Frenemies: The Epic Disruption of the Ad Business (and Everything Else) (21 page)

Lucrative new revenue streams explain why network television, unlike financially ailing traditional media like newspapers, magazines, and radio, is not on life support. . . . By 2016, Les Moonves's CBS was making more money than when he joined CBS twenty years before.

Les Moonves, the sixty-seven-year-old CEO and chairman of CBS, measured the success of the 2016 Super Bowl by the quantity, not quality, of the ads. It was the third most-watched Super Bowl in history, and CBS was charging $5 million per ad. “The ad sales went through the roof,” says Moonves, arms folded across a blue pin-striped suit as he relaxed in the ornate, spacious thirty-fifth-floor Black Rock office that was once founder William Paley's. “It was the second highest day in ad revenues in the history of any media. The only time it was beat was by ourselves with the Mayweather versus Pacquiao fight,” the so-called fight of the century. “We did four hundred million dollars for the day on the Super Bowl.”

The ebullient Moonves had more than a Super Bowl to celebrate in February 2016. Under his leadership, by the end of the 2014–15 season
CBS had gone from last in the early 1990s to first in the prime-time ratings race for twelve of the last thirteen years, and 2015–16 would make it thirteen out of fourteen. He was handsomely compensated for his labors, receiving a pay package in 2015 of $56.8 million. He could also celebrate that CBS was no longer 100 percent reliant on advertising. The federal government in the early '90s initiated two measures with profound financial implications for the networks. The first came when Congress passed the Cable Act, requiring cable companies to compensate broadcasters for offering CBS and other programs on cable systems. The second was when the FCC rescinded the Financial Interest and Syndication Rules (Fin-Syn), allowing networks to own and sell their programs. In addition, unlike two decades ago, the networks no longer compensated their affiliated stations to carry their programs, and new digital platforms now paid the networks to show their programs.

By 2015, new revenue spigots enabled CBS to derive half its revenue from nonadvertising sources, including: the nearly $1 billion CBS got from retransmission consent fees paid by the cable companies and reverse compensation paid by local stations to carry network programs; the $1.5 billion CBS received from being able to syndicate and sell its programs internationally; the approximately $1 billion CBS received in 2015 from the sale of its archived programs to digital platforms like Netflix, Amazon, and Apple. Lucrative new revenue streams explain why network television, unlike financially ailing traditional media like newspapers, magazines, and radio, is not on life support. By contrast, the newspaper industry lost more than half its jobs between January 2001 and September 2016.

Les Moonves has been hailed as the Steve Jobs of television. “For me, Les Moonves represents the North Star,” Michael Kassan says, calling him “a brilliant operator. You can never lose sight of the fact that he began his career as an actor. He's a showman.”

Josephine and Herman Moonves raised three children in the
middle-class neighborhood of Valley Stream, just over the Queens border. She was a nurse, and her husband ran the three gas stations he inherited from his father. “I got my competitiveness from my father and my sense of art from my mother,” Moonves says. He was a good student and skilled at both tennis and baseball in high school and at Bucknell University, where he also performed in school plays. “I was a very competitive athlete and competitive in virtually everything I did,” he says. “I like winning.”

After graduating from college in 1971, he moved to New York City with hopes of becoming an actor. After attending acting school and performing as a tough guy in TV series like
The Six Million Dollar Man
and
Cannon
, it dawned on him that acting was a dead end for him. “I knew I was a mediocre actor,” he says. He segued to producing plays before joining the development office of Columbia Pictures to nurture and select TV sitcoms. After two years, he moved over to 20th Century Fox to develop movies of the week and miniseries. Recruited by Lorimar Television in 1985 to supervise its movies and miniseries, he would rise to be head of creative affairs and then president. When Lorimar merged with Warner Bros., he was elevated to CEO of their combined television operations. Warner Bros. Television thrived; one year he successfully sold twenty-three shows to various networks, including
Friends
and
ER.
Even as a mediocre actor, he believes his experience before the camera made him a better program executive. “I knew what to look for in a script and in talent.”

With CBS lagging in last place among the four networks in prime time, the network recruited Moonves to become president of its Entertainment division in 1995. Ratings rose, as did he, first to CEO of CBS Television and then in 2003 to CEO of all of CBS. The corporate parent of CBS was by now Viacom, and its chairman, Sumner Redstone, divided the company into Viacom, with its cable and Paramount Pictures, and CBS. Although Moonves's range of responsibilities is
wide—in addition to the network he oversaw its TV stations, its TV studios and distribution arm, its HBO pay-TV competitor Showtime, its CW network, CBS Radio, CBS Interactive, outdoor advertising, and Simon & Schuster, among other divisions—he still micromanages the Entertainment division. He says he reads twenty scripts each week and “no pilot gets green-lit without my approval. And none of the four or five lead actors on a show gets hired without my approval.” He has programmed some series worthy of the “Tiffany Network” tag that originally attached to CBS, like
The Good Wife.
But he does not pretend to be a highbrow. This is reflected not just in the many formulaic programs that helped propel CBS to ratings glory, like
NCIS
,
The Amazing Race
, and
Hawaii Five-O
, but also what he describes as the “delicious candy” of series he wishes he owned, like the ten episodes of
The People v. O.J. Simpson
on the FX network.

Moonves attributes part of his success to a core team of executives who have been at his side for a minimum of a dozen years. His favorite movie is
The Godfather
, and to members of his team he is seen as a benign version of Don Corleone. “He is one hundred percent accessible to me and my team,” Jo Ann Ross, the lauded president of CBS Sales for more than two decades says, “I never want to disappoint him.” His second wife, Julie Chen, once told the
Hollywood Reporter
, “If you cross him, he doesn't forget. You're dead to him.”

He feared he was, figuratively, dead in late 2005 when Sumner Redstone announced that the parent company would be split into two separate entities, Viacom and CBS. Moonves was unhappy, believing he was stuck with slow-growing assets like radio, publishing, billboards, and even the CBS network, all of which Wall Street punished because they were pigeonholed as old media. He wanted some of Viacom's fast-growing cable assets and its movie-manufacturing arm, Paramount Pictures. However, within a few years Viacom's stock tumbled and CBS's soared. By February 2016, Viacom had a market value
of $12.4 billion, half its former worth, while CBS was now worth nearly twice as much as Viacom. “He is the only guy since Bill Paley who is both a businessman and a showman,” says George Schweitzer, president of CBS Marketing for two decades. “We've had businessmen and showmen. We've not had both.”

The showman might have
to be waterboarded to publicly admit the perils ahead for CBS. As newspapers are more reliant on Facebook to distribute its content, Moonves privately knows he is increasingly dependent for revenues on digital platforms that lustily compete for the attention of viewers. He says he is comfortable with this because “we are a content company.” Now that CBS is allowed to own and produce programs, it is a television studio, not just a network platform for other studios. “Netflix is a friend. They pay us a lot of money,” he says. “Netflix just paid us $5.5 million per episode for
Star Trek
outside of the U.S. All in, it's hundreds of millions of dollars.”

Netflix is also a classic frenemy, for while CBS receives revenue from them it has built up a competitor. Irwin Gotlieb thinks Moonves and the other networks that sell programs to Netflix and Amazon and other streaming platforms are “potentially sowing the seeds of their own destruction by selling their content to Netflix and any other subscriber VOD [video on demand] system.” Netflix is a colossus. Already, it estimates that its subscribers watch one billion hours per week, and by the end of 2017 it expected to have 116 million subscribers, nearly half of them in the United States. CBS and the other networks today have smaller programming budgets than Netflix or Amazon. And at the same time, Google and Facebook are siphoning more of CBS's ad dollars.

Moonves's optimism is predicated, in part, on his bet that cable system owners will continue to pump more dollars into paying
retransmission fees to the networks to air their programs, a sum he believes will climb close to $2 billion by 2020. His bet relies on three assumptions. He assumes that growing consumer pressure to break up cable bundles will not weaken cable's ability to make those payments. He assumes that by selling network programs to cable competitors like Netflix he will not retard cable's willingness to make those payments. And he believes, as he says flatly, that cable “needs the networks.”

Moonves the salesman does not wail publicly about the perils ahead for CBS. Michael Kassan will surely advise his clients to invest more ad dollars elsewhere, including digital platforms like Google and Facebook, which by 2017 were poised to receive more ad dollars than the traditional ad sales champ, television. Irwin Gotlieb may refuse to pay steeper prices for ads on CBS because its audience is not growing and the number of those who watch ads on CBS shrinks. A generation accustomed to not watching ads will drive brand clients away from expensive thirty- and sixty-second ads. Les Moonves is not deaf. He's heard marketers like Michael Kassan say quite publicly that at some point soon advertisers will insist on paying less and will shift dollars elsewhere. He has reason to fear how CBS will pay for expensive quality drama series that after several seasons of star salaries can cost up to $10 million per hour. And while CBS has nicely diversified its revenue streams, with only half its revenues now coming from ads, one out of every two dollars is still an irreplaceable revenue stream.

These perils became public in the summer of 2015 when Disney CEO Bob Iger acknowledged that ESPN was for the first time losing subscribers—3.2 million subscribers, Nielsen reported—and thus “there's an inevitability to ESPN peeling itself away from the traditional pay-TV bundle.” Iger went on to say, “eventually” ESPN would be “sold directly to the consumers,” streamed over the Internet just as Netflix is. This unsettled the easily rattled financial markets. Because ESPN had always been a financial juggernaut, Wall Street clamored to
ask: If ESPN bypasses the cable middleman, with the most popular programming in the cable package removed, did this doom the cable bundle? Did it mean more viewers would rebel against the expensive cable bundle and cut the cord? With cable stressed, did this mean broadcasters would lose some of the retransmission fees cable pays? If ESPN's growth has stalled, did this mean popular sports programming has hit its ceiling? Didn't this demonstrate that broadcasters substantially overpaid for sports rights? And if Disney would pull ESPN from cable, did this mean that Internet TV, like Netflix, is destined to replace traditional television? Didn't it mean viewers are fleeing from familiar television channels?

As questions mounted, media stocks cratered, losing more than $100 billion of their value by the end of 2015. CBS's stock price fell by one third. “Wall Street went crazy,” Moonves says. Wall Street was reacting, he told a reporter for
SportsBusinessDaily
, as “if the whole ecosystem is failing. And that is just not true.” The financial community was straining for a new narrative, and he defined it thus: “‘Digital is taking over the universe. The old guys are dead.'”

Moonves didn't believe that. CBS's profits belied it. But Michael Kassan among others believed the networks, like ESPN, were in a long-term downward spiral. “The last bastion is sports,” Kassan says. “That's why the market crashed when Bob Iger made the comments about ESPN. Everyone said, ‘Oh my God, we know this is happening on ABC. But ESPN?' That's like the joke about the guy who comes home and sees his wife in bed with his best friend and he looks and says to his friend, ‘I have to. But you?'”

Broadcast viewing tumbled badly between the start of the new season in September 2015 and December. The ratings of only three returning programs improved,
Advertising Age
reported, while 42 fell by an average of 25 percent. Cable programs also nose-dived. As viewing choices multiply—the average TV home had 206 channel choices,
according to Nielsen—so audiences bifurcate, leaving fewer viewers for each platform. And this does not include their Internet and app options. Advertising dollars drifted down as well. The Upfront sales marketplace, which usually begins in May and runs into summer, and where roughly three quarters of ad dollars for the 2015–16 season would be invested, sank by an estimated 10 percent for broadcasters and 5 percent for cable networks. About $2 billion shifted from traditional to digital media. It is now conventional wisdom that the young, impatient with constant advertising interruptions and spoiled by being able to watch what and when they want without commercial interruption, and to be able to binge on it, will continue to abandon traditional television.

David Poltrack, the venerated chief research officer for CBS who has worked at the network for nearly fifty years, rejects this notion. He believes those who shun advertising and television are a passing fancy. The young may be tuned out to advertising and television today, he says, but that has always been true, and as they age they will become more like their parents. Millennials between twenty-five and thirty-four watch 43 percent more TV than those eighteen to twenty-four, he says. Although one third of each broadcast hour is devoted to advertising interruptions, and slightly more on most cable channels, he merrily insists, “People do not object to advertising. They object to bad advertising and irrelevant advertising. People like advertising. Advertising informs people. Advertising entertains people.” When you ask millennials whether they would pay even as little as a dollar not to have to watch ads, he says, 90 percent say they would prefer to watch ads.