Big, Bold Bets for 2000: Satellite TV Will Soar; Allen to Buy Universal

Will a clash of egos between the media mavericks behind the proposed merger of CBS and Viacom--Mel Karmazin and Sumner Redstone--interfere with a happy marriage? Will America Online make a run at Time Warner? Could Walt Disney Co. finally challenge Fox in regional sports programming with Barry Diller as its partner?

Making predictions is risky business--as Company Town’s record from last year demonstrates. Many of our annual forecasts fell wide of the mark: John Calley did not resign as head of Sony Pictures Entertainment; Joe Roth remains the studio chief at Disney despite continued rumors that he will leave (maybe next year). Chris-Craft Industries did not throw in the towel on UPN, although there could be a restructuring in 2000, given its partner Viacom’s merger plans with CBS. And neither EMI nor MGM was sold.

But we did hit a few home runs and a couple of singles. As predicted, some entertainment companies did spin off Internet ventures to capitalize on the stratospheric values in that sector. Not a tough call.

Better: Cable mogul John Malone did sell his sports interests to his partner, News Corp. And Paxson Communications was forced to “morph,” selling a stake to NBC at a low price that reflected its financial straits.

Leo Hindery did leave AT&T;, where he was head of cable, although he did not end up in Hollywood or politics as we predicted. (He now heads up the Internet venture of Global Crossing, a telecommunications company.) And AT&T; did agree to buy MediaOne Group, although it did not end up with Century Communications Corp. as predicted.

The year 2000 could be a slow news year, judging from the forecasts of many analysts. After the unprecedented media consolidation of the last four years, many people are predicting a year of transition and continued digestion, with deal-making concentrated in the new-media arena.

But all it takes is one unexpected development to set off a chain reaction. Perhaps some big gun of the Internet will try to cash in on the highflying stock values of Web companies before the bubble bursts by bidding for a hard media asset. AOL and Yahoo are the most likely bidders, because their shares boast market values that are double and triple those of many of the world’s largest entertainment companies.

We are swinging for the fences this year with bigger and bolder predictions. Based on insights drawn from interviews with analysts, investors and industry executives, here are some of our bets for the entertainment industry in 2000--or at least some food for thought.

Satellite TV Growth: Armed with new powers to offer local broadcast channels to consumers, the direct broadcast satellite services DirecTV and EchoStar Communications will post record growth, with cable operators losing subscribers that they cannot offset by increases in revenues from new services such as high-speed Internet access and interactive TV.

Consequently cable values will take the biggest pounding since 1996, when Tele-Communications Inc. (now owned by AT&T;) for the first time lost subscribers to satellite TV services, causing cable stocks to crater.

Time Warner Spinoff: Time Warner will spin off a portion either of its cable systems or of its Roadrunner high-speed Internet service to the public to capitalize on record valuations and hedge against competition.

AOL on Takeover Prowl: Time Warner will stockpile the cash to help battle a potential hostile takeover by America Online, which seeks to move deeper into content to offset an erosion in its core Internet access business. Time Warner, whose market value is a third of AOL’s, has so far managed to ward off AOL’s overtures. Sources say Time Warner’s major shareholders rejected an offer of 40% over the current market price, worried that AOL shares used in the transaction are grossly overvalued. With bankers unwilling to lend it cash, AOL will be unable to finance the takeover, and will turn its sights on a smaller target, such as Dow Jones Co. or E.W. Scripps.

A Bid for EchoStar: To round out its bundle of telecommunications services to compete against AT&T;, Global Crossing and other emerging telecommunications providers, MCI/WorldCom will buy EchoStar, the nation’s No. 2 provider of satellite TV service.

GM Takeover Target: DirecTV, the nation’s leading satellite TV service, will hit 10 million subscribers. That will place it in the same pay-television league as Time Warner, the nation’s second-largest cable operator, which has more than 12 million subscribers. To win the prized DirecTV, a telecommunications giant or leveraged buyout firm will wage a takeover battle for General Motors, its under-performing parent. So far, GM’s $35-billion unfunded pension liability has served as an effective poison pill, but with DirecTV’s value about equal with GM’s, the ability to sell off the auto assets and get DirecTV virtually for free is too tempting to deal makers.

Universal Sale: Paul Allen, the computer-billionaire-turned-cable-investor, will buy Universal Studios in a deal that finally gives its owner, Seagram Co., an investment return to gloat about. Diller, the chief of USA Networks, which is 45% owned by Universal, has been pushing Allen to purchase the studio and put him in charge, according to sources. Allen helped Diller take over Ticketmaster, trading his stake in the ticket brokerage for an interest in USA. Allen has been foraging for content assets to push through the cable and wireless distribution systems he has acquired over the last two years. However, skeptics say Seagram scion Edgar Bronfman Jr. has too much to prove to sell so soon after turning Universal into the world’s largest music company with the purchase of PolyGram.

USA-ABC Alliance: Diller will make good on the station alliance he hyped in November, teaming USA Network’s second-tier station group with Disney’s ABC stations to take aim at Rupert Murdoch’s regional sports cable juggernaut. After Diller’s touted Cityvision format failed to gain traction, USA turned to the tried-and-true method of buying up local sports rights to draw viewers to its stations. But he needs a backer with deep pockets and broader sports clout to build a nationwide network. Disney could fill the bill, taking a stake in a new USA station group that would help feed ESPN, vie for rights with ESPN and ABC and be cross-promoted by both. Although ESPN ceded the regional sports business to Fox after failed attempts to gain a foothold, Fox still fears that a broadcaster will try to replicate what it has done with sports in cable by tapping into fans’ local sports fever.

News Corp. Shines: News Corp., which is wildly undervalued because of Wall Street’s fears of Chairman Murdoch’s free-spending habits, will outperform all other entertainment stocks as Chief Executive Peter Chernin relentlessly works the investment community to make his and other executives’ stock options more valuable.

Setting Liberty Free: As a condition of its approval for the acquisition of MediaOne Group, the Justice Department will force AT&T; to spin off Liberty Media Corp. on the grounds that the telecommunications giant should not have dominance in both cable distribution and programming. Cable mogul John Malone, who controls Liberty Media despite its technical status as a subsidiary of AT&T;, has been eager for such an outcome, and has been buying assets, such as a stake in Emmis Broadcasting, hoping to force the issue. Federal rules prevent cable operators from owning overlapping broadcast properties.

Making Friends: Despite speculation that Mel Karmazin will take the fun out of Viacom’s counterculture and irritate Sumner Redstone by stealing the limelight, Karmazin will endear himself to his new partner by plastering Redstone’s image on one of CBS’ billboards within eyeshot of Viacom’s headquarters in Times Square.