Deal Shows Use of Teams to Build a Global TV Empire

Rupert Murdoch’s $311-million purchase of the Los Angeles Dodgers says more about Hollywood than about baseball. The purchase price, about double the going rate in major league baseball, is so far out of the ballpark that it’s highly unlikely the team will make money.

Few professional sports teams are profitable as stand-alone enterprises--and the Dodgers are no exception. Although many owners are in the game simply because they love the sport, a passion for baseball had nothing to do with this purchase. Rather, Murdoch sees sports teams as another form of programming for his sprawling television empire, valued more for their ability to drive other businesses than for any profit.

The Dodgers purchase is the latest in a string of notable programming buys by entertainment conglomerates that are changing the face of the business. Across the spectrum of entertainment, companies have been paying what on the surface appear to be irrational prices for signature products that can break through the clutter of consumer choices created by new satellite, digital and Internet technologies.

In one heart-stopping week of deal-making in January, professional football pulled down an unprecedented $18 billion from broadcast and cable networks for the rights to televise its games--more than double what it would cost to buy all the teams in the league. The medical drama “ER” scored $850 million to appear on NBC for three more years, making it the most expensive television series of all time.

And those deals followed by a month the release of “Titanic,” the most expensive movie ever made, costing more than $200 million, four times the average motion picture. Although the movie went wildly over budget, the expenditure is indicative of the escalating stakes for studios that want the privilege of being associated with top directors such as James Cameron.

Like priceless pieces of art, prestige media properties have come unhinged from the underlying economics of the business, evading the principle that every project should stand financially on its own. Increasingly, these Picassos and Van Goghs of entertainment have become loss leaders, valued not for their prospects of turning a profit, but for their ability to build assets or bring cachet to their corporate owners.

The structural realignment of the entertainment industry in the 1990s has contributed to the trend toward Tiffany prices. New digital technologies have exploded entertainment options across the globe, bringing scores of television channels to countries that previously had few.

To seize these opportunities, media companies have bulked up, buying and building an array of products to keep international pipelines full. The race for global dominance has eliminated all but a handful of giants that today straddle the globe with both the means to produce content and deliver it to consumers.

Led by Disney, Time Warner, Murdoch’s Australian-based News Corp. and Viacom Corp., these so-called vertically integrated corporations own combinations of broadcast networks, satellite television services, cable channels, productions studios, libraries of filmed entertainment, sports teams and music companies. And they have justified paying higher and higher prices for content because of their ability to spread costs across fields of assets.

“Technology opens up foreign markets, so we have to get bigger to increase our capital strength,” said Richard Parsons, president of Time Warner, the world’s largest media conglomerate. “Our ability to pay drives up the cost of content that is in scarce supply. These things mutually reinforce each other.”

Although many see recent payouts as freak occurrences, some industry experts predict a continuing surge in prices.

“You haven’t seen the top yet, which is determined by the public’s desires and our ability to pay,” Parsons said. “Everyone wants to play in this market. Of course, if we go into a downturn, this whole thing tanks.”

In the meantime, some wild bets have been struck that bank on unconventional payoffs.

* Analysts predict that all the winning bidders of professional football will lose money. Despite a multimillion-dollar write-off on football four years ago, Fox, for one, was willing to pay 39% more for its NFL contract this time around because of the sport’s role in building its station group, sports franchise and promoting its prime time lineup to the hard to reach male.

Four years ago, the NFL contract helped Fox lure valuable station affiliates away from CBS that validated its status as a fourth broadcast network.

* NBC agreed to pay the Warner Bros. production studio $13 million an episode for three more years of “ER,” up from the current $2 million, knowing that at least one of its rivals would have ponied up more for the chance to rise in the ratings and fight erosion of their audience to cable. According to some calculations, the power of the top-rated program in prime time would propel any of the major networks to No. 1 in the ratings.

Although NBC is unlikely to make money on the series in the next three years, it will come out ahead because of profits from the first four years of the show.

* For News Corp., the Dodgers is the centerpiece of a sports business that could eventually include the Kings hockey club, the Lakers basketball team and a new football franchise for Los Angeles. The teams secure the future of Murdoch’s regional sports cable juggernaut, which relies on televising major Los Angeles games, particularly as Disney looks to launch its own regional sports channels to complement ESPN.

* Two years ago, Warner Music agreed to pay the rock group REM $80 million for a series of albums that analysts are certain will never pay off. Securing REM was a way of signaling other musical artists at a time of management turmoil that the company was serious about keeping its important acts. And just as blockbuster movies help studios sell second-string films, groups like REM drive music sales of other acts.

Sometimes these big bets even pay off. Although most Hollywood executives expected “Titanic” to sink like the ship, News Corp. and Viacom could share an estimated $600 million in profits; the film has surpassed every box office record in history, breaking through the $1-billion barrier in ticket sales.

“What’s the worst thing that happened in Hollywood this year?” asked Leo Hindery, president of Tele-Communications Inc., a leading cable operator. “ ‘Titanic’ making money,” he said, arguing that it will lead others to take bigger risks and translate into higher box office prices and cable rates.

The partners in “Titanic” were able to turn the property into a massive event played out across a global stage in part because of their extensive tentacles. With satellite television services that reach every corner of the globe but China and patches of continental Europe, News Corp.’s global apparatus enabled the company to build momentum for “Titanic” worldwide rather than waiting for word of mouth to snowball.

“Titanic took in $75 million at box offices around the world in one weekend,” said Peter Chernin, president and chief operating officer of News Corp. “That was unthinkable 10 years ago. Today, the country--and the world--is so tied together that it is possible to permeate the collective consciousness with a galvanizing event.”

Disney is the master of this game. Its blockbuster animated feature “The Lion King” sold 54 million videos, bumped up ratings on ABC, beat all records when it was turned recently into a Broadway musical, and continues to bring children to theme parks here and abroad.

“You can work the content, which is like a rolling stone covered with Velcro that picks up dollars as it rolls through the distribution chain,” said Dean Valentine, the chairman of UPN and former head of Disney Television.

One of the earliest consolidators, media mogul Ted Turner, was ridiculed for almost bankrupting his company with the $1.5 billion purchase of the MGM library in 1985. But the escalating values of content has made him look like a genius as he turned those old movies and cartoons into cable channels TNT, the Cartoon Network and Turner Classic Movies that were sold to Time Warner with the rest of his company, including the Atlanta Braves, two years ago for $7.5 billion.

Turner’s model for squeezing value from programming is still in force today. As programming costs soar, owners have sliced and diced content to reach different audiences to recoup their investments.

Time Warner has churned out an assortment of new channels, relying on the combined assets of both companies. Turner’s CNN has drawn on the editorial expertise of its new siblings--Sports Illustrated, Money and Fortune magazines--to start sports and financial channels.

But this sort of “re-purposing” of content has created a vastly more competitive landscape, whittling away at margins and at mass audiences. Fox and NBC have both launched news channels to challenge Time Warner’s CNN, in part to get more mileage out of their resources.

The media giants’ increasing self-sufficiency has threatened independents, leading many analysts to wonder how long companies lacking all the pieces of the puzzle, such as DreamWorks and MGM, can hang on and whether unaffiliated networks such as CBS and NBC will be forced to pair up with production studios to better compete against ABC and Fox, which can get movies and television shows from their studio parents.

Some industry experts believe that vertical integration could eventually help contain costs. “This panic about the economics of the entertainment business is a momentary spike,” said Robert Broder, partner of Broder, Kurland, Webb, Uffner, a leading Hollywood talent agency.

“The price NBC paid for ‘ER’ will further encourage networks to own or control the programs on their air, restricting a free market and putting a ceiling on costs. The issue for the next decade will be how to determine value for participants like writers and directors inside a closed system when nothing goes to auction?”

Yet this scenario may be years away.

In a recent report, Wall Street analyst Harold Vogel predicted that escalating costs and fragmenting audiences would create a “more difficult growth environment than at any time in the last five years” for media stocks.

Indeed, operating profit margins of the leading entertainment companies have declined. Even top-performing Disney has seen its profitability decrease to 19% of revenues last year, from 25% in 1987.

At the moment, the highest prices for programming are being earned by properties with the greatest chances of reaching dwindling mass audiences.

“We are in a period of gradual but material change in the rules, where people are searching for ways to stem the high failure rates,” said Frank Biondi, chief executive of Universal Studios. “The strategy du jour is high-impact, event programming.”

At the box office, these are big-budget movies such as “Independence Day” that rely on action adventure themes, animation, special effects or stars with worldwide appeal.

In TV, NBC calls it “appointment television”--programming such as “Seinfeld” that creates such a buzz that 30% or more of the nation tunes in. “ER” fits the bill, and so do Super Bowls.

The Dodgers, an American icon, synonymous around the world with hot dogs and apple pie, is in the same camp--at least so Murdoch hopes.

In fact, though he would have to negotiate with the league to get a waiver of existing rules, Murdoch envisions exploiting the brand name globally, using his international satellite television services to televise games from Mexico to Japan in hopes of turning the Dodgers into the world’s favorite baseball team.

But these mega-events have left less money for everything else, creating a two-tier system with no middle class.

“The middle has dropped out of the entertainment business, maybe forever,” said Chernin. “Because of the infinite choices, consumers either gravitate to the big events that galvanize the country--and the world--or to programming with personal appeal that fills a finite niche, like ‘Wings of a Dove.’ ”

Meanwhile, new capital keeps flowing into the market, contributing to the inflation in programming prices. Australian media magnate Kerry Packer and financier Kirk Kerkorian have given MGM a lifeboat, while Korean investors and financier Paul Allen have financed DreamWorks SKG to the tune of $2 billion.

In addition to the glamour factor that has historically enamored investors of this high-stakes game, there is an underlying belief that the next few decades will see a continued geometric rise in demand for entertainment from a newly forming middle class around the world.

“There hasn’t been the shakeout necessary.” Biondi said. “If there wasn’t a fundamental optimism in the business and in the development of global markets, people wouldn’t be stepping out on the risk curve like this.”