The nation’s big entertainment companies busted into the new century looking a lot like hormone-fed beef, sprouting unwieldy combinations of film and TV studios, music, cable, broadcast networks, radio and TV stations, billboards, satellites, theme parks, toys and restaurants.
That’s after a decade of consolidation as media doctors prescribed critical mass and vertical integration as keys to a long and healthy corporate life. The mother of all deals, Viacom’s proposed $40-plus billion purchase of CBS, slipped through right on the cusp of the new millennium.
As Viacom, Walt Disney, Time Warner, Seagram, News Corp., Sony and MGM tweak their assets, seeking — with varying degrees of success — to enhance both cash flow and share price, they face a looming set of challenges as the media and entertainment industry jumps into the technology revolution.
“The next four to five years will not be about M&A, but about R&D,” says media analyst Richard Bilotti of Morgan Stanley Dean Witter. “Entertainment companies will need to spend time developing high-quality content, not engaging in huge mergers.” He added they must be quick and nimble to keep growing market share — not easy for multibillion-dollar behemoths — and invest wisely in new businesses and technologies.
As Wall Street digests the variables and surveys the media landscape, Viacom and News Corp. are flat out favorites.
Their shares advanced by some 50% last year, and the bull run isn’t over. Sony, whose stock quadrupled in 1999, is front and center in the convergence of hardware and software, of the TV and PC, and Seagram, many say, is poised for dramatic growth.
Time Warner is steady. Disney’s in trouble, but on the mend. And the future of MGM, a lone studio among the integrated giants, is far from clear, although the Lion has its staunch supporters on the Street.
Big players are racking their brains to create viable Internet businesses and spin them off into separate public companies. They’re also setting up inhouse investment funds to identify promising technology and web companies.
All agree it’s an expensive proposition. “Companies will be taking on huge risks, but the payoffs, if they chose the correct strategy, should be phenomenal,” says Bilotti.
The marriage of music and the Internet is a big component of the new online equation.
Universal, now the world’s largest music group, has made some high-profile forays on the Web, and others are following suit. With consumers now able and — often — willing to download music from the Internet for free, the profits of traditional players appear at risk.
Seagram CEO Edgar Bronfman Jr., Time Warner topper Gerald Levin and their counterparts take every occasion to tout the Web as a well of untapped revenue for their companies. They’re convincing, they may even believe it, and down the road they may be right.
Universal Music, which saw operating income jump 12% for its fiscal first quarter ended last September, has reason to be upbeat. In contrast, Warner Music’s income fell 20% during the same period — the latest for which figures are available.
Meanwhile, Hollywood, long the most alluring business in entertainment, is under siege. Virtually every film studio has committed to cutbacks in production costs and in the overall number of films turned out.
The trend is a healthy one, says Merrill Lynch analyst Jessica Reif Cohen, as spending on talent, advertising and marketing drops. She also notes new accounting standards are likely to be adopted that will force studios to report earnings more in line with their cash receipts. That’s good news for investors.
She views the onset of DVD as a fresh source of filmed entertainment income as the digital video discs boost the value of film libraries and the profitability of the homevideo window.
As for the small screen, both broadcast and cable TV have been reaping the benefits of a booming economy accompanied by a rich ad climate — and neither shows signs of ebbing.
“A strong ad market covers a multitude of sins,” one broadcast exec joked recently — like the fact that ratings continue to erode.
TV, says Morgan Stanley, is “the pricing leader for all media.” Witness ABC’s unprecedented $3 billion ponied up for Super Bowl spots. But the investment firm cautions that high prices may be pushing some advertisers into radio, billboards and elsewhere, and it foresees big trouble if dot-com or pharmaceutical advertising tapers off.
The advent of digital TV and virtually unlimited channel capacity plus newcomers TiVo and Replay with advanced recording capabilities could dramatically change viewing habits as consumers can watch any show anytime. And as high-speed Internet access rolls out with quality streaming video, the TV-PC divide will become cloudier.
But despite common challenges and shared interests, the biggest U.S. entertainment companies remain very different animals with unique strengths and varied business plans.
Time Warner is the sole cable operator in the group. Likewise, News Corp.’s heavy overseas investment in satellites and publishing set it apart. As a group, the stocks have been compared with Mexican jumping beans — rarely up or down at the same time.
These companies are also run by an unusually colorful cast of CEOs who weigh heavily in Wall Street investment calls.
Bronfman was out of favor for some time, viewed as a bit of a lightweight, until the bold purchase of Polygram in late 1998 changed some minds.
Before that, “Everyone hated Sumner (Redstone of Viacom) two years ago. They hated Jerry (Levin of TW) four years ago. These stocks trade on perception,” one analyst observes. The Street is admiring but wary of News Corp.’s Rupert Murdoch, seen as a liberal spender, but makes perpetual doe eyes at CBS’ Mel Karmazin, preacher of shareholder value.
- VIACOM: Stock rose about 50% last year, making Viacom the great mover of 1999 and probably the fastest growing of the diversified entertainment companies going forward, says Scott Davis of Schroder & Co. The merger with CBS will likely close in March, gathering together a tremendous collection of assets from TV and radio stations, billboards and the CBS Network to Paramount Pictures, Simon & Schuster and the powerhouse MTV Networks.
Redstone, Karmazin and their investors are drooling at the lucrative cross-selling and promotion potential. The deal is being scrutinized by regulators, who could require TV station divestitures or force Viacom to forgo its interest in UPN.
Viacom is also set to sell off its remaining 80% stake in Blockbuster if shares of the video rental chain move into the $20s.
- NEWS CORP.: Stock was up just under 50% in 1999 but is still considered by many to be the most undervalued of the big media companies. President and chief operating officer Peter Chernin is highly regarded by Wall Street, and the group “continues to redeploy capital into new businesses with high growth prospects,” says Merrill Lynch’s Reif Cohen.
Bilotti of Morgan Stanley sees News Corp. as the only one of the major media companies that has shown an aptitude for growing internationally, exporting the strategies that make it successful in the U.S. to develop content and distribution channels abroad — a key to growth in coming years.
Fox Entertainment, which News Corp. spun off into a separate public company late last year, hasn’t fared as well. Geared to U.S. investors with little appetite for Australian newspapers or satellite services in India, Fox shares have languished near the $25 mark, just about where they first started trading.
A poor showing by the Fox Broadcasting Network this season hasn’t helped. Nor have tough comparisons with 1998 earnings that were inflated by streams of “Titanic” revenue. Fox’s prolific TV production arm, firing on all cylinders, is a bright spot, and the upcoming theatrical slate looks impressive. Reif Cohen sees Fox stock rising to $35 this year.
- SEAGRAM: Stock gained about 15%. That’s not a bad run, but analysts note that lots of people lost lots of money when the shares plunged from $65 to $34 between April and October before making up some lost ground.
That drop coincided with a hefty $1.5 billion stock offering by the company as well as news that co-chairman Charles Bronfman would unload some of his own shares. Davis says investors also found the stock overvalued after running up on an excess of enthusiasm for the online music business and for Seagram’s new Islands of Adventure theme park in Orlando, Fla.
Seagram appears to be absorbing the Polygram acquisition nicely. Universal Pictures seems to have definitively kicked its losing streak from the dark days of “Meet Joe Black” and “Babe: Pig in the City.” Cash flow from its giant beverage division gives Seagram’s numbers some extra heft, and the company should show impressive growth going forward, Davis and others say.
- TIME WARNER: Stock up circa 15% in 1999 after a much bigger increase the year before. Some analysts see good value here, and all agree the company is cash-flow rich — meaning share repurchases in the cards– and houses a terrific collection of assets. Big management changes at Warner Bros. and Warner Music were a bit disruptive but could re-energize both divisions.
The issue, they agree, is the absence of a near-term catalyst to boost the company’s stock price or financial results. The closest big-ticket event would be a restructuring, exepcted this summer, of Time Warner Entertainment.
Time Warner owns 75% of the TWE partnership — which includes Warner Bros., HBO, cable systems and other entertainment properties — and cabler MediaOne owns the rest. MediaOne is in the process of merging with AT&T, which will probably hash out a telephony deal with Time Warner.
- WALT DISNEY: Stock’s gone nowhere, and the company is in a fix. A dismal performance at its consumer products unit — licensing, Disney Stores, etc. — as well as a downturn in homevideo took a huge, 30% bite out of the Mouse’s profit for fiscal 1999 ended in September from the year before. The company said net income — of $1.3 billion — will be flat in the current fiscal year as it aggressively attacks its trouble spots.
Under siege, chairman-CEO Michael Eisner became much more visible and hosted an unprecedented conference call for investors and the press to discuss the company’s prospects.
“Finally all the bad news got out,” said Jeff Logsdon of Seidler Cos., calling Disney a study in “re-engineering, reinventing and redesigning.” Broadcasting at ABC is turning up, he noted, and ESPN continues to rake in the profits.
Disney sold its Fairchild Publishing to Conde Nast late last year and also shaped a deal to sell its Anaheim-based sports teams the Angels and the Mighty Ducks. Those talks broke down, and the teams are no longer on the block. Disney also inked a deal to build a new amusement park in Hong Kong that will give it a coveted entree into the enormous Chinese market.
- SONY: Stock actually quadrupled to nearly $290 during the year. Not many U.S. media analysts follow the company since film, TV and music only represent a small portion of its revenue compared with its mammoth consumer electronics business. PlayStation is driving sales, and an inflow of capital into the Japanese market has clearly found its way to Sony stock.
As a brand name it’s unbeatable, and Wall Streeters say Sony is viewed as an innovator as well as a company whose presence in the home and in the content business makes it ideally suited to cash in on media’s tech revolution, whatever direction that takes. Still, some on the Street call the stock price rather unbelieveable.
Rumors continue to dog Sony about a spinoff or sale of its U.S. entertainment business or teaming the studio with a U.S. broadcast network. Sony has considered a number of options in the past, but execs don’t seem in any hurry to either unload all or part of those assets.
- MGM: Volatile stock soared more than 10 points, or some 80%, in 1999 as energetic new management took the reins and the studio turned out a run of box office successes, including the latest James Bond installment, “The World Is Not Enough,” in November. The current regime is touting cost savings, co-financing and a new way of doing business altogether.
But the key, the big shoe yet to drop, is a distribution deal that chairman-CEO Alex Yemenidjian has promised. It lookds like the company is looking to launch a trio of minipay networks on digital cable.
“Every year’s an interesting year for MGM,” Logsdon says dryly.
The stock really jumped when owner Kirk Kerkorian canceled a scheduled equity issue in October and shifted to a rights issue instead, which enticed investors and squeezed short sellers. It’s Kerkorian’s third go-round with MGM and just about everyone is curious to see where he takes it, whether you buy the turnaround story or not.