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Karmazin Bullish on '04 Prospects

Although it recently downgraded its financial-analyst guidance for this year because of slow growth in local advertising, Viacom Inc. is painting a rosy picture for 2004 ad sales.

Speaking at the Goldman Sachs Communacopia conference here last Tuesday, Viacom president and COO Mel Karmazin said advertising sales — spurred by the Super Bowl, increased political advertising and the Olympic Games — should reach new highs in 2004.

"I think 2004 is going to be the first year, certainly since the Viacom-CBS [Corp.] merger, when you will see the true power of the company," Karmazin said.

Triple play

That, he added, will be spurred by the triple play of having the Super Bowl, the Olympics and a presidential election all in the same year.

"Advertising revenue growth in quadrennial years — a year there is an Olympics and a presidential election — that ad revenue growth tends to be 200 basis points higher than in the previous three years," Karmazin said.

Karmazin didn't give much information on ad sales this year. Viacom said last month that it expected mid- to high-single digit growth in revenues and operating income for the full year, versus its earlier guidance of high single-digit growth for revenues and double-digit growth for operating income.

In radio — a problem area for Viacom in the second quarter — ad revenue rose 3% in July, was flat in August and increased 4% in September, Karmazin said.

In the television market, Karmazin said that although scatter pricing has been somewhat soft, that's mainly because of the strong upfront and the fact that many advertisers are buying air time closer to the actual air date, which affects pricing.

But because most broadcast networks sold about 85% of their inventory in the upfront, there is a scarcity of ad inventory, which should drive up prices.

"The fourth-quarter scatter market is not over. But in talking to our people, they all believe pricing on all of the inventory is going to be up double-digits from upfront pricing," Karmazin said.

He said Viacom isn't seeing any shift from broadcast television to cable, or vice versa.

The Walt Disney Co. president and COO Bob Iger also said he expected 2004 to be a banner year, fueled by growth at Disney's ABC broadcast network and its cable networks. The local ad market has been "a little softer," said Iger, but that is being more than made up for by strong network advertising.

"Our stations, particularly in large markets, are pacing ahead of last year," Iger said. "We thought it would be equal to last year, but so far, the signs are relatively positive."

Karmazin addressed the rumors that Viacom was looking to sell off its Blockbuster Inc. video-rental business, hinting that a sale is not out of the question.

According to Karmazin, Viacom has the option of selling its 81% stake in Blockbuster, bringing the company in-house or leaving the relationship as it is.

Several analysts have speculated Viacom would look to sell Blockbuster, mainly because its future looks dim as more and more cable operators roll out video-on-demand.

DVD bonus

In response to the growing competitive threat, Blockbuster has shifted its focus from video rentals to sales of DVDs and video games, a strategy that has paid substantial dividends.

For the second quarter ended June 30, Blockbuster revenues were up 9.5% to $1.39 billion, fueled mainly by DVD sales. In the period, DVD sales rose 39% to $107.3 million from $62.4 million in the prior year.

"We have said for many years that Blockbuster is not a strategic asset that is necessary for Viacom," Karmazin said. "Blockbuster for the last three years has contributed to the growth of Viacom.

"Blockbuster's 2003 will be its best year ever. We understand the challenges, we understand the technology issues. Blockbuster generates a significant amount of free cash flow, it's a great brand, and it has some great initiatives underway.

"Nothing has changed. We continue to reap the benefits of its free cash flow and continue to keep our options open."