annals of communications
The New Yorker - July 18, 1994
back in play
Barry Diller has said that network broadcasting is the past, so what does he see for CBS? And what will happen now that Larry Tisch has put CBS in play?
As is true of any enabling relationship, Laurence A. Tisch, the chairman of CBS, and Barry Diller, the chairman of the QVC home-shopping network, needed each other in order to go on to something else. Tisch, bruised by criticism that he lacked vision and was too miserly to run a network, wanted to extricate himself from a souring relationship with CBS. Joining forces with Diller, in a merger announced at the end of last month, gave him a way to depart from CBS without appearing to have fled a failure; now he could appear to be a statesman who would be leaving CBS in strong hands. As for Diller, he needed a larger platform for his talents than QVC allowed, particularly since its meteoric rise may have stalled. "They are saving each other," Christopher Dixon, PaineWebber's media and entertainment analyst, says of Tisch and Diller.
The motivation for this union is two parts emotion and one part economics. If Tisch had been thinking only of the economics, he might have demanded a steeper purchase price for CBS than the one he engineered with Diller--a hundred and seventy-five dollars a share in cash and a stock swap between the two companies. He might also have cashed out all his CBS stock--through the family-held Loews Corporation, he owns twenty per cent of the company--instead of retaining 9.4 per cent. But emotion, too, was involved. While Tisch has never been known as a jolly man, those who have worked alongside him at CBS say that he has been especially unhappy of late. He was furious when, last December, he had to choose between continuing to lose as much as a hundred and fifty million dollars a year by televising National Football League games and losing the television rights to those games--which CBS had broadcast for thirty-eight years--to Rupert Murdoch's Fox network. The N.F.L. went to Fox. Then, in May, Tisch lost eight CBS-affiliated stations when the financier Ronald Perelman's New World Com-munications Group shifted its allegiance to Fox--a move that triggered the kind of bidding war for affiliates among the networks that Tisch had entered the business vowing to end.
Tisch did, of course, have his successes at CBS: he recruited some accomplished managers; he opened his wallet and allowed Howard Stringer, the CBS broadcast president, to lure David Letterman away from NBC; he presided over CBS's third straight prime-time-ratings triumph; and CBS, according to a ranking official there, earned three hundred and twenty-five million dollars last year and is expected to earn slightly more than that in 1994. Nevertheless, Tisch could hear a mounting chorus of criticism. CBS's hit shows had begun to slip in the ratings. Its sports division was devastated by the loss of the N.F.L. games. Its nightly newscast, once the pride of the network, was flipping between second and third place. The affiliates were restive. By selling off CBS's non-broadcasting divisions--CBS Records, the magazine division, the regional cable sports networks, and the book division--Tisch had invited the charge that he lacked vision. Then, when he declared that he was earning at least nine per cent interest by investing the money from the sale of these assets in Treasury bills rather than in new stations or other enterprises, his critics were certain that he was straitjacketing CBS. Tisch has long believed that if an investor worries first about the downside of his investments, as his son Tom, who manages the family investments, once said, "then the upside will take care of itself." This, obviously, is the strategy of a trader, not of a builder. Its weakness, one CBS executive who has worked in other companies complains, is that it protects the asset but does not enlarge it. And, at age seventy-one, with no successor in sight, Tisch was criticized for not thinking enough about the future of the asset. The Tisch who jumped into CBS by buying its stock in 1985 ("It surprises me, too," he told me at the time, when I noted that this was not a typical Tisch trade, because things like sentiment and pride were involved) was the same Tisch whose pride was now telling him to leave.
DILLER, too, was motivated by more than mere business logic. Early in 1992, at age fifty, he suddenly resigned as the chief executive officer of Fox, Inc. He was inundated with job offers, but he wanted to take a year off and look into the future of the communications industry before deciding what to do next, and he visited broadcast networks, Hollywood studios, and cable, computer, telephone, consumer-electronics, and publishing companies prior to joining QVC. At one point, he did explore the idea of buying a network: he talked with NBC, but the discussions never got serious enough to require a meeting with NBC's parent, General Electric, and its chairman, John F. Welch. Diller left the distinct impression that he felt that the network-broadcasting business represented the past. Owning a network "would be fun," he told me in early 1993. "But, even as I say it, I bore myself. In the end, I thought, it only involves ego."
Now Diller says he must have uttered these words in another context; perhaps he was saying he would not try "to repeat myself" by returning to the Fox network, which would "bore" him. At the time, however, Diller said he was following his head, which told him that cable enjoyed many advantages over the networks: cable had two sources of revenue--subscriptions and advertising--while broadcasting had a single source, advertising; cable owned its distribution system, while the networks, in effect, rented time on two hundred-plus local stations; and cable had the most sophisticated wire into households and the best entrepreneurs. The future of television, Diller said then, would be "led by the cable systems."
So, armed with twenty million dollars of his own money and capital from three of the nation's major cable companies--Tele-Communications, Inc., Comcast, and Time Warner--Diller chose cable. In January of 1993, he became the chairman and C.E.O. of QVC, which is based in West Chester, Pennsylvania. He was said to be on the front line of interactive television, poised to use his rare blend of managerial and programming skills to fill the most glaring need of a cable universe that will someday encompass five hundred-plus channels: more and better programming. Diller said that viewers would no longer be passive, as they had been when they watched network television. That was the past, he said. In the future, they would be able to summon up information, acquire a book, hear and see a great teacher lecture. They would be liberated from the tyranny of a television schedule, which told them what they could watch and at what time. This was the future.
On June 30th, the future reached back to the past. "QVC could never be enough for Barry," his friend David Geffen, the music impresario and producer, says. "It was the first step in Barry's going to work. It was the beginning, not the end." Diller's closest friend, the designer Diane Von Furstenberg, commenting on the power of emotion as a motivator in the making of the deal, says, "How about sitting in Bill Paley's seat!" Diller was the vice-president for prime-time television of ABC Entertainment in the seventies, and the chairman and C.E.O. of Paramount and then Fox in the eighties. Being a major player matters to Diller, a close friend who has worked for him observes. "He was such an important factor," this friend says. "Barry Diller's being put in the TV Hall of Fame"--as he was recently--"is like being embalmed." When Diller went to QVC, he ceased to be a major player in the entertainment business. Whatever QVC's business successes, it is an operation that sells things. CBS buys things, including the products produced by the Hollywood studios.
Diller recoils at the suggestion that somehow Tisch and CBS have rescued him. "I'm so tired of people saying how lucky I am to be out of West Chester, Pennsylvania," he says. "They're all wrong. I have friends who were saying that. They don't get it. The evolution of that business fascinates me. Interactivity fascinates me." Diller and Tisch are both notoriously tough-minded, as can be attested by those who watched Tisch sell his flagship Loews theatre chain and Diller refuse to raise his bid for Paramount last year because he thought the prize was not worth the price.
"I think it's a good deal for everybody," Mario Gabelli, who is a major investor in media properties, says. Tisch gets away from CBS, Gabelli points out, and Diller gets the opportunity to enlarge an asset. "I think it's a very shrewd exit for Larry," NBC's president, Robert Wright, says. "If he had simply announced that the company was going to issue a hundred-and-seventy-five-dollar-a-share dividend--equal to sixty per cent of the market value of CBS--people would have said, 'The company is going nowhere. There is no vision. There is no future.' By combining his taking out a huge dividend and gluing on QVC, he gives it a sense of a future and takes away all the sting. The market is happier with Barry Diller glued on."
THERE are good business reasons for the union. Network profit margins may not be what they were when ABC, CBS, and NBC formed a virtual monopoly, but as mature businesses they have yielded steady profits over the past few years. Together, the three networks and Fox reach more than sixty per cent of all viewers on any given night, and on many nights CBS alone reaches twenty per cent of them. Extolling this "remarkable engine of communication," Diller says, "In a fractionated world, being able to get that kind of mass circulation regularly, and not wanting to extend that brand--my God, what an opportunity! On that, I've never wavered." And, while Diller says that he continues to think that cable is "a terrific business," he also says that the "geopolitics" of television has changed since 1992. The federal government has ceased treating the networks as monopolies but has placed new restrictions on the cable industry and is also freeing the telephone companies to compete against cable. Direct-broadcast satellites will siphon off cable customers, particularly in rural areas. Despite talk of a technological new frontier, there remains at present a scarcity of cable channels. The network audience share, which declined by nearly a third between 1980 and 1992, has levelled off in the past two years. And advertisers, for all their complaints about the arrogance of the networks, still need a mass audience, particularly when they are introducing new products. "You can feel the earth trembling, but it hasn't shifted dramatically yet," a senior Capital Cities/ABC official says.
What does CBS allow Diller to do strategically? "I think broadcasting can be a huge growth business," he says. To achieve growth, he plans to focus first on what exists at the network today, starting with costs. "In any change of ownership, you have a window to cut costs," says a CBS executive who is thrilled at the prospect of Diller's heading the network. CBS owns seven stations, and Diller will try to bring their profit margins up from about forty per cent, which is low, with better programming. He was an advocate of more youthful programming at ABC and at Fox, and he will no doubt try to improve CBS's demographic appeal to advertisers, who are convinced that only younger viewers--and particularly younger women--shop, and that they are impulse shoppers.
Then, there are longer-range things that Diller might do. He hopes to enlarge the amount of programming that CBS produces itself. "I tend to speed up everything," he says. "My tendency is to go faster rather than slower." Might he try to acquire a studio, as friends suggest? "It's not for me," Diller says. "It's ridiculously speculative. But if an opportunity came up that made sense, I'd look at it." He also sees an opportunity to challenge CNN by creating a twenty-four-hour news operation. "I think that the news divisions are underutilized," he says. "All of them. They have really remarkable resources." Diller could sell programs that CBS produces to his cable partners. He could aggressively expand CBS's sales and partnerships overseas, as ABC has long done and as NBC has begun to do. He could program fewer hours, as the Fox network does.
Does Diller still believe--as he told me in 1993, soon after joining QVC--that if he had acquired control of NBC he would have reduced the cash compensation that is paid to the network's affiliated stations? Is he still open to the possibility of switching from a broadcast to a cable-system affiliation, with cable reversing the process and paying compensation to the network? Diller avoids the compensation question. As for switching affiliations to a cable system, he now says, "I can't imagine it."
One opportunity that Diller can imagine will be provided by compression technology, which will allow a network to squeeze anywhere from four to six channels onto the current broadcast-spectrum space that the government has granted it for a single channel. Diller wants to "multiplex"--offer "distinct program services"--under the CBS brand name. "If you get the right to do that, look at your ability to compete, with your brand name," he says. CBS might offer the all-news channel that Diller mentioned, and an all-sports channel, and an all-cultural channel--or, he says, an all-quality CBS entertainment channel. He believes that the CBS name and its reputation as "the Tiffany network" will be valuable assets in helping to sell such services. "Which is why Howard Stringer is such a critical executive in the proceedings," he says. "What Howard Stringer represents is the best of the tradition."
A former employee of Diller's who admires him says, "He'll use CBS as he used QVC. Barry has a big dream. He'll use this as a step, not as the end of the game. He'll buy a studio. He'll buy a publisher." In other words, he'll reverse the direction that Tisch took, which was to shrink CBS into a simple broadcasting company. Diller brings to CBS his cable partners, who will own about twenty per cent of the network. (TCI could wind up as CBS's biggest shareholder, owning more shares than Tisch if the merger is consummated.) Diller acknowledges that he will try to build CBS into a multimedia giant.
Diller surely realizes that there are obstacles in his path. CBS could now become a prize in an auction, as Paramount became a prize after Viacom and Paramount thought they had arranged "a strategic partnership" and Diller thought otherwise. More than one studio is taking a look at CBS. A ranking Disney executive, who was asked last week about the merger, refused to comment on Diller or Tisch or any aspect of CBS, "for legal reasons"--a remark suggesting that Disney is considering a bid. When Diller was asked if he thought that Michael Eisner, a friend and former colleague at Paramount and ABC, and now Disney's chairman, might attack, he said, "I don't know. I hope not. It's tough for any studio to do." (Diller has talked with Eisner and has told associates that he is convinced Disney will not make a bid for CBS.) A studio would need government antitrust waivers and the approval of the Federal Communications Commission to take over a network--requirements that Diller says he doesn't need to meet, because in the merger CBS will technically own QVC, so there is no "change of control" of the network. Of any potential rivals, Diller says, "I'll make it as difficult as I can."
Others may try to make matters difficult for Diller. "The fact that a significant block of ownership is in the hands of cable operators is dangerous, and should not be permitted," an important ABC official says. He worries that the owners of the cable box could, to harm ABC, shift the local ABC channel from 7 to, say, 72 on the dial. And Wright, NBC's president, says of the merger, "It certainly scares a lot of people here." Wright is not sure that NBC, ABC, and Fox have the legal standing to petition the F.C.C. to challenge the merger.
Barry Diller is "more excited now than he was when he was trying to buy Paramount," David Geffen says. "I've never heard him like this. He said to me recently, 'This is my destiny.' " And according to Diller's investment banker, Herbert A. Allen, once you have money, people are inspired to keep score a different way. "The same three things drive everyone," he says. "The fun of the business. Pride. And the fear of failure." (c)