Vivendi-USA Deal Gets Industry Future Half Right

Though experts talk of Vivendi Universal’s acquiring the entertainment assets of USA Networks Inc. as a triumph of consolidation and “vertical integration,” the pattern in the industry really is that of “fragmentation.”

Under fragmentation, more and more methods are available to distribute TV shows and movies through cable and satellite channels and the Internet. Also, more-specialized channels, such as the Golf Channel and Home & Garden TV, reach niche audiences. And there are more modes of entertainment, such as video games and Internet chat shows, attracting customers.

That spells a future with more competitors than most analysts are predicting today.

And that also means the benefits that experts claim for the Vivendi-USA Networks deal will prove to be of less value than its $10.3-billion price tag indicates.

The conventional wisdom sees good reason for Universal to acquire USA Networks’ cable channels so that it can control at least some distribution for its feature films and television shows.

But that ignores the fact that consolidation of entertainment companies, which really caught the attention of investors and Wall Street in 1994 with Viacom Inc.’s purchase of Paramount Pictures, followed by Walt Disney Co.’s 1995 purchase of Capital Cities/ABC Inc., has not always brought success to companies or joy to shareholders.

In fact, most consolidations, including the big one in January that united AOL and Time Warner, have resulted only in entertainment conglomerates with some parts faring well and other parts poorly. It doesn’t stretch the imagination to foresee a wave of de-consolidation taking apart these companies a few years from now.

Wall Street might suggest, for example, that the successful ESPN sports channel be spun off from a Disney company that has been less profitable since it acquired the Cap Cities/ABC properties.

Meanwhile, Vivendi Universal Chairman Jean-Marie Messier, a onetime investment banker at Lazard Freres in his native France, is bolstering distribution. In addition to USA Networks, Messier is investing $1.5 billion for an 11% stake in satellite firm EchoStar Communications Corp., which he sees as an additional distribution outlet.

Messier’s goal is to gain bargaining power in negotiations for entertainment deals and good positions in cable and broadcast systems for Universal’s features. “We are strong enough to make commercial agreements to get our movies into distribution,” he said after announcing the deals of the past week.

If measures of fear and greed are behind most business transactions, fear is driving consolidation. As entertainment companies have seen the media marketplace divide and multiply--from three main broadcast networks to scores of cable channels, from TV sets to personal computers, from feature films to video games outselling movies--they have tried to gain access and control in as many forms as possible.

To his credit, Messier sees the future. “The trend is broadband, digital interactive TV, wireless broadband,” he said at a news conference Tuesday. Yet like so many others in entertainment, his vision is of scarce resources in distribution and production--only so many “seats at the table,” as an industry phrase puts it.

But the next frontier of entertainment and media, the Internet, is profoundly different. When broadband Internet comes to homes, probably within five years, it will bring infinite channels through which producers of entertainment features can send their creations to the world.

“There will be information and entertainment coming from many sources, hundreds of competitors,” says Andrew Kessler, a San Francisco-based investment manager in high-tech industries.

The industry will see much larger competitors. Microsoft Corp. already is coming on strong, with the Xbox in stores this holiday season, a game machine that has powerful computing and communications capabilities. Microsoft Chairman Bill Gates sees the Xbox as an entry point to the living room, through which his company can stream interactive entertainment and information software.

Thus far Microsoft’s only major media success has been in MSNBC, its joint venture with NBC’s cable and Internet news service. NBC, of course, is a subsidiary of General Electric Co., which created CNBC, the business cable network. GE recently agreed to acquire Telemundo, the Spanish language network, for $3 billion.

Hollywood executives and analysts in recent years believed that GE would sell NBC to an entertainment firm because the TV company would be unable to stand alone in an era of consolidation. But new GE Chief Executive Jeffrey Immelt, like his predecessor Jack Welch, has big plans to use NBC as the company’s vehicle for home entertainment and information on the Internet, just as it uses the Internet in business for constant communication with suppliers, customers and employees.

Both Microsoft and GE, each with market capitalization approaching $400 billion, are much larger and stronger than any entertainment company. In growing international markets such as China and India, Microsoft and GE have far more to offer host countries in technology and business ventures than do traditional entertainment companies.

That doesn’t mean entertainment will be dominated by big companies.

On the contrary, just because the Internet opens access to so many producers, competition will be intense to establish brand names and strong Web sites for niche markets. That’s already happening. Amazon.com is an easier-to-use, more efficient online store than its numerous me-too competitors.

The industry’s future, in short, will be an extension of trends already evident: a marketplace so fragmented and diverse that success will require an entertainment firm to be extremely nimble.

Are Disney and AOL Time Warner Inc. nimble? Will USA Networks make Vivendi Universal nimble?

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Times staff writer Corie Brown contributed to this report.