No Evidence That ‘Synergies’ Theory Works, They Say : Some Question Advantage of Time-Warner Deal
Sony buys CBS Records. A big French publisher buys Women’s Day and 11 other U.S. magazines. Rupert Murdoch snatches up 20th Century-Fox movie studio, the Metromedia television stations, TV Guide. And now the biggest of all: Warner Communications merges with Time Inc.
Is the media and entertainment world merging into a few global titans that will eventually squeeze out smaller players in a competitive world war?
Officials of Time and Warner say their worries about the emerging competition was a primary reason for their union, announced Saturday. They see a handful of giant concerns buying up publishing houses, movie and TV studios, distribution businesses, record companies, television stations and cable systems.
It won’t be long, they warn, before communications companies that don’t follow suit will find themselves in financial danger.
“The minute you let your guard down, you’ll be swallowed up,” Time Inc. Chief Executive J. Richard Munro said Monday as executives of Warner Communications and Time explained the reasons for their merger, which will create the world’s largest media and entertainment concern.
Warner Chairman Steven J. Ross added that competing in the business will be like driving a car up a steep grade. “The minute you put it in neutral, you’re going to be at the bottom of the hill,” he warned.
A lot of other people say, “Nonsense.”
The skeptics say that despite the recent torrid pace of media mergers, the advantages of the communications conglomerates may not be as great as they appear. They certainly aren’t great enough to keep strong new companies from elbowing their way into the business, as they always have in the past, critics contend.
“The communications business has so much activity and change that I just don’t believe it’s possible for a few giants to control the information flow around the world,” said J. Kendrick Noble, an analyst with Paine Webber in New York.
The goal of these new media giants is to cut the high risks of producing their various products by selling them in many forms and markets around the world.
Warner and Time will gain complementary advantages--"synergies,” in the threadbare term--as soon as they merge. The expertise and inventory of Warner’s Warner Bros. studio will provide programming for Time’s Home Box Office pay-TV unit in new ventures as well as current ones.
Time will benefit from the overseas marketing and distribution strength of Warner, which distributes its own records and films, and the films of Walt Disney Co., abroad. Warner should be assisted in selling its products by the direct-marketing expertise of Time Inc., which is the largest in the business, analysts speculate.
Executives of the company say they expect that their mutual strengths will allow them to capitalize on the new television markets that are opening with deregulation in Europe and Asia. They decline to be specific about their plans, but analysts speculate that they may try to provide not only movies and television programming, but also cable systems and direct-broadcast satellite systems.
“As Asia follows Europe in deregulation, we expect to be the blue chip provider in the market,” said Nicholas J. Nicholas Jr., Time’s president.
The company may envision a day when it will have the kind of close integration that many media companies admire in Murdoch’s News Corp. The programs that are produced on Murdoch’s Fox studio can be broadcast through the Fox Broadcasting Co. stations in the United States and on Murdoch’s Sky Channel satellite operation in Europe.
News Corp. can offer advertisers package rates in its publications. And it can buy newsprint and equipment for its 150 publications at a discount.
But many experts question how great those advantages really can be.
The drawbacks of such attempts at “vertical integration” have been apparent in the past. Harcourt Brace, for example, once purchased a paperback publishing operation, called Jove, with the intent of using its Harcourt’s hardback books as a source of paperbacks, Noble recalled.
But Jove’s editors didn’t feel that Harcourt books were the best for their paperback line. Ultimately, the business was sold to MCA.
Taft Broadcasting--which has since been broken up--owned not just television stations but Hanna-Barbera Productions, the renowned producer of cartoons. But while this arrangement was expected to give the stations a ready source of product, the TV station managers often found programming they preferred, and sold the cartoons to others.
“Whatever you might say about synergies, the interests of the producers and distributors aren’t the same,” said Alan J. Gottesman, also an analyst with Paine Webber.
Noble said the idea of dominant media companies came from Europe, where, in fact, some companies have historically dominated large shares of newspaper and book publishing and printing businesses, and other media.
But while such Europeans as Robert Maxwell, chairman of the Great Britain-based Maxwell Communications, do believe that a new class of media giants is emerging, “lots of smart people believe too many different businesses can lead to management neglect of some of them,” said Noble.
CBS and Playboy Enterprises were among the companies that diversified into other media, then sold off their holdings to pay closer attention to their core businesses. Others, such as newspaper giant Gannett Co., have made conscious decisions to concentrate on the United States from reluctance to take on such unpredictable factors as foreign regulation, labor practices and currency exchange rates.
It has also not been established that worldwide media enterprises can attract advertisers willing to buy ads in the media of different countries. Some blame the disappointing performance of Murdoch’s Sky Channel on the sharp cultural differences between viewers in various European nations.
Some analysts question whether Time and Warner officials would have faced a competitive threat if they chose to remain alone. “I just can’t see how any competitors could keep the magazines of Time Inc., or the programming or records of Warner, from making money,” said Andrew Horneck, research director of the Veronis, Suhler & Associates investment bank.
Some analysts even question whether the two companies’ executives are truly motivated by a fear of the new global competitors. “It sounds good to say you’re worried about these foreign threats, but I think other factors, like their fear of a takeover, were probably much more important in this,” said Peter Wade, president of the New York office of J. B. Were & Son.
THE FOREIGN MEDIA GIANTS Maxwell Communications (England) Financial Data: 1987 revenues of $1.61 billion and profits of $244 million Publishing: Macmillan Inc. Pergamon Press Scientific Research Associates (textbooks) Webb Publishing (farming magazines) Official Airlines Guide Printing: Newspaper inserts and magazines such as Parade, TV Guide, Time and Sports Illustrated News Corp. (Australia) Financial Data: 1988 revenues of $4.8 billion and profits of $367 million) Newspapers: Boston Herald San Antonio Express-News Daily Racing Form The Times (London) The Herald (Melbourne) Daily Mirror (Sydney) Magazines: TV Guide Seventeen New York magazine New Woman magazine Elle magazine (50% joint venture with Hachette SA) 7 travel business publications Entertainment: Twentieth Century Fox Film Fox Broadcasting (TV stations in Los Angeles, Houston, Dallas, Chicago, Boston, New York and Washington Publishing: Harper & Row Sony Corp. (Japan) Financial Data: 1988 revenues of $11.5 billion and profits of $294 million Entertainment: CBS Records Consumer electronics: Betamax, Betacam and Handycam video equipment Trinitron television sets Walkman and Discman audio equipment Philips NV (Netherlands) Financial Data: 1987 revenues of $29.8 billion and profits of $458 million Consumer electronics: Magnavox Sylvania Philco Norelco Musical instruments: Selmer Ludwig Bertelsmann AG (West Germany) Financial Data: Estimated 1988 revenues of $6.3 billion and profits of $157 million Entertainment: RCA Records (labels include RCA, Arista, Ariola) Magazines: Parents magazine Publishing: Doubleday Inc. (includes Bantam, Dell, the Literary Guild, Doubleday book and record clubs) Hachette SA (France) Financial Data: Estimated 1988 revenues of $3.9 billion and profits of $45 million Magazines: Woman’s Day Elle (50% joint venture with News Corp.) Car & Driver Popular Photography Road & Track Cycle World Flying Boating Publishing: Grolier Inc. (encyclopedias and educational materials)