Media Mega-Mergers Are No Guarantee of a Hit

A good question about the rush of deal making that burst like a fireworks display in Hollywood last week is what’s in it for customers and ordinary shareholders?

The main deals involved a governmental OK for Time Warner to acquire Turner Broadcasting for $6.5 billion. Also, Rupert Murdoch’s News Corp. agreed to pay $2.4 billion for the 80% of New World Entertainment it didn’t already own.

It was almost a sidelight that a group backed by billionaire investor Kirk Kerkorian reached a $1.3-billion agreement for MGM.

The idea behind the Time Warner and News Corp. deals was to give enlarged companies control over distribution of films, television shows and music so they could play a greater role in an expanding global entertainment industry.

The vision of a growing opportunity around the world is correct. New television systems are opening up in Eastern Europe, vast Asian markets continue to blossom. Conservatively estimated, the worldwide market for Hollywood’s entertainment products is now about $18 billion.

But it remains to be seen whether creating big companies with all capabilities under one roof is a business model for the ‘90s or a throwback to the conglomerate craze of the 1960s, when companies were put together in one decade and dismantled in the next.

U.S. companies in other industries are slimming down to what they do best these days--AT&T; splitting up, for example. And customers no longer come in bunches but in individual lots. So Hollywood’s bigger-is-better strategy will teach a business lesson whether it succeeds or fails.

Time Warner, the company that resulted from the 1990 merger of publisher Time Inc. with movie, television and music producer Warner Communications, will once again become the world’s largest entertainment company when the Turner merger is approved by shareholders.

Time Warner had lost that distinction a year ago when Walt Disney Co. acquired Cap Cities/ABC in a deal that stunned competitors. “The Disney-Cap Cities deal created power that dwarfed everybody,” says an industry executive.

Since new laws allowed networks to own programming and removed restrictions on station ownership, there has been a scramble to buy TV stations.

The aim is market power. With films costing an average $50 million to produce and market, ownership of distribution spreads costs and guarantees outlets for shows and movies. Also, “it’s more profitable to put on shows you produce yourself,” says an executive of a station-owning company. “If one show is a dud, pull it and put another on your own station.”

That’s the theory at least. But it’s a curiously old theory dating to years before 1948 when film studios owned movie theaters. When audiences had limited choices, control worked. In fact, it worked too well. Antitrust laws forced studios to sell theaters in 1948 to end their chokehold on distribution.

*

But today the Federal Communications Commission allows networks to own programs and studios to own networks because the idea of a chokehold is laughable. With 50 to 100 channels and viewers with remote controls in their hands, choice is anything but limited.

Finding shows people like is hard enough. The Fox network has a winner in NFL football but hasn’t been able to come up with enough winning shows for evening hours.

Putting on shows people don’t like just because your company owns them sounds like a way to drive away viewers and advertisers alike.

And looming on the horizon is the development of the Internet into a marketplace that may be the ultimate in individual choice.

Perhaps bigger companies will get the new environment right. But they haven’t yet. Viacom Inc., which acquired Paramount and Blockbuster in early 1994, is struggling, its stock price at a two-year low. Troubles at Blockbuster and Paramount are draining the company, as conglomerates of the ‘60s used to be drained by their weakest links not supported by their strongest.

It’s far too early to tell about Disney-ABC but so far the famed merger has yielded no wonders.

As to Time Warner, “they were better separately as Time Inc. and Warner Communications,” says Joan Lappin, head of Gramercy Capital, an institutional investment firm that often holds entertainment stocks but doesn’t at present. Indeed, Time Warner stock has never again reached the price of Time Inc. stock before the 1991 merger.

That’s not to belittle the promise of the entertainment business. “The rapid growth of cable and satellite services overseas, and demand for American films and television programming are very bullish long-term prospects,” says Arthur Rockwell, head of research at Yaeger Capital Markets in Los Angeles.

But the business must be managed. Right now for all their outward sophistication, Hollywood firms remain provincial. They sell films and TV shows around the world. But as Edgar Bronfman Jr., president of Seagram Co. points out, “that’s not a global business, with local companies and local initiatives.”

Bronfman, whose company bought MCA last year, aims to build an international entertainment company as his family over decades built a global business in liquor production and distribution. “It may take us 10 years, but that’s the way it should go,” Bronfman says.

His instinct is correct. The truly enormous international demand is for TV shows that build on local characters and situations. The new world market is individual--but vast numbers of individuals.

Rupert Murdoch’s News Corp., based in Sydney, Australia, understands this. For its Star TV satellite service in Asia, Murdoch has purchased rights to Hindi films for India and plans to do likewise with Chinese-language films for China.

Building a business in local cultures, through partnerships with local companies, takes effort and patience. Profits come more slowly; some 70% of News Corp.’s $750 million net income still comes from U.S. operations.

But that’s what makes entertainment a growth business for the ages--and a particularly great business for Southern California, where industry employment is now 223,000 and growing 9% a year. That’s why money continues to come into the business, whether films succeed or fail. If Kerkorian hadn’t stepped up for MGM, the Dutch firm PolyGram would have.

And deals continue to get done, whether successful or not remains to be seen.