The New Viacom

CBS Broadcasting established Viacom as an independent company in 1970 to comply with regulations set forth by the U.S. Federal Communications Commission (FCC) barring television networks from owning cable TV systems or from syndicating their own programs in the United States. The increasing spread of cable television and the continuing possibility of conflicts of interest between television networks and cable television companies made the spinoff necessary, and Viacom separated formally from CBS in 1971 when CBS distributed Viacom’s stock to its shareholders at the rate of one share for every seven shares of CBS stock. Viacom quickly became one of the largest cable operators in the United States, with over 90,000 cable subscribers. It also owned the syndication rights to a large number of popular, previously run CBS television series that it made available for syndication to cable TV stations. Revenue from these rights accounted for a sizable percentage of Viacom’s income. In 1976, to take advantage of Viacom’s experience in syndicating programming to cable TV stations, its managers decided to establish the Showtime movie network to compete directly with HBO, the leading outlet for films on cable television. In 1977, Viacom earned $5.5 million on sales of $58.5 million. Most of its earnings represented revenues from the syndication of its television series, but they also reflected growth of its own cable TV systems, which at this time had about 350,000 subscribers. Recognizing that both producing and syndicating television programming could earn greater profits, Viacom’s managers decided to produce their own television programs in the late 1970s and early 1980s. Their efforts produced only mixed results, however, no hit series resulted from their work, and the Big Three television networks of ABC, NBC, and CBS continued to dominate the airwaves. During the early 1980s, the push to expand the cable television side of its business became Viacom’s managers’ major priority. Cable television is a highly capital-intensive business, and Viacom made a large investment to build its cable infrastructure; for example, it spent $65 million on extending its customer base in 1981 alone. By 1982, Viacom had added 450,000 subscribers to the 90,000 it inherited from CBS, making it the ninth largest cable operator in the United States. Also, by 1982 Viacom sales had grown to $210 million, with about half its revenues coming from program syndication and about half from its cable operations. Viacom’s managers, however, continued to feel that its cable operations were not a strong enough engine for future growth. One reason was that cable TV prices were regulated at this time, and cable companies were limited in how much they could charge customers. Its managers continued to believe that real growth in earnings would come not from providing cable television service but providing the content of cable programming—television programs. Given their previous failure in making their own programs, Viacom’s managers sought to make acquisitions in the content side of the business—in companies that made entertainment programs. In 1981, Viacom started in a small way by buying a minority stake in Cable Health Network, a new advertiser supported television network. Then, in September 1985, in a stroke of fortune, it made the acquisition that would totally change the company’s future. Viacom purchased the MTV Networks from Warner Bros., a company that desperately needed cash because Warner’s own cable TV system needed a lot of capital to keep it viable.