Mr. MTV Grows Up
Tom Freston has gone from Kabul to cable and beyond. Now he has to keep Viacom hip, happy, and hot.
(FORTUNE Magazine) - Say something in Farsi, Tom. "Dasterast is 'to the right,'" replies Tom Freston, the new chief executive of Viacom. "And dastechap is 'to the left.' Ruberu is 'straight ahead,'" he goes on.
"I always liked that. You're in the back of a taxi with no fenders, and you'd go, 'Ruberu, ruberu,' and the guy would really take off. Then you'd have to yell, 'No, no, bas, bas, bas!'"
Resting comfortably in Viacom's corporate jet--no need for back-seat driving here--Freston is returning home to New York from an MTV Networks sales conference in Miami Beach. Freston ran MTV Networks--which includes cable channels MTV, Nickelodeon, VH1, and Comedy Central--for 17 years.
Now, though, he is recalling the most important time of his business life, the years 1972 to 1979, when he lived in Afghanistan and India, manufacturing and exporting women's clothing to luxury retailers in the West under less than optimal conditions. E-mail? Forget it. Fax? No way. Telephone? Just try getting a line installed in New Delhi back then. A stable business climate? Not with OPEC jacking up oil prices, Congress imposing textile tariffs, and Soviet tanks rolling into Afghanistan.
"It was the greatest training ground," Freston says. "How do you take what seems to be total chaos and bring order to it? I always felt that anything I would do in life would be easier than what I was doing in Afghanistan and India. And that's largely turned out to be correct." This unusual career path--from Kabul to cable--is one reason Freston seems unfazed by his new job, which is to steer the slimmed-down Viacom into an unpredictable media future.
Even at 60, with his spiky hair and laid-back, self-deprecating manner, Freston is a hip guy--a countercultural CEO, if such a thing is possible. He counts Bono and Dave Matthews as friends. He lives in a Manhattan townhouse once owned by Andy Warhol. He has been everywhere from Lesotho to Laos, where he spent his honeymoon.
About 14 years ago, on a spur-of-the-moment vacation trip to Vietnam before it opened to Western tourists, Freston and three MTV executives were hustled off to jail after he took photographs of men who turned out to be police officers. His companions were fearful, but Freston, pulling out his Vietnamese phrase book, smiled, and said, "My name is Tom. I am sorry." Sara Levinson, a former MTV executive who was there, says, "The police guys thought it was so hysterical that they let us off."
By his own account, Freston has led a charmed life, pursuing his two great passions, music and travel, and being very well paid to do so, to the tune of $20 million in salary and bonus, plus stock options valued at $32 million, in 2004, the last year for which compensation figures are publicly available. Some stockholder activists, citing Viacom's poor stock performance, say he was overpaid.
But Freston is confident that investors will learn to love the new Viacom (Research). "I've never been as jazzed or as excited or as optimistic as I am right now," he says. Freston says the company is ideally positioned to grow, not just on television but on the Internet and on cellphones, here and around the world. "I look at the Internet and the whole digital interactive world as an amazing opportunity for us," he says. "We're the kings of the short attention span."
There's no doubt that Viacom's niche- oriented networks remain cultural powerhouses. Nickelodeon has the ever popular SpongeBob SquarePants and a new hit for young girls called Zoey 101. MTV's reality show Laguna Beach has exploded into a teen phenomenon. Comedian Jon Stewart, host of The Daily Show on Comedy Central, has earned a reputation as the most trusted name in fake news.
But Viacom has big worries too. Cable is a maturing business. Advertising dollars are shifting to the Internet. Paramount has been a disaster lately, and the new studio chief, Brad Grey, is off to a rocky beginning.
All Freston has to do is keep the company's creative juices flowing, manage its transition to new media, and turn around skeptics on Wall Street. Ruberu!
Freston clearly thinks he got the better deal when Viacom was divided. Delivering a pep talk to about 300 MTV salespeople in Miami Beach, he sounds pleased that the new Viacom no longer owns slow-growth units like the CBS broadcast network, TV stations, radio stations, the Simon & Schuster publishing house, and billboards. There's a limit to how fast those businesses can ever grow, he says, no matter how well they are run. "CBS is not our enemy," he adds. "They're like that nice family member that has moved away."
This has been an amicable divorce. Nevertheless, Freston and his crew at MTV Networks feel liberated. When Viacom split up, its shares were worth nearly 40% less than they had been five years earlier. Partly that's because investors have turned bearish on media giants; traditional media are losing audiences, advertisers, and buzz to the Internet, and the movie and TV businesses are threatened by piracy and digital video recorders, which invite viewers to skip commercials.
But there's no doubt that the CBS assets, in particular radio and billboards, weighed down the old Viacom. "The difference now," Freston tells his people, "is that we no longer have to use the profits we are making to subsidize the underperformance of the other businesses. We're going to control our destiny."
So far the split has not paid off for investors. Shares of the new Viacom have fallen by about 5% since Jan. 1, trailing the broader indexes. They aren't cheap either--about 20 times this year's earnings, 17 times next year's. Most analysts are bullish, but investors seem to be taking a wait-and-see approach.
In comparison with other media giants, the new Viacom is a simple company, almost a pure content play. Its cable units--the MTV Networks plus BET--generated $6.7 billion in revenue and $2.6 billion in operating income in 2005. That's about 70% of the company's revenue and virtually all its profits. The cable networks get about 60% of their revenue by selling advertising, another 27% from fees paid by cable, satellite, and telephone distributors, and the rest from DVDs and licensing deals. Historically, the cable networks have been great performers: Revenues have increased by 16% annually since 1994.
By contrast, Viacom's entertainment unit, Paramount, which brought in nearly $3 billion last year, made just $62 million. Viacom's corporate expenses were $169 million, which, had they been allocated to the operating units, would have wiped out all of the studio's profits. It should be said here that Viacom's numbers for last year are a little fuzzy because they include special charges, write-downs, severance expenses, and the costs of separating from CBS. But there was no way to dress up Paramount, which Merrill Lynch media analyst Jessica Reif Cohen calls Viacom's "problem child."
Looking ahead, Freston tells investors that Viacom will produce double-digit growth in revenues and operating income. To accomplish that, he has laid out three goals. No. 1: Turn the company's array of cable networks into producers that can deliver content to all platforms. No 2: Keep growing the brands outside the U.S. No. 3: Turn around Paramount.
As cable channels, Viacom's networks are thriving. Nickelodeon has been the top-rated basic cable network for ten years. (SpongeBob, its biggest star, is more popular than ever.) MTV has been the top-rated cable network among 12- to 24-year-olds for even longer. Last year Comedy Central enjoyed record revenue and profits, thanks in part to Stewart, who ranks just behind Oprah Winfrey (and ahead of Jay Leno, David Letterman, and Bill O'Reilly) as TV's most popular personality in a recent Harris Poll. All the cable channels have healthy margins, in the 40% range.
Surprisingly, the Internet has not cut into the amount of time young people spend in front of the tube. Viewing among teens grew by 5% last year, according to Nielsen. "This generation's teenagers will pack 34 hours of viewing into a 24-hour day," Freston says. "They are probably the most voracious consumers of media the world has ever seen."
You might think that MTV, with its music videos, powerful brand, and deep connections to its audience, would also be the leading destination for young people on the Internet, but it isn't. Teens are more likely to spend time at Apple's iTunes or at MySpace, the phenomenally popular social-networking site owned by News Corp.
MTV may be king of the short attention span, as Freston notes, but young people on the Internet are more interested in connecting with one another or creating their own material than they are in consuming professionally produced content delivered by a media giant. To be sure, MTV's site is doing well--it reached about 7.5 million unique users in January, according to Nielsen/Net Ratings, but MySpace brought in nearly 30 million, making it the No. 1 media property of any kind for teenagers.
"Absolutely, there have been geysers like Friendster or MySpace," says Jason Hirschhorn, chief digital officer of MTV Networks. "But we can't run after every hot little thing. I'd argue that if you look at all of the hot things on the Internet over the years, many of them no longer exist--while we have been on a steady incline for years."
Viacom has aggressively ramped up its new-media presence. It bought three Internet companies last year: video entertainment site iFilm, which features both professional and user-generated video, for $49 million; a fast-growing site for kids and their parents called Neopets for $160 million; and a videogame site called GameTrailers for an undisclosed sum.
As broadband has spread, the company has built out sites like MTV Overdrive, TurboNick, and Comedy Central's Motherload, which feature lots of video. "MTV Overdrive is a huge, attractive web presence," says Josh Bernoff, vice president of Forrester Research. Spreading its bets, MTV is developing a music subscription site with Microsoft called Urge and making The Daily Show and South Park available through Apple's iTunes.
Meanwhile, Viacom has made no fewer than 67 deals around the world to deliver content ranging from music videos to standup comedy via cellphones. "It's going to be a major, major, pervasive screen for our audience," Hirschhorn says.
Viacom projects that revenues from digital media, about $150 million last year, will grow to $500 million in three years. "We will live or die in this next phase," Freston says. "We go from being TV-centric to brand-centric. Our brands have to prosper on every platform that's out there--TV, digital TV, online, wireless, video on demand, and so forth. We've got to prosper or else."
Viacom's other growth opportunity lies outside the U.S. Ten years ago MTV Networks produced 15 channels in six languages in 78 territories; today there are 124 channels in 28 languages in 169 countries. The best thing about many of the foreign markets is that MTV has room to grow. "The average cable and satellite penetration in the international marketplace is about 35% to 40%, where the U.S. market was in the mid-1980s," Freston told investors recently.
That leaves Paramount. The studio has nowhere to go but up--among the majors last year, it was last in grosses, last in market share, and last in profits. To beef up the ailing business, Viacom last fall acquired DreamWorks SKG, the film studio formed by Steven Spielberg, Jeffrey Katzenberg, and David Geffen, for a steep $1.6 billion, outbidding NBC Universal. It has since sold off the DreamWorks library for $900 million and hired Stacy Snider, a well- regarded executive from Universal, to run DreamWorks.
Brad Grey, 48, a former talent agent who has produced movies and TV shows, including The Sopranos, became Paramount's chairman in March 2005. It's much too soon to assess his performance as a studio executive. But he can't be happy about press reports linking him to Anthony Pellicano, the Hollywood private eye who has been charged with illegal wiretapping. Grey's lawyer, Bert Fields, has acknowledged hiring Pellicano, who targeted two people who sued Grey. Grey has said he knew nothing about any illegal activity Pellicano may have engaged in.
Grey has never run a big organization, but he is getting plenty of help. Bob Daly, who ran Warner Bros. with Terry Semel for 20 years, tutored Freston in the nuts and bolts of Hollywood for a summer; he's now a Paramount consultant. David Geffen, a close friend of Freston's, is a key advisor. Grey hired former Fox TV programmer Gail Berman to help pick movies, but word is her role has been limited.
Freston says he's pleased with Grey's overhaul of the studio. This spring and summer Paramount will release the first movies that were green-lighted and marketed by the new team: Mission: Impossible III with Tom Cruise and Philip Seymour Hoffman; Nacho Libre, a comedy starring Jack Black as a Mexican priest who moonlights as a wrestler; and World Trade Center, Oliver Stone's 9/11 film starring Nicolas Cage as a New York City firefighter.
Lots of people who go to work in show business are looking for fun. What they often find are egocentric, short-tempered bosses and cultures built on fear. "Most companies suck the life out of people," Freston says. "A good corporate culture is a great competitive advantage these days."
That may be a hidden benefit of the Viacom split. Cobbled together by mergers, the old conglomerate was a stock, not a company. MTV Networks has long been known as a great place to work--one that rewarded creative people with money and freedom. "As long as Tom is on top of the totem pole, the rest of us can look up and say, 'Hey, it's safe to take a chance,' " says Judy McGrath, who replaced Freston as chairman of MTV Networks.
The inner circle around Freston--McGrath, MTV Networks president Van Toffler, Nickelodeon head Cyma Zargami, Bill Roedy of MTV International, and Doug Herzog, who oversees TV Land, Spike, and Comedy Central--all started at the company in the 1980s. Herzog, who left for a while and worked for Rupert Murdoch and Barry Diller, among others, says, "This place has got the greatest creative culture in the business, bar none."
It took Freston some time to find a business that was fun. He grew up in Rowayton, Conn., where his father worked as a public relations man for a paper-bag company. After business school at New York University he bummed around in Aspen, Mexico, and the Virgin Islands before getting a job at Benton & Bowles, thinking advertising would be a creative business.
A couple of years working on GI Joe, Prell, and Charmin ads disabused him of that notion, and he took off again, this time spending a year traveling in Europe, the Middle East, and finally Afghanistan and India, where he got into the import business. "It was all an excuse for me to live an adventurous life in Asia," he said. He made a lot of money and then lost it all. He retreated to New York, bought a copy of What Color is Your Parachute?, and landed a marketing job at MTV in March 1980, about 18 months before it went on the air.
He has never looked back. He persuaded cable operators to carry MTV, then took over its programming, and after his boss, Bob Pittman, left, he became CEO of MTV Networks in 1987. He held that job until two years ago. "I have a distinct lack of ambition," he once said. "I'm at the nexus of all the things I love, and it's been that way for many years."
Even as the company has grown from three domestic cable channels with annual revenues of about $100 million to a global business with nearly $7 billion in revenues that goes well beyond television, Freston has tried to keep it feeling small and irreverent and entrepreneurial. Size, he says, is the enemy of creativity, so he runs a decentralized operation where people feel they can make a difference. "I really believe we are a bottom-up company," he says.
His own passion for the business is contagious. McGrath says she'll call to talk about a business problem, and Freston will first have to tell her about the music he has just heard on Tempo, Viacom's Caribbean-themed music channel. He loves reggae and jazz and the music of West Africa; he traveled there a few years ago with Dave Matthews and movie producer Brian Grazer to see the reunion of a legendary Senegalese band called Orchestra Baobab. Put Freston in a new place and "he becomes a little boy instantly," says his friend Ken Lerer, another traveling companion. "It's what he loves." Grazer says, "He experiences life with a high level of expertise and innocence at the same time."
One of Freston's strengths--the close ties that he develops with other Viacom executives--can be a weakness as well. He is very loyal and often hires his friends. Freston and Grey, for instance, got to know each other because they were part of a band of globetrotting media moguls who traveled to Cuba and Brazil for vacations.
This past year was a big one for Freston. He turned 60 in November, celebrating by going to a U2 concert and then eating and drinking with friends at the Spotted Pig, a Lower Manhattan restaurant, until daybreak. He became the CEO of Viacom in January. He has spent much of his time since then traveling to investor meetings and talking with analysts. He claims to enjoy it, although not as much as he likes discovering a new band or a restaurant in some remote locale. MTV, he joked, is a place where "one can, if one is so inclined, senselessly prolong one's youth." Now it's time for him to grow up.
Which is as it should be. He's running a public company, and investors demand results. The trick will be to see whether Freston can keep Viacom young and fun and risk-taking, as he was way back when in Afghanistan. What was that word again? Ruberu!