazin quickly exercised the tightfistedness he had learned from Kluge. The station manager at Philadelphia's KYW-TV was queried by Karmazin on why his station needed three subscriptions to Electronic Media magazine and five to Broadcasting and Cable. Another time, he sent an expense form back to a major market radio manager circling a $20 expense with a note: ''Don't you have anything better to do than take an intern to lunch?'' Employees at CBS's New York broadcast center refer to the boss as ''Mad Mel'' and gripe about his just-announced replacement of the company pension plan for new employees with a stock-option scheme. If anything, Karmazin is an equal-opportunity slasher: Gone are CBS's two private jets and Black Rock's kitchen staff. In fact, he's now studying selling Black Rock, too, though CBS would remain a tenant.
As a manager, Karmazin skips pleasantries but rewards top execs' performance with lavish stock options. ''His leadership style is blunt as a punch in the nose,'' says CBS Evening News anchor Dan Rather. ''Direct, but mixed with an ability to listen.'' The style does not endear him to all. ''He loves confrontation,'' says one former insider. ''Basically, somebody stole a toy from Mel Karmazin when he was 10. And he has this chip on his shoulder that he has to prove to everybody he is smarter, brighter, faster, quicker.''
NO LOVE LOST. When Jordan, at 63, announced his retirement last October, the official line was that he had accomplished all he wanted and CBS was better left to a hands-on operator. But his departure came amid the growing impatience of Karmazin, whom he had elevated to the presidency of CBS several months earlier. A top media exec who knows both men points out that Karmazin kept his office in a separate building after selling Infinity to CBS. When Jordan vacated the Black Rock corner suite built for CBS founder William S. Paley, Karmazin moved in. ''Mel was scathing about Jordan,'' says this executive. ''It was oil and water. I don't think they had any conversations that made sense to either one of them.''
One thing Jordan and Karmazin did agree on was the importance of getting the NFL back. In paying $500 million a year for eight years--roughly double what NBC paid under the previous contract--for a package of AFC division games, CBS boosted its young-male demographics and used gridiron to hype shows like Raymond. While NBC's Wright says his network would have lost $150 million last year paying what CBS did, Karmazin insists CBS made money. ''Bob Wright should be dealing with the problems he has with his sales department,'' he says.
Last year, say media executives, Jordan and Karmazin explored a slew of ways to boost CBS stock, including selling part of the network and sharing news resources with CNN. But CBS took a different course and spun off its radio and outdoor businesses in a $3.1 billion initial public offering, selling 18% to the public and reviving the Infinity Broadcasting Corp. name. For Karmazin, bold changes in direction are not unusual. ''What I like about him is, there is no such thing as a permanent obstacle,'' says CBS News President Andrew Heyward. ''He's not afraid of making mistakes, and when he does, he moves on quickly.''
That's what happened with the Internet. A former CBS executive recalls that at a meeting about Internet strategy a year ago, Karmazin had said: ''Why are you wasting your time? It's not a business.'' That was then. Now, the CBS boss is enamored of the Web--and no wonder. Almost overnight, CBS's minority stakes in two popular sites, Sportsline USA Inc. (SPLN) and CBS Marketwatch.com Inc., became worth close to $700 million combined. Still, Karmazin is scrambling to catch up to NBC (GE), with its Snap portal and range of Web partnerships, and ABC (DIS), with its ties to Infoseek Corp.'s (SEEK) Go Network. CBS will be ''one of the significant players in new media,'' vows Karmazin. ''We're not going to miss cable and the Internet.''
If, for once, Karmazin falls short of his goals, there is no dearth of potential suitors or partners for CBS's assets, from Ted Turner to USA Networks Inc.'s Barry Diller to Sony. In the meantime, Karmazin may complain about his newly public image, but he is clearly enjoying having such a large domain over which to put his indomitable stamp. ''I love the business,'' he says. ''I spend a lot of time at it and a lot of people have gotten rich with us.'' For Mel Karmazin, the relentless pitchman, the selling never stops.
By Richard Siklos in New York with Ronald Grover in Los Angeles
To read a correction/clarification about this story, click here.
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COVER IMAGE: CBS: Can CEO Mel Karmazin Reinvent Network TV?
TABLE: Mel's World
CHART: While the Network Pulls in Big Ad Dollars...Radio Is the Big Moneymaker
CHART: Karmazin's Regime Is Expected to Take Off...And the Stock Is Responding
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PHOTO: Touched by an Angel Cast
PHOTO: Mel Karmazin, Circa 1978
RESUME: Melvin Alan Karmazin
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