Freston Out At Viacom, Investors See Uncertainty

Stop the music. Surprisingly, Tom Freston is out at Viacom.

The Viacom CEO will be replaced by two former Viacom executives: Philippe Dauman becomes president and CEO, and Thomas Dooley becomes senior executive vice president and chief administrative officer.

A key problem has been the 20 percent drop in Viacom's stock--which witnessed another 6 percent drop on the news of Freston's ouster.

Factor in the debacle over Paramount Pictures' handling of Tom Cruise and hesitation about buying cool new Web sites like MySpace. Redstone told Wall Street analysts yesterday that Viacom was going in the wrong direction--and Freston was to blame.

Freston--the longtime MTV executive, who started as a vice president of marketing for the network in the 1980s--had until recently been a favorite of Sumner Redstone, chairman of both Viacom Inc. and CBS Corp.

"I'm surprised to see it," says Dennis McAlpine, managing director of McAlpine Associates. "I thought he was in solid with Sumner."



Redstone added: "It was a very difficult decision. On the one hand, we love Tom. We appreciate his great contribution to the company. On the other hand, being very realistic, the board felt that not enough was being done. We weren't moving ahead as entrepreneurially and as aggressively as we should."

Hal Vogel, president of Vogel Capital Management, says Viacom's sinking stock price is directly attributable to the weakness in the company's TV advertising business--a weakness that has affected all cable networks. But Vogel says blame shouldn't be directed at Freston.

"Tom is taking the blame for the slowdown in the cable advertising market," says Vogel. Other than discounting and the like, he says there is "little one person can do to turn around the entire cable ad market."

Ironically, Viacom's MTV upfront has been better than most.

A few weeks ago, Freston noted that Viacom's MTV upfront ad sales had outperformed the market--which resulted in slight 1 percent to 2 percent gains in pricing versus a year ago. That's not bad, considering that many other cable networks saw pricing rollbacks versus a year ago. Recently, MTV made changes at the top of its advertising ranks--promoting Hank Close to president of U.S. ad sales for MTV Networks. He replaced Larry Divney, who held the same position.

"It's Sumner's toy box, and he can do what he wants with it," says McAlpine. "We have been on this road before with Mel Karmazin and Frank Biondi." Karmazin and Biondi were former Viacom executives who didn't see eye to eye with Redstone, and subsequently left the company.

This wasn't the direction Redstone anticipated when he formulated the breakup idea of Viacom Inc. and CBS Corp. last year. The idea was that both companies--once separated--would thrive, especially with Viacom's fast-moving MTV business. Instead, the stock dropped 20 percent, while CBS Corp. stock has grown 12 percent.

Vogel added that Freston was hamstrung. Redstone gave Freston the go ahead to buy companies like MySpace--but with one caveat: Don't spend too much.

He was trying to do what Sumner instructed--don't overpay--says Vogel. As a result of being too cautious and fiscally conservative, Viacom lost out to News Corp. in the bidding for MySpace. "If he hadn't been handicapped, it might have gone differently."

Redstone may have forgotten his own cautionary words of advice to Wall Street analysts concerning the performance of the company split: Give the breakup some time to work--at least a year. Instead, the Viacom board gave Freston just nine months.

Wall Street is now seemingly concerned--as the stock was down an eye-opening 5.6 percent to $34.89 on the day of the announcement. "There is uncertainty about where the company is going," says Vogel.

Jessica Reif Cohen, media analyst at Merrill Lynch, wrote yesterday in her email newsletter to clients and other interested parties: "This change is unexpected and is not likely to be well received by the Street or the creative community. Mr. Freston had spent over 25 years with MTV and was a key figure in building it into one of the premier entertainment franchises globally. Mr. Dauman and Mr. Dooley, both of whom currently serve on Viacom's Board of Directors, are confidants of Viacom Chairman Sumner Redstone, but do not have significant experience in running a major entertainment company."

Another analyst--Richard Greenfield of Pali Capital--wasn't so glum. He still had the stock as a "buy"--since he senses more management changes to come. In his email newsletter he wrote: "Viacom's new management (which was a part of its old management) has been gone long enough that it does not have personal ties to a significant portion of current senior management (particularly the recent hires over the past couple of years within corporate, MTVN and Paramount). That should enable Dauman/Dooley to swiftly make changes where changes are necessary.

"While it is somewhat unusual for Philippe Dauman (who is the executor of Sumner Redstone's estate) to be President and CEO without previous day-to-day operating experience (with Tom Dooley, also not a day-to-day operating executive), we would hope to see someone elevated within the company to a COO role or for a strong operating executive to be brought in from the outside."

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