In Global Media, Smarts Will Count More Than Size

There are great trends running in the world entertainment and media industries and fascinating lessons for investors and everybody interested in business.

But they are not the lessons suggested by the hype in Hollywood and Wall Street right now.

The latest buzz is that Ted Turner will meet with directors of Turner Broadcasting System on Monday and discuss a $6-billion plus bid for CBS Inc., which only three weeks ago agreed to sell out to Westinghouse for $5.4 billion.

Whether he makes the bid or not, Wall Street likes the story. CBS rose to new highs last week amid the general enthusiasm for media and entertainment stocks that has prevailed since Walt Disney Co. bought Cap Cities/ABC and then hired top Hollywood agent Michael Ovitz as its president.

Disney was lauded for becoming a giant because, experts said, great size would be needed to succeed in the emerging global marketplace.

This “reinvents the entertainment industry on a global scale,” gushed one film producer.

But that may be precisely the wrong way to look at things. It should be a warning signal for investors that Hollywood rhetoric is running ahead of reality.

Despite talk of global scale, none of the companies in the current buyout wave do that much of their business overseas--although foreign markets produce roughly half the box office receipts for some U.S. movies.

And the notion of combining movie studios with television networks is not a reinvention of the industry but an idea that Rupert Murdoch has been working on for more than 30 years.

Murdoch, the 64-year old Australian-born head of News Corp., which owns 20th Century Fox, the Fox Network, major interests in satellite television networks in Asia and Europe, and newspaper, magazine and book publishing concerns on four continents, has built his company on the simple insight that people everywhere are changing their work patterns, gaining more leisure time and therefore becoming an enormous market for entertainment and information.

He has built a company with $8 billion in annual revenue on that idea. Yet almost 70% of News Corp.’s earnings today come from the United States, notes investment analyst John Tinker of Furman Selz Inc.

The point: Although international markets promise growth, they remain to a large extent underdeveloped. And the skills needed to develop them are those of entrepreneurs, not big companies.

Murdoch has navigated international markets more or less successfully because he’s a bet-the-company visionary. The players in today’s media derby who most resemble him are Turner and Sumner Redstone of Viacom.

In 1986, Murdoch paid more than $1.5 billion to buy six television stations from John Kluge, a notoriously hard bargainer. Experts scoffed that Murdoch had overstepped himself, that debt taken on to buy the stations would sink him.

But Murdoch used the stations and programming for young audiences to create the Fox Network. The linkage in a network made the stations more valuable and the stations made the network more valuable so News Corp.’s billings grew. The debt was paid in timely fashion and Murdoch had created value.

Big companies don’t often think that way, as Murdoch proved in 1994 when he paid $1.6 billion to lure National Football League telecasts away from hapless CBS, which was looking for predictable returns on investment and couldn’t see the sense in paying to keep the NFL.

But Murdoch used football to further strengthen his network and even to attract CBS affiliate stations to join Fox, thus reducing his rival’s value while increasing News Corp.’s.

Turner made a similar big bet in 1986 when he paid more than $1 billion for MGM’s film library. Turner then used the films to create the Turner Network Television cable channel and to bolster other channels.

But Turner almost lost his company at that time because of conditions on his borrowings. He was saved by investments from cable owners, including Time Warner and Tele-Communications Inc., which took seats on Turner Broadcasting’s board and veto power over his future investments.

Those big company reins on Turner may have held back international development for Cable News Network.

But global ambitions are behind Turner’s envisioned bid for CBS. “He wants it to give TNT leverage in bidding for sports attractions,” explains investment analyst Art Rockwell of Los Angeles’ Yaeger Capital Markets, who once worked for Turner.

Sports programs are marketable in all countries. Murdoch has signed up sports attractions for News Corp.’s Star TV satellite network in Asia. ESPN, the sports network owned by Cap Cities--now Disney--has the rights to cricket in India and other countries and is working to sign up soccer rights.

But U.S. companies should be prepared for a few lumps doing business with local entrepreneurs. In 1993, Murdoch bought 64% of Star TV from Hong Kong businessman Li Ka-shing--who may have been eager to sell because Star’s ratings in China were declining.

Murdoch then put his foot in it by boasting in a London speech that satellite TV would bring down dictators. Beijing’s Communist leaders heard that and promptly banned not only Star TV but all satellite dishes from their populous land.

So Star is concentrating on India, where it has a successful Hindi language service, and working to get back into China. Entrepreneurs adjust and go on.

But those kind of foreign market uncertainties make big company bureaucracies nervous. And Disney is just such a bureaucracy. A member of the Indian family that negotiated cricket rights with ESPN notes that he has a two-page agreement and a handshake for those rights. But on another deal with the Disney organization he is on “the 46th rewording of the contract.”

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So success overseas may come slowly for Disney and others in Hollywood. In a few years, disillusionment will set in and many of the giant companies being hailed today may be dismantled.

But global markets will continue to grow and Murdoch and entrepreneurs like him will prosper from them.

Because the overriding message for investors and all who are interested in business is that the so-called information highway is real. The infrastructure for global media, from powerful computer link-ups to vast satellite networks, are being put in place now at a cost of billions of dollars.

That’s the reality behind the current froth and hype of Hollywood and Wall Street. It doesn’t mean instant riches but it promises a very interesting future for media and entertainment companies.