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Under Siege


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UNDER SIEGE

Howard Stringer should have been jubilant during the weekend of May 22. The president of CBS Broadcast Group was traveling to Britain for dinner with Prince Charles, who was celebrating his 25th anniversary as the Prince of Wales. In those 25 years, Stringer had risen to become the top operating executive at CBS Inc. and one of the most eloquent champions of traditional broadcasting in America. By reviving his network's ratings and luring David Letterman from NBC Inc., he had even convinced his saturnine boss, CBS Chairman Laurence A. Tisch, that broadcasting could be fun again.

Throughout the weekend, though, Stringer says he had a bad feeling that something back home was amiss. On the previous Thursday, one of CBS's most powerful affiliates, New World Communications Group, had abruptly canceled a meeting to discuss TV syndication. Stringer wasn't sure what New World had up its sleeve. But from previous sessions with company executives, he knew its principal backer, financier

Ronald O. Perelman, had ambitions that went well beyond airing CBS shows on its affiliates.

Sure enough, New World dropped a bomb on May 23, announcing it would switch all 12 of its stations--eight CBS, three ABC, and one NBC--to Rupert Murdoch's Fox Broadcasting Co. In return, Murdoch would pay $500 million for a 20% stake in Perelman's company. Overnight, CBS lost stations that reach some 10% of its national audience.

"UNDER CONTROL." Worse, unless it can poach affiliates from ABC or NBC, the network could be left with Fox's lower-powered stations in such critical markets as Dallas, Detroit, Atlanta, Cleveland, Tampa, and Phoenix. Within days, CBS was hit with rumors of further affiliate defections in Buffalo, Boston, and Charlotte. Rumors resurfaced that a disheartened Tisch might sell the network. Indeed, executives at all three networks began asking whether the whole affiliate system had come unglued. Rattled, Stringer called Tisch from overseas to ask whether he should skip the dinner and fly home to New York. Tisch said no. "I knew this meant a lot to him," Tisch told BUSINESS WEEK. "And everything here was under control."

Well, perhaps. CBS Inc. is hardly going out of business. The network is No.1 in the ratings and had record 1993 earnings of $326 million on revenue of $3.51 billion. Tisch insists the New World defections "have been blown out of all proportion." He says they will cost CBS a mere $8 million in lost ad revenue and the expense of signing up new affiliates. Yet Murdoch's blitzkrieg has clearly left CBS shaken. Says Stringer: "It's an irony that the champions of broadcasting are the ones most hurt by this whole thing."

The real irony, say media experts, is that Tisch's narrow focus on broadcast could actually make a bad situation worse. In the eight years since he took over CBS, the 71-year-old investor, also chairman of Loews Corp., has concentrated doggedly on network TV--to the exclusion of anything else. His strategy for the network of Murrow and M*A*S*H boils down to four words: boost ratings, cut costs.

Now, as he confronts a tectonic shift in his industry, several observers believe Tisch's lack of vision could come back to haunt him. "He's been rowing upstream for the last four or five years, refusing to get into cable, refusing to take on strategic partners," says Porter Bibb, an investment banker at Ladenburg, Thalmann & Co. who recently published It Ain't As Easy As It Looks, a biography of Ted Turner. Adds Christopher Dixon, a media analyst at PaineWebber Inc.: "Networks that are one-trick ponies are liable to feel an inordinate amount of pressure."

Certainly, NBC and ABC don't welcome Murdoch's midnight raid either: It will increase the cost of doing business for everybody. But they derive much of their growth from cable programming, overseas expansion, and other media assets. CBS, by contrast, is a pure-play network. As broadcasting goes, so goes Tisch. And for the moment, anyway, that's nowhere good. Says Bibb: "He may have overstayed and overplayed his hand at the network table."

In retrospect, Tisch's troubles seemed almost inevitable. Rupert Murdoch, a man whose vision is as sprawling as Tisch's is narrow, was willing to move mountains to catapult Fox into the front rank of networks (page 34). He began last December by bidding $1.6 billion for rights to the NFL's National Football Conference, $400 million more than longtime incumbent CBS. Murdoch then used football as a lure to fish for several of Tisch's 206 affiliates.

Stringer derides Fox as a network of "downscale comedies and titillating soap operas." True enough. But Murdoch understands that more and more station owners no longer desire a full-service network. Some, such as New World, want to produce and air their own shows. Others want the freedom to buy more syndicated programs. Even before Perelman's move, New World stations were delaying the Late Show with David Letterman to run other shows. Because Fox airs only 15 hours of prime-time programming a week, compared with the Big Three's 22, and no daytime or late-night programs, Murdoch can offer station owners airtime.

STATION IDENTIFICATION. Tisch can't. With higher costs and less syndication revenue than Fox, CBS must air the vast majority of its schedule throughout the country to remain viable. That's why Tisch's rivals expect him to be relentless in his pursuit of new affiliates. "They're going to do what they have to do," says Neil S. Braun, the new president of the NBC Television Network. It will be a grueling and costly battle: Network executives will have to spend the next few months cajoling prospective CBS affiliates in the New World markets while scrambling to head off Fox in other markets.

Tisch says he relishes the prospect. "This has reenergized the whole company, including me," he says. Indeed, the tough-minded CEO isn't without weapons to fight back. CBS says it may extend contracts with affiliates to five years, from one now. The network, which already owns seven stations, may buy more. CBS may also make an equity investment in a station group. Rumors have Tisch working on a deal with Scripps Howard Broadcasting, in which Scripps would switch its ABC affiliates in Detroit and Cleveland to CBS in return for CBS picking up Tampa and Phoenix stations that were dropped by Fox in the Perelman deal.

While Tisch denies it, several former CBS executives say he will also have to boost affiliate compensation--the cash he pays the stations to air everything from 60 Minutes to Letterman. CBS currently spends about $120 million on affiliate compensation--a figure Tisch has steadily reduced over howls of protest from the stations. Now, though, the leverage has swung back to the stations (page 36). One former senior CBS executive predicts that within two years, Tisch will have to double the current compensation.

Tisch will be helped in his campaign by having a team of executives who understand affiliates. In addition to Stringer, CBS will be represented by CBS Television Network President Peter A. Lund, a former president of station owner Multimedia Inc., and Anthony C. Malara, president of affiliate relations, who once ran a CBS station.

Lund says the team will focus first on the six markets immediately affected by New World's deal (Perelman has announced plans to buy two more CBS stations in Dallas and Austin; their affiliations will switch later). Even in just six markets, the mating dance quickly becomes complicated. Many prospective CBS affiliates are members of larger groups. For CBS to lure a strong one, it may have to agree to take on a weaker station in another market, as in the rumored Scripps deal. With Scripps, Meredith, Washington Post, Gannett, and Cox Enterprises each owning at least one station in the six markets, says Lund, the game of musical chairs could rearrange affiliates in 20 cities.

However complex the talks, Tisch notes that CBS boasts one indisputable advantage. It leads the ratings race in three key time periods: daytime, prime time, and--with the remarkable rise of David Letterman--late night. Such victories are crucial because ratings, more than any other factor, still drive advertising sales--both at the network and the station level. Because the New World stations fell short of the network's overall ratings, CBS Research Chief David F. Poltrack figures that CBS would only lose 1.5% of its national audience even if it ends up with weaker Fox stations in those markets.

STAR POWER. With the all-important ad sales season about to begin, Madison Avenue seems to be buying that line. Several media buyers say the station defections will probably hurt CBS more in the posturing that accompanies the season than in the sales themselves. "CBS is saying it will have no effect," says Gene DeWitt, head of media buyer DeWitt Media Inc. "They don't expect to make any concessions." As for the season itself, experts predict all four networks will rack up 6% to 8% rate increases over last year.

CBS also plans to put marketing muscle behind any affiliate that switches to the network. George F. Schweitzer, president of CBS Marketing, says he will roll out ad blitzes. And he plans appearances by stars from prime-time programs in local markets to remind viewers where they can find "America's Most Watched Network."

How long it will remain "most watched" is open to question, though. After three seasons on top, some observers say CBS is ripe to be picked off by ABC. Some of its comedies, such as Murphy Brown, are beginning to age, and the stalwart 60 Minutes will be hurt by the loss of football as a lead-in. Also, the network won't have the Winter Olympics, which helped power CBS's triumph in the 1993-94 season. And its chief programmer, Jeffrey F. Sagansky, is departing. ABC, by contrast, has been building momentum with sitcoms such as Home Improvement and new hits such as the steamy police drama NYPD Blue.

Demographics are another problem. Unlike Fox or ABC, which chase younger audiences, CBS has targeted 35-to-54-year-old viewers, which it claims are more attractive to advertisers. Some media buyers dispute that contention, but most give the network points for consistency. Now, though, some worry that CBS is blurring its image. For the upcoming season, the network is adding shows--such as a comedy, The Boys Are Back--that aim for younger, more urban audiences. "I always get nervous when a network says it is going to do something different," says Betsy Frank, director of TV and new media services at ad agency Saatchi & Saatchi Advertising Worldwide.

CBS has little to fear from NBC, which has finished in last place since the 1992-93 season, except that NBC's strength in sports highlights CBS's weakness. Braun says NBC Sports has assembled the best lineup of the Big Three networks, with pro basketball, Major League Baseball, football, and the 1996 Olympic Games in Atlanta. For major events, once-dominant CBS has only college basketball and the 1998 Winter Olympics, which it will telecast from Nagano, Japan.

If CBS Sports is lagging, CBS News is limping. Poltrack acknowledges that the CBS Evening News with Dan Rather & Connie Chung could take a disproportionate hit from the station defections--especially if the network has to replace the departed stations with former Fox affiliates. That's because the Fox stations don't have local newscasts to build up audience interest before the national broadcast. If, as Poltrack admits is possible, the Evening News loses 5% of its national audience, the broadcast might no longer be competitive with ABC or NBC. Currently, it vies with NBC Nightly News for second place after ABC's dominant World News Tonight.

NICKEL-AND-DIME. Stringer, who used to be president of CBS News, admits this would take a psychological toll on the network, given its proud journalistic heritage. "Life is tough enough without this," he says. But other CBS executives say the network may help new affiliates build local news operations, which would stem the loss in audience.

As Stringer and others rally the troops, some former CBS executives question how much of Tisch's current troubles derive from his penurious style. In 1987, for example, Tisch was faced with a dilemma in Miami: NBC had just dumped its affiliate WSVN in favor of WTVJ, anteing up $270 million for the stronger affiliate. Tisch could have chosen to bid against NBC. But instead he opted to pay $59 million for a cheaper independent station, WCIX. Unfortunately for Tisch, the owner of WSVN just happens to own CBS's affiliate in Boston. CBS executives confirm that he now may switch his affiliation to Fox.

Tisch has alienated affiliates in other ways. In May, 1992, CBS tried to slash affiliate compensation by $20 million--mainly by charging stations for promotional services it used to supply gratis. After the affiliates threatened to preempt CBS shows, the network backed off. Now that Tisch may have to dole out more cash to lure new stations, existing affiliates wonder whether he'll try to offset that by reducing their compensation: "They've shown a tendency to take it out of our hides before," says Alan Bell, president of the broadcast arm of Freedom Communications, which owns four CBS affiliates.

Because of his nickel-and-dime attitude, Tisch probably squandered a chance to build stronger bridges to his affiliates than NBC, ABC, or Fox. After all, unlike those companies, Tisch never branched into cable networks--a competing distribution channel.

COLD CASH. That purist approach cost him dearly in negotiations with the cable industry last year. The networks had successfully lobbied the federal government to be allowed to demand payment from cable operators for the right to carry their signal. When most operators refused, ABC and NBC quickly cut deals to gain distribution for new cable networks in lieu of payment. Without cable, CBS lacked bargaining clout and Tisch came up empty-handed.

Despite everything, CBS executives stand by their broadcast-only strategy: "That's what got us to where we are," says Stringer. What's more, he believes broadcast networks--with their mass audiences and strong brand names--will remain a vital force in a media world fragmenting into niche cable networks and home-shopping services.

Tisch has similarly staunch convictions. He says Murdoch only persuaded New World to ditch CBS by offering cold cash. "Without $500 million, would anybody switch to Fox?" he asks. "Who are we kidding?" And given its cost, Tisch professes no regrets about letting Murdoch steal away football. He says several station owners have written him to say they will stick with CBS.

But many media observers believe change is inevitable at CBS--all the more so now that Murdoch has shuffled the cards. One rumor popping up again is that Tisch will sell the network. Certainly by shedding its music and publishing assets, Tisch has positioned CBS as a manageable acquisition for a film studio or other media company. And it's no secret that Tisch has entertained offers from prospective buyers such as Walt Disney Co. Several investment bankers say he has never gotten his price.

Now, they suggest, might be an opportune moment for suitors to try again. Government regulations, which prohibit networks from entering the syndication market, are falling away. CBS stock has dropped 12%, or $580 million, since the New World deal was announced. And outsiders wonder whether Tisch has the heart to plod through yet another period of upheaval at the network. Tisch answers the rumors with the same declaration he has used for years: "We always do what's in the best interest of our shareholders."

That's a hard position to criticize. But with the media world spinning round him, and with CBS struggling to find its place, Larry Tisch would probably best serve his shareholders if he didn't stick to the same playbook.

TISCH'S TENURE...

In 1985, Laurence Tisch bought 24% of CBS for roughly $700 million and set about shedding assets to focus on broadcasting. In 1986 and 1987, Tisch sold off the company's publishing properties for $1.1 billion and its record company for $2 billion. By 1991, he had slashed the payroll at the network's crown jewel, CBS News, from 1,467 to 1,067. But Tisch also spent big on programming, buying broadcast rights to baseball and football and luring David Letterman away from NBC. The network's ratings zoomed. Thanks to a 1990 stock buyback and the network's current market value, Tisch has more than recouped his investment.

...AND HIS MOUNTING PROBLEMS

AFFILIATES In late May, Fox Broadcasting lured away eight CBS affiliates, accounting for 10% of the network's national audience. Other defections are rumored.

PROGRAMMING In May, 1993, CBS lost Major League Baseball to ABC and NBC, and in December, the NFL's National Football Conference to Fox. Its prime-time schedule is vulnerable because of aging shows, few new hits, and a resurgent ABC.

NEWS The CBS Evening News with Dan Rather and Connie Chung is likely to lose a disproportionate share of viewers from the defection of affiliates to Fox.Mark Landler in New York


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