Centurion media doing the right thing

Centurion Media

Complete "Centurion Media: Doing the Right Thing" Case (NA0005-PDF-ENG) from your Harvard Case Studies Course Pack. Please answer the following questions specifically regarding this case:

What was the problem facing Richard Bennett (if any)?
Do you agree with Bennett’s assessment of the problem he faced? Explain why you agree or disagree with him.
What were Richard Bennett’s options for dealing with the problem? Identify how Bennett might have applied each of several ethical theories to his problem situation.
What was Richard Bennett’s responsibility to his subordinates in assuring an ethical work environment? In your opinion, what ethical theory might have been his motivation for creating an ethical work environment?
Did Joseph Fowler have a conflict of interest in his situation? If so, describe the conflict of interest. Do you think he could have fulfilled his fiduciary duties to both Centurion Media and Northpark? Explain the reason for your answer. In your opinion, what might have motivated Fowler’s actions?
Centurion’s corporate general counsel, Tom Watson, told Bennett there was no problem with the contract between Centurion and Northpark. In your opinion, can a contract be legally valid but also unethical?
What motives might be inferred for Chuck Reilly’s actions regarding the Northpark contract? In your opinion, what ethical theories best describe the basis for his actions?
Did Vicki Porter face an ethical dilemma? If so, identify her options for dealing with the dilemma and what ethical theories apply to each option.
Use the Case Study Guidelines under the "Start Here" tab as a guide on writing this. Your paper should be a minimum of 5 pages (not including the cover sheet and references) and follow APA guidelines.

E ach time Richard Bennett reached across his desk for the mail and other docu- ments his assistant had placed in his in-box, he smiled because he thought of the friendly disagreement with his wife about the “proper” way to handle this task.

His approach was “top-down.” Whatever was on top of the in-box was dealt with first, then down through the stack until it was all finished. His wife preferred the “priority” method, first sorting through everything to determine the urgency of each item. Bennett felt that was just a waste of time. “By the time you’ve gotten your stuff sorted, I’ve probably finished with at least one-third of the items in my in-box,” he had kidded her. Bennett was thinking of his wife again that morning as he sat down at his desk. Tomorrow, July 12, 2006, was their wedding anniversary. How could forty-one years have gone by so quickly? His reminiscing was abruptly interrupted when Bennett saw the item on top of his in-box.

A special courier had delivered a package from the corporate office of Centurion Media. Inside the package was a contract signed by Joseph Fowler, the new president of his division. (Refer to Exhibit 1 for corporate structure.) As Bennett read through the contract, he had a sick feeling. The contract required all of the cable television systems in the Centurion cable division to sell their advertising inventory at severely discounted rates to Northpark Media. Northpark was a national buying service that bought and resold commercial spots on cable television systems; Centurion Media owned 25 percent of Northpark’s outstanding common stock. From the wording Bennett saw in the con- tract, Centurion Cable would lose millions of dollars in revenue both by selling com- mercials so cheaply to Northpark and by alienating existing customers, who would stop buying from Centurion. Because Fowler had been CEO of Northpark before coming to Centurion, Bennett immediately wondered if that relationship had played a role in the negotiation of this contract.

Centurion Media: Doing the Right Thing 1

Centurion Media: Doing the Right Thing

Carolyn Conn, St. Edward’s University Aundrea Kay Guess, St. Edward’s University Jonathan Hiatt, St. Edward’s University

Copyright © 2008 by the Case Research Journal and Carolyn Conn, Aundrea Kay Guess, and Jonathan Hiatt. All rights reserved to the authors and NACRA.

This case was presented to the North American Case Research Association (NACRA) at its annual meet- ing, October 18–20, 2007, Keystone, CO.

The authors wish to thank the individual portrayed as Richard Bennett in this case. We want to thank the editor and associate editor of the Case Research Journal and the anonymous reviewers for their time and valuable suggestions. This case was written to stimulate class discussion rather than to illustrate the effective or ineffective handling of a managerial situation.

This case did not occur in the cable television industry. The industry, as well as the names of all firms, their locations, and the people involved in this case have been disguised.

NA0005

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2 Case Research Journal • Volume 28 • Issue 1 • Winter 2008

Exhibit 1 Centurion’s Corporate Structure

As a vice president in Centurion’s cable division, Bennett managed cable network systems in the southeastern United States. Bennett had been a regional vice president in the cable division of Centurion Media for nearly ten years. Most of his management team had been with him from the time he began as regional vice president. They had worked hard to build relationships in the communities where they operated, and finan- cial growth provided proof of their success. Revenues for his group’s cable systems had almost doubled annually since his first year as regional vice president. His group had been recognized for their accomplishments as the “Outstanding Team” nationwide at the previous year’s Centurion Media annual banquet. In Bennett’s opinion, the Northpark contract would destroy everything Bennett’s group had done in their region during the past ten years.

Bennett wondered if the other vice presidents had received their copies of the con- tract. He had to get to the bottom of this and try to avert financial calamity. He knew he had to be careful. One of Bennett’s golfing buddies who was in upper management of Centurion’s newspaper division had had a run-in with Fowler at a corporate meeting the month after he became president of the cable division. His buddy warned Bennett not to trust Fowler. Bennett called his sales director, Vicki Porter.

Vicki, you are never going to believe what I got by special courier this morning. It’s a contract signed by Joseph Fowler between Centurion Cable and Northpark Media—and we’ve got to sell them any of our advertising inventory they want at rates way below what we are charging this year and below many of the annual contracts we already have with advertisers for the coming year. Those customers are going to be furious if they ever hear about this—and, you know they will. Worse still is the impact this contract will have on our bottom line. We’ll lose millions!

Porter said she understood Bennett’s frustration, but reminded him they needed to talk to other Centurion Cable vice presidents about the Northpark contract before they did anything. Bennett said he would make a few calls, and they agreed to meet later that

Centurion Cable TV Division

Joseph Fowler, president

Five vice presidents for other regions

Vicki Porter, sales director for

SE region

Richard Bennett, vice president for

SE region

Centurion Media, Inc. Chuck Reilly, CEO

Centurion Broadcast TV Division

Centurion Newspaper Division

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Centurion Media: Doing the Right Thing 3

day to work out a strategy for dealing with the contract. Bennett had hired Vicki dur- ing his first year as vice president at Centurion Cable and had never regretted it. He respected Vicki’s judgment and knew she was trustworthy and knowledgeable about the political workings of the corporate offices and boardroom of Centurion Media. He had told her numerous times she was the logical choice to be promoted into his position after he retired.

THE CABLE TELEVISION INDUSTRY

The cable television industry originated in the mountains of Pennsylvania in the late 1940s. John Walson, owner of an appliance store in rural Mahanoy City, wanted to increase sales of televisions. To improve reception and better demonstrate the televi- sions, he erected an antenna on top of a nearby hill and ran a cable to his store. Customers soon began asking for their houses to be connected to his antenna.

Walson charged two dollars a month for this service and by the middle of 1948 had 727 customers. He and other entrepreneurs soon began setting up similar “Community Antenna Television” (CATV) systems in rural areas where television reception was poor. By 1955, there were about 400 such systems with a total of 150,000 subscribers.1

Initially, CATV systems throughout the United States provided their customers with the three channels from the national broadcast networks: ABC, CBS, and NBC. Expansion of the systems and demand from customers resulted in the growth of pro- gramming to include hundreds of national cable networks (such as A&E, HBO, Showtime, ESPN, and CNN) as well as the offerings of local standard broadcast stations.

Cable television systems were established under franchise agreements within specific geographic regions. Under FCC regulations, some cable operators had been granted franchises in multiple areas of the United States. Cable operators that had multiple fran- chises were referred to as Multiple-System Operators (MSOs). As of 2006, the twenty- five largest MSOs served more than 61 million subscribers nationwide.2

Cable Television Revenues

Operators of cable television systems obtained revenue from several sources: subscriber fees for basic service, additional subscriber fees for premium programming, fees for spe- cialty services (such as movies on-demand), and local advertising. Sales of subscriptions for basic cable service had stalled; thus, advertising revenues had become more signifi- cant to the operators of cable systems. The dramatic increase in the number of available digital cable channels resulted in ever-increasing amounts of advertising space. Nationwide, total cable revenue for 2007 was estimated at $74.7 billion, with $26.9 bil- lion of that coming from advertising.3

Cable television operators sold local advertising on their systems based on a pre- determined number of commercial breaks within each network program. On average there was two minutes per hour of commercial breaks. These commercials were in addi- tion to those purchased directly by advertisers through the national cable networks. Depending upon the city and surrounding area served by a specific cable system and the demand for a given program, the local advertising rate in various markets across the United States for 2006 averaged from less than $20 per thirty-second spot to approxi- mately $200.

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4 Case Research Journal • Volume 28 • Issue 1 • Winter 2008

TELEVISION ADVERTISING

Television advertising spots had been available for purchase from multiple sources: national broadcast (ABC, CBS, NBC); national cable networks (e.g., ESPN, MTV, CNN); local broadcast affiliates (e.g., KABC in Los Angeles, WFOR4 in Miami, and WXIA in Atlanta); and local cable (e.g., Comcast, Time-Warner, Cox). Small advertis- ers did not need national placement of their commercials. Instead, they targeted a local market and bought lower-priced commercials from local broadcast stations (frequently in locally-produced programs such as evening and late news) and/or from local cable operators.

Industry data for 2005 showed that audiences watched cable as much as they were watching broadcast networks, causing an increase in the demand for advertising on cable systems. For 2005, gross cable advertising revenue was estimated at $24 billion with local cable advertising at $5.6 billion. Experts predicted 10 percent annual growth for local cable advertising, 9 percent for national cable, 4 percent for national broadcast, and 1.5 percent for local broadcast.4

Unsold inventory of advertising in their local commercial breaks had presented chal- lenges for the operators of cable systems. Nationally, unsold inventory on cable was equal to roughly 70 percent of the total available spots (called “avails”).5 Much of the unsold inventory was in “late night” (after “prime time”) through the following “early morning” (approximately 5 A.M.).

Some internet-based companies had begun exploring ways to sell the unsold “rem- nant” advertising inventory in various media, including newspapers, radio, and cable television. Google had been extremely aggressive in this area. In fall 2006, Google debuted an on-line bidding system for selling advertising in all media. Google began this service in the newspaper and radio markets, with plans to expand into broadcast and cable television. Most major newspaper chains and major papers, such as The Chicago Tribune and The New York Times, subscribed to Google’s new bidding service. Google reported their initial ad volume sold through the system was double their pro- jections.6 Their public statements about the system described their plans to add spot sales on broadcast television and cable networks.7 Some industry experts postulated that availability of online advertising order systems would force cable television program- mers to partner with firms such as Google and eBay to help sell advertising on the pro- grammers’ cable and satellite networks.8

Some members of the radio industry had tried to keep Google at a distance, prima- rily because of concern their advertising would become a commodity and prices would be driven down. However, Google’s position had been just the opposite, as described by Douglass Merrill, their vice president of engineering, “If you use some of the things that we understand about finding appropriate value and targeting, we might get folks who haven’t advertised on radio before to advertise now. . . . With those advertisers comes new money; with those, rates rise.”9

CENTURION MEDIA

Centurion Media began as a newspaper publishing business called Centurion News in the late-1940s. The corporate founder, Charles Reilly Sr., had the foresight in the 1950s to expand into broadcast and cable television. In order to obtain sufficient capital for his new ventures, Reilly took the company public and named the new company

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Centurion Media. In 2006, Centurion Media was a diversified public corporation head- quartered in Chicago, Illinois with operating divisions in several major media segments, including Centurion Broadcast Television, Centurion Cable Television, and Centurion Newspaper. A president managed each division. (Refer to Exhibit 1 for Centurion’s organization chart.)

Charles Reilly Sr. served as chief executive officer (CEO) until 1975 when he became chairman of the board. Even though it was a public corporation, Centurion Media maintained the feel of a family business. When Reilly Sr. stepped down as CEO, Charles Reilly Jr. replaced him and served in that capacity until 2001. At that time, Charles Reilly III (Chuck) was named CEO. Chuck Reilly had worked in various departments at Centurion, starting first as an errand boy during summers in high school. After graduating from college with a degree in radio, television and film, he began working full-time for one of the broadcast television stations owned by Centurion. He was well liked by his colleagues and regarded as a hard worker. They also respected him because he had started at the bottom and never used his father’s and grandfather’s positions as influence to get ahead in the company.

CENTURION CABLE DIVISION

As a division of Centurion Media, Centurion Cable had a president supported by six vice presidents, with operational responsibility for multiple cable television systems within specific regions of the United States. Each vice president was autonomous with primary responsibility for franchise negotiations in the cities and towns where their sys- tems operated. Every region had its own sales department that sold advertising at the rates established by the regional vice president. The rates were based on demand for commercial placement and availability in various programming, as well as competitive market forces. The president was primarily responsible for the execution of their divi- sion’s portion of the corporate strategic plan and for representing their division’s inter- ests to the upper management of Centurion Media.

In January 2006, Terrence Moore, the fourth president of Centurion in eight years, was transferred to Centurion’s broadcast television division and replaced by Joseph Fowler. Moore, president for two years, had been a hands-off manager, letting the regional vice presidents run their own operations with little input or guidance from him. The management style of the new president, Fowler, was at the other end of the spectrum. A few current Centurion Cable employees had worked for Fowler at Northpark, and they described him as being dictatorial, with little patience for people who disagreed with him.

Chuck Reilly personally recruited Fowler from his position as CEO of Northpark. When Reilly introduced Fowler around Centurion’s offices, Reilly noted they had been friends in college and began their media careers together at Centurion. Reilly let every- one know Fowler was a tough negotiator and had led Northpark to impressive growth in revenues and profits. Reilly said he was expecting Fowler to have a significant impact on the cable division’s bottom line in a short period of time.

NORTHPARK MEDIA

A simple concept had been the basis for Northpark Media’s business. Most cable televi- sion operators could not sell all their available advertising inventory and most small

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businesses did not have employees dedicated to buying local airtime. Northpark nego- tiated with cable television operators to buy large quantities of commercial advertising at deeply discounted rates. In turn, they resold those commercial spots to small local businesses for higher prices—but at rates that were lower than what the firms could negotiate for themselves. Northpark became the intermediary between the small busi- nesses and the local cable operators.

The company was established in 1974 and went public in 1984. Their stock traded on the New York Stock Exchange and was included as part of the Standard & Poor’s 400 Mid-Cap. During fiscal year 2005 they employed nearly 13 hundred people.

Northpark Media had experienced exponential growth in sales, along with steady growth in their stock price under the leadership of CEO Joseph Fowler. In the two fis- cal years ending December 2004 and 2005, revenue had grown from $358 to $553 mil- lion, with operating income rising from $61 to $104 million, and net income increased from $24 to $42 million. Northpark had minimized capital expenditures while gener- ating increases in earnings and cash flow. At a time when many companies in the media industry were having difficulty, Northpark was regarded as a solid investment. Bennett knew that most investment analysts who covered the publicly traded company rated it as a buy or a strong buy. Northpark had bought some commercial airtime from Centurion Media in recent years, but the amount was an insignificant portion of their total purchases. The company had formed no close trading partnerships or alliances with any particular media companies.

In late spring 2006, Centurion Media completed several purchases of Northpark stock which gave them control of approximately 25 percent of Northpark’s outstanding common stock. After Centurion completed these purchases, they held two positions on Northpark’s ten-member board of directors. Chuck Reilly had been persuaded by Joseph Fowler to buy the stock because Northpark was the “wave of the future” for the next few years in the media business. As Fowler reportedly described it in a meeting with Centurion Media’s upper management:

At least until Google and other Internet firms get the beta testing done for their technol- ogy and their internal processes ironed out, buying services such as Northpark will replace traditional sales departments. Then, in a few years Google and others will have made so many inroads into media buying that companies like Northpark won’t be need- ed either. Centurion can get in on the action in the short-run by buying significant own- ership of Northpark.

JOSEPH FOWLER

In the spring of 1999, Joseph Fowler was promoted from chief operating officer to CEO of Northpark Media. Fowler’s career in media began with an internship during college in the sales department of one of Centurion Cable’s systems. After graduation, he was hired as an account executive for a broadcast television station in Atlanta, Georgia. He later returned to his hometown of Boston where he worked his way up from sales to higher-level management positions at several cable systems in the area.

Fowler’s reputation was that he did not take “no” for an answer. A sales assistant at Centurion Cable who had worked in a similar position at Northpark described his pres- idency there as “frightening,” marked by indiscriminate firings of long-time employees. When he was hired as CEO of Northpark, financial news articles described Fowler’s high six-figure salary, stock options, his bonuses which were based on revenue growth, and

6 Case Research Journal • Volume 28 • Issue 1 • Winter 2008

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his seat on the Northpark board of directors. Only a short time after being hired as pres- ident of Centurion Cable, rumors circulated within the division that Fowler had played hard-to-get and ended up with an even higher compensation package from Centurion than what he had at Northpark. The corporate gossip was that Fowler had been allowed to keep his position on Northpark’s board of directors and to retain ownership of his Northpark stock and options, although Bennett had no way of confirming this.

Chuck Reilly’s memo in January 2006 announcing Fowler’s hiring described his wide range of experience working in various media across the country, as well as the sig- nificant growth in Northpark’s revenues and profits while he was their CEO. The memo ended with a statement about Chuck Reilly’s professional respect for Fowler as a visionary in the media business and it mentioned their long-standing friendship. It also quoted Fowler as saying his personal business motto was: “Profits equal success.”

THE CONTRACT REVIEW MEETING

Vicki Porter was alarmed at what Richard Bennett described over the phone. From what Bennett had read to her from the Northpark contract, their cable systems and all of those within Centurion Cable would, indeed, lose millions in advertising revenues. She could not imagine what had caused Joseph Fowler to sign a contract like that with Northpark. Was the guy that unfamiliar with Centurion’s side of the industry? Or, did he just have a screw loose? She cleared her appointments for the entire afternoon in order to meet with Bennett.

When Porter arrived at Bennett’s office, he was calmer than he had been on the phone that morning. But, he was dejected when he greeted her:

It’s worse than I thought. I’ve been reading and re-reading this contract. In addition to every Centurion Cable system being required to sell all the advertising Northpark wants at extremely discounted rates, we have to guarantee that we’ll run at least 90 percent of the commercials they buy. If we don’t, we’ll have to pay a penalty of five times the dis- counted ad rate. Oh yeah, and the contract wording says it cannot be cancelled and is automatically renewable!

Porter was stunned.

What do you mean? Even if I have a local advertiser who’s willing to pay top dollar on the rate card—Northpark’s discounted contract will take precedence over a higher rate paid by all other advertisers? Are you saying the Northpark contract also trumps annual contracts we already have in place? How’s that supposed to work?

Bennett handed her the contract.

Read it for yourself. Look at section six on page four. It says the Northpark purchases of our commercials supersede all existing and future contracts with other advertisers. I don’t think it can be any plainer than that.

Porter looked at section six of the contract.

That’s exactly what it says. When this gets out, our sales people won’t be able to sign up any new advertisers—at any price—because we won’t be able to promise them their spots will actually make it on the air. There’s too much chance they’ll be bumped by Northpark. And, I don’t even want to think about what our existing advertisers are going to say. At best, we’ll lose our credibility with them. At worst, we’ll get sued. Our contracts with existing advertisers contain a provision about being pre-empted only due to emer- gencies or other advertisers paying a higher rate; not a lower one!

Centurion Media: Doing the Right Thing 7

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Bennett was certain the contract meant financial disaster for Centurion. It would be one thing if Northpark bought only the unsold commercial time. But, the way he read the contract, Northpark was entitled to buy any commercial spots they wanted (prime- time and elsewhere) at deeply discounted rates. The real kicker in the contract was that all the Centurion Cable systems had to guarantee at least 90 percent of the spots Northpark bought would run and would not be pre-empted—even if other advertisers were willing to pay more.

Bennett went on to describe telephone conversations he had earlier that day with the five other vice presidents of Centurion Cable.

After I got off the phone with you, I called every other vice president in the cable divi- sion. None of them saw this coming. Nobody can believe a contract of this magnitude could have—or would have—been kept so hush-hush. It’s just not the way Centurion does things. Even though it’s been like a revolving door in the president’s office, every- one who’s been in that position since I’ve been at Centurion has told the vice presidents to handle our own sales contracts. Every vice president I talked to today said this con- tract will make their region lose millions . . . just like it will do to us.

In Bennett’s southeast region in 2006, they were selling their commercial inventory at prices ranging from $80 to $180 per thirty-second spot (with an average of $100 each). The deal that Fowler negotiated with Northpark allowed them to purchase any of Centurion’s commercial advertising inventory for re-sale at prices discounted by 70 percent off the regular advertising rates. Consequently, almost overnight, Bennett’s sys- tems could be replacing revenue which averaged $100 per commercial with revenue averaging only $30 each! What had been a deeply discounted $30 spot turned into a $150 penalty if the spot purchased by Northpark did not air.

When she was hired as Sales Director, Porter began tracking the percentage of unsold inventory as well as the rates at which commercials were sold. She knew it was an important way to measure the effectiveness of her department and also to measure their progress from year to year. Before Porter joined Centurion Cable, their unsold inventory was at 80 percent, significantly higher than the industry average of 70 per- cent. She had steadily built her department and customer base and at the mid-point of 2006, they had achieved a level of 60 percent for unsold inventory. Porter knew that some of their success was due to a strong economy in their region. More importantly, Bennett had given her total authority to negotiate rates with customers, to build “pack- ages” for multiple programs purchased, and to discount rates for annual contracts. As she showed two charts to Bennett (see Exhibit 2 and Exhibit 3), she commented:

Look at these graphs. The first shows the dramatic decrease we have achieved in unsold inventory. Our region has gone from 80 percent when you first joined Centurion ten years ago to 60 percent for the first half of 2006. Right now we are ten percentage points below the industry average. We’ve achieved that while simultaneously increasing rates for the spots we sell. Our sales department worked their fannies off to achieve numbers like this. I’ve sacrificed a lot personally to make all this happen. Do you think Fowler even looked at this data?

Bennett reassured Porter he knew their success in achieving the dramatic changes in advertising sales had been due to her efforts. He felt Fowler was not interested in any kind of data. There had to be something else going on. Maybe Fowler was just trying to make himself look good at the expense of everyone else.

8 Case Research Journal • Volume 28 • Issue 1 • Winter 2008

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Centurion Media: Doing the Right Thing 9