The King of Content

by Keach Hagey

  Wall Street wasn’t impressed, either. Viacom’s stock dropped 6 percent on the news of Freston’s ouster, as analysts took the move as evidence that Tom Cruise wasn’t the only one walking around the Paramount lot exhibiting some erratic behavior.18 Merrill Lynch analyst Jessica Reif Cohen downgraded Viacom’s stock, citing the new management team’s lack of operational experience and unwelcome impression that this was “an attempt by Mr. Redstone to reassert himself in an operating role.”19 Bruce Greenwald, a finance professor at Columbia University, summed up the overall response to the New York Times: “I think that Sumner has just lost it.”20

  Privately, Sumner expressed reservations at the time to some of his closest advisers about naming Dauman to the CEO job. “He said, ‘I don’t have a first choice. I don’t have a best choice. I would prefer to have somebody who is reliable that I can lean on to the unknown.’ He saw that there were reservations there,” said one family adviser.

  But the full extent of Sumner’s mistake was not apparent until Thursday, Freston’s last day in the office. As he emerged from the elevator into the lobby for the last time, he was greeted by a mob of more than a thousand employees, jamming the lobby so full they had to spill out onto the Times Square sidewalk, cheering, crying, and chanting his name. He stopped, said a few words, and received many hugs. “People were weeping, screaming,” one MTV staffer told Broadcasting & Cable. “I’ve never experienced anything like that at the workplace.”21 The man who had turned MTV into the defining cultural voice of several generations and shaped MTV Networks into the most successful cable television business on earth, who had built and greased and tuned up the profit engine of Viacom, was gone. Analysts fretted that his deeply loyal employees would follow him out the door, and the stock kept falling.

  But Dauman was used to being underestimated. He and Dooley set forth on a charm offensive, wooing Freston’s most important lieutenants, Judy McGrath and Brad Grey, and convincing them to stay. Grey, as Freston’s hire, was seen as particularly vulnerable, since he was heading into his second year atop the studio still in last place. But minutes after Freston was fired, Dauman was on the phone with Grey, reassuring Grey that he wanted him to stay.22 Dauman was similarly complimentary about McGrath, Freston’s protégée, whom Freston had selected to be CEO of MTV Networks and to whom MTV Networks executives and employees were fiercely devoted.

  Gradually, as Dauman and Dooley talked analysts down from the ledge they had fled to after hearing Sumner’s rage about MySpace and interpreting that as plans for a big acquisition, the stock recovered. Dauman and Dooley pledged no big changes in strategy, and certainly no big acquisitions, and by the end of the year the stock was back to where it had been at the beginning.23

  * * *

  Instead of buying the next hot online media property, Dauman kicked off his tenure by suing one. YouTube was exploding in popularity among the same teenage audience that MTV had long dominated. By the summer of 2006, it had hit twenty million monthly unique visitors, its rate of growth far outstripping MySpace’s.24 But YouTube had a problem: much of that traffic was people watching copyrighted clips of The Daily Show and South Park that users were uploading illegally, not to mention homemade music videos with copyrighted sound tracks. According to the Digital Millennium Copyright Act of 1998, Internet companies were not liable for such copyright violations so long as they took them down as soon as the content owners asked them to, but this protection only held so long as they didn’t profit from the violation. That meant YouTube couldn’t put ads on a lot of the videos on its site. To solve this problem, YouTube had been trying to negotiate licensing deals with the big media companies, to some success. But as YouTube grew, so did its tensions with media companies. Despite the audience overlap, Sumner declared in October that he did not see it as an acquisition target because of the legal liability involved, though it would later emerge that Viacom had been a suitor. Google had no such compunction, and in October 2006, it bought YouTube for $1.65 billion.25

  Hours after that announcement, Google CEO Eric Schmidt sat down with executives from Viacom, whose deal from the previous year with YouTube to distribute video from MTV Networks over the Web had lapsed. Trying to defuse growing tensions, he made the case that Google was a friend to content owners and was working on a digital “fingerprinting” system to identify copyrighted content that had been posted to YouTube. He even floated the idea that Google might be willing to guarantee Viacom as much as $500 million in advertising revenue over the next few years as part of a deal that would indemnify it from copyright litigation. Viacom thought the number should be closer to $1 billion. Over these and other technical questions, the talks stalled by the end of the year. In February, Viacom ordered YouTube to pull down one hundred thousand clips of Viacom content and then sued YouTube for $1 billion, alleging “massive intentional copyright infringement.”

  It was a stunning move, the first time a media company challenged YouTube in court. Of course, it was also classically Redstonian, using the courts as a way of shifting the leverage at a negotiating table. But the Internet was a different arena than the antitrust playing field of old. Many Viacom executives worried that their channel brands would become irrelevant if they vanished from the kids’ favorite online hangout. Dauman had also misjudged the case before him. The litigation dragged on for six years and the parties ultimately settled out of court with no money changing hands. In the meantime, Viacom licensed its video instead to also-rans like Joost and watched much of the online video revolution pass it by.26

  * * *

  The full extent of the error would only be apparent in hindsight, however, and in the moment, Dauman was making good on his pledge to double the company’s digital revenue to $500 million by the end of 2007 by launching more than three hundred websites, mostly overseas. Sumner had no reason to worry. Caught up in his marriage to Paula—they bragged to friends they had sex as many as four times a day, fueled by an obsession with cruciferous vegetables that he credited with his longevity—he was becoming more isolated from the business back in New York.27 Were he to get hit by a bus tomorrow, he told Newsweek, he would be quite comfortable knowing that Dauman was in charge of his empire.

  But just as Sumner was feeling at ease with his consigliere at the controls, his empire was hit with yet another broadside from a disgruntled blood relative. This time it was his nephew, Michael, who on November 3, 2006, sued both Sumner and his own father, Eddie, for allegedly depriving him of his rightful stake in the Redstone media empire.28 Using documents dredged up by Eddie and Madeline’s suit, Michael alleged that both National Amusements’ 1972 buyout of Eddie’s stake and its 1984 buyout of Michael’s and Ruth Ann’s stakes had shortchanged him and the other Redstone descendants. He wanted $4 billion, half the value of the empire.29 Like so many times before, Sumner’s control over Viacom and CBS was threatened by a member of his own family.

  Sumner was enraged. “This suit is particularly troubling considering the important role Sumner Redstone has played in helping Michael overcome serious obstacles throughout his life,” a National Amusements spokeswoman said. “Mr. Redstone essentially rescued Michael from a difficult family environment, removed him from a mental institution, paid for his education and gave him a job at NAI. It is unfortunate that this is how Michael has chosen to repay Sumner Redstone’s care and generosity.”

  Painting Michael as crazy while also bragging about having employed him was a delicate balance, but people who knew Michael say he continued to have profound emotional problems until his death, alone, at age fifty-six, from what the coroner ruled a toxic combination of fentanyl, oxycodone, and temazepam.30 “He was a recluse,” said one person who knew him at the time of the case. But he had inherited the intelligence, as well as some of the resilience, that ran in the Redstone family, and he managed to piece together a surprisingly normal adult life. He earned his GED while still at the Menninger Clinic in Topeka, then returned to Boston to enter Northeastern University, where he earned a
bachelor’s degree in public administration. He continued to seek mental health treatment on his own and was diagnosed at twenty-one with post-traumatic stress disorder (PTSD), he later said in court.31 While at Northeastern, he met his first wife, Shelley, with whom he had three children. In 1988, he got his MBA from Bentley University in Boston, and after working an array of jobs including at his father’s development company, he came to work at National Amusements in 1994 in what he described as international business development. “My duties range,” he said.32 “He kind of went in and futzed around the office for a while,” said one person who knew him.

  Tall, blue-eyed, and auburn-haired, with more than a dab of his grandfather’s movie star looks, Michael had trouble reading social cues but pursued his interests in aviation and the natural landscape of Colorado, where he later moved. He was devoted to his children but feuded bitterly with his own father his entire life. He and Shelley had wanted to adopt Adam initially when he arrived from Tokyo because, as he said in a deposition in 2004, “we knew that once my parents took him, that he was going to have a horrible life. And I knew that because I had lived part of it when I wasn’t in the hospital, and I saw what happened to my sister. And when he died, I mean, I wasn’t that surprised.”33 In the same lawsuit, Eddie declared, “My son is manipulative and he’s a liar and has serious mental problems.”34

  During Eddie and Madeline’s 2004 litigation, Michael learned about the 1959 trust that his grandfather had set up for his benefit.35 He also learned, for the first time, of the “oral trust” that his grandfather had directed his father to keep half of his National Amusements shares in for his grandchildren. According to Michael’s complaint, Eddie’s settlement had effectively reduced his and Ruth Ann’s stakes in National Amusements from 50 shares to 331/3 shares, without their having any say in the matter. Worse still, he alleged, was Sumner’s handling of the 1984 buyout of his and his sister’s stakes in National Amusements. “Sumner was effectively both the buyer and the seller in the transaction, signing the agreement as president of National Amusements on one hand and as trustee of the trusts on the other hand,” his complaint alleged. As a result, he argued, the trusts sold out for bargain-basement prices: $21.4 million for shares representing 45 percent of the company, despite the fact that National Amusements’ real estate by itself was worth more than $150 million.3637

  A judge ruled that the statute of limitations had passed and threw out most of the case, but Michael would ultimately get his revenge, if not his money. The fight over the meaning of the term “oral trust” went on for years, hauling Sumner onto the witness stand. While up there, Sumner unwisely claimed that, while Eddie had been forced by the settlement to put his shares aside for his children, he had given his shares to his children as a gift. Seizing on these words, the IRS later successfully sued Sumner for unpaid gift taxes that, over forty years of compound interest, added up by some estimates to more than $16 million.38 “Somebody compiled all the papers for the Michael litigation and wrapped them up in a bow and delivered them to the IRS under the whistle-blower statute,” said one person familiar with the case. In little ways, here and there, Sumner’s ruthless willingness to push aside his own family members to maintain absolute control of National Amusements was starting to catch up with him. So was his age. On the witness stand, “it wasn’t the old Sumner,” said one person close to the family. “There were some gaps there.”

  Chapter 17

  “Good Governance”

  By the time Shari became vice chair of Viacom in 2005, she was accustomed to being the only woman in the room. She was often the only woman at meetings for the theater circuit, the only woman at National Amusements’ board meetings, and now the only female director of the second-largest media company in the country. But as that company prepared to split, she helped recruit a new crop of independent board members to ensure that, for the public companies at least, this would no longer be the case. Viacom had long been notorious for overpaying its executives, a characteristic typical of controlled companies with their often clubby, homogenous boards, but with the stock stalled, there was pressure for change. After Sumner, Freston, and Moonves took home nearly $160 million between them in 2004, a year the stock dropped 18 percent, shareholders sued Viacom’s board.1 Under the banner of “good corporate governance,” Shari wanted to ensure that the new Viacom and CBS boards would resemble royal courts somewhat less than Viacom’s had in the past. This ultimately did not sit well with the king.

  Things started out promisingly enough. Of the seven new independent board members she helped recruit for the two companies, three were women, and one was African American. She recruited Bob Kraft, owner of her beloved New England Patriots, to be her ally and chair Viacom’s compensation committee, with the goal of tying pay more closely to performance. Sumner was such a Patriots fanatic that once, while spending the holidays with Paula’s family in New Jersey, he forced Teterboro Airport employees to work on Christmas so that he could watch the Patriots play from his grounded private plane as a way of bypassing the NFL’s blackout rules. Shortly after Freston’s ouster, Viacom cut Sumner’s compensation in half, to $10.5 million, and made more of it contingent on the company’s performance.2 When CBS followed suit a few months later amid ongoing settlement talks with the shareholders who sued, Sumner declared, “The pay-for-performance model is one I have long championed.”3 But by then, all three of the newly recruited female independent directors had resigned.

  Shari and Sumner had been fighting about his pay for years. Shortly after she arrived at National Amusements, Sumner wanted to increase his salary there, as he did not yet take a salary from Viacom (that would only come during the Karmazin years). Shari voted against it, stunning her father and the rest of the National Amusements board with her chutzpah. In the ensuing years, directors and executives at Viacom and CBS heard Sumner use the “c-word” to refer to her on multiple occasions. They fought about the use of the Viacom plane. They fought about the future of the theater business. Most people chalked it up to two passionate personalities clashing. “I never took any of the fights seriously,” said Sherry Lansing, who was close to both of them, as well as to Phyllis. “I just thought, ‘Oh well, they will be back together next week.’” Shari still wrote him poems on his birthday and signed them, “Love, Shari.”

  But by late 2006, the strain was starting to show publicly. In an interview with recently retired Disney CEO Michael Eisner in October, Sumner was candid about their disagreement on the theater business: he wanted to sell the theaters, while she wanted to keep expanding. “I don’t have to agree with her because she’s my daughter,” he said. “It’s not a growth business.” But it was what he said after Eisner prodded him on why he wasn’t planning to name Shari CEO of National Amusements that everybody remembered. “You want to give away what you have to your family, be my guest. . . . I am still very active. I work very hard and travel around the world for Viacom. I’m not about to give up control. . . . My wife is closer to me these days than my daughter.”4 The studio audience laughed, like he was joking.

  But the thing that truly broke their relationship was Midway Games. In early 2007, despite his promises at the end of 2005 to never again put National Amusements at risk with his Midway obsession, Sumner wanted National Amusements to buy more of his Midway shares. Shari vehemently opposed the idea, but she was outnumbered by Dauman, Abrams, and Andelman. In February, National Amusements bought another 12.4 million shares from Sumner for roughly $85 million, bringing National’s stake to 74.3 percent and Sumner’s personal stake to 13.6 percent.5 Shari was stunned that these men, savvy lawyers all, who all knew perfectly well that Midway was a dog, would allow this madness to continue. The moment crystallized for her the impossibility of her situation: so long as these men were on the board of National Amusements, her 20 percent stake would always be meaningless. In her view, they were more interested in sucking up to Sumner than representing the fiduciary interests of National Amusements and protecting her fa
mily’s legacy.

  The break over Midway was profound enough to prompt Sumner to begin maneuvering to undermine her right to succeed him as chairman. “Unfortunately I have come to believe that Shari does not have the requisite business judgment to serve as chairman of the three companies,” he wrote to the trustees of the trust on February 8, 2007. Because Congress had passed the Sarbanes-Oxley Act tightening regulations on public company accounting since the trust was signed in 2002, he argued, “I believe it may not be wise for the trustees of the NA Trust to impose on the independent directors of CBS and Viacom the obligation to have Shari appointed as chairman of the board of each company.” He suggested, instead, that the boards should “have the discretion to independently judge whether to appoint Shari as chairman.” In the letter, which only came to light in litigation a decade later, he also seemed to suggest that because Dauman was back working at the company—and in fact was CEO—he no longer needed Shari as a successor.6 But of course, the whole reason he agreed to make Shari chairman during the divorce was so that Phyllis could have assurances that someone loyal to her, not one of Sumner’s lackeys, would have oversight of the empire after Sumner died.

  Shari had had enough. She wanted out. She hired lawyers, and negotiations began on her possible exit from the empire.

  Meanwhile, the tensions spilled into public view again in April 2007, after Sumner pledged $105 million to three medical institutions. When Sumner asked that National Amusements pay the first installment of his pledge, Shari objected, arguing that National Amusements, not Sumner, should then get credit for the gift. Again, Dauman, Abrams, and Andelman sided with Sumner. Andelman told the Boston Globe that the gifts were “modest and highly tax-advantaged” and in the best interest of National Amusements.7