Book Corner: The King of Content
My second in this book report series - a Sumner Redstone bio
I like reading business books in part to gauge how I might’ve traded the stocks of companies during different time periods. Spoiler alert - I nearly always get humbled when reading these types of books. My first post in this “series” on Netflixed went into how hard it is to make predictions in the media space, and as you read the post you’ll see more of the same.
I’m absolutely convinced now that I never would’ve bought Netflix early in its history even if I had known everything there is to know about the company; the bull thesis was entirely based on what the company could be, and to project into the future you had to make projections about Blockbuster, which for a long period of time was beating NFLX at its own online rental game.
On a similar note, I might’ve considered buying Viacom / ViacomCBS stock in the 2000s / 2010s, probably because I’d have liked that it was cheap on a free cash flow basis, buying back stock and family controlled. Read on for more on why none of these alone or in combination are good reasons to buy. Below is a chart of how Viacom stock performed over 2015-2016, a time during which the Redstone family was involved in a very public spat over who would control Sumner’s companies:
Below are some learnings from The King of Content:Sumner Redstone's Battle for Viacom, CBS, and Everlasting Control of His Media Empire by Keach Hagey. This is an incredible book and if you’re interested in the history of post-Prohibition life, movies (drive-in and indoor theaters), cable, streaming, advertising and more, I can’t recommend it enough. If you watch Succession, you’ll quick realize the Redstone family is the influence for most of the characters in the show and that real life is stranger than fiction.
Here are some investing lessons I got from the book:
Media is not an easy sector to be a shareholder in - I’m just gonna be honest with myself - I think after reading this book media stocks are in the “too hard” pile for me. Sumner Redstone built up a collection of media assets that at the time appeared to be perennial money makers - MTV, Nickelodeon, Paramount, BET, Comedy Central and more. There were years the stock did extremely well and no less than the legendary Mario Gabelli owned shares. Had I been investing over the last half century plus, I don’t think I would’ve predicted the rise and fall of the cable bundle or been able to pick winners and losers in the content space. This book was a reminder to me to be honest with myself about the dangers of owning companies that need to reinvent themselves constantly.
Buybacks aren’t always a good thing - My newsletter loves to celebrate buybacks, but in retrospect for Viacom (now ViacomCBS, note the companies were separate, merged, spun off and then re-merged) a better use of cash would’ve been M&A or reinvesting in the business. Near-misses on M&A here are telling. Consider that Viacom tried to buy Facebook multiple times, the last of which was in early 2006. The deal almost got done but fell apart over what now seem like small valuation differences ($1.5bn v. $2bn ask from FB) and Mark Zuckerberg wanting more cash upfront. ViacomCBS also tried to buy Vice in mid 2019 before talks fell apart. Viacom / ViacomCBS was active in buybacks for much of its history, but that did not stop a slew of bad quarters from destroying shareholder value as ratings precipitously declined for MTV and Nickelodeon, the former of which failed to reignite the popularity of the TRL days (notably Redstone fired Tom Freston, largely the architect behind MTV) and the latter of which sold NFLX episodes of SpongeBob and other shows.
Constant CEO / board changes may be a signal you should not own the stock - For sports fans who know owners that constantly hire and fire managers, Sumner Redstone will be a familiar figure. Redstone was quick to fire CEOs for dips in the stock and even acted as CEO of Viacom himself. Hindsight is 20-20, but in reading this book one of Sumner’s most glaring mistake was firing Tom Freston from the then-split off Viacom in 2006. Freston was largely responsible for making MTV a double-digit CAGR business that was the growth engine of the company. The firing was unexpected and employees were shocked. Redstone reportedly fired Freston because he wasn’t aggressive enough in trying to acquire MySpace (which News Corp. acquired and later had to write down). Viacom’s next CEO, Phillipe Dauman, had a law and banking background and lacked Freston’s content credentials. MTV for a time lagged under his leadership before efforts were made to bring back old hit shows developed under Freston. Hindsight for sure is 20-20, but I think history would’ve played out differently had Freston stayed. Additionally, all of the Redstone companies had significant turnover at the board level, especially as the family drama escalated in 2015+.
Know the controlling shareholder for companies you own and decide if you’re comfortable with them running the show - the controversy around Sumner’s health and who would control his companies if he died was a major distraction from the operational sides of his businesses. It was obvious as the 2010s wore on that Sumner wasn’t playing a role in business strategy, and that his daughter, Shari Redstone, and Dauman had different visions for the future of Viacom / ViacomCBS. Viacom / CBS / ViacomCBS stock reacted again and again negatively to the ongoing Sumner drama. In an environment like this, it was difficult for managers to make decisions. As a shareholder, I want to know whoever is running the show won’t be a distraction.
A financial crises can reveal who is swimming naked - the financial crisis had many negative impacts on the Redstone empire because of the amount of debt the underlying companies and Redstone himself took on. The latter is notable since Redstone was buying Midway (a video game company you might know for NFL Blitz, Mortal Kombat and other games) stock with margin debt. He invested over $800 million in the company and promptly sold it off for $100K (that is not a typo - 100 thousand) when margin calls came rolling in. Even worse, National Amusements (the theater arm of Redstone’s empire) had to raise cash to pay off the margin loan. Midway had no strategic benefits for any part of the Redstone empire and later filed for Chapter 11 (once again, know your controlling shareholder).
Overall, this book serves as a cautionary tale for any investor excited to look at family-owned businesses in the media sector actively buying back stock.