TV Deals’ Message? The World Needs Entertainment

The significant business news last week was not from gloomy Asia but from fun and games in the U.S. economy. Television networks bid $18 billion for rights to televise pro football over the next eight years. And NBC said it would pay $13 million an episode to broadcast “ER,” the hospital drama.

If nothing else, the extravagance says that the entertainment industry is confident about the U.S. and world economies. The unprecedented TV contracts are part of the trend that has seen the movie “Titanic” recover most of its $200-million production costs from box-office receipts in its first month of distribution.

There’s excitement in the business as big players throw huge sums on the table. Walt Disney is making a major bet on sports, paying more than $9 billion to secure National Football League games for ABC and the cable channel ESPN.

Disney’s move presages a challenge to Rupert Murdoch’s News Corp., which emphasizes sports as a key attraction for its Fox network in the U.S. and its BSkyB and Star satellite networks in Europe and Asia. Fox pledged $4.4 billion last week to retain rights to NFL football.

Such drama, such glamour! But what does it mean to you as an ordinary investor? Should you buy a selection of entertainment stocks with your retirement savings?

Only if you know the risks and have a long-term horizon. “If you invest for five years, entertainment companies can earn a good return. But if you invest for a shorter term, you’d better be a nimble trader,” advises analyst Jeffrey Logsdon of Cruttenden Roth, an investment bank in Irvine.

News Corp., for example, currently sells for less than it did three years ago, despite success in building its worldwide complex of newspaper, film and television businesses. In the last year, its stock has returned about 11% including dividends--not bad, but less than the average gain for the market as a whole.

Disney stock, by contrast, went up about 40% last year and is a consistently strong performer. But a more typical entertainment stock is Time Warner, which last year jumped 60% after trading at flat prices from 1993 through 1996. Others, such as Viacom, Sony and Seagram, which owns Universal Studios, varied widely in stock performance.

The stock movements--or lack of same--reflect Wall Street’s perspective on the entertainment industry. Professional investors “don’t look at reported earnings so much as at growth of assets,” explains Logsdon.

They look at how many movies and TV shows companies are distributing, and how they are developing their franchises, because Wall Street sees entertainment as an expanding industry worldwide.

And that view is a key to understanding how sensible companies could pledge so much money for football.

Entertainment is not really fun and games but a major global industry more akin to the airplane business of Boeing and Airbus because it demands constant investment. It’s a business of big risks and sometimes small returns, where major moves often have to be made for competitive motives as opposed to profit.

CBS, the television network which was then under different management, balked four years ago at NFL demands for a hike in contract terms and lost the broadcast rights to newcomer Fox. What followed was the destruction of CBS. Affiliate stations deserted the network, CBS-owned stations declined in value and the company eventually was sold in 1995 to new management--which didn’t hesitate last week to bid $4 billion to get football back.

NBC, a division of General Electric, was the network that balked last week, refusing to pay fees that would make the programming unprofitable. Los Angeles-based entertainment analyst Arthur Rockwell thinks NBC dropped a pass.

“They have given up a franchise that was a solid attraction for their affiliate stations, for their whole distribution system. In a case like that, profitability is irrelevant.”

Maybe, maybe not. Fashions change. NBC and GE, with ambitions to build an international network, may have questioned how global American football can become. NBC has put its emphasis on basketball and on retaining “ER.” Wall Street, obviously deciding that time will tell, first hiked GE’s stock price on the day NBC lost the NFL, but later sent CBS stock up about 5% on the week.

Investment pros support expansion in entertainment, up to a point. Viacom, which owns the Paramount studio, MTV and other cable channels, piled up assets and now has to slim down by selling publisher Simon & Shuster and the Blockbuster Video chain.

Disney, with cash flow approaching $5 billion a year, is developing from within by creating Disney Cruise lines, Disney Camp resorts for parents and children and virtual-reality theme parks called Disney Quest.

Entertainment is a paradoxical business, known for the hit and miss of movies and TV shows yet one that attracts financiers because of unparalleled long-term values. Kipling Hagopian, a partner in the Los Angeles venture capital firm Brentwood Associates, calls it the “riskiest business” he’s ever seen.

Yet he and associates founded Segue Partners several years ago and produced last year’s successful film “Ransom,” starring Mel Gibson.

But “Ransom” was an old story, first filmed in 1955 starring Glenn Ford and Donna Reed. Hagopian, with help from Disney studios, bought the rights to the story for $500,000 from the MGM film library. Then he made the new “Ransom,” which so far has grossed $300 million worldwide. And that gives you two insights into the business: A 40-year-old product can sell for $500,000, undoubtedly more than it originally cost to make. And the business has expanded so much worldwide that a remake can bring in $300 million and counting.

So it’s easy to understand why new money always seems eager to buy in. Seagram, for example, bought control of Universal Studios in 1995. But the liquor company has been ambivalent. It has not made the investments needed to invigorate the studio. Faint hearts seldom win in entertainment, and Seagram’s stock has languished.

Sony bought Columbia Pictures in 1989 and proceeded to lose billions of dollars over several years. But Sony has mastered the business, had a great year last year and rewarded stockholders with a 45% price appreciation. The market’s judgment is that the company paid heavy dues but has bought a place in an industry with a great global future.

It’s an axiom of the business that demand for entertainment does not diminish in good times or bad. That may be tested by Asia’s recession. But if there is one business with a sure future as Asia, Africa and the rest of the world move into a new century, it’s entertainment. Let that conviction, which drove the bidding for football and the hospital show last week, be your guide as long-term investors.