The Hollywood Economist

Games That Moguls Play

Sumner Redstone’s next move.

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What kind of game is Redstone playing?

Sumner Redstone, who built Viacom into one of the world’s largest media conglomerates through spectacular leveraged buyouts, is now going to divide it through a stock split into two separate, publicly traded companies. The company that is retaining the name Viacom Inc. will be comprised of the Paramount movie studio (stripped of its television production) and the MTV, VH1, and Nickelodeon cable networks. The second company, which will return to the name CBS, will get both broadcast networks (CBS and UPN), all the owned and operated television stations, the King World TV production arm, the Infinity radio and outdoor advertising unit (for which Viacom took a $20 million write-off this year), and the Simon & Schuster publishing house.

Redstone hopes that this maneuver will dazzle Wall Street into increasing the share price of both parts of his divided empire. In fact, both sides will be managed exactly as they are now: Tom Freston will continue to head the Viacom side, and Leslie Moonves will continue to head the CBS side. More important, control will continue to be in the hands of Redstone, since his personal investment vehicle, National Amusements Inc., owns the majority of the special class of voting stock in both new companies. The split, aside from allowing Redstone’s top executives to cash in their out-of-the-money stock options (which automatically get vested when there is a change in corporate ownership), may involve little more than the proverbial rearranging of the deck chairs on the Titanic.

Meanwhile, Redstone is moving into the video-gaming business, which he describes in Business Week as “the hottest part of the entertainment industry.” After turning down a proposal for Viacom to buy Electronic Arts, the world’s largest publisher of video games, Redstone himself has bought control of Midway Games through National Amusements Inc.—he also made his daughter Shari Redstone the vice chairman and installed his own board. Even though Midway currently loses a great deal of money, part of the company’s appeal comes from the potential for video games to be platforms for paid “product placement” or unlabeled advertising inserted into the game itself.

The logic goes like this: SinceRupert Murdoch’s DirecTV, Time Warner Cable, and Comcast are now equipping their subscribers with TiVo-type digital recorders, it is only a matter of time before a significant portion of television viewers will routinely be able to TiVo-out TV ads. Advertisers will need to find new ways to reach their audience’s eyeballs, and video games present just such an opportunity. “Unlike television,” Shari Redstone points out, “you know they’re glued to their screen.” To this end, Midway Games has signed licensing deals with Viacom’s arch rival, Time Warner, to develop games based on Warner Bros. animation such as Happy Feet and Ant Bully.

Midway’s development into an alternative advertising platform raises a possible conflict of interest for Redstone. The CBS part of Redstone’s empire is the largest harvester of conventional television, radio, and billboard advertising in America. How will Redstone fit Midway into his twin empire? The speculation inside Viacom is that first he will take Midway private by buying up the rest of the shares (indeed, a wire story today reports that Redstone has increased his holdings to 89 percent), and then he will resell it to Viacom at a hefty price (his rapacious buying of the stock has driven up its price nearly fourfold, even though Midway itself continues to lose money). To keep the purchase from appearing to be incestuous self-dealing, Redstone will no doubt delegate the job of determining the purchase price to a committee of independent Viacom directors.

Surprisingly, the real concernamong Viacom executives is not that Viacom may wind up paying an inflated price for a money-losing game company but rather that Redstone’s dabbling with Midway may help fuel an intra-empire competition for advertising dollars. “Moonves can’t wait to launch CBS cable channels that will compete with MTV,” one Viacom insider suggested. “No one knows, Sumner least of all, how it will play out.” Game-playing often has unanticipated consequences—even for moguls.