For 2003, Media Sector Fomenting Rebellion

Many media pundits predict that next year will be a time for rebuilding. But just as surely, it will be a time for rebelling.

Granted, tremendous turmoil in the media sector this year is likely to lead to a search for stability in 2003, as leading media companies such as AOL Time Warner Inc., Vivendi Universal and Walt Disney Co. focus intently on recovery rather than rapid expansion through acquisitions.

Indeed, for most media executives, cost cutting will be the order of the day as they hunker down amid a still-lethargic economy and continued accounting probes in pockets of the industry.

Yet that doesn’t mean there won’t be plenty of battling between media giants, as well as within them. Among the expected developments: Cable companies will revolt against their program suppliers over pricing, and at least a couple of top executives will face mutinies within their own ranks.

Here are some predictions for 2003 -- some bolder than others -- based on interviews with analysts, investors and industry executives:

AOL Time Warner will bid farewell to its chairman, Steve Case.

The architect behind the troubled merger of the world’s largest entertainment company and its leading Internet service provider will resign under pressure in February, giving the board enough time to print up proxy statements with a new slate of directors for a vote at the company’s annual meeting in May.

The board will appoint a nonexecutive chairman from within its ranks, leaving current management, under Chief Executive Richard Parsons, in place.

The ouster will be cheered within Time Warner, where Case is seen as a symbol of an America Online culture that led to regulatory scrutiny of the company’s accounting practices and overzealous promises that backfired on investors.

On Wall Street, however, Case’s departure will be greeted with a big yawn. Many already viewed Case as little more than a figurehead who lost power and credibility amid AOL Time Warner’s stock plunge and a housecleaning of top management that left Time Warner executives in charge.

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Viacom Inc. will see a shakeup at the top.

Despite assurances by Viacom Chairman Sumner Redstone that the contract of his No. 2 would be renewed, President Mel Karmazin will hit the road.

The two strong-minded execs will not be able to set aside their egos and personal agendas to come up with a new working arrangement. The departure will set off a power struggle among division heads.

Karmazin, for his part, will kick back and count his money as feelers come in from Disney and AOL.

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The balance of power will shift from program suppliers such as Disney to distributors such as Comcast Corp.

After completing its acquisition of AT&T; Broadband in late 2002, Comcast will use its clout as the nation’s leading cable operator to extract better deals from all of its programming suppliers. In the process, the company will save hundreds of millions of dollars in programming costs, just as it promised Wall Street.

Comcast already has filed a lawsuit against Starz Encore Group, challenging one of the most expensive programming deals in the cable industry, after inheriting the movie channel’s contract from AT&T.;

Sources say the cable operator also could use the courts to fight similar battles with other programmers -- or simply refuse to give channels their customary rate increases when contracts expire. Other television executives say the cable operator plans to launch new channels, potentially undercutting the value of existing networks.

They say Comcast is particularly keen on starting regional sports networks in competition with Rupert Murdoch’s News Corp., which charges some of the highest rates in the industry for its sports channels.

To be sure, media giants that control families of channels -- including News Corp., Viacom, AOL Time Warner and Disney -- aren’t going to roll over. But Comcast is poised to play hardball.

In fact, one cable executive suggests that ESPN will be Comcast’s biggest target. The Disney-owned sports channel has imposed particularly steep annual rate increases on its cable customers.

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News Corp. and Liberty Media Corp. will take control of DirecTV after three years of trying, triggering a war between the satellite concern and its cable industry rivals.

Murdoch, partnering with John Malone’s Liberty Media, will make a deal to buy General Motors Corp.’s satellite service, DirecTV -- only to face a torrent of opposition from the cable industry.

In their lobbying campaign, the cable companies will argue that DirecTV would give News Corp. too much power over both content and distribution, allowing the company to favor its own programming for satellite distribution and unfairly withhold it from cable operators.

But the anti-News Corp. effort with Washington regulators will only be pushed so far. The cable industry still must rely on Murdoch’s company to provide it with some of its most popular programming, including Fox News and Fox’s regional sports channels.

And in the end, Murdoch will win the war.

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Malone will make a successful play for control of Vivendi Universal’s entertainment properties, beating out billionaire Marvin Davis.

Oil tycoon Davis will fail to raise enough money to buy the Universal entertainment assets, as would-be investors remain queasy over the piracy of music, Universal’s biggest business.

Meanwhile, Malone’s Liberty Media will invest cash, plus its 100%-owned stake in the Starz Encore Group, in a new company made up of Vivendi’s U.S. entertainment assets.

Liberty will wind up with more than 25% of the new Universal and then take the company public.

Barry Diller, the current co-chief of the Universal entertainment group and a close ally of Malone’s, will become chairman of the public company. But he will hire a high-profile CEO who allows him to concentrate on his Internet company, USA Interactive.

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Michael Eisner will remain chairman and chief executive at Walt Disney.

Amid investor pressure on the Disney board to bring in a new CEO such as Viacom’s Mel Karmazin or News Corp.’s Peter Chernin, Eisner will hang on to his post.

But it’s not because of any major improvement in the company’s financial performance. Disney’s stock price will remain depressed as every segment of the company, save for its cable networks, continues to sag.

All the while, stockholders will remain restive through 2003. By year’s end, speculation will again emerge about a corporate takeover by Comcast, which will have paid down its debt and shaped up the AT&T; properties, laying the groundwork for its next major conquest.

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A fight will erupt in Washington over further loosening of media ownership rules, delaying deregulation.

Federal Communications Commission Chairman Michael Powell will move to relax decades-old rules that restrict who may own broadcasters and how large they can grow. But opposition within the agency will postpone any policy changes until at least late in the year.

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A public offering by AOL Time Warner’s cable division will pump liquidity into the troubled industry.

AOL Time Warner will spin off its cable arm, which in turn will buy the systems owned by Cablevision Systems Corp. That will give Time Warner Cable control over the largest coverage area in the industry, spanning from Long Island to New York City.

With Comcast and Time Warner calling the shots within the industry, pressure will mount on third-ranked Cox Communications Inc., troubled Adelphia Communications Corp. and Charter Communications Inc. to sell or merge.

Paul Allen, the billionaire who controls Charter, will refuse to throw in the towel, even as his company slips closer to Bankruptcy Court. Ultimately, he will refinance Charter’s operations as a federal investigation of how the company accounts for subscribers is resolved.

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The music industry will continue to implode, undermined by Internet piracy.

With pirates stealing the equivalent of 30% of the annual revenue at some major record companies, EMI and Warner Music are trading at nearly a third the value they were two years ago, when they last attempted to merge.

Cutting its losses before values decline any further, AOL Time Warner will shed its music group, selling out to EMI.