Mar
01
1990

Capital Cities/ABC

No. 2, and Trying Harder

Capital Cities/ABC Stock CertificateIn 1985, Capital Cities, a company with interests in TV, radio and publishing, spent $3.4 billion to take over the American Broadcasting Co., a company four times its size. At the time, ABC employees feared their new parent’s tight fists and sharp eyes. Cap Cities management has certainly lived up to its advance billing; the acquisition, which looked a little grandiose in 1985, effectively paid for itself in four years.

Cap Cities/ABC is a diversified media conglomerate with little debt and $1.1 billion in the bank. just tinder 80 percent of 1989 sales (which totaled $4.96 billion), and 86 percent of profits (1989 total: $922 million) came from broadcasting, with the balance from publishing. Within broadcasting, however, lie several stories. The radio share of sales and profits is small—8 percent and 11 percent, respectively. (These are estimates by First Boston; Cap Cities/ABC doesn’t provide a detailed breakdown.) The network, though responsible for 62 percent of Cap Cities’ sales, produced only 20 percent of its broadcasting profits, and the profit margin (profits/sales) was an anemic 7 percent.

Radio, video and cable TV—the latter two considered broadcasting here—are far more lucrative, with margins around 30 percent. But the real money-spewers are the eight local TV stations the network owns, which reach just under the legal maximum of 25 percent of the U.S. population. Though they produce only 21 percent of sales, they contribute more than half of broadcasting profits, and their profit margin is 54 percent. This is the highest for the three networks; NBC’s owned-and-operated stations had a 42 percent margin; CBS’s, 36 percent.

Network profits are low, and local station profits high, because networks pay their affiliates to broadcast their programming, and split the ad revenue with them. (Obviously, if you own the station, you save the fees and keep all the ad revenue.) With the growth of cable, VCRs and a fourth web, Rupert Murdoch's Fox Network, the old order is changing.

The networks’ share of primetime audience eyeballs has fallen from 94 percent in 1978 to below 70 percent, and is likely to continue its downward slide, especially as Washington, Los Angeles, Chicago and the outer boroughs of New York City are increasingly wired for cable. NBC president Robert Wright sees the mid-50 percent range as its likely resting place; ad people are about 10 percentage points more optimistic.

Even though 50 percent of the primetime audience is nothing to sneeze at, the networks are not entirely happy with the future of broadcast TV. In what may be a taste of things to come, ABC started charging a Florida affiliate to carry its programming in early 1989. Even if this doesn’t become standard procedure, networks want to reduce payments to affiliates, since local stations would have to pay up for substitute product. And they’re looking to milk the broadcast cow with more vigor.

While it’s hard to work up much sympathy for an industry that collectively made $610 million on sales of $7.8 billion in 1989, the three networks nonetheless feel terribly put upon. Consequently, they are practicing the classic techniques of a monopoly suddenly faced with competition: slashing staff and wages, outsourcing, diversifying and searching for new sources of revenue.

Like NBC and unlike CBS, the network is getting more deeply into cable and is beginning to move overseas. Cap Cities/ABC owns 80 percent of ESPN, 38 percent of Arts & Entertainment and 33 percent of Lifetime, as well as 25-50 percent interests in several satellite and cable channels in Europe.

With all three networks now in the hands of hard-nosed operators (Laurence Tisch at CBS, and GE at NBC), the culture of network TV, once characterized by an almost royal indifference to costs, has now joined the business mainstream. And Cap Cities/ABC is a virtuoso at fattening its bottom line. Morgan Stanley estimates that corporate overhead has been reduced by $50 million a year under the new regime. In 1988, ABC News was the first network news division to make money in a presidential election year, usually a time of high costs and skimpy ad revenue. (According to Wall Street estimates, CBS News broke even, and NBC News lost $50 million in the same year.)

 

Thomas Murphy

Cap Cities/ABC CEO Thomas Murphy

Some of the cost-cutting is hard to argue with—like having Peter Jennings cover the Iowa caucuses from inside the state capitol instead of building a $500,000 temporary studio.

But the favorite target of the cost-cutter is always labor, especially in an industry with relatively low capital costs. And this is an area where Cap Cities chair Thomas Murphy—who recently announced his partial retirement—shines. As a Newspaper Guild official said of Murphy shortly after the ABC takeover was announced, “If I ever get to hell, I know I’ll meet him there.’

Cap Cities had a long history of labor conflict, especially at its newspapers, an industry that has suffered from a squeeze not unlike that of today's broadcasting business. Unionists argue that the Cap Cities style is confrontational and penny-pinching, the kind of stuff that alienates people and sends morale into the tank. No one seems to have an accurate count of how many people have been laid off—the company refuses to give a count—but private estimates are around 1,500, which would put ABC at the head of the network class.

Wall Street, of course, loves to see a company on the labor offensive, one of several reasons it has long carried a torch for Cap Cities. Brokerage reports on the company typically gush with admiration for Murphy and the Cap Cities team. The consensus is that ABC, currently the No. 2 network in the ratings and in profitability, is best positioned for the long haul. NBC and CBS are in the hands of financiers; the Cap Cities crowd has three decades’ experience in the broadcasting business.

The eight TV stations it owns, more than the other two networks, are likely to remain money machines despite the encroachment of cable. And ABC has cable covered too—while ESPN is paying off nicely, NBC is new to the game, and CBS hasn’t even tested the waters yet.

ABC has several new hit shows—including Doogie Howser M.D., thirtysomething, Roseanne and America’s Funniest Home Videos—while NBC’s fare, especially The Cosby Show, is getting a little long in the tooth. The news division, as viewers are frequently reminded, is the nation’s No. 1 source of information (or whatever it is that Jennings and Koppel deliver).

Cap Cities’ other lines of business, radio and publishing, are suffering from “softening” trends in national advertising, but TV is at the heart of the company’s business. About the only negative is the rising cost of programming, especially big-time sports—like the $900 million ABC had to pay to keep the rights to Monday Night Football, or the $450 million ESPN paid for a Sunday night package.

It’s sometimes said that there’s only enough room for two-and-a-half networks; Cap Cities/ABC is unlikely to be the one bisected. In fact, should the global media universe condense into about ten giants, Cap Cities is almost certain to be in that pantheon.

Doug Henwood is editor of Left Business Observer, 250 W. 85 St., New York, NY 10024. This series of media profiles has been assisted by grants from the Fund for Investigative Journalism and W.H. and Carol Bernstein Ferry. Research assistance by Valerie Picard.

BOARD OF DIRECTORS

Chair Thomas S. Murphy was a member of the group that started Capital Cities in 1957, when it was a rag-tag collection of small TV stations; among his colleagues was the late CIA director William Casey. Casey was on the board from 1976 until he became chief spook in 1981. Casey’s failure to disclose his holdings in Cap Cities caused a mild furor when it was revealed by Newsday in 1985. Casey was, and Murphy and fellow board- member Thomas Macioce are, members of the Knights of Malta, a secretive international club of right-wing ruling-class Catholics with long-suspected intelligence links.

INSIDE (Cap Cities/ABC employees)
•Daniel B. Burke. President. Will become CEO in June 1990. Former head, JelI-O division, General Foods; brother of retired Johnson & Johnson chair and eminence grise James Burke. Other boards/memberships: Avon, Conrail, Rohm & Haas; American Film Institute, American Women’s Economic Development Corp., National Urban League, New York Botanical Garden, Ohio Wesleyan University, Conference Board, Council on Foreign Relations. 1988 salary: $969,286.
•Thomas S. Murphy. Chair and CEO. Will retire as CEO in June 1990 while retaining chair. Other boards/memberships: General Housewares, IBM, Johnson & Johnson, Texaco. Member of legendary class of  ’49, Harvard Business School. Member, Knights of Malta. 1988 salary: $1,030,501.
•John B. Sias. Executive vice president, ABC Television Network Group, and veteran of Cap Cities’ publishing division. Sias has a reputation as a cut-up—the kind of guy who wears a Captain Marvel T-shirt under his white business shirt. 1988 salary: $815,286.

OUTSIDE (non-employees)
•Robert P. Bauman. Chair, SmithKline Beecham. Harvard Business School classmate of Daniel Burke. Former General Foods exec and former vice chair of Avco and Textron. Other boards/memberships: Avco, McKesson Corp.

Warren Buffett

Warren Buffett

•Warren F. Buffett. Legendary billionaire investor based in Omaha, with major holdings in Cap Cities (16.6 percent), Salomon Bros., Washington Post Co. Close friend of Post publisher Katharine Graham and CBS head Laurence Tisch. Owner, Buffalo News, several insurance companies and retailers. Promoter of population control, nuclear nonproliferation, rhino preservation, and US/Soviet friendship. Other boards/memberships (partial list): Berkshire-Hathaway (Buffett’s investment vehicle), Omaha World-Herald, Salomon Bros.; Boys Clubs of Omaha, Grinnell College, Urban Institute
•Frank T. Cary. Retired chair, IBM. Other boards/memberships: Hospital Corp. of America, J.P. Morgan, Merck, New York Stock Exchange (whose chair and vice-chair are members of the Knights of Malta), PepsiCo, Texaco; Business Council, MIT.
•Leonard H. Goldenson. Retired chair, ABC.
•Leon Hess. Chair, Amerada Hess; owner, New York Jets. Other boards/memberships: Mutual Benefit Life.
•George P. Jenkins. Consultant to W.R. Grace & Co; retired chair, Metropolitan Life. Other boards/memberships: Bethlehem Steel, Chicago Pacific, Trammel Crow.
•Frank S. Jones. Professor of urban studies, MIT.
•Ann Dibble Jordan. Social worker and consultant to University of Chicago Medical School and Stroh Co. Other boards/memberships: Granite Broadcasting, Johnson & Johnson, National Bank of Washington; National Symphony, National Foundation for Learning Disabilities, World Population Institute.
•Thomas M. Macioce. Partner, Shea & Gould (New York law firm); former chair, Allied Stores. Member, Knights of Malta. Other boards/memberships: Columbia Press, Grossman’s, Manufacturers Hanover, the Vatican Bank.
•John H. Muller, Jr. Chair, General Housewares. Other boards/memberships: Robbins Co.
•William I. Spencer. Retired Citicorp executive. Other boards/memberships: Amerada Hess, Bridge Capital Mgmt., Keller Indus., McLean Indus., Trust Co. of the West, United Technologies, US West; Colorado Coil., Council on Foreign Relations, Nature Conservancy, NY Blood Center, NYU Medical Center.
•M. Cabell Woodward Jr. Vice-chair and chief financial officer, ITT. Other boards/memberships: Melville Corp., Sheraton Corp.

The Bill Casey Connection

William Casey

CIA director and media mogul William Casey

Several Capital Cities founders and board members have had intelligence connections, but none more prominently than the late CIA director William Casey.

Casey, along with broadcaster Lowell Thomas, Republican leader Thomas Dewey and others, started Cap Cities in 1954. Serving as the company’s chief counsel, Casey was also a board member until 1981, when he was appointed by Reagan to head the spy agency. When Casey was forced to put his stocks in a blind trust in 1983, he quietly kept control of his largest single holding: $7.5 million in Cap Cities stock.

Despite his close connections to a company in the news business, no one ever accused Casey of being a fanatical supporter of the First Amendment. In November 1984, in his official capacity as CIA director, he asked the Federal Communications Commission to revoke all of ABC’s TV and radio licenses, in retaliation for an ABC News report that suggested the CIA had attempted to assassinate a U.S. citizen (ABC News, 9/19/84, 9/20/84). In February 1985, the CIA asked the FCC to apply Fairness Doctrine penalties to the network. The following month, ABC was bought by Casey’s Cap Cities. (See "The Seizing of the American Broadcast Company,” by Andy Boehm, L.A. Weekly, 2/20-26/87.)

—The Editors