ENTERTAINMENT : Seagram’s Daring Bet: The Future Is Fantasy

On Wall Street and in much of the mainstream business press, Seagram Co.’s $5.7 billion purchase of 80% of MCA Inc. seems yet another act of folly by a star-struck Hollywood wannabe. Yet, Seagram’s bold move may reflect less naivete than acumen in taking advantage of the burgeoning industrialization of fantasy.

By selling off its share of a classic “petroleum age” company--E.I. DuPont de Nemours & Co.--for control of MCA, Seagram is positioning itself for leadership in “knowledge value” industries, which rely less on engineering skill than on the intangible power of culture-based products.

Like Viacom Inc.’s earlier $10-billion takeover of Paramount Pictures and the quick multibillion-dollar capitalization of the fledgling Dreamworks SKG, the MCA deal underscores the enormous appeal and long-range potential of knowledge-value industries. Even if Edgar Bronfman Jr., who spearheaded the MCA acquisition, proves as incapable as his Japanese predecessors in capitalizing on his new asset, the broad spectrum of entertainment-related businesses--including tourism, multimedia and even much of retail--will still be among the brightest prospects of any U.S.-based industry.

Several factors undergird the growth potential of these industries. In the United States and other affluent countries, a greater premium is being put on leisure time, whether spent at a movie theater, in front of a multimedia computer or at a retail mall like Universal CityWalk. During the past decade, spending on recreation-related products has grown faster, in real terms, than virtually any item on the family budget--except taxes. By contrast, expenditures for food, autos, clothing and appliances have barely moved. Accordingly, since the early 1990s, entertainment-industry growth, overall, has been running at about 10% annually, with some sectors, like video games, exploding at a 30% annual clip.

The appetite for industrialized fantasy has been expanding even more quickly in East Asia, the world’s fastest-growing and potentially most lucrative consumer market. Investment in entertainment-related assets--movie theaters, compact entertainment centers, theme parks--in the region, according to Forbes, is expected to grow to $5 billion by the year 2000, up from a mere $1 billion today.

Nowhere is this trend clearer than in the emergence of tourism--the business of catering to escapist fantasies--as the world’s single-largest industry. It is no coincidence, for example, that the fastest-growing major city in America during the 1990s has been Las Vegas, a city whose very existence depends on serving as a kind of urban theme park.

For many other urban areas, fantasy-related enterprises are becoming more and more important as traditional industries move to edge cities or the hinterlands. To survive, the cities left behind need to cultivate industries dependent on artistic skills, the crafts and specialized management, assets readily available only in urban environments.

At the same time, these industries--from pure entertainment to tourism and design--display the ability to lure dollars from the suburbs and small towns back to hard-pressed urban areas. New York, New Orleans and San Francisco may no longer be competitive in attracting manufacturers and corporate headquarters, but they remain highly seductive to tourists who find their images and experiences unduplicated in Marietta, Ga. or Plano, Texas.

For example, New York, having lost most of its industrial base and facing a continuing hemorrhage of its traditional white-collar work force, increasingly pegs its future on its tourist and communications industries. It has even taken to promoting itself as a kind of Hollywood-on-the-Hudson, using its media power to project itself into the center of the entertainment and celebrity culture.

Yet, as the MCA deal demonstrates, the real heartland of the fantasy industry is in the city that invented it--Los Angeles. In many ways, the region has become the Chicago of the entertainment age, with its dense network of creative producers and specialty companies. Today, the region’s film industry alone employs four times as many workers as in New York, which is, by far, its largest competitor, while generating some $23 billion in revenues, compared with $3 billion for New York.

In recent years, some analysts have seen the growth of new technologies in other regions as a threat to Southern California’s fantasy machine. With the rise of interactive multimedia, techno-enthusiasts in Seattle, Silicon Valley and elsewhere envisioned a digital means to overcome Southern California’s long-dominant creative community of screen and song writers, actors, directors, producers and entertainment managers.

At a recent meeting with multimedia executives, for example, Microsoft Corp.’s local representative pooh-poohed the notion that his industry even needed to be in Los Angeles, asserting that the new media didn’t need the “hassles” of working with Southern California’s entertainment-related businesses.

Maybe so. But as the MCA deal demonstrates, “content”--Hollywood’s specialty--is proving itself to be far more valuable than mere technology. Last year alone, movie and television production added more than 15,000 jobs, equal to the entire statewide growth in all computer software-related jobs.

The shift toward Hollywood also can be detected in the sudden flow of high-tech cash into Southern California’s fantasy mills. Shortly after Microsoft’s local representative dissed Hollywood, Microsoft co-founder Paul G. Allen announced he was financially backing Storyopolis, a new L.A.-based multimedia firm specializing in children’s stories. Two months later, Allen kicked in half a billion dollars to help capitalize Dreamworks.

Microsoft, itself, has invested $15 million in Dreamworks’ new interactive division, which will be headquartered in the Southland. And in February, Silicon Graphics Inc., another high-tech giant, invested $500 million to gain control of two leading 3-D graphics software firms.

The shift from technology to content is propelling the local multimedia industry, which is roughly on a par with its Bay Area birthplace and as much as four times larger than the much-hyped concentrations in techno-centers in Seattle and New York. “The industry used to be viewed as computer-centric, and it was viewed as a Silicon Valley business,” says Bob Davidson of Davidson and Associates, a supplier of education software. “Today, it’s viewed as media-centric . . . it’s also animation, graphics, sound.”

As Hollywood’s fantasy skills bolster multimedia firms, other entertainment companies are moving into such fields as commercial production, theme parks and the design of retail centers. These Hollywood-based businesses are luring advertising production out of Gotham into Southern California, where, by some estimates, roughly half of national advertising production is done.

But the largest piece of the fantasy pie has to do with tourism and recreation. At a time when many other industries have downsized or have threatened to move out, new recreation-related developments include a proposed $3-billion expansion of Universal Studios, a more modest expansion of Disneyland, the recently approved $60-million Old Town Temecula Entertainment Center and the new Lego World in Carlsbad. To attract the broadest range of tourists, even family-oriented destinations like Orlando and Anaheim are adding high-profile adult entertainment to their repertoire. As part of its Disneyland expansion, Anaheim has lured Tatou, a celebrity nightclub formerly in Beverly Hills, to a new 16,000 square-foot locale next to the Magic Kingdom.

These theme-park developments, in turn, are encouraging entertainment-related companies to push into broader fields like recreation. Universal and Time Warner Inc. are not only focusing on character creation but also on marketing them through themed attractions, retail stores and multimedia products.

This complex of fantasy venues has opened up new opportunities for smaller Hollywood firms like Cinnabar. A well-established movie-prop maker, it now earns most of its profits from creating themed stores for companies like MCA/Universal, building backdrops for commercials and designing stores for retail clothing and food chains.

Similarly, Xenotech, a North Hollywood lighting manufacturer, does much of its business providing “theatrical lighting” for shopping malls and entertainment centers, including the shaft of light atop Las Vegas’ Luxor Hotel. Although based on a technological edge, first developed for the movie “Blade Runner”--Xenotech sees its growth inextricably linked to the Hollywood fantasy industry.

“We’re not far away from whole cities being designed not only as cities but . . . (as) the right kind of stage that’s entertaining,” says Xenotech President Richard Hart. “Our cities are going to become back lots . . . on a grander scale. Everyone wants the Hollywood effect--it’s the secret the rest of the world wants.”

As Xenotech, Cinnabar and hundreds of other entertainment-related firms have proved, the ability to employ and develop this “secret” represents a major growth opportunity for any firm with access to fantasy factories. If Seagram’s Bronfman fixes his vision on taking advantage of this emerging reality, his purchase of MCA may prove one of the wisest corporate purchases in recent memory.*