Viacom Deal Has Record-Industry Players Ready to Face the Music

Forget about Sumner Redstone's succession plan. The real issue is the kind of power Viacom will have in the music industry.
Author:
Publish date:

Psst. Wanna know the real question in the Viacom/CBS merger?

Think it's the potential cat fight between

Viacom's

(VIA) - Get Report

Sumner Redstone and

CBS'

(CBS) - Get Report

Mel Karmazin?

Probably not, unless Sumner finds the fountain of youth.

The way the two companies will mesh their Internet strategies?

Go away, Web dorks. In 2000, the new Viacom will get, oh, about 0% of its revenue off the Net.

The future of Viacom's

UPN

network?

The

Nielsen

ratings offer no proof that UPN actually exists.

Stumped?

Try music.

Sure, CBS television and

Paramount

will be the new Viacom's best-known divisions. But

MTV

and

Infinity Broadcasting

(INF) - Get Report

, CBS' radio subsidiary, were the true engines behind this deal. Together they will be by far the most powerful force in the music business, which each year generates $40 billion in album sales worldwide. So aside from CBS and Viacom, no one has more at stake in the merger than the Big Five record companies:

Seagram

(VO) - Get Report

,

EMI

,

Sony

(SNE) - Get Report

,

Time Warner

(TWX)

and

Bertlesmann

.

That's because the new Viacom will join MTV and

VH-1

, the leading cable music channels, with CBS'

Country Music Television

and Infinity's 160-plus radio stations, including 60 in the 10 largest U.S. markets. The combination will give Viacom unprecedented power to determine what tens of millions of music fans see and hear, enabling the company to boost artists it favors -- and pose a formidable obstacle to musicians and record companies it doesn't.

The merger "just increases the power of Viacom to become the hit makers and the star makers in all genres of music," says Michael Nathanson, a music industry analyst for

Sanford C. Bernstein

, a boutique investment bank based in New York. "They're going to be so influential."

Radio companies and record labels have always had a love-hate relationship. The stations depend on the companies for a steady supply of new product; the labels need the stations to reach listeners. But in the last three years, the radio industry has consolidated dramatically, thanks to new federal rules that allow a single company to own as many as eight stations in major markets.

That change has helped swing the balance of power in the industry toward station owners, who are using a variety of new tactics to squeeze marketing dollars out of the record industry. For example, some stations are now asking that record companies commit to advertising on their stations if the companies want their artists to be invited to perform at free concerts hosted by the stations.

To some critics, the stations are perilously close to breaking the law. Federal rules have banned "payola," or taking money in return for radio airplay, for three decades.

"We've seen a return, almost, to payola," says

University of Illinois

professor Robert McChesney, a onetime music critic and author of a new book on media concentration. "Back before the 1990s, payola was a crime.

But now that the money, instead of going to the disc jockey, goes to the

station owner, it's all right."

So far, though, the marketing deals seem to have passed legal muster. In any case, they're here to stay. "There's no question ... that radio companies are finding ways of looking for marketing dollars from record companies," says Ron Rodrigues, editor-in-chief of

Radio & Records

.

But the radio companies are practically philanthropic compared to Viacom, which knows MTV's power over advertisers hoping to reach the young-adult market and mixes advertising and programming with a heavy hand. MTV and Viacom declined to comment for this story, but in a May 1998 article in

The Wall Street Journal

, MTV executive John Popkowski summed up the channel's attitude. "Popkowski dismisses what he says are arbitrary distinctions between paid advertising and what most viewers think of as programming (and says) any and all exposure on MTV is a valuable commodity," the

Journal

reported. In other words, companies that don't advertise have a tough time getting mentioned on the channel.

So should record companies quake in their balance sheets at the prospect of an even more powerful Viacom? Not necessarily, according to industry analysts.

"There's good news and bad news," says Chris Dixon of

PaineWebber

. "MTV has been a phenomenal marketing partner for these labels. You can start to cross-promote even deeper. ... At the end of the day,

both Viacom and the music companies are in the business of promoting music."

"They're in the exact same boat, and they really desperately need each other to be successful," Rodrigues says. "They both need listeners."

But Tom Wolzien, who works with Nathanson at Sanford C. Bernstein, isn't so sure. He calls the relationship between the two sides "a never-ending seesaw. ... To the extent that the distributor gets more power, the packager gets squeezed." Wolzien predicts it will take at least two years before the merger's full effects will be apparent in the music business.

In the meantime, Wolzien expects the deal will put new pressure on CBS' competitors in the radio industry as the new Viacom rebrands some of its stations with the MTV label. In markets where Infinity already has one rock station, Wolzien says it may "do an MTV brand as a second rocker and push really hard on the second-place guy." (CBS declined to comment about its plans for the stations.)

And what do the record companies think? They're not saying. None of the big labels returned calls for this story. Neither did the

Recording Industry Association of America

.

Meanwhile, McChesney worries that the merger will put another nail in the coffin of artistic freedom. "The music industry, of all our popular culture genres, is the one that's been in the biggest crisis in the 1990s," he says. He contends that Karmazin and Redstone have used the same strategy to build their companies: "They locate genres, they get close to monopoly control over them and then they commercialize them as much as possible. ... Their whole success is predicated on their ability to make advertisers dominant."

McChesney says he wouldn't be surprised to see the new Viacom, which should rake in more than $10 billion in ad revenue next year, begin working with big advertisers like

General Motors

(GM) - Get Report

to help create and market bands that are advertiser-friendly. "VH-1 and MTV have eliminated the conflict between editorial and commercial," he says. "They're nothing but selling, selling, selling, selling all the time."