Entertainment Merger Mania : THE RIVALS : Scoping Out Who’s Where With What--and What May Happen

The landscape of the entertainment industry is changing rapidly.

Westinghouse’s acquisition of CBS on Tuesday and Walt Disney Co.’s purchase of Capital Cities/ABC Inc. a day earlier demonstrates the continuing consolidation of the entertainment world as fewer and fewer conglomerates fold more and more businesses under their corporate umbrellas.

As government regulations of the network business fall away, analysts predict that there is going to be even more of a scramble among powerful companies to gobble up the remaining pieces, which could prompt acquisitions of such previously unavailable powerhouses as General Electric’s NBC and Thorn-EMI.

Competition in this environment is becoming tougher. The world of show business is becoming increasingly polarized with major media players like Disney, Time Warner, Viacom and News Corp. dominating the field.

Wall Street analyst Michael Wolf, a partner in Booz, Allen & Hamilton, observes: “To compete in this new world, entertainment media companies have to be very vertically integrated. They need to be both deep in the businesses they’re in and broad across the whole range of businesses.” In the changing landscape, he adds, “it’s not good enough to be great; you have to leverage strengths across the whole set of businesses.”

Companies that were once content to create programming are expanding into distribution, publishing, music, cable and network broadcasting and interactive multimedia services. In the process of making their businesses grow, these firms frequently must assume huge debt loads and sometimes spark dramatic culture clashes.

The job of managing these creatively driven, asset-heavy conglomerates is complicated.

As music mogul David Geffen points out, “The entertainment business is a different animal from other industries.”

He notes: “It’s not like filling cans with Coke or stamping out Rubbermaid products. Companies usually stumble when they get very big and have to make creative decisions about a zillion different areas.”

Geffen’s point is that each company has its own strengths and weaknesses that it must address, but that it’s nearly impossible and questions whether it’s necessary to be in every business across the board.

“It’s not realistic to compare these businesses. They are not similar, and that is not the way people who run them analyze their prospects for the future.”

Here are some of the major entertainment companies and what analysts say they need to do to compete in the future:

Walt Disney Co.

Disney may have just pulled off the biggest coup in entertainment business, but the firm’s rock music division is still the laughingstock of the record industry. Disney Chairman Michael Eisner has professed an interest in cashing in on the lucrative record market but has avoided sinking billions into the purchase of an existing operation like Thorn-EMI. Eisner has been unsuccessful in trying to lure former Warner Bros. Records Chairman Mo Ostin to take over Disney’s flagging Hollywood Records division, which has lost more than $75 million since opening its doors in 1990.

Analysts, however, see the rock label’s disappointment as but a “blip on the radar” in an otherwise impressive set of assets.

Some analysts also suggest that Disney could better exploit its animation characters and theme park merchandise in the interactive multimedia world.

“I know Disney used to pooh-pooh interactive multimedia and took a toe-in-the-water-stance in the electronic game area, but I believe that could be a key growth area for them,” said Tom Adams, president of the Carmel Valley, Calif.-based Adams Media Research. “Kids who love ‘The Lion King’ are going to grow up into adult computer consumers. There’s little doubt that Disney could quickly become a leader in the ‘edutainment’ game business.”

Time Warner

Time Warner ruled the roost in the entertainment business before Disney’s announcement Monday of plans to buy Capital Cities/ABC. Last year, the New York-based media giant raked in $16.5 billion in revenue, dominating the domestic market in music, publishing, film and television studio production, with divisions that receive high marks from both financial analysts and media critics. Time Warner falters primarily in the broadcasting sector, where its fledgling WB network scores few points with analysts.

Although its individual businesses are profitable and reported record post-merger profits in the latest quarter, the company has racked up losses in the last five years because of the high cost of servicing its $15-billion debt. Its music division has been beset by management turmoil over the year, and analysts speculated that the firm could resolve its biggest problem by spinning off its cable interests. “Time Warner’s problem is not how to get more but how to have less,” said one executive from a competing firm. “All they have to do is spin off the cable and they’d have a staggering group of content assets. That stock would go through the roof.”

Viacom

It wasn’t long ago that Disney’s Eisner sided with Viacom top dogs Sumner M. Redstone and Frank J. Biondi Jr.’s vision that a content-driven corporation was the key to success. Analysts believe that top brass at the $10-billion company that owns Paramount Motion Picture Group may shift gears soon, though, and start shopping for a major network. The current effort to build a Paramount network from scratch will take a long time.

“Up until now, these guy have been clearly moving in another direction entirely,” said one competing executive. “Redstone and Biondi have staunchly believed that content was where the profits were going to be in the future. All that could change now.”

Whether or not Viacom changes course, Redstone is definitely interested in expanding Viacom’s horizons into the music business. The firm, which already owns MTV Network and the Blockbuster record retail chain, was rumored to have put in a bid for Thorn-EMI, and it has also approached respected record executives such as Ostin and Doug Morris to form a record label.

News Corp.

Chairman Rupert Murdoch gets high marks from analysts for creating an $8-billion global media empire with a phenomenal satellite distribution system. Murdoch proved to competitors that network television was not dead when the innovative programming featured on his upstart Fox stations nabbed viewers away from the Big Three as well as from cable stations.

News Corp. has been relatively successful in the film world, with Twentieth Century Fox churning out action hits such as “Die Hard” and “Speed,” and it has a strong hand in the media market with successful newspaper operations around the world. In addition to continuing the company’s worldwide expansion, analysts say News Corp. is considering a leap into the record business and Murdoch has been seeking advice from music executives recently about how he should proceed.

Seagram/MCA

The next logical move for Seagram/MCA chief Edgar Bronfman Jr. is to buy a broadcast network, analysts believe. It is something that former MCA president Sidney Sheinberg and former MCA chairman Lew Wasserman long lobbied for but were repeatedly rebuffed by their company’s former owner, Matsushita.

“CBS is the logical missing piece for Seagram/MCA,” says Derek Baine, an analyst with Paul Kagen Associates.

“If I were MCA, I would vertically integrate with a network to ensure shelf space,” said one industry analyst. “I would completely redo the television operation and become more actively involved in the cable networks.”

Because Seagram is a Canadian company, it’s not entirely clear whether it can buy a network outright under U.S. law.

The company, analysts point out, is strong in its theme park business and is on the verge of building an even stronger music operation, making recent deals with DreamWorks SKG and with former Warner Music domestic chief Morris, and aggressively moving into the international marketplace.

MCA’s Universal Pictures has had a spotty record over the past several years, but the recent hiring of former Creative Artists Agency super-agent Ron Meyer is seen as a way to attract more talent and thus better movies to the studio--a major Bronfman priority.

Sony

It’s hard to find an analyst with a kind word to say about Sony at the moment, and it’s unclear what Sony could buy to make itself more competitive.

Because of its foreign ownership, Sony cannot buy a network, which it lacks for its flow of television and movie product from its Columbia and TriStar studios. But it could certainly join up with a partner to get into the broadcast ring.

“Sony suffers from a number of problems,” says one Wall Street analyst. “Like MCA, they don’t have a broadcast network, and also missing is a location-based entertainment [as in theme parks]. They have great libraries but have never found ways to exploit them . . . . Basically, they need to fix the company.”

Although Sony’s music division is profitable, its market share began slipping this year. Industry watchers say the division, with its high-performing Columbia Records and Epic Records, and that has a strong international presence (particularly in Japan), is likely to bounce back.

Turner

Analysts agree that Turner has great vision and great cable networks but that it still has some pieces missing, mostly notably a broadcast network. The consensus is that Ted Turner could very well come in with a competing bid for CBS, knocking Westinghouse out of the ballpark.

“Ted has been trying nonstop for four years to get a network, and for years he was laughed at,” a Wall Street analyst said, adding, “Ted should not be laughed at.”

One scenario being floated is that Turner could team up with Seagram Co. to make a play for CBS. Baine, the Paul Kagen Associates analyst, says: “We think Time Warner could sell its stake in Turner [approximate value of $1.6 billion] to Seagram in exchange for Seagram’s 15% share in Time Warner [valued at $2.5 billion]. That would get Time Warner off the Turner board, which has prevented Turner from buying a network. Seagram would wind up owning 19% of Turner and could provide the additional funds to make a bid for CBS, since Turner is too leveraged to do it on his own.”

A Wall Street analyst points out that “Turner is not a vertically integrated company. They’re in the film business, but they’re missing the machine to provide big hit movies. They don’t have distribution, home video and theme parks.” Unlike some of its rivals, said the analyst, “other than cable, Turner is in no other major business,” which would also include publishing, music or theme parks. But, at the moment, it appears Turner has no particular interest in those.

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What’s Next

This week’s proposed mergers involving Capital Cities/ABC and CBS change the landscape in entertainment, putting pressure on rivals to boost their competitiveness. Among possible moves to look for:

More Network Maneuvering

The deals signal the rising value of the Big Three networks. Thus, they add pressure on Turner Broadcasting, Viacom, Seagram or others said to be interested in acquiring CBS to make a competing bid before the Westinghouse deal closes in four months. Meanwhile, General Electric might be prompted to sell its NBC unit or find it a partner, perhaps a studio or other content provider.

Asset Sales

Debt-laden Time Warner must sell more assets to reduce its massive $15-billion debt; it could spin off its cable interests.

Broadcast Station Consolidation

Other owners of broadcast stations might feel more pressure to consolidate, because the merged Westinghouse-CBS would own 15 television stations and 39 radio stations, including TV outlets in seven of the top 10 markets and radio stations in all of the 10 biggest markets. Congress is considering legislation to let companies own more broadcast outlets.

Movie Improvements

Seagram-owned MCA has placed a high priority on improving its movie division.

Expansions Into Music

Viacom has an extensive array of assets, with a glaring gap in the music business; it might bid for Thorn-EMI or form a record label. News Corp. is also considering a leap into the record business. The addition of Capital Cities/ABC leaves Walt Disney with few gaps in its lineup, but the company needs to improve its music division, analysts say.

Exploiting Technology

Various players, even Walt Disney, could better exploit their assets through interactive multimedia, analysts say. Various companies will also continue to pursue joint ventures with Baby Bell telephone companies, software firms and computer makers.