When CBS chief Leslie Moonves was named co-president in June of the network's parent company, Viacom Inc., his biggest challenge was clear: turn around the troubled radio division, Infinity Broadcasting.
But reviving Infinity just got infinitely harder.
On Wednesday, Infinity's biggest star, Howard Stern, stunned the radio industry with the news that he would leave Viacom at the end of 2005 to launch new programming on Sirius Satellite Radio Inc., an upstart company with only 600,000 subscribers.
Stern's departure pushes to the fore an issue that Moonves understands could determine his future at Viacom. Chairman Sumner Redstone, who has promised to step down as CEO in 2006, has said that he will tap as his successor either Moonves or Tom Freston, the former cable chief, who is also a co-president. Redstone confirmed that Moonves' handling of the radio division will be a key test of his leadership skills -- and an opportunity to shine.
"He got the toughest part of the company," said the 81-year-old Redstone, who expanded Moonves' portfolio in June to include not only Infinity but also two other underperforming operations: the Paramount Television production studio and the outdoor advertising group. "I told him at the time, 'It gives you a better shot at showing how good you are.' "
Freston got the prize asset in the management shuffle in June, snaring oversight of the troubled Paramount Pictures movie studio that Moonves coveted. But some Viacom insiders say an Infinity rebound could be more meaningful to the company because the radio group is so much bigger, generating more than twice the profit of the movie studio.
Redstone said Wednesday that a radio rebound was crucial because of the cash it would supply for investment in faster-growing businesses such as cable and television that account for 75% of Viacom's profit.
"Radio was starved," said Redstone, who was critical of former Viacom President Mel Karmazin, saying his financially tightfisted management undermined the success of Paramount Pictures and Infinity. "Radio will never grow like it used to, but any improvement would help fund other parts of Viacom."
Just last week, Moonves outlined a plan for investors to pump more money into programming and marketing at a core group of Infinity stations as part of his turnaround plan. In recent days, he has made the rounds of the company's radio stations, where profits have been dropping for the last two years as the industry failed to recover from an advertising downturn.
"Leslie is bringing in a new viewpoint," said Infinity President Joel Hollander, who downplayed the negative effect of Stern's departure. Although Infinity does not disclose revenue for its programs, Merrill Lynch & Co. estimates that Stern's show generates $80 million to $90 million a year of Infinity's overall sales of $2 billion.
Hollander said the free radio business was vibrant, generating $20 billion a year in revenue. The nation's radio stations reach 95% of the country's 100 million households, while satellite rivals have only 3 million subscribers.
But some industry executives noted that because Stern's morning show provided a strong lead-in to the rest of the day's programming, his value was vastly more than the revenues attributed to his show alone.
"No one can command the following of Howard Stern," said Jessica Reif Cohen, an analyst at Merrill Lynch who follows Viacom. She said Viacom was unlikely to make up the cash flow that Stern's show generated by replacing him because no other radio personality was as big.
Stern's announcement is just the latest fire that Moonves has had to put out. The former actor, who rebuilt CBS and continues to oversee the nation's most-watched broadcast network, was criticized last year for bowing to political pressures in pulling the plug on a docudrama, "The Reagans," which some people said portrayed the former president in an unfavorable light.
More recently, federal regulators fined CBS $550,000 for indecency after singer Janet Jackson bared her breast during the broadcast network's Super Bowl halftime show. The network is also still smarting from controversy after its news division relied on fake documents for a report on President George W. Bush's military service.
Stern, who was fond of Karmazin, his former boss, has made no secret of his frustration with Moonves, ranting on the air about Infinity's increasing attempts to censor his show. For months, the radio personality has been telegraphing his interest in defecting to satellite radio, where he would presumably be free from indecency regulations.
Stern was pulled off the air by six stations owned by Clear Channel Communications Inc. in February after the nation's largest radio broadcaster announced a new policy to prevent airing indecent content. The company was fined $1.75 million to settle complaints about Stern and other radio hosts.
Sources say Infinity is in talks with the Federal Communications Commission to settle complaints stemming from Stern and other radio hosts that could result in even bigger fines.
Said Redstone: "There's no question his program created issues in Washington."
Stern still has nearly 15 months remaining on his contract, prompting industry executives to ask Wednesday whether Infinity would be forced to buy him out. Stern has already begun promoting Sirius on his website, and many people speculate that he will do the same on Infinity's airwaves. He reaches one of the largest audiences in radio -- about 12 million to 15 million people a week.
Infinity's Hollander dismissed the idea. "We expect to honor his contract," he said.