Reversal of fortunes

Congloms now high on pics, but frazzled over stock

In these stressful times, media moguls have begun to view their empires in a different perspective.

According to the former mantra of the moguls, movies are a lousy business characterized by low margins and high risks. Now, suddenly, movie studios are the bulwark of corporate profits; CEOs of these newly merged giants, and the Wall Streeters they serve, are singing the praises of the film business.

And instead of bellyaching about the cost of news, the execs are now boasting about their news divisions’ coverage and public service.

The shift was evident as moguls resurfaced publicly en masse for the first time since the Sept. 11 terrorist attacks — gathering with hundreds of investors at Goldman Sachs’ annual Communacopia media conference in New York Oct. 2-4.

Viacom chief operating officer Mel Karmazin stressed that half of the company’s revenue, led by Paramount and Blockbuster, “was not affected by the tragedy.” News Corp. chief operating officer Peter Chernin praised Fox’s upcoming pics and described in detail just how much money theatrical releases can pull in, from domestic and overseas box office, to ancillary windows like video and pay-TV.

The conglomerates’ other arms, such as their TV divisions, are being hard hit by the decline in ad revenues; all hopes of imminent Internet recovery have dwindled. Meanwhile, box office is sturdy and the video market is booming. Now, when all but MGM have been gobbled up by giants, the concept of an independent Hollywood studio doesn’t seem quite as passe.

Goldman Sachs speakers, who also included AOL Time Warner chairman Steve Case and Walt Disney chief operating officer Bob Iger, sit atop huge congloms forged by a decade of mergers. Diversification was obligatory as the good times rolled in the ’90s and companies bulked up on broadcast and cable networks, film studios, publishing and Internet assets.

Newly minted leviathans were supposed to be shockproof, better able to weather storms. That’s being put to the test now by a deep advertising slump, a slow economy and fear of escalating violence at home and abroad.

Media stocks certainly suffered, despite a rally last week, and belts are being tightened across divisions. Chernin said News Corp. will cut millions of dollars of costs. AOL Time Warner announced thousands of layoffs even before the attack. Every company is re-examining budgets and studying new ways to save even as they look for a recovery in a not-too-distant future.

Karmazin claimed advertising is already back. Chernin and Case talked of uncertain times but good fundamentals and growth. Only Iger saw the downturn continuing well into next year with no sign of recovery.

In a market starved for good news, stocks perked up despite the mixed messages. “By and large, what people heard was that the danger is finite. Mel and Peter didn’t say, ‘This puts us on a negative growth path for 10 years,’ ” says Frank Biondi, a former top exec at Viacom and Universal.

Others were skeptical — especially of comments by Karmazin and Iger about a more robust TV scatter market. “Sure, maybe on (CBS’) ‘Face the Nation’ Sunday morning” or other fringe periods, says one fund manager.

“Advertising is a nightmare,” he adds, and unlikely to recover until at least the third quarter of 2002, even if there’s a swift resolution of the current crisis.

That’s a big assumption. Many in media and other industries wonder if the battle against terrorism will resemble the Gulf War — a contained conflict that ended in victory and ushered in a long boom — or Vietnam, a protracted struggle that eroded confidence and business sentiment.

“For the first time since I can remember, there is a remote possibility that this could spiral into something a lot worse than a three- or four-quarter recession,” says one investor.

Until there’s more visibility, advertising will stay weak. Karmazin estimated a hit to earnings at Viacom of about $500 million through year’s end from lost ads and higher newsgathering costs. Chernin put the figure for Fox at $100 million so far. The numbers will head higher any time costly coverage of breaking news preempts programming and advertising.

Not that execs are complaining. “I believe, as media companies, we have a special opportunity to use our resources to meet this challenge — to connect and inform people as never before,” said Case in a lofty keynote.

Karmazin thinks the “extraordinary newsgathering cost” born by media companies demonstrates the need for more consolidation in the sector. He urged regulators to move quickly to lift the ban on dual network ownership so CBS could team up with ABC or NBC.

However, given the current climate, maybe owning two Hollywood studios would be a better bet just now.

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