annals of communications
The New Yorker - October 4, 1993
the last studio in play
Barry Diller and Sumner Redstone differ about where their industry is going, and Paramount Communications may prove to be their testing ground.
Although Sumner Redstone hadn't played poker in twenty years, he knew he couldn't lose this hand. He had five aces--the supreme hand in a seven-card game called day baseball. Redstone was travelling with three colleagues, and this was the final hand before their plane landed. Redstone did not want just to win; he wanted to empty his friends' pockets.
"Explain to me again the rules of this game?" he asked the other players. The four men sat in leather armchairs around a table in the rear of the plane--a G-3 jet taking them from the West Coast to Minneapolis. Nines and threes are wild and the best hand is five aces, Redstone's colleagues told him. After the cards were dealt, Redstone hesitated, munched some nuts, stared at his hand, and lamented, "I don't know whether I should stay in." The other players--Frank Biondi, who was the chief executive officer of Viacom International, Inc., the company that Redstone controlled; George S. Smith, its chief financial officer; and Julian Markby, then an investment banker with Drexel Burnham Lambert, all of whom, along with Redstone, were on a five-day tour to sell five hundred million dollars' worth of Viacom bonds--paid little heed to Redstone's plight. Each felt that he held the winning hand. Biondi had five kings. Smith had five jacks. Markby had a full house.
While Redstone seemed to dither, the others pushed their remaining capital--matchsticks--into the pot. Then Markby put his hand down. Smith put his jacks on the table, which topped Markby's full house. Next, Biondi showed his five kings, certain that the pot was his. With a blank expression, Redstone put his aces down one by one, and then he jumped up and yelled, "I wiped you out! I wiped you all out!"
That poker hand revealed the essential Sumner Redstone, Biondi says: "focussed" and absolutely determined to win. Redstone himself says, "I have an extremely obsessive drive to win."
In 1954, seven years after graduating from Harvard Law School, Redstone joined his father in a family-owned movie-theatre business in Massachusetts, and parlayed some shrewd investments into a company called National Amusements. In 1979, after he was badly burned in a Boston hotel fire, Red-stone was told that he might never walk again; he spent five months in a hospital, and, though his right hand remains gnarled, he says he plays a better game of tennis today than he did then. He displayed similar tenacity when, in 1987, people insisted that he could never acquire Viacom, a diversified cable-and-broadcast-programming company; he persisted, sweetening his bid three times and finally succeeding.
Today, Redstone, who is seventy years old, hopes to gain control of Paramount, the last available major studio. On September 12th, he announced that Viacom would acquire Paramount Communications for eight billion two hundred million dollars, or sixty-nine dollars a share. Redstone thought he held the winning hand. Yet, eight days later, Barry Diller, who had become the chairman of Paramount Pictures at age thirty-two, announced that QVC Network, his home-shopping company--backed by QVC's principle partners, John Malone, the C.E.O. of Tele-Communications, Inc. (T.C.I.), and the chairman of Liberty Media Corporation, and Brian Roberts and his father, Ralph, the president and the chairman of Comcast Corporation--was offering eighty dollars a share for Paramount. At stake is something much larger than a single studio, of course. The purchase by either bidder would create a global giant involved in movies, cable, broadcast television, books, sports, and the world of interactive electronics.
The battle for Paramount could trigger a bidding war reminiscent of nineteen-eighties dealmaking. In part, the contest sets software providers who want to circumvent the middleman against gatekeepers who own part of the electronic superhighway--the cable wire--and want to own the software as well. If Redstone wins this contest, he will own a global programming colossus that includes MTV, Nickelodeon, VH-1, Showtime, the eight hundred and ninety or so films in Paramount's library, and network-TV programming produced by Paramount, and also such syndicated successes as "Cheers," "Roseanne," and "The Cosby Show," not to mention one of the world's largest publishing enterprises and the New York Knickerbockers and the New York Rangers. Redstone believes that he does not need to own the highway that distributes his products if he owns brand-name products. By contrast, if Diller and his cable partners prevail, they will own both the cable wire into one-quarter of all cabled homes and the software to help program their cable channels here and abroad. Barry Diller's close friend Diane Von Furstenberg says, "Barry's been dreaming of this for a long time"; Paramount was "the first mountain he climbed" when he was a young Hollywood executive, she adds. Now he sees an opportunity not just to reclaim that mountain but also to oust the man who shoved him from the top in 1984--Martin Davis, the present chairman and C.E.O. of Paramount.
AS early as last spring, Davis had rea- son to be concerned. Since assuming control of the company, in 1983--at the time, it was known as Gulf + Western--he had succeeded in sharpening its focus as an entertainment company: he had shed non-entertainment and non-publishing assets; he had reduced the company's debt, renamed it Paramount Communications, and amassed more than a billion dollars in cash. Yet he knew that Paramount was vulnerable to a takeover. He knew that all the channels that were going to be available someday would need programs. He knew that over the past five years his studio had lost market share, and that even with a new team running it his quarterly earnings for the period ending October 31st might alarm Wall Street. After a string of flops, the studio was expected to miss its private budget targets by up to eighty million dollars, according to two sources. Such swings are not uncommon in the movie business, but Davis knew that inves-tors might panic, and that Paramount's stock price might fall sharply. And he knew, too, that investors were impatient, because Paramount had not made a big deal, even though he had been promising one.
Over the past four years, Davis had had a series of exploratory conversations about a merger of some sort, but nothing had come of these discussions; the companies that he had been talking to turned out to be not for sale. The one contemporary he feared was Malone, whom he showered with compliments and regularly invited to dinner. Davis could not have been comforted to see Malone and Diller become partners last winter, but he was sure that his own relationship with Malone was secure. "He's one of the great visionaries of our time," he told me then, insisting that I attribute the quote to him by name in a magazine article.
Davis grew anxious when Malone, in a telephone conversation late last winter, seemed to confuse something that Davis had said about him with an unattributed quote from a cable-company C.E.O. in the same article. The C.E.O. had complained that Malone was "an evil genius." Davis reassured Malone. He went so far as to order a paperweight with his compliment embossed on one side and the "evil genius" line on the other and send it to Malone. Davis thought it was funny, but he never learned what Malone thought about the gift. "I never heard from him," Davis says. His suspicious nature was now on full alert. Maybe his friend would become an adversary. Maybe his old nemesis Barry Diller was up to something. This suspicion hardened into certainty when Davis invited Diller to lunch last summer and asked whether QVC hoped to acquire Paramount. "I got a vacant answer," Davis recalls.
"We felt that the world was changing," Stanley R. Jaffe, Paramount's president, who is second in command to Davis, says. "It was becoming a world of a few giants in media and communications. We worried that competitors like News Corporation"--controlled by Rupert Murdoch--"and T.C.I. were getting too strong a hold on the gate." Among possible merger partners, Davis felt comfortable with Sumner Redstone, whom he had known for forty years.
By last spring, Davis had relented on something he had long insisted on: that in a merger Paramount would necessarily be the buyer, not the seller. Redstone would be the buyer now. Neither man needed anyone to tell him how snugly the assets fitted: Viacom's growing cable channels--particularly MTV and Nickelodeon--could make movies and have them distributed by Paramount's worldwide distribution system; Paramount's plethora of television programs could appear on the companies' combined twelve broadcast stations, or on Viacom's one million one hundred thousand cable boxes; MTV's and Nickelodeon's characters and merchandise could appear in Paramount's five theme parks; Paramount's book division was a natural match for the interactive technology that both companies had invested in. Together, the two companies would rank among the world's largest communications companies, rivalled only by Time-Warner, Murdoch's News Corporation, Capital Cities/ABC, the Walt Disney Company, and Bertelsmann. Diller and Malone would need Paramount/Viacom to provide programming for their cable channels.
DISCUSSIONS between Davis and Redstone grew more intense in June, when Davis asked his investment banker, Felix Rohatyn, of Lazard Freres, to begin serious negotiations with Redstone's banker, Robert Greenhill, who had just left Morgan Stanley and become president of Smith Barney Shearson, a firm better known for brokerage than for dealmaking. Redstone said in a statement, "This has nothing to do with money, this has nothing to do with glory. . . . This is an act of destiny."
At various points over the next two months, the deal did not seem destined. Negotiators wrestled over price and over the amount of cash versus the amount of stock the merger would involve. Redstone and Davis squabbled over what one banker called the "social issues": who would be C.E.O.; what role the No. 2 man at each company--Stanley Jaffe at Paramount, Frank Biondi at Viacom--would play; whether the name "Paramount" would precede the name "Via-com" in the new company. "I never thought it would happen," Redstone recalls. Several times last summer, he broke off negotiations.
But by Tuesday, September 7th, after meeting much of the day in a conference room at Smith Barney, the negotiators had reached a tentative agreement on the economic outlines of a deal: Viacom would pay Paramount shareholders sixty-nine dollars and fourteen cents a share in stock and cash, depending on the price of Viacom's stock, which had risen, partly because Redstone was buying it; Sumner Redstone would become chairman of the combined company and own nearly forty per cent of its common stock and seventy per cent of its voting stock; and Martin Davis would become the C.E.O. of the new company. Biondi's and Jaffe's roles would probably be defined after the merger was completed.
Rohatyn asked that his team members be left alone in the room so they could call Davis.
Davis said into the phone, "I want to see him face to face."
"Hiya, boss" is how Redstone greeted Davis when he picked up the tele-phone. It was an appropriately soothing opener, for, though Davis would be the C.E.O., Redstone would sign his checks. Rohatyn, who has done many deals in his sixty-five years, observes, "Most deals are fifty per cent emotion and fifty per cent economics."
Redstone and Davis dined that night in a suite at the Hotel Carlyle. They talked about how, together, they could build a global communications giant, how they would be partners. They also talked about how they were determined to block what they saw as the monopo-listic designs of Malone and Diller. Redstone, who calls himself "an old-fashioned liberal" Democrat, and who worked as a young lawyer for Harry Truman and was a supporter of Bill Clinton, accused Malone of seeking a cable monopoly, because he was both a gatekeeper and an owner of much of the programming that he allowed to pass through his gate. That night at the Carlyle, Redstone and Davis shook hands on a deal.
At the press conference several days later, in the Viacom cafeteria, Redstone dominated the podium. "Software is the name of the game," he declared.
What about a potential hostile bid from Barry Diller, John Malone, and Comcast?
Redstone said he had known Diller a long time and did not believe he would attack this deal. Of Malone, Redstone said, "I respect him, but I don't fear him." Besides, he added, the political environment was adverse to Malone. Privately, both Redstone's and Davis's investment bankers saw the possibility of at least one bid. "We recognize that we're opening the door to other bidders. No question," Steven Rattner, a partner at Lazard Freres, told me. The biggest threat, he predicted, was likely to come from Diller and his allies. "They want a studio in order to claim its library and its capacity to produce product," Rattner said. "They know this is the last studio play--until the Japanese get tired of their toys."
At the press conference, however, Redstone and Davis acted nonplussed. In separate turns at the microphone, both practiced the new old math, asserting that one Viacom plus one Paramount equalled not two but four, or even six or eight. "This is Time-Warner without the debt," Redstone declared.
Diller did not agree with such math. "I am not a big believer in synergy," he told me on the eve of the Redstone-Davis announcement. "More money has been thrown away on empty synergistic arguments. It's mostly noise."
Was it possible that Diller's QVC would bid for Paramount?
"There are circumstances that might allow us to make a move," Diller said.
One of Diller's two main partners in QVC--Brian Roberts, of Comcast, which is America's fourth-largest cable system--was eager to pounce. After word of the impending marriage between Redstone and Davis leaked, Roberts said, "When the new highway technology comes down, a way for a cable company like ours to play an even greater role is to own programming."
For the next several days, Redstone basked in his new celebrity. When he arrived in the lobby on the twenty-eighth floor of Viacom, at 1515 Broadway, for a picture-taking session with a Newsweek photographer, he could not contain his glee. "See that national press!" he exclaimed to a press assistant. He agreeably posed before a panel of twelve TV screens, which displayed MTV and other channels of his. Obviously, one part of Redstone is ham. "This guy really wants to be a media mogul," says a business associate.
Yet there is a more modest side to Redstone. He wears off-the-rack suits, draped loosely on a six-foot-plus frame. His shoes--black loafers--are scuffed, his shirt cuffs don't show, because he wears short sleeves, and his ties, which are wide, can also be garish. He has lived in the same house, in Newton, Massachusetts, for the past thirty-five years, and owns neither a private limousine nor a corporate jet.
While Redstone can be a demanding--even a rough--boss, his style of management tends to be collegial. He likes to say he treats people as "partners." He is in the office most days, attends the regular meetings that Biondi conducts with other Viacom executives, participates in strategy and deal conversations. In day-to-day management, Biondi sets the corporate style, and the style is one of trust. Family pictures dominate his office. He does not micromanage. He listens. He analyzes.
The management style practiced by Martin Davis and Stanley Jaffe at Paramount contrasts sharply with Viacom's. While Redstone is somewhat dishevelled, Davis always looks as if he had just come from the barber. Not a strand of parted silvery hair is out of place. He wears monogrammed white shirts, crisp and fastened at the sleeves by cufflinks, and tailored pin-striped suits, the pants held by sedate suspenders. Yet there is about Davis a jumpiness, a sense that he is about to pounce. Unlike Redstone or Biondi, Davis regularly converses only with Jaffe and two or three other executives. "Marty does not talk to a lot of people," says Jaffe, who is not only his deputy but his friend and admirer. Jaffe's style is more hands on, but, like Davis, he is known to yell at underlings. While Jaffe is respected as a talented producer, people snicker at what they say is his imperial manner. The most recent Paramount proxy statement reveals that Paramount constructed an elaborate screening room in Jaffe's Westchester County home, at a cost of a million five hundred thousand dollars.
Davis and Jaffe are imposing figures, and are often viewed as mirror images of each other. "Marty Davis would enjoy pulling the wings off flies," one business rival says.
Davis concedes that he is tough, but maintains that he isn't nasty. "Some people misinterpret me," he says. "If I have something to say, I'm direct."
WHEN Barry Diller ran Paramount, in the early eighties, he found Davis too direct. Two days after the merger with Viacom was proclaimed, Davis sat in his office, high above Central Park, and said that even if Diller and his allies made a bid and offered more dollars per share than Viacom, he was prepared to recommend that his board reject the offer. Ironically, he echoed the line taken by executives at Time and Warner when they opposed Davis's hostile 1989 bid for Time. "Nobody can offer this combination," Davis declared. "A few more dollars can't do it, because it can't equal the value we're creating. You can't compete with this future." The offer, he added, would have "to be so extraordinary that Sumner and I would look at each other and say, 'It has to be.' " But he would not define "extraordinary."
Although there was general praise for the comfortable way the holdings of Viacom and Paramount meshed, in the aftermath of the merger announcement people began to wonder how other elements would mesh, starting with the contrasting management styles. "These people can't get along," says a Hollywood studio head who knows them all. "On a scale of one to ten, the possibility of the four of them surviving together is zero."
Redstone challenges this view, saying of Davis, "He'll have a good time with this, because I've never acted like a boss in my life."
The reaction from the Diller camp was harsh, and concentrated on another perceived weakness of the merger: the absence of a dominant creative figure, like Diller or Disney's Michael Eisner. "You have two perfectly adequate pieces of concrete placed next to each other," one of Diller's colleagues said. "There's no energizing force. No one who understands programming. Synergy is different from energy."
"That's a stupid response," Davis says. "Look at MTV. It's creative. I'd match Jaffe's creativity to Diller's. Diller was brilliant in creating a fourth network, but I haven't seen anything happen after that. I respect Eisner, but he relied on people he inherited; Jeffrey Katzenberg has built the Disney studio."
Redstone believes that the cable sun is setting. Whether he succeeds or stumbles in his bid for Paramount, this core assumption provides a much overlooked motive for his proposed merger. When Diller joined up with Malone and Comcast to run QVC, in an attempt to become cable's principal programmer, he bet that cable would dominate the electronic highway into homes. Redstone and Davis are making a different bet. They see that the public is angry about rising cable prices. They see that Congress and the Clinton-Gore Administration are inclined to treat cable the way Washington once treated the three TV networks: as a monopoly. Already, the courts are relaxing strictures that prevented the telephone companies' entry into the video business. There is a clamor within Congress to compel cable companies to choose between owning the hardware (wire) and owning the software (programs), just as TV networks like CBS were once compelled to choose between owning a distribution system and owning a software company like Viacom, as CBS did in 1970. Meanwhile, by rapidly paving the way for other highways into the home--including the telephone wire, the satellite dish, and the wireless radio frequencies of cellular phones--technology has spawned competition, not retarded it, while chasing smaller competitors.
Against this backdrop, one can better understand the business motives of Redstone and Davis versus Diller and cable. Redstone is betting that, with an ample supply of programming for the much heralded five-hundred-plus-channel future, software manufacturers like Viacom and Paramount will be able to treat the cable gatekeeper like a middleman. "Software will get distributed because the public will demand it," he declares. "People want their MTV." He is suggesting that MTV, Nickelodeon, and TV shows like "Cheers" are brand names, and distributors must carry the products on their shelves. And if they don't, "there are other ways to distribute programming," he says. "As competition develops, the life of the programmer improves."
With other means of distributing products, and with more channel choices, the demand for products outpaces the supply, says Robert Iger, the president of ABC. "Shelf space is now so enormous that the ownership of shelf space is less important."
Something else is happening, too: the distinction between software and hardware is fading, for a brand name can guarantee its own distribution. "There's been a little bit of a power shift," Steven Rattner says. "Programming will be king."
Redstone's proposed deal with Paramount differs from some recent entertainment-industry mergers. There are three options that communications companies can select from, Rattner says. The first is to be a studio and produce products. The second is to be a wholesale distributor of products, as MTV, CBS, and HBO are. The third is to be a hardware-delivery system, whether that hardware is a cable wire or a Walkman. MCA's merger with Matsushita and Columbia's with Sony were meant to create synergies between Japanese-produced consumer-electronic hardware and studio software--between Options 1 and 3. The union between Viacom and Paramount would strengthen the joint company in Options 1 and 2, but not appreciably strengthen it in Option 3.
It was with Options 1, 2, and 3 in mind that, on September 20th, QVC bid nine billion five hundred million dollars to acquire Paramount. This bid was about eleven dollars a share more than Viacom's accepted offer. QVC would pay about thirty dollars a share in cash and the rest in QVC stock, and that was about twenty-one dollars in cash more than Viacom bid. "Sumner Redstone can't compete with this offer," a member of Diller's group said. "His package is worth about sixty dollars a share. To compete, he has to come up with thirty-five or forty per cent more cash. And in a bidding contest Diller can call on backers other than just Malone and Comcast"--including Ted Turner, the chairman of the Turner Broadcasting System. Of course, Redstone can also come up with another partner, or sell an asset like his cable system. But by the end of last week one of Davis's advisers was gloomy: "Diller is Secretariat in the 1973 Belmont Stakes. He's lapping the field." Perhaps to slow him down, Viacom filed an anti-trust suit in federal court in Manhattan last week, charging that QVC's bid represented an attempt by John Malone to monopolize the cable-TV market.
Behind the Diller-Malone-Comcast bid is an ambitious attempt to become a perfectly vertically integrated company, controlling everything from the idea, through the production of that idea, to the dissemination of it. Look at it this way, Diller said late last week: "If you were at Paramount and you could buy QVC, you'd get a company that is on the frontier of interactivity, a company that is countercyclical to your own. Electronic retailing is countercyclical to the vagaries of the TV and movie business. Along with it, you get a management with a history with Paramount and maybe an ability to operate it. Plus you'd get an alliance with Liberty cable"--John Malone--"and Comcast. If you could do all that, the market and the public would say, 'Wow!' That's what will happen if we complete this."
With the stakes so high, the battle between Redstone and Diller might attract even more players. Today, however, Barry Diller seems to have all the aces. (c)