As appeared in U.S.News and World Report, August 14, 1995

Tomorrow's media today

Entertainment giants race to find the programs -- and profits -- of the future

BY WARREN COHEN

Don't touch that dial! It's whitehot from the merger frenzy that electrified the entertainment industry last week, when two of the nation's three venerable television networks were sold in a pair of transactions totaling more than $ 24 billion. Not since the mid-1980s has TV experienced such turbulence. Back then, Laurence Tisch's Loews Corp. gained control of CBS, General Electric bought NBC and Capital Cities purchased ABC. This time, Disney acquired Cap Cities/ABC for $ 19 billion and Westinghouse paid $ 5.4 billion for Tisch's CBS. All the dealing has increased the value of the networks, and analysts speculate that even General Electric might reconsider selling NBC. Last year, the network was priced at around $ 6 billion; but NBC President Robert Wright suggested that in the current market, it could fetch around $ 11 billion, although there is no "For Sale" sign hanging from NBC's headquarters. The willingness of Disney and Westinghouse to take on large amounts of debt for their network acquisitions underscores their tremendous faith in the entertainment business. In 1994, Americans watched nearly $ 30 billion worth of filmed fare such as movies and television shows. That's nearly three times the amount spent a decade earlier, and it helps explain why so many companies today are trying to snap up entertainment assets. Last year, for example, Viacom, which owns MTV, laid out $ 9.5 billion to capture Paramount; along the way, it merged with Blockbuster Entertainment. And several months ago, Seagram spent $ 5.7 billion for an 80 percent stake in MCA, the producer of Jurassic Park. In all, mergers and acquisitions in the entertainment industry have hit $ 51 billion this year and are on a pace to break last year's record of $ 72 billion, according to Securities Data Inc.

But last week's big deals reinforce the notion that advertiser-supported network television may still be the surest bet in the ferocious, fast-changing media marketplace. Although challenges from cable TV and VCRs have eroded the networks' audience over the past 20 years, prime-time shows still command the attention of 60 percent of the American viewing public every night. No other medium delivers as many eyeballs, and no other medium produces as many hot shows -- two reasons why advertisers continue to flock to the tube. television advertising spending reached $ 27 billion in 1994, a 15 percent increase over the previous year. And the market is still hot: Early ad sales for next season's fall schedule have already reached a record level.

V-chip. Legislative changes should make broadcasting even more lucrative. Last week, the House of Representatives passed a telecommunications bill, two months after the Senate passed its own version of the initiative. President Clinton has threatened to veto the legislation because he fears the concentration of media power will lead to higher prices for consumers. Yet one of the president's concerns was allayed last week, when the House included in its bill a requirement that televisions be equipped with a V-chip that would allow parents to block programs that feature sex and violence. The networks fear that the device could cut into audiences and advertising.

Still, much of the legislation would help enhance last week's deals. One provision, for example, would allow a company to own more than one station in a marketplace. Both Disney and ABC possess Los Angeles television stations and now may not need to divest one of these properties. Current laws also restrict a station group to no more than 25 percent of the nation's audience, but the House bill would increase this ceiling to 35 percent. That will help the Westinghouse-CBS deal pass legal muster because the two companies' total of 15 TV stations reaches about one third of the United States. The prospect of legislative change undoubtedly played a role in NBC's decision last week to purchase three new stations for about $ 311 million.

New profits. Recent regulatory changes at the Federal Communications Commission have brightened broadcasting's fortunes even more. Regulations once restricted networks from owning and syndicating programming, reserving the privilege for others, such as Hollywood studios, instead. Networks could gain broadcast rights for only the original airing of a program and its rerun, making money solely from advertising. Meanwhile, the studios got rich by reselling the episodes of popular shows to local and international stations. Disney, for example, received nearly $ 3 million for each of the 124 episodes of "Home Improvement." Today, the ownership rules are being phased out. The number of shows produced by the television networks is climbing -- from 10 in 1990 to 27 last year. In November, the old syndication rules will finally expire, and the networks will be allowed to tap into a major new source of profits.

If networks produce more home-grown shows, many Hollywood studios worry that they may find it harder to obtain an outlet for their programs. One of the reasons Disney wanted ABC was so that it could rerun its vast library of movies and cartoons on network TV rather than on its lower-rated cable channel. Having access to a talented programmer like Disney also benefits ABC. As future competition arises from services like advanced interactive cable and satellite TV, demand for programming will grow. The networks that thrive will be those that acquire and air the best-quality shows. With a partner that has a proven track record, ABC can now be assured of getting Disney's new ideas first. In contrast, Westinghouse doesn't offer CBS any programming expertise -- only additional television stations. That fact may open the door for a programmer like Ted Turner, who might try to make a higher bid for CBS.

There are many other reasons why media companies want to join forces and become players in both programming and distribution. Integrated companies, for example, can reap profits by maximizing copyrights. Time Warner, a case in point, profits from its Batman franchise in numerous ways. This summer's top box office hit, Batman Forever, has already generated $ 175 million worth of ticket sales, on top of the $ 414 million earned at the box office by the first two Batman films. Those movies have been sold to video stores, international theaters and television networks. Time Warner owns DC Comics, which puts out six Batman titles each month. The company also licenses the Batman characters for products ranging from lunch pails to video games. And consumers can purchase Batman T-shirts for $ 22 in 124 Warner Bros. stores worldwide. Cost savings are another factor driving media mergers. Analysts estimate, for instance, that if Ted Turner fulfills his desire and purchases a network, consolidating the news operations with CNN would save his company up to $ 200 million a year.

Turner isn't the only player in search of a major broadcast network. Time Warner, Tele-Communications Inc., Seagram and Sony have all flirted with the idea recently. In the interim, Time Warner and Viacom have each spent an estimated $ 300 million trying to build their own small TV networks. Some companies are trying to invent new avenues of distribution. Time Warner and TCI, for example, are testing advanced systems that offer hundreds of channels with services like movies-on-demand and interactive shopping. So far, however, the effort has slowed because of high costs. The pending telecommunications bill could also introduce a new distributor: phone companies that would send video programs coursing through their wires. In anticipation of this legislation, Bell Atlantic, Pacific Telesis and NYNEX have formed Tele-TV with the help of Hollywood agent Michael Ovitz and former CBS President Howard Stringer. Three other Baby Bells have teamed with Disney for a similar service.

Video games. Another area of exploration for entertainment giants is video games and multimedia computing. Last year, video game sales hit $ 4.1 billion, close to the $ 5.3 billion taken in at movie theaters. In response, MCA, Disney, Fox, Viacom, Time Warner and Turner Broadcasting have all launched "interactive" divisions in an effort to translate their existing products into the new formats. This hasn't been easy. Big-name stars usually drive Hollywood's box office. But technological innovation and creativity may be more important for a winning computer game. The bestselling CD-ROM Myst, for instance, was created by two brothers in Spokane, Wash., well outside of Hollywood's orbit.

The fact that some markets like video games can take off so quickly should serve as a reminder to those trying to predict winners and losers in the new media age. ABC may be riding high today, for example, but only a few years ago it was mired at the bottom of the ratings. And for those who criticize the Westinghouse-CBS deal because of CBS's low 1995 ratings, don't forget that from 1991 to 1994 Tisch's network earned record profits and had the highest audience numbers. TV fortunes, after all, rise or fall with a mere flick of the dial.

With Katia Hetter