A Trial in Separation

CBS chief executive Leslie Moonves, second from left, and CBS Chairman Sumner Redstone, center, applaud as the new CBS Corp. stock begins trading.
CBS chief executive Leslie Moonves, second from left, and CBS Chairman Sumner Redstone, center, applaud as the new CBS Corp. stock begins trading. (By Richard Drew -- Associated Press)
By Steven Levingston
Washington Post Staff Writer
Wednesday, January 4, 2006

When Leslie Moonves arrived at CBS in 1995 as president of entertainment, the future of on-demand viewing, Internet television and mobile video might have been whispered about only in the most sophisticated tech circles. Now, as chief executive of CBS Corp. -- the stand-alone company officially split off from Viacom Inc. yesterday -- Moonves is pushing hard to reap rewards of the digital entertainment revolution.

"I'm still a network broadcaster at heart," he said yesterday, as CBS made its debut on the New York Stock Exchange after five years in the Viacom stable alongside MTV Networks and Paramount Pictures. "But at the end of the day, it's clearly a brave new world."

Besides television operations that include cable sports, the Showtime channel, the UPN network and a group of stations, CBS also has radio, outdoor advertising and publishing interests.

CBS faces challenges in the new landscape, such as piracy of its programs and the potential loss of advertising revenue as viewers watching shows on digital video recorders fast-forward through ads. The defection of Howard Stern to Sirius Satellite Radio will drag on revenue at CBS Radio. But yesterday, investors drove the stock price higher in the belief that the network's strong television programming will translate into a flow of cash when the shows are repackaged for digital platforms.

CBS's split from its parent could hold lessons for other media companies seeking higher-growth avenues in the new entertainment environment. The giant radio broadcaster Clear Channel Communications Inc. last year split off its live entertainment business. And America Online Inc. founder Steve Case last month joined investor Carl C. Icahn in calling for the breakup of AOL-Time Warner.

"This split may be a sign of a trend in the media business, but it is not a permanent trend," said Josh Bernoff, an analyst at Forrester Research. "Plenty of companies are trying to get bigger as others are getting smaller."

Katherine Styponias, an analyst at Prudential Equity Group, was notably bullish on the new CBS. While the stock closed at $26.20, up 70 cents, or 2.8 percent, on its first day of trading on the exchange, Styponias thinks it will reach $30 a share. She noted the strength of CBS's programming and the potential value of the network's content -- such as the "CSI" and "Survivor" series -- when released through new distribution streams. She also played down concerns about falling ad revenue from the rise of a DVR-savvy audience.

"We believe that the decline in broadcast advertising due to new technologies like the digital video recorder will happen more gradually than some think," she wrote in a report. "We don't think ad agencies have the ability to replicate the reach and ratings that broadcast television provides using any other media at this juncture."

Some analysts think that stressing CBS's current golden touch in programming may be misleading for long-term investors. "CBS is highly dependent on its ratings as a network, which look good now," Bernoff said. "But there will come a time when CBS is the number three network, and at that time, the company will look like it's in big trouble. Anybody buying the stock should be aware of that."

Styponias is less upbeat about the future stock performance of Viacom. She said in her report that she thinks the company overestimated its expected operational earnings from Paramount, especially in light of the studio's lack of compelling DVD titles for the first half of 2006 and the smaller number of films it has planned for release this year.

Viacom rose 44 cents, or 1.1 percent, yesterday to close at $41.59. Class A shares rose $1.54, or 3.9 percent, to $41.54.

Jessica Reif Cohen, an analyst at Merrill Lynch, is optimistic about prospects for both CBS and Viacom. CBS will benefit from Moonves's success in producing hit TV shows, and Viacom has a strong cable business and a variety of revenue streams from its MTV and Paramount operations, she said. "There's a big difference on the street about whether the split is a good thing or a bad thing. We believe it shouldn't hurt business prospects. It should force a revaluation of the stocks upward."

Moonves was typically ebullient about the opportunities the new era presents. As examples of new media revenue streams, he pointed to recent deals in which CBS provides content to Verizon Communications' cell phone users, Comcast Corp.'s video-on-demand customers and online sports fans who want streaming broadcasts of NCAA basketball games and are willing to watch ads. He said the advantage to CBS is that the content already exists; it brings added revenue with no cost to distribute. "It's not like we're spending millions of dollars investing in an infrastructure," he said.

For a broadcaster that only years ago was regarded as the old-folks network, CBS is embracing the ethic of youth in the digital era. "They are reinventing the Tiffany network," said Phillip Swann, an industry consultant based in Arlington and president of TVPredictions.com. "CBS is going to be a much more savvy, hip, cutting-edge network -- not necessarily because they want the appearance of being hip, but rather they see money."

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