Behind the Deal: Mel Karmazin On Radio

Mel Karmazin made his first public appearance since his departure last summer as president/COO of Viacom during the 12th annual National Assn. of Broadcasters' European Radio Show, held Nov. 7-9 in

Mel Karmazin made his first public appearance since his departure last summer as president/COO of Viacom during the 12th annual National Assn. of Broadcasters' European Radio Show, held Nov. 7-9 in Lisbon, Portugal.

The following is his Q&A session Nov. 8 with Billboard's London bureau chief, Emmanuel Legrand.

On Nov. 18, Sirius Satellite Radio named Karmazin as its CEO.

The U.S. radio landscape has changed dramatically in the past 10 years. You've been one of the architects of these changes. What are your views on the current U.S. radio market?

I am very bullish about the radio business. I think it is a great business. In 1996 -- when the FCC changed the ownership rules and allowed [companies] to have up to eight radio stations in a single market and no limit on the total number of stations -- there was a tremendous number of merger-and-acquisitions activity. Many companies took the opportunities to expand their portfolio.

Clear Channel owns 1,200 stations and, as the biggest aggregator of the stations, only owns 10%-12% of the total. So despite a great deal of consolidation, it is not Microsoft. The biggest broadcaster benefiting from consolidation does not have anywhere near the kind of market share that Microsoft has. I think there is a need and an opportunity, but I do not think the government will be cooperative about further consolidation.

My viewpoint was that only one station in Los Angeles was a good business, and when rules changed to allow two, two stations was a better business. And now owning eight stations in Los Angeles -- that's an even more extraordinary business. I think the industry has made a lot of mistakes along the way in how it treated consolidation, but for me -- who started in the business when regulation allowed only seven AM and seven FM stations -- consolidation has benefited the consumer and the shareholders in the company that have participated in this business.

Consolidation is of concern in Europe. The perception here is that consolidation in the U.S. has not made better products but made radio groups even more profitable. Do you think consolidation has had a good effect on the whole landscape?

I do. I believe there is much that has been written about the negatives of consolidation, but if you look at the facts you will see that there are more formats available on radio, and more choices. If you look at the facts you'll see that the consumers have more choice in programming than they had before.

Take a market where you had three owners of stations and they were all competing in the same genre -- country music, for example. After consolidation took place, you had more formats -- jazz, rap, rock, etc.

The other aspect is that it was also a defensive move for the industry. We've seen advertisers all consolidate, and advertising agencies are consolidating. When I left Viacom this summer, there were four main agencies -- among them WPP, Omnicom, and Interpublic -- that accounted for 75% of CBS revenues. You don't want to be a small company negotiating up against these very big advertising agencies. Consolidation in the advertising side is continuing. You may have read that WPP is to acquire Grey Global. Why would the buyer have all the power, and against them you'd just have a single radio station? In order to keep some quality in the negotiation between advertisers and media, the media needs to have the ability of consolidating to compete effectively.

Do you think there is still room for consolidation and that it would be good for the market?

I do. In a market the size of New York City that has 100 free over-the-air radio stations, one company can only own eight stations. You can only own 8% of all radio stations in a market the size of New York! I don't see the reason why it should not be more.

By the way, if you ask me if I think it's going to happen, I don't think there are going to be the opportunities for further consolidation, from a political point of view. So let's assume you believe that in any market there should be at least four or five competitors. Let's take New York, and let's say there should be up to five different companies who could operate stations. That means one company could operate up to 20 radio stations, not eight stations. And then, if there's an argument that says, "You may have 20 stations that represent the most revenues, and you have too much revenues," well, in the U.S. there's the Justice Department, which looks at acquisitions involving Microsoft and other industries. So the Justice Department would be the one ruling on whether there is too much consolidation.

What would be the effects of further consolidation?

I think you need a very healthy radio industry. If free over-the-air broadcasting is not going to be very financially viable, radio groups will not be able to step up and pay for the programming that the consumers want to hear. We saw what happened in television when cable TV came along. They had two streams of revenue, and terrestrial broadcasting only had one stream of revenue, so an awful lot of very desirable programming has moved from free TV to pay TV.

The same thing could happen in radio. It is interesting that over the last couple of months, a satellite radio company made a bid to take on the [National Football League]. If you are in any market in the U.S. on a Sunday and you want to hear any football game, you have to subscribe to satellite. Another satellite company took Major League Baseball. The local games will be available, but to hear the other games you will need satellite radio. And more recently, Howard Stern announced he was moving to satellite radio. And I think that's the major, major transforming event. You can argue that putting football and baseball on satellite gives them an advantage because they have the spectrum. In the case of Howard or Rush Limbaugh or any major talent, what makes radio successful has been content. "The play is the thing." Shakespeare said it. People don't just listen to radio, they listen to programs, and if the compelling programs are not going to be on free radio, then the industry is in great trouble.

My job at Viacom was principally capital allocation: I have a certain amount of money to invest: Where do we put it? Do we go in movies or put it in cable networks? If you are not going to get the kind of return from your radio stations because it is not a big enough business or it is not growing as much, then you will see capital allocated elsewhere.

In my opinion, that would be very bad for the industry. One of the things that helps you become important is consolidation. If today radio is not going to be a growing and important part of the companies that own it, then you will probably see a cycle of companies selling. What excitement can there be in owning 84 stations when there is no limit to the number of cable networks you can own? There is a need for more consolidation, but there's no sympathy on both sides of the [political spectrum] right now for any change. Even with a Republican administration, there have not been many moves toward deregulation. It's a problem, and if you can't grow, investors will look somewhere else.

Does it make sense for Howard Stern to sign to a company that has only 700,000 subscribers? Were you surprised?

I think that was brilliant for Howard. The jury is out on whether or not it is good for anybody else! To make it clear, I had no knowledge at all in advance that he was doing it. We e-mailed each other after it happened, and I have not spoken with him since, so all the information I have is what's been filed with the FCC and what is generally available to the public. It is an unbelievable deal -- for Howard! He already makes a tremendous amount of money; he will make even more money. It is probably not good news for Viacom, because if they did not want him they would have fired him, so the assumption is that they wanted him.

It is not good for Viacom, and if the question is, "Is it good for Sirius," who knows? One will have to see whether or not the subscriber growth [Sirius] is anticipating is achieved. If Sirius can get at least 1 million new subscribers at $12.99 a month, then they paid for it. If they don't, they made a bad investment.

But this is the kind of investment that Rupert Murdoch made when he had the Fox network in deep trouble and traditional broadcasters were waiting for him to shut down the network. He made a bet on the NFL and he took the NFL away from CBS. In one programming move, he got credibility, a lot of affiliates went to Fox and Fox became that incredible thing. The question is whether or not Stern and the major league baseball or other deals will pay off.

But I can tell you alternatively that if [satellite services] did not have content, I can guarantee you they would fail. Will they win with this content? Maybe. If they didn't have desirable content, would they win? The answer is no. You can have 200 radio stations available to you, but if there's nothing on that is different to the 200 stations that exist already, then you will fail.

Do you think Stern would have stayed with Viacom if you had been there?

No idea, but I would doubt it. As much as Howard and I had a good personal relationship, he did negotiate with me for a lot of money, and Viacom paid a lot. I started with Howard some 18 years ago because he said some things on GE that [former General Electric CEO] Jack Welch did not feel comfortable with. GE had the station called WNBC, and WNBC was not making that much money, so why should Jack Welch and GE shareholders put up with Howard, who was an embarrassment to them? The day he was fired, I called his agent and hired him the next day, and he's been with us for 18 years. Each time we renegotiated he asked for more money. He always complained about how much money we made vs. how much money he made. This deal will pay him an unbelievable amount of money. Would I have known in advance? Sure. Would I have had the ability to match a proposal? Sure. But at the end of the day, do I think he would have gone anyway? Sure.

When it comes to Howard Stern, the issue of free speech comes to mind. Has it been more difficult to exercise free speech in the U.S. recently? Is that what you hold against the FCC?

No. I think that in the United States, indecency is protected speech under the constitution. This means that you are allowed to broadcast indecency. But what the Supreme Court has said is that, even though indecency is legal, it is necessary to protect children. So if you want to broadcast indecency, you can to do it after 10 o'clock at night. Between 10 p.m. and 6 a.m., there's no problem in saying anything you want. Nobody is broadcasting indecency during the daytime.

What has happened is that some broadcasters have adopted a talk format, and many of the talk-radio performers are not interested in appealing to an over-50 audience, but to an 18- to 34-year-old demo. And it would be ridiculous having programming targeting the 18- to 34-year-old that is not going to include the topic of sex. The government has never said that you can't discuss sex on the radio. Life would be so much easier if the government said, "You cannot discuss sex on the radio." We would have taken it to court, and the Supreme Court would have said they're right or whatever, and we would have lived by the rules. Then the FCC has moved into television recently, because of that Janet Jackson thing.

I guess you mean the "nipple" incident during the Super Bowl.

It was on the screen for a fraction of a second, but a fraction of a second too long. It should have not happened. Nobody knew it was going to happen. Janet Jackson duped MTV and CBS.

I think that indecency thing is politically motivated. I think it represents a small fraction of the content that is aired daily. We still don't have clear guidelines.

Going back in ancient history, there was a time in radio where you had the seven dirty words. And the rules were that if you didn't use any of the seven dirty words, you had no problems. Howard Stern never used the seven dirty words because we knew the rules. What happens here is that you're dealing with this grey area, and it is very dangerous when you deal with free speech and government tries to decide what should and what should not be on the radio. I hope that broadcasters will continue to fight to broadcast content that you believe is appropriate. If you make mistakes, you should pay the price, but you should not worry about license renewal because if you are really going to worry that somebody is going to take your license away, then I can assure you these companies won't take any chances.

There was this one commissioner from the FCC -- I won't name who -- I was looking for support on the subject, and the commissioner said, "Mel, this is the envelope of what is permitted. I want you to broadcast in the middle of the envelope." And I said, "Commissioner, if this is the envelope, why shouldn't [we] be allowed to be on the whole envelope and not just on the middle?" And his answer was, "If you want my support, I want you in the middle of the envelope." I'm saying that if that's what the broadcasting business is only allowed to broadcast, then Internet and satellite will replace terrestrial radio faster.

At Viacom, your activities outside the U.S. were just 15% of your total business. Why didn't it grow it further?

First of all, there was the opportunity to continue to grow our radio business in the United States. So it wasn't like there wasn't any opportunity inside the U.S. Roughly 85% of Viacom's business came from the United States. There's only 5% of the population in the U.S., but it was 85% of our business. Some of the difficulties we've had -- and some are loosening -- were about regulation.

The other thing that you also have to understand is that when you are a U.S. company, you have to operate under U.S. law, so even though some things may be legal in China or Russia, the same things might not be legal in the U.S. As a U.S. company, you still need to play by the rules of the U.S., so that means that often you could not compete. Once the rules changed in the United Kingdom that allowed U.S. companies to have controlling interest in British broadcast companies, all the stock of British companies went up, and they are still trading at prices that are far above what media companies are trading at in the United States.

I think there are opportunities outside the United States that either will go to companies from the U.S. or there will be some mergers of European companies. I think mergers are risky. I merged Infinity into CBS and sold CBS to Viacom. There's always risk associated with mergers, and there's even more risk when associated with different countries and different cultures.

What do you think of digital radio?

It is important that radio makes the change to digital. Any other media is digital. Radio should not continue to be analog.

In the U.S., the benefits of digital radio are very good, but not nearly as extreme as they are in Europe. In many countries, the switch to digital will represent so many more choices, and that's going so good for the consumer. Consumers will rapidly embrace all of those choices, and that will significantly translate into advertising dollars. I am very bullish about the radio business in the U.S., and even more bullish about the radio business outside the United States.


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