Jon Taplin’s Blog

In the mid-eighties, from my perch as a VP of the Merrill Lynch Media Mergers and Acquisition Group, I watched John Malone, Barry Diller and Sumner Redstone act like three ADHD moguls with too much access to easy money. They acquired and disposed of media companies with a kind of random sensibility and eventually wound up with three conglomerates (Liberty Media, IAC and Viacom) that had no internal rationale. They constantly used the word “synergy” to explain why the companies made sense, but ultimately they could ignore the doubting analysts because they had crafted the capital structure in such a way that they controlled the companies with a second class of voting stock, even though they were minority shareholders.

Now the reality of the market crash has brought them to heel. Redstone is fighting for his very survival.

But now much of his wealth — at least that which is tied to the stock prices of Viacom and CBS — has evaporated, and it is unclear if Mr. Redstone remains a billionaire because it is unclear how much money he has outside of National Amusements, other than personal holdings in Viacom and CBS that together are worth around $10 million.

Half the debt, or $800 million, comes due on Dec. 19. Mr. Redstone recently said publicly that the talks with banks had been going smoothly and that the value of the assets held by National Amusements “well exceeds its debt.”

That he can say this with a straight face is a tribute to the insularity of an old man who fights with his children like King Lear as his empire crumbles. Malone, who more than anyone presided over the explosion of digital cable and satellite programming has also recently faced margin calls. His troubles are just beginning. Ten years ago his Discovery Channel was a brilliant programming ploy to attract advertisers trying to reach upper income, college educated viewers. But not content with a good thing, Discovery expanded from one network to 14 channels including Discovery Health and The Military Channel (I kid you not). Any student in Econ 101 can tell you that dumping 14X the ad inventory on the market while growing your overall market share by 8% is a supply-demand disaster waiting to happen. Now it is happening as the ad market shrinks.

Barry Diller, presiding over a motley group of assets like Match.com and Lending Tree was in 2006 the highest paid executive in America.

In all, Mr. Diller reaped $469.7 million last year from salary, bonus, other perks and the exercise of existing stock options at IAC/Interactive and Expedia…“By any objective measure, Barry Diller is grossly overpaid,” said Jonathan Weil, managing director of Glass Lewis.

Now Diller has divided IAC into five equally pointless firms in the hope of realizing some value. But the notion of putting my money in a low margin travel business like Expedia just doesn’t revive the old “animal spirits”, and Barry will never have the honor of being the highest paid exec again.

The conventional wisdom has always been that the media business is relatively recession proof. This is a highly doubtful bit of speculation based only on the fact that the vertically integrated movie business survived the Great Depression in relatively good shape. But the controlled output in the 1930’s from the major studios with contract actors and directors, to their wholly owned theater chains is a far cry from today’s business with talent, distribution, exhibition and finance all working at cross purposes. The Sundance Film Festival supposedly has 900 submissions for the current year! Even assuming that half are documentaries, does anyone think that more than 25 of these films will ever be seen in a theater?

Almost all of the “dumb money” has fled the entertainment business. Like the rest of the economy, it will have to slim down and make do with less. For the old bulls it will be quite a comedown.