Viacom’s Strategy--Merging the Content With Distribution : Technology: An acquisition of Paramount would put the new giant in enviable position with ‘vertical integration.’

In the early 1920s, legendary Paramount chief Adolph Zukor began buying movie theaters in a massive acquisition campaign that helped the studio to dominate the motion picture business for the next decade. Zukor, who had already built the industry’s most formidable production machine, understood the value of combining content and distribution.

Nearly a century later, Viacom Chairman Sumner Redstone--who, like Zukor, started as a theater owner--has pursued the same logic in the bitter fight he appeared to win Monday for the media conglomerate Paramount has become.

The technology rationale behind the Paramount-Viacom merger, which has been obfuscated throughout the long saga by slogans like “information superhighway” and “interactive multimedia universe” is that simple: “It’s about companies that need content connecting with companies that have content,” says one entertainment technology executive who has followed the merger closely. “It’s called vertical integration.”

That integration would, of course, take place against the backdrop of emerging new forms of entertainment and communication. And in an age where libraries of film and television shows are expected to be leveraged into zillions in profits by the rise of video-on-demand and interactive television, the newly combined company would be in an enviable position indeed.

Said Bishop Cheen, a senior analyst at Paul Kagan and Associates: “We have a field of dreams and now we have a field of Goliaths that are able to dream very large dreams.”

Among the other Goliaths are Tele-Communications Inc. (which plans to merge with Bell Atlantic Corp.), Time Warner and News Corp., each of which brings different technological handicaps to the rapidly evolving entertainment and communications game.

Japanese consumer electronics firms Sony and Matsushita, both of whom followed the Zukor strategy of consolidating content and distribution by buying U.S. entertainment firms in the 1980s, are in the midst of negotiating with cable and phone companies as it becomes apparent that the future of information and entertainment delivery will require wired and wireless networks outside the home as well as--if not in lieu of--videocassette recorders and compact disc players within.

TCI and Bell Atlantic probably have the most potential for synergy. Phone companies have huge networks of high-speed fiber-optic lines and expertise in two-way communications. Cable companies have broad-band lines which can carry masses of digital pictures, sound and data into homes, and they understand programming.

Together, TCI and Bell Atlantic would reach 40% of the nation’s cable homes. But Time Warner, which last spring announced an alliance with U.S. West, is also working on matching its strengths with the phone company’s in its Orlando, Fla., interactive television experiment. And Time Warner, like the new Paramount-Viacom combination, has an extensive programming library on its side of the balance sheet.

News Corp., pursuing Chairman Rupert Murdoch’s belief in a “wireless world,” is focusing on satellite broadcasting as an alternative form of distribution.

With Nynex Corp.’s $1.8-billion investment in Viacom’s Paramount bid, the newly merged company would have a telephone component similar to TCI’s and Time Warner’s.

Nynex has one of the richest territories in terms of population density--and as a result, some of the deepest pockets of all the Baby Bells. And Blockbuster’s presence in the Viacom alliance adds an element of retail distribution that analysts say will be valuable, at least in the short term.

Which one of these media giants will dominate the shifting new landscape, or whether a new one will emerge, will become clearer as interactive television trials begin in different communities across the country later this year.

Using “video servers,” which can digitally store huge amounts of programming, and AT&T; switching technology, Viacom’s test bed in Castro Valley, Calif., will provide 1,000 households with interactive shopping, information and, most likely, Paramount movies on demand.

But the Viacom trial will almost certainly include movies from other studios as well, which is why many entertainment executives say they are not concerned about their new, reconfigured competitor.

“Even we are not conceited enough to think our content is enough to drive a whole new service that the consumer doesn’t even perceive that they need yet,” said one industry executive.

In other words, content is still king. Said an MCA executive: “I’m assuming the customers of Viacom’s cable systems will want to have access to programming that they hear is good whether it comes from Universal or Disney or Sony or whoever. I don’t hear of people wanting to see ‘Jurassic Park’ because it comes from Universal--but they definitely want to see it.”

In addition, the nuts-and-bolts technology required to build the new distribution system acts as something of a great leveler among the new-age media giants. Everyone is grappling with the evolution of new compression technologies that allow movies not to appear grainy or jerky when sent over fiber cables, the design of new chips to support such compression, and server technologies that allow the storage and access of tens of thousands of titles.

Notes Bob Lambert, vice president for new technology at Disney, “By and large, the technologies being touted as new and improved and able to change the world are not coming from the companies that are assembling the infrastructure. They are coming from a variety of technology companies across the industry--and that puts everyone else in a pretty even horse race.”