The Lion In Sumner

By Daniel Kadlec

Executives at the MTV networks stood and roared their approval at a budget meeting last November when Sumner Redstone, chairman and CEO of parent company Viacom, pledged $30 million of corporate cash to launch Logo, a gay channel that the MTV brass had regarded as a top priority. Under Viacom president and heir apparent Mel Karmazin, the channel had been delayed. But at this meeting, attended by Karmazin, Redstone openly said to MTV chief Tom Freston, "You want to do it? You have the money." Karmazin was silent. "It was a dramatic moment," Freston recalls. "All of a sudden, we got something we hadn't expected." The new channel is set to debut early next year.

This wasn't the only time Redstone took the lead in orchestrating a shift toward bigger risks on the content side of Viacom's media empire. At a meeting this year with executives at Viacom's Paramount Pictures, with Karmazin present, Redstone stunned his team with a commitment to bankroll more of the big-budget films that studio heads love but that Karmazin loved to avoid. The divide over how far to wade into expensive movies and risky programming was not gaping. Karmazin says he was eager, for example, to launch the gay network. But things weren't moving fast enough for Redstone. Ultimately, Karmazin realized he would never really run the company, and he last week announced his resignation.

Redstone, 81, was quick to promote to co-president both Freston, 58, and Leslie Moonves, 54, who ran CBS, filling the vacancy left by Karmazin, 60. Redstone said he would finally call it quits within three years, setting up a horse race for the top job at Viacom, a la GE after Jack Welch retired in 2001. Critical to Redstone, Freston and Moonves are dyed-in-the-wool content guys. Freston, a free-spirited music lover who has served on the board of the Rock and Roll Hall of Fame, engineered the phenomenal success of MTV. Moonves, a hard-charging executive, has turned CBS Television into the top-rated network. Left out was Jonathan Dolgen, 59, chairman of Viacom Entertainment Group, who resigned a day after Karmazin. "My emphasis is on creativity," Redstone tells TIME. "You have to invest and not just be concerned with the next quarter."

Reports of sniping between Karmazin and Redstone began surfacing almost immediately after the media titans joined forces with the merger of CBS and Viacom in 2000. Even Karmazin's new contract, signed just last year, didn't put an end to constant rumors of feuding. But in contrast to Redstone's creative leanings, Karmazin's focus was on running a lean operation, and by last month Karmazin had evidently tired of Redstone's upstaging him. Karmazin denies any material conflicts and says he resigned because "there was too much about Mel and Sumner, and I didn't think it would go away." He says he was concerned that press scrutiny of their relationship was hurting the company's stock price.

Karmazin's departure wasn't the blow it once would have been. One analyst rushed out a report titled "Mel Who?", and the stock barely budged. Just a few years ago, Karmazin was a Wall Street darling, highly prized as a tough, budget-minded operator who could make the free-spending creative forces at Viacom toe the line. But his star faded as Viacom consistently fell short of financial targets.

Making matters worse, some of the most glaring problems have been at Viacom's Infinity Broadcasting division, which features radio stars Howard Stern and Don Imus. Karmazin built Infinity through deft dealing in the 1980s, before merging the company with CBS. So beholden to Karmazin is Stern that on his program, he promised to follow Karmazin out the door, and his website has a clock counting down the 19 months remaining on his contract. Karmazin had become vulnerable because of lackluster results at his prized Infinity, where profits rose a tepid 5% last quarter--embarrassing next to gains of 24% at Freston's MTV Networks and 38% at Moonves' broadcast-television division. By the time Redstone and the board got around to serious succession planning early this year, Karmazin's standing had slipped. Indeed, Redstone had been snubbing him for months--even deriding him in front of other executives. At a media conference in March, Redstone "pretty much ignored mentioning Mel," says Dennis Leibowitz, a partner at Act II Partners, a hedge fund.

As the relationship deteriorated, Karmazin was overruled on a series of decisions. He opposed Viacom's initiating a dividend; Redstone wanted the company to pay one. Karmazin reportedly wanted to keep the Blockbuster video chain (he tells TIME it was a board decision and out of his jurisdiction); Redstone wanted to spin it off to shareholders. To no one's great surprise, Redstone, the son of a linoleum salesman, who built a national theater chain and used it in 1987 to buy Viacom (then a simple cable company with a handful of channels), got his way on both counts.

Since acquiring Viacom, Redstone has expanded it into a collection of high-profile assets, including the UPN television networks and such cable channels as BET, Nickelodeon and Showtime, in addition to radio, outdoor advertising, theme parks, Simon & Schuster, CBS and MTV. The firm had net income of $1.4 billion last year on revenue of $26.6 billion. Redstone owns 11% of it all, but through his Class A voting shares controls 71% of the shareholder vote. "I tend to do better," Karmazin tells TIME, "when I am the CEO of a public company reporting to an independent board. Viacom will always be controlled by ... Sumner Redstone."

Which adds an unusual dimension to the Freston-Moonves bake-off. Will the winner really win? The two contenders are close friends and vacationed together last year in Brazil. They're also friendly with Redstone, often dining with the boss. That's something Karmazin rarely did, which grated on Redstone, who values a family culture at work. Both Freston and Moonves say they're thinking not about who will get the top job but about how to move Viacom forward. "It's about creative energy and vision," says Moonves. "We have very little ego about sharing the turf."

Yet the two have dramatically different styles. Moonves is a tough executive who wears his competitive drive on his sleeve. Redstone, he tells TIME, is "very competitive and likes to be the best at every business, and so do I. 'You have a fire in your belly,' he has told me. And I take that as a compliment." Freston, who once ran a clothing business in India and Afghanistan, is also a brilliant manager who sometimes appears less interested in getting the top job. "At corporate events, I usually find him in the mosh pit instead of the VIP tent," says a media executive who knows him. But former Viacom president Frank Biondi predicts that Freston "will quicken to the chase."

No matter who emerges as Redstone's favorite, he may have to compete with a third candidate. Last month Redstone's daughter Shari, 50, a board member who stands to inherit her dad's stake in Viacom, said she intended to take a larger role on the board. Redstone insists that Shari will never have an "executive or operational role." Others aren't so sure. "My guess is she resurfaces in a key role," says Porter Bibb, a banker at Media Tech Capital.

For his troubles, Karmazin walks away from Viacom with stock and options valued at $250 million. What riles some shareholder groups is that Karmazin, in addition, will get the full value of his full-term contract: $30 million. "We took a hard look at the contract and felt the language was pretty broad, and decided we just didn't want to go there," referring to a severance dispute, says David McLaughlin, chairman of Viacom's governance committee.

The shake-up leaves many questions unanswered. How much will Viacom risk on new content? Redstone says many new cable projects are under way and Paramount is open to making $100 million movies. "We will not be profligate," he says. "They must make sense." Still, the studio has bombed recently with lower-cost movies like Beyond Borders and Paycheck. Megabudget flops would be a disaster. Karmazin's future is also the subject of hot gossip. He wants to be a boss, soon. But there are no big media CEO slots open, and one of the choicest, the job held by Disney's embattled chief, Michael Eisner, isn't coming up for grabs so long as Eisner has support from his board. But bankers would gladly bankroll Karmazin should he decide to build another radio empire, possibly starting with the underperforming Infinity stations that Redstone says he'll dump.

Viacom's king of content has had a hard time with likely successors in the past. Before Karmazin, there was Biondi, whom Redstone fired over a clash in management style. This time Redstone says he really will leave the stage. But many believe the dual heirs apparent might want to keep their options open.

--With reporting by Daren Fonda/New York and Jeannie McDowell, Desa Philadelphia and Sonja Steptoe/Los Angeles

With reporting by Daren Fonda/New York and Jeannie McDowell, Desa Philadelphia and Sonja Steptoe/Los Angeles