The King of Content Read online

  But two years later, MGM/UA decided it wanted to buy back the Home Entertainment division, which turned out to be one of the best-performing parts of an otherwise beleaguered media company. Because it owned 85 percent of the shares of Home Entertainment, it could vote to accept any price the parent offered. Sumner found the price that they did offer “insultingly low,” so he sued in federal court, charging the parent company’s management and board of directors with fraud, misrepresentation, and violation of securities. The company raised its offer several times, and eventually the two sides settled at a price that meant an extra $10 million for Sumner.44

  Sumner held up the episode as an example of how litigation is sometimes necessary. But perhaps more important, it showed him that not only could he profit from bets on Hollywood but he could remake its business practices. The same take-no-prisoners, scorched-earth approach he’d used to pry the best movies out of studios could be used to shape the Hollywood dream machine itself.

  Chapter 9

  Defeating the Viacomese

  As one might expect from a fledgling cable outfit built on rock videos, MTV Networks always threw wild parties. But one particular company retreat, held at Gurney’s seaside resort in Montauk in the fall of 1985, took an especially depraved turn. The senior management, led by thirty-two-year-old Bob Pittman, had committed themselves to tequila for the evening, having just lost out on their attempts to buy the company in a leveraged buyout. His colleagues started throwing bottles, then chairs, then fish from the aquariums, and, eventually, six-foot potted palm trees through the windows. One enterprising inebriate threw a giant jar of Red Hots down the stairs. “We kind of destroyed the place,” said Tom Freston, general manager of MTV and VH1 who, at age forty, was by far the eldest of the executives. “If MTV can still go back to Gurney’s I’d be shocked,” said Pittman. “We were very poorly behaved,” agreed Geraldine Laybourne, a former schoolteacher then running the children’s channel Nickelodeon, herself “ancient” compared to her colleagues at thirty-five. “It was really kind of frustrated adolescence misbehaving.”

  They had good reason to be frustrated. MTV Networks was exploding with promise. In less than five years, its flagship MTV had become the driver of America’s youth culture. Dire Straits’ hit song “Money for Nothing,” with Sting’s falsetto “I want my MTV,” was the number one song in the country. The previous year, 1984, MTV had made more advertising revenue than any other channel on cable, and by 1985 it was the most profitable and fastest-growing of all the cable channels.1 Meanwhile, the broader company, which also included Nickelodeon and newcomer VH1, was on track to make $144 million in revenue in 1985, nearly 50 percent more than the previous year.2 And yet the company’s beleaguered and mismatched parents, Warner Communications and American Express, wanted out. They had formed Warner-Amex Satellite Entertainment Corp. (WASEC) in 19793 based on a vision of the future that was accurate but ahead of its time: that our lives would one day revolve around screens attached to telecommunications lines that we would use to consume entertainment and buy things. But by the mid-’80s, as it became apparent that cable television—particularly a channel featuring men in leather pants and pink lipstick—was not going to be a vehicle for selling financial products, Amex was eager for an exit. Warner, meanwhile, needed cash in the wake of the implosion of its Atari video game business, so they put MTV Networks on the block.4

  In an attempt to control their own destinies, Pittman, Freston, and other MTV Networks senior executives tried to acquire the company themselves through a leveraged buyout backed by Forstmann Little, a New York private equity firm. For weeks, it seemed like Warner Communications, which by then had agreed to buy out American Express, was going to accept Forstmann Little’s offer of first $470 million and then $500 million, but in the final days of August 1985, the deal fell apart.5 Instead, MTV Networks and Warner-Amex’s 50 percent stake in its sister company, Showtime/The Movie Channel, went as part of a broader $667.5 million deal6 to a bunch of financial guys7 from a company called Viacom—then pronounced Vee-uh-com—whom the snarky MTV executives began to derisively refer to as the “Viacomese.”8

  Viacom International Inc. was created in 1971, after new federal rules barring the Big Three networks from syndicating their programming forced CBS Inc. to spin out its cable television and television rerun distribution business into a separate public company.9 Starting with a base of old CBS library shows like Gunsmoke, The Andy Griffith Show, and I Love Lucy, Viacom had grown by the mid-’80s into a diversified media conglomerate spanning four television stations; eight radio stations; a stake in the Lifetime cable network; a stake in Showtime/The Movie Channel, the tenth-largest cable system operator; a television production company that made shows like Matlock; and a television and film syndication arm that, most crucially, had the syndication rights to The Cosby Show, then the top-rated show on television.10 It was led by Terry Elkes, a bespectacled, Bronx-born, City College–educated lawyer and former paper mill executive who had won Wall Street’s admiration with the company’s 23 percent compound growth rate in its first fourteen years but was nobody’s idea of a creative visionary—not even his own.11 As he told the Wall Street Journal in 1985, “The company that was spun off from CBS had a distribution and marketing mentality and not a production mentality and it’s taken us a long time to understand what to do.”12

  But his aggressive bidding for MTV Networks and the rest of Showtime was undeniably savvy, transforming Viacom overnight into a cable-programming powerhouse just as cable deregulation was loosening the belt that until 1984 had kept cable fees low and thus cable bundles slim. Elkes correctly predicted that the new cable legislation would prompt cable operators to create a new “basic” service in which they would offer more programs—including movies now available on a subscription basis—for a higher price than the $9 to $12 a month their customers were currently paying, creating a massive new demand for cable programming. His only mistake was to underestimate the extent of the change. He mused to the Los Angeles Times that the new rules might allow the emergence of a new basic cable TV service for around $25, or $57 in today’s dollars.13 In 2016, the average cable bill was about $100.14

  But what Terry Elkes did not take into account was just how much these hooligans from MTV Networks—now the fastest-growing unit and strategic core of the company—would grow to hate the Viacomese. This opinion was solidified the morning after their mournful bacchanal, when a bunch of hungover mostly twentysomethings dragged themselves into a luncheon to meet their new owners. Elkes arrived by helicopter, like the corporate conqueror that he was, and delivered a stiff welcome to his new underlings that fell entirely flat. “The Viacom guys were essentially deal people and distribution people; they didn’t know how to talk to creative people,” Pittman said. “They were just so out of their element. And, I think, they were just sort of dorky.”

  The young leadership of MTV Networks at the time was, meanwhile, the epitome of cool. The tone was set by Pittman, a former long-haired radio programing prodigy from Brookhaven, Mississippi, who had started his broadcasting career at age fifteen and once gone by the DJ name “The Mississippi Hippie.” Pittman had climbed to head of programming at WNBC in New York when he was just twenty-three years old and joined WASEC in 1979 to apply his programming expertise to The Movie Channel, WASEC’s challenger to HBO.15 When Warner-Amex executive John Lack came up with the idea for MTV, he tapped Pittman to lead it. The idea was deceptively simple: take the free promotional videos that bands were making to help sell their albums and string them together on a television channel aimed at twelve- to thirty-four-year-olds, a demographic that mainstream television executives more or less ignored at the time. MTV launched on August 1, 1981, with the Buggles’ paean to disruptive innovation, “Video Killed the Radio Star.”16

  One of Pittman’s first hires was Freston. Tall and wild-haired with deep-set blue eyes, Freston arrived at the countercultural idea factory of MTV with the least traditional background of all, h
aving spent most of the last decade running a clothing company in Afghanistan and India. Freston had grown up in Rowayton, Connecticut, and after graduating first in his class from New York University’s Stern School of Business, he had started out in advertising before finding that hawking G.I. Joe dolls at the height of the Vietnam War was more than he could stomach. He left to travel the world, eventually settling down in Afghanistan, which at the time was “very safe and enchanting and exotic,” to start his business. The Communist coup in 1978 and changing Indian trade policies did it in, and he returned to the United States at the age of thirty-four, half a million dollars in debt. His record executive brother told him Lack was looking for people without television experience to work on a new music channel. Freston, a passionate music fan, was interested. Lack hired him on the spot in March 1980 to run marketing, despite suspecting that Freston’s talk of being in the “import-export business in India” was a code for something less legal. “I think he thought I was a hashish dealer or something,” Freston recalled.

  Freston shared an office with John Sykes, a twenty-four-year-old former Epic Records promoter buzzing with true-believing music fanboy energy, who headed up promotions for the channel. In the early years, Freston and Sykes would go out to cable markets like Tulsa and Syracuse in search of evidence that MTV was actually helping bands sell records. “You selling any Buggles? Are you selling any Police records? Are you selling Duran Duran records?” they would ask, according to Sykes. When they found a store that had suddenly sold a bunch of Duran Duran records, they’d rush back to New York and make an ad for Billboard about it. Their hustle paid off.

  “MTV took off like a rocket,” Laybourne recalls, dragging its sibling, Nickelodeon, along for the ride. As the first channel devoted completely to children, Nickelodeon was a revolutionary idea that won piles of programming awards, but it took longer to start making money. (Today, Nickelodeon is Viacom’s most valuable channel.) “I used to joke that MTV had a bigger Communicar bill than our programming budget,” she said, referring to the limousine service. The small budgets in the early years were tolerated because they came with great autonomy set by Warner Communications chief Steve Ross. “We were really just a creative company that wanted to make great stuff,” Laybourne said. “Bob Pittman was not a big spender, but he was excited about brave ideas.”

  Pittman, now short-haired and most often spotted in a suit, initially signed on to serve the new regime as president and chief executive of MTV Networks, largely out of loyalty to Ross, his mentor. But it didn’t last long. “I chafed under the fact that we tried to buy the company and now I’m working for these guys,” he said. Within a few months, he left to start a new venture with MCA, and Freston was named copresident in a power-sharing arrangement with an ad sales executive named Bob Roganti. The Viacomese “didn’t trust Tom with the ad sales or business side,” Laybourne explained. Meanwhile, more founding executives like Sykes followed Pittman out the door, while those who stayed grew increasingly frustrated.17 “They didn’t pay any attention to us, and they didn’t let us spend any money,” Laybourne said.

  * * *

  Little did they know that in March 1985, six months before their failed leveraged buyout, a Boston theater chain owner in his sixties had begun quietly buying up Viacom stock as a hedge against the lack of growth in his own industry.18 By now Sumner Redstone was an icon in Boston and the exhibition industry and a respected figure among his fellow investors, but virtually unknown beyond these realms. But an interview with the Boston Globe that spring suggested he was not content to keep it this way. “What has really driven me, though, is the desire to do whatever I do better than anyone else,” he said. “I enjoy recognition.”19

  Nearly a year later, in May 1986, a corporate raider who was a household name, Carl Icahn, made what at first appeared to be a play for Viacom, buying up a 17 percent stake in the company and saying he’d be willing to buy the whole thing. In the end, Icahn’s move turned out to be merely “greenmail,” meaning he was willing to go away after the company bought back his shares at a higher price than he bought them for. So when Sumner, Mickey, Korff, and National Amusements ramped up their holdings in Viacom to 8.7 percent over the course of the summer of 1986, most of Wall Street wrote it off as just another greenmail attempt. “Although Viacom has been widely recognized as a takeover target, National Amusements isn’t a likely suitor,” the Wall Street Journal wrote soothingly. “Mr. Redstone frequently makes sizable investments in entertainment companies, and in most cases has cordial relationships with management.”20

  Terry Elkes, however, wasn’t taking any chances. Sumner’s growing stake and the Icahn greenmail spooked him, so he and other top managers put together a $2.7 billion bid to take Viacom private through a leveraged buyout.21 Sumner woke up on the morning of September 17, 1986, and read about it in the New York Times—and hit the roof.22,23 The bid was only about $5 a share above Viacom stock’s trading price of $35 a share, which Sumner felt was far too low given the potential that lay within the content engines of MTV and Showtime.24

  “He thought, ‘They were trying to steal the company away. I don’t like it. I think it’s worth a lot more,’” recalled Philippe Dauman, then a young associate at Shearman & Sterling whom Sumner had hired that summer to help with the regulatory paperwork required when investors cross the 5 percent threshold of ownership in a public company, during a 2016 interview.

  The son of French immigrants and raised in Manhattan, Dauman was dark-eyed, diminutive, and coolly formal, with a penchant for elegant European tailoring and a raw intellectual brilliance that rivaled Sumner’s own. He had skipped directly from kindergarten to third grade, scored a perfect score on his SATs at age thirteen, and entered Yale at sixteen.25 Like Sumner, he didn’t find the Ivy League undergraduate experience much of a challenge, so he spent most of his time playing poker and backgammon, honing a love for craftily separating his peers from their money that he would bring into his professional life as a mergers and acquisitions lawyer. A youth spent surrounded by classmates much older and taller also instilled a quality that would endear him to Redstone, who was then used to underlings quaking before him as if he were an angry volcano: Dauman was utterly unafraid.

  “It was obvious from the beginning that Philippe and Sumner had an affinity,” recalled Steve Volk, Dauman’s boss at Shearman & Sterling. “Sumner listened to him, threw a lot of questions at him, and liked the way Philippe answered them. There was just a chemistry between them.”

  Even though Dauman was just thirty-two years old and not yet a partner, Sumner requested to deal directly with him, and soon they were on the phone multiple times a day, beginning with a routine call from Sumner to Dauman’s home each day at five a.m. Dauman, trained to work through the night on big deals, had gotten good at faking an alert voice even when summoned from slumber and appeared to Sumner to be keeping the same hours as his restless client. Eventually, Dauman told Sumner that he was waking up his wife, and Sumner agreed to put off the calls until seven a.m.

  Within twenty-four hours of reading of management’s buyout attempt, Sumner had decided to go to war, with Dauman at his side.26 He immediately bought more stock and hired Merrill Lynch—the one major banking outfit that the Viacom management had not tied up with its own bid—to explore how he would go about financing a takeover.27 No one, including Sumner, was quite sure of his intentions, but as he continued to ramp up his holdings, Viacom’s stock price soared above management’s initial offer, forcing them to sweeten it. Meanwhile, Sumner put on his best country bumpkin routine, a pose he would employ frequently in the ensuing years to ensure his rivals underestimated him. “It’s a whole new world,” he marveled to the New York Times. “It was not long ago that all I knew about leveraged buyouts was that they were referred to as L.B.O.’s. I’m much more educated now.”28 On October 17, 1985, he made one last effort to convince management to keep Viacom a public company, but when the board voted the next day to approve management’s sweet
ened bid, the battle lines were set. Management owned just 5 percent of the company’s equity—far less than Sumner owned—and was having to rely on high-interest junk bonds to finance their bid. “He said, ‘These guys are going to take over the company for less money than we already have invested in the stock. Why don’t we think about doing it?’” recalled one person close to National Amusements.

  And so he essentially moved into a one-bedroom room at the Carlyle Hotel in New York and hunkered down with Dauman, Merrill Lynch’s Ken Miller, and the rest of his advisers for round-the-clock negotiations with bankers. It took months, during which Sumner came to rely ever more heavily on Dauman, who could both authoritatively explain concepts like “poison pill”—an antitakeover measure that Viacom’s board had adopted that would dilute shares if any investor went over 20 percent—and happily deliver papers to his hotel room in the middle of the night that Sumner would sign in his bathrobe. On Christmas morning, long before the age of cell phones, Sumner even managed to track Dauman down at his in-laws’ house, despite Dauman never having mentioned his wife’s maiden name to Sumner. Convinced that some catastrophe had happened with the deal, Dauman ran to the phone. “He just wanted to talk,” Dauman recalled. “He must have called ten or eleven people to find out where I was.”

  On February 2, 1987, Sumner offered to buy Viacom for $49.25 a share—an offer, he argued, that was not just higher than the management’s offer but more secure.29 Viacom’s management’s reliance on junk bonds would almost certainly require selling off and cutting huge pieces of the company to make the interest payments, were they to succeed. Sumner’s offer would be funded by $400 million in cash and Viacom stock that National Amusements already owned, along with $2.25 billion in bank loans.30 Nevertheless, Viacom’s board rejected it, claiming it was worried about the time it would take Redstone to clear regulatory hurdles.31 Sumner wanted to go higher, but he needed more information about the inner workings of the company. He requested it from Viacom’s board but for a long time got nothing. So he resorted to other methods.32