WHY WOULD SOMEONE AS SHREWD as Viacom topper Sumner Redstone be willing to pay some $37 billion of his company’s stock to purchase CBS? The explanation for what I feel is a serious overpayment lies, I suspect, somewhere in the vicinity of Lower Manhattan’s financial district.

Down there, where values are placed daily on the efforts of even the mightiest of moguls, attention must be paid to a few hardy prejudices regarding showbiz. These simple truths include: Distribution is Good. Production is Bad. Or, in today’s parlance, Content is OK — if it’s digital. What’s really nifty are “pipelines.”

In the current wisdom, these pipelines, which carry the content to the intended audience — cable systems, satellites, Web sites (natch) and even radio and television broadcast networks — are great, while the creation of programming to go through those pipelines is a messy, risky and unpredictable affair.

In the far less troubling world of pipelines, “product” goes in one end and ratings, chart rankings and box office grosses come out the other end in a neat and predictable manner.

Recently, I had lunch with a highly respected entertainment industry investment banker. He proffered the opinion that the enthusiastic reception to the news of the impending Viacom/CBS nuptials was based on the prevailing view that the merged company was now “too big for the success or failure of any single movie or television program to matter.”

“This is a good thing?” I asked. Indeed, he responded, from the Street’s standpoint, it was. The sheer size of the combined enterprise, he went on, would now protect the investor from the presumed risks of the creative process.

“Doesn’t it also protect them from the rewards?” I countered.

“Precisely” was his answer, but “that’s what the Street wants.”

Now, my banker friend is far too wise to endorse this point of view — he made it clear he was just reporting. I, on the other hand, am far too old to regard this as a happy development. When I joined Warner Communications in 1974, “The Exorcist” had just poured tens of millions in profits (I know, the amounts sound positively quaint) into the company’s coffers. The following year “Jaws” did even better for MCA, and the release in 1977 of “Star Wars” allowed Fox, over the next two years, to double the net worth it had accumulated in the preceding 50 years. Ah, those were the days. Now, happily, we are protected from such dreaded occurrences.

CBS — which you and I have foolishly considered a TV network, a bunch of O&Os and a passel of radio stations — is in the modern view a series of pipelines. People who run a network affiliate, a radio station or a local cable system get their programming from others. Their primary task is to sell advertising to the audiences that someone else’s programming has attracted.


the highest of callings, it is an activity that Wall Street understands — and loves. When Mel Karmazin exhorts his sales force to bring in 10% more revenue each year, even if the programming being delivered is attracting a shrinking audience, analysts cheer. And it can work — for a year or two.

But ultimately, it is the ability of the programming to deliver an audience for those commercials that counts. For myself, I would be a bit reluctant to hand over programming decisions to the man who built his career on giving America Howard Stern and Don Imus.

Producing content for these pipelines, unlike selling ads, requires a number of skills, chief among them guessing what the public might want to watch, listen to or read — in short understanding creative people and the creative process. This is precisely what a skilled entertainment executive does, but it is an activity that makes Wall Street decidedly nervous.

One of the great strengths of the entertainment industry is its relative immunity to the ups and downs of the economic cycle. (Yes, Virginia, there was an economic cycle before it was banished by the Internet.)

The selling of advertising, unlike the sale of movie tickets, cable subscriptions, CDs and DVDs, is highly susceptible to swings in the business climate.

Yet the business of selling time and space is just what the Karmazin-led CBS is all about. Is there a more content-free “media” business than billboards — a field CBS leads thanks to a recent acquisition? Other than occasionally putting a fig leaf on a Calvin Klein underwear billboard, the outdoor advertiser, not CBS, decides what the public sees.

It is this content-adverse CBS which Sumner Redstone has so warmly — and richly — embraced. He has built Viacom over the past dozen years into a poster child for what’s good about the entertainment business.

Since the 1994 purchase of Paramount transformed the company, its annual cash flow has quadrupled to more than $2 billion, while long-term debt has been reduced by a rousing $7 billion. The worldwide success of MTV and Nickelodeon has been the East Coast counterpart to the Left Coast’s consistently impressive film and television results at Paramount.

At this point I feel I should remind all concerned why a company makes an acquisition: so that the resulting combination is better, as opposed to simply bigger, than before.

CBS/VIACOM WILL HAVE more than twice as many shares outstanding after the merger, so each Viacom share will represent not quite half as big a slice of a now larger — but not tastier — pie. Redstone, currently the proud owner of 28% of Viacom’s total shares, will own less than 14% once the merger goes through.

So why is this man smiling? It just might be related to the fact that his voting interest in the merged entity, as opposed to his ownership interest, will remain undisturbed at 67%, thanks to his limiting the CBS shareholders to nonvoting stock.

Wall Street has, for some reason, been almost somnolent about this tiny aspect of the deal. Why this silence from normally voluble institutional shareholders of CBS? My guess is that they recognize that they will be far happier as owners of Viacom/CBS than they would be sticking around with the current package of CBS assets.

Sumner gets to control a much bigger, if less interesting, company. Karmazin gets to be in charge of day-to-day operations, and presumably end up the successor as CEO to the 76-year-old Redstone.The losers? Just the current Viacom holders who will, I think, have reason to wish they were still stuck making that risky content, before Sumner discovered the joys of pricey pipelines.

(Roger Smith was formerly VP, corporate affairs, of Warner Communications and exec VP of Carolco Pictures. He now heads the Gotham-based consulting firm of Roger Smith & Co.)