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A CNN suitor?

In a media world where vertically integrated conglomerates dominate the landscape, NBC is perceived as the weakest link when its combined assets are compared with those of AOL Time Warner, Viacom and Disney. But the Peacock enterprise—with cable networks MSNBC and CNBC as additional outlets for its newsgathering resources—has the news model right. That's why CBS News and CNN are once again engaged in serious talks about combining forces in a merger or a joint venture.

Both sides confirm that the talks are ongoing but also stress that it's hard to say when or even if a deal will get done. However, one CBS source says its prospects have been heightened by the change in leadership at the Turner Broadcasting System group, now headed by Jamie Kellner.

"It's an easier conversation to have with Jamie," says a Viacom source familiar with the situation. "Before that, it was never quite clear that you could ever get to a discussion of a merger of equals."

Merging CNN, in some form or other, with a major broadcast news division is not a new idea. It's the second time in three years that such talks occurred between CBS and CNN. Before that, there were several similar rounds of negotiations between NBC and CNN.

The first go-round with NBC took place in 1985. NBC had recently abandoned an attempt to launch a cable news network from scratch when it failed to get the support of cable operators whose news needs, CNN founder Ted Turner assured them at the time, were being adequately served by CNN.

Turner then offered to sell half of CNN to NBC, recalls Tom Wolzien, an NBC News vice president at the time and now an entertainment analyst with Alliance Capital's Sanford Bernstein & Co.

"I never thought it was a bad idea," says Wolzien, who believes it makes a great deal of sense for CNN to form an alliance with CBS or ABC. But thorny issues mostly having to do with control have prevented such an alliance, he says. The NBC model is almost ideal, he says, because NBC controls both the cable and broadcast networks and doesn't have to consult with Microsoft. The software maker, a 50-50 equity partner in MSNBC, is, for all practical purposes, a silent partner on the TV side, although it does have input on the Web site.

But with CNN and CBS, "the key difference," says Wolzien, "is you're dealing with two entrenched institutions. And that makes it a lot harder to work it out unless you say, 'We're going to fold the two institutions together and make them one.' Otherwise, you have all kinds of governance issues."

But, he adds, the economic downturn may be just the spur to consummate a deal between CNN and someone—CBS or ABC. Indeed, both CNN and ABC News have embarked on aggressive cost cutting, including layoffs. CNN implemented a plan earlier this year to reduce its work force by up to 10% (600 jobs). ABC News wants to pare between $15 million and $20 million in annual expenses. To get there, nearly 10% of the ABC News work force (125 positions) will be eliminated through buyouts, layoffs and attrition by the end of this month.

ABC would love to strike a deal with CNN. But, for now, it's sitting on the sidelines. Sources confirm that ABC has asked CNN to call before finalizing any deal with CBS.

Sources at both Time Warner and Viacom insist that cost cutting isn't the main motive behind the talks. Rather, they say, it is brand extension and revenue growth. Still, the cost savings will be substantial. Estimates are that each side might reduce costs by up to $200 million annually by exploiting efficiencies of a combined operation.

And that's a saving that could go right to the bottom line, which of course is what the parties hope to improve by doing the deal in the first place. CNN is said to contribute roughly $250 million in operating profit annually to parent AOL Time Warner. CBS News and ABC News contribute approximately $150 million and $130 million, respectively, including ad sales for the prime time magazines. Excluding prime time, both news divisions would be operating at a loss, according to Wolzien.

NBC News contributes about $300 million in operating profit to the network, thanks largely to the strong performance of Today
and Dateline. In addition, cable networks CNBC and MSNBC contribute another $300 million or so in profit. Those numbers explain why the NBC News model is so compelling and why CNN and CBS are talking. The current talks are being led by CBS News President Andrew Heyward and CNN President Philip Kent, although sources say both Kellner and CBS Television President and CEO Leslie Moonves have been involved and support an arrangement if terms can be worked out.

While just about everybody says a deal makes sense on paper, some within the companies remain skeptical. "All the cultural, operational and organization issues that existed three years ago still exist today," says one insider who was there for the earlier round of talks.

What does Viacom President Mel Karmazin think of an alliance with CNN? "We'd all love to see it happen," says a Viacom source familiar with Karmazin's view. "It's one of these deals that makes all the sense in the world on paper. But personalities and business plans aren't just a piece of paper."

A CNN alliance with CBS News would have its ironies. In the mid '80s, Ted Turner made an abortive play to take over all of CBS. The move prompted a raft of stories questioning the colorful mogul's integrity and lifestyle, which CBS at least had a hand in planting. Although Turner's junk-bond bid fizzled, he put CBS in play, and it was acquired by Laurence Tisch, whose slashing business sense certainly didn't help the news department.