Time Warner Mixes Vision and Power

What’s really behind the proposed merger of Warner Communications and Time Inc.? Both vision and muscle--a grand vision of global entertainment and a calculated grab for market power.

The vision looks ahead to the time when movies will be beamed directly from film studios to high-definition television screens in homes and theaters worldwide.

It is a vision that has captivated Hollywood for a long time. In 1962, Darryl F. Zanuck, the founder of 20th Century Fox, was asked if television would replace movies. No, said Zanuck, movies would not only survive alongside television, they would thrive. The time would come, he said, “when I will make a movie on Friday, distribute it on Saturday and recoup my investment over the weekend.”

He was talking about instant worldwide distribution of entertainment--which is the real promise of high-definition television, the clear-picture, big-screen TV that Japan is developing. It’s the vision driving Sony Corp., which is angling to buy a movie studio as it looks to globally distribute entertainment and information. It’s the vision driving entrepreneur Rupert Murdoch, who has put together the Fox movie studio, the Fox television network and a satellite TV service in Europe called Sky Channel.

And it’s the vision behind the combination of Warner, the descendant of the Warner Bros. studio that made Edward G. Robinson and Bugs Bunny famous, and Time, the magazine empire that owns Home Box Office and American Television & Communications, the second largest U.S. cable system.

TV Networks Should Worry

But exciting as the vision is, it is also years away from being realized. And meanwhile, the Time-Warner combination--if the merger is completed as planned--will hold awesome power in today’s media markets.

“If I were the television networks, I’d worry,” said analyst John Tinker of Morgan Stanley, as officials of CBS and NBC demanded that the government grant their companies the right to own cable systems and to own and syndicate programs. The networks fear the market power that Time Warner could exert as owner of a movie studio, a major exhibitor of movies (HBO) and cable systems with 5.5 million subscribers. The company would be a seller and a buyer of programming on a massive scale and could theoretically set differential prices to favor itself and hurt competitors.

Network fears are understandable. Market power is something to be reckoned with, as Time Inc. demonstrated last year in the magazine field--where it publishes Time, Life, Fortune, People, Money, Sports Illustrated and others. For years, the accepted wisdom in the advertising world was that independent magazines had nothing to fear from a multi-publication company like Time. Individual magazines have specific readerships and attract advertising on that basis, went the thinking. One didn’t need to be a big company.

Then Time showed the field what market power is all about. To discomfort competitors, Time offered advertisers who increased their ads in any Time publication a free ad in another of its magazines. The strategy boosted lagging ad page totals in Fortune and Sports Illustrated, and forced competitors to give advertisers a similar deal. It became an expensive year of giving away ad pages for Time’s competitor, Newsweek, and Fortune’s competitors, Forbes and Business Week. Time has since ended the practice, having shown the mailed fist and made its point.

Could Time Warner bring the same kind of muscle to cable? Possibly, but it hasn’t yet, even though Warner Communications has owned a studio and a cable system for years, just as Time has owned HBO and cable systems. That’s one reason the Justice Department probably won’t intervene on antitrust grounds.

Another reason is that increasing globalization may be making domestic antitrust rules beside the point. Traditionally, antitrust in the film industry has meant movie producers can’t own theaters, a restriction that has eroded. The question for the future will be whether it makes sense to bar a U.S. company from owning a studio and a cable system if programs are distributed globally and restrictions don’t apply to non-U.S. companies.

In any case, such interesting questions are for the future. The thing to keep in mind about Time Warner is that people and institutions move less quickly than technology. Darryl Zanuck, who died in 1979, outlined his vision of instant global movies in 1962. But 27 years later the vision hasn’t become reality. Time Warner, even presuming a competing offer doesn’t derail the merger before it starts, could fall over its shoelaces in actually trying to operate as one company.

Still, you don’t have to see a vision realized to appreciate how smart it is, and how much it offers a glimpse of business in the global future.