Industry preparing for major structural change

There’s always a buzz around every company on the first Tuesday after Labor Day. The delicious torpor of August is over. It’s time to get back into angst mode, and this September, with the economy tanking and an election looming, angst is in the air.

In the entertainment business, “change” is not the fuzzy fragment of rhetoric that Barack Obama incorporates into every paragraph. Showbiz is girding itself for major structural change that will impact every player atop the entertainment economy.

A hint of all this emerged from the recent Lehman Brothers report — a turgid doomsday analysis that scared the hell out of some institutional investors. The report concluded that “the core economic models” of the film and TV business would be “disrupted” by surging digital distribution.

Thus the geniuses at Lehman Brothers, having suddenly discovered the problems that have overtaken the music business, decreed that film and TV also would suffer “an accelerated decline.” The upshot: Lowered ratings for all of the major media congloms, essentially declaring them to be risky long-term investments. To be sure, some feel Lehman Brothers itself has become a risky short-term investment.

While this “Doctor Strangelove” view of the entertainment industry is disdained by more sophisticated analysts, there’s nonetheless a widespread expectation that the next year or so will witness some extraordinary changes in the corporate landscape. These changes will surely enrich the investment bankers, but their impact on everyone else might be less beneficial.

Within the next months or years, power players in the industry would not be surprised if some of the following megadeals came to fruition:

  • Time Warner, hungry to escape its present entrapment, will sell off its key magazine properties, complete its detachment from AOL and acquire key assets of NBC Universal. All this would trigger some intriguing negotiations with the next administration’s antitrust gurus, which in turn would likely unglue some cable assets. But the end result could be a stronger “content king” that might prove more attractive to investors.

  • Sony will sell off its entertainment assets following the retirement of Sir Howard Stringer (he’s now 65) and would again focus on its core businesses. This would put into play the Sony film studio, TV production company and some digital assets that surely would cause a feeding frenzy among the other congloms.

  • The growing power struggle at Viacom would bring about a reassessment of its corporate schism — a curious divide that has brought about unorthodox adventures like the Paramount-MGM cable channel. As the Paramount and CBS assets face growing intercorporate competition (they are separate publicly held entities), there will be mounting pressure on both to launch major acquisitions and build new power centers. The Les Moonves-led CBS already is pushing its Web presence and even building a new movie company.

  • With investors punishing Rupert Murdoch for his counterintuitive expansion in conventional media (the Dow Jones acquisition may prove to be ill-timed), there will be mounting pressure within that empire to add cable components, build its Web presence and mount still further international ventures. Rupert clearly yearns to rule the world, rather than being constrained by U.S. turf wars.

  • While the Disney of Bob Iger continues to win approbation on Wall Street, it is too heavily dependent on economic and technological cycles to appease the analysts and hence, probably would also stand ready to hit the acquisitions trail. In Lehman Brothers terminology, Disney, too, is a “not recommend” at “a time of significant business model uncertainty.”

  • Finally, there’s the continuing melodrama involving MGM and UA. MGM must renegotiate its long-term loans and find new financing for its production program. Will the banks be forthcoming or will new potential partners like Lionsgate come into play?

More action on the mergers-and-acquisitions front not only spells more revenue for the investment bankers, but also distracts critics from scrutinizing Wall Street’s own fiscal disasters. The bankers may not face digital incursions, but their own business models have been exposed as being motivated, not by long-term strategy, but by short-term greed.

Perhaps, despite the problems of the moment, Hollywood may yet have the last laugh. And meanwhile, those filing back into their offices post Labor Day may find themselves pining for the sleepy days of summer.

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