Subdividing Hollywood’s mega-properties
COULD CARL ICAHN have been right after all?
The 1980s-era takeover king abandoned his battle to break up Time Warner Inc. last week after a seven-month-long effort that earned him little but sneers. Wall Street largely ignored his arm-waving, and most big Time Warner shareholders stayed out of the fray.
But Icahn’s retreat doesn’t change the fact that, in the end, he was on to something: The bigger-is-better mantra that created Time Warner and the rest of the Hollywood hierarchy may indeed have run its course.
It’s easy to see why conglomerates are appealing, particularly in a business as volatile as Hollywood. The idea is to give yourself a hedge: If the movie business is in the tank, cable can offset it. If newspaper ads aren’t moving, maybe books are.
In addition, having a world of related brands under one roof allows you to cross-sell your own content: Warner Bros. movies can get space in Time or Entertainment Weekly, while Disney can make a mini-franchise out of movies such as “Pirates of the Caribbean” and “The Haunted Mansion,” based on rides at Disneyland. Bigger size also gives you financial muscle. All of this works as long as most of the individual pieces are clicking. Then, profits are big enough to support the overhead, and investors are willing to stomach what is known on Wall Street as the “conglomerate discount” -- a 15% to 20% whack to the stock price of the unwieldy behemoth compared to what each of its parts would be worth separately.
The problem with Time Warner and some of its brethren is that very little these days is clicking. And investors are realizing that even if you can run a TV network or a movie studio or a cable system, you may not be able to do all of that under the same roof.
“The word ‘synergy’ is used to hide a lot of sins,” said Henry Berghoef, director of research at Chicago’s Harris Associates, an investment firm with stakes in Hollywood’s big corporate players. “Shareholders are generally better off if companies stick to what they’re good at.”
That, of course, is a realization that already has hit the rest of the corporate world. The appetite for conglomerates has always been faddish, reaching its peak in the 1980s and 1990s, when companies such as News Corp., Time Warner and Viacom came into their own. Now, the mood has shifted, in part because some of the biggest conglomerates of the last decade -- Cendant, Tyco, even Enron -- have proved to be fatally flawed.
But Hollywood has held on, partly because of money and partly because of ego. Executives of multinational corporations like rubbing shoulders with movie stars as much as the next guy.
The game may now be up, however, because nearly every part of the entertainment business is hitting a wall. Movies are hurting not just because of lousy box office but because the biggest stars have more leverage than ever. That is forcing studios to give away more and more of their profits to the celebrities, who are essentially free agents and can turn against them on a dime (or 10% of the gross, as the case may be). The stars themselves, not the studios, are the brand.
Elsewhere, in TV and in print, competition and digital distribution are putting pressure on costs. Digital cable has resulted in an explosion in the number of network competitors, creating a glut of networks and an insatiable hunger for something to put on them. In print, the very survival of many newspapers and magazines is under debate as marketers realize that the Web enables them to reach exactly the consumers they want -- for a sliver of the price.
If you’re an investor, all of this makes that conglomerate discount that much tougher to take. Sure, you can buy stock in Disney, News Corp. or Time Warner -- which offer you a soup-to-nuts play on Hollywood -- but why would you?
Earlier this year, Viacom bowed to the new reality. After spending years singing the praises of its sprawling setup, the company split in two in January; Viacom retained the cable and movie business, while CBS took on the television network, radio and outdoor advertising. Although it’s too early to tell whether the split will work, both companies’ stock prices have gained since the split.
Time Warner and Sony may have to be next, despite the Icahn flop. Both have tried, unsuccessfully, to marry their digital arms with their entertainment ones, and both are struggling to address simultaneous drops in their entertainment businesses.
Ironically, it is Disney, despite its recent turmoil, that may end up being the Hollywood conglomerate that works. Though Disney’s tentacles are everywhere, it has a focus that seems to work; apart from ESPN, most of the rest of the company is aimed at a family-friendly, youth-oriented demographic, so the kind of cross-selling that is critical to conglomerates actually makes sense. And Donald Duck never asks to renegotiate his contract.
For the consumers of Hollywood content, the breakup of the conglomerates may be a good thing. Todd Gitlin, a Columbia University sociology professor who has long been critical of Hollywood’s wares, is convinced that a slimming of the bureaucracies could improve the movies, TV shows and magazines that these companies produce.
“It’s easier for people to advance in their corporate hierarchies by green-lighting self-imitative blockbuster material than by doing something different,” said Gitlin, author or “Media Unlimited: How the Torrent of Images and Sounds Overwhelms Our Lives.” “Right now, their imaginations are thwarted.”
It’s unfortunate that Icahn didn’t talk about any of this. His charmingly retro proxy fight was focused on criticizing Time Warner’s corporate jets and swanky Manhattan digs, which is why Wall Street didn’t take his effort too seriously.
But Dick Parsons, Time Warner’s chief executive, and his cohorts in those lavish digs should not assume that Icahn’s comedown amounts to proof that their business model is sound. Icahn, the 70-year-old takeover artist, may have been more right than even he knew.
