Hollywood Vs. Wall Street - Consolidation and Investment in the Media Industry

Weekly Corporate Growth Report, Oct 9, 2006 by Dolbeck, Andrew

The media business is big business. The industry's high potential profits draw investors while high levels of competition drive dealmaking and consolidation. Traditional media companies, such as film and broadcast television, are facing challenges from the Internet and specialty media platforms such as digital ondemand television. But as media companies diversify to meet these challenges, the line between media content production and media distribution grows thinner, making some industry players nervous.

Consolidation and dealmaking help media companies stay on top of a growing array of entertainment markets. Liberty Media Corporation recently acquired IDT Entertainment. Liberty proceeded to merge IDT with its pay TV subsidiary Starz Entertainment Group to create Starz LLC, an integrated media company that will produce and distribute programming content for multiple platforms. The new entity will create content for theatrical release, DVDs, cable and satellite television, and the Internet.

While big media companies argue that they need to consolidate their businesses in an increasingly competitive market, others are arguing for limits to media industry consolidation. Consumer groups, independent content producers, journalists, and other media and entertainment industry players are arguing that consolidation is killing creativity and diversity. Television producers, musicians, actors, and writers speaking in a public hearing before the Federal Communications Commission stated that media industry consolidation is hurting the diversity of programming available to American consumers. The FCC hearing is part of an investigative follow-up to an FCC decision two years ago that loosened restrictions on media ownership.

As major television networks merge with or acquire media production houses, they gain the capacity to develop more of their programming in-house. According to Taylor Hackford, third vice president for the Directors Guild of America, about 66 percent of network television programs came from independent producers in 1993, with the remaining 44 percent produced by networks. In 2006, only 22 percent of television shows aired were independently produced. In-house production can lead to cost-savings for the networks, but it may also limit the production of bold new material by limiting the number of content developers. "Homogenization is good for milk," stated Patrie Verrone, president of the Writers Guild of America, "But it's bad for ideas."

Big media companies don't just answer to their viewers, however. Since many of the largest media players are public companies, they also have to answer to Wall Street. Movie studios have also turned to outside investors such as hedge funds and private equity firms to help finance the rising cost of movie production. In January 2006, Relativity Media raised S600 million to fund 18 films at Sony Pictures and Universal Pictures. Actor Tom Cruise is reportedly working with hedge funds to launch an impendent studio. According to Merrill Lynch media analyst Jessica Reif Cohen, all six major movie studios use outside film financing, amounting to an estimated S2 billion to $2.5 billion in annual commitments.

That's a lot of investment capital to answer for. With the media sector growing more diverse and complex, investors have a lot of concerns, and media players have to show they have answers. And sometimes they have to answer quickly. Hedge funds in particular, look for short-term gains rather than supporting their investments over the long haul.

Challenges from investors and shareholders are driving new company strategies. CBS, for example, has answered concerns about competition from the Internet by creating online programming to complement its television content. DirecTV is being challenged for its reliance on telephone companies to bundle their DSL service with satellite TV. With telephone companies entering the video business on their own, they will soon become competitors for DirecTV's customers.

To meet challenges from investors and survive in the competitive media marketplace, media players want to be free to make alliances and acquisitions. They want to have multiple platforms to distribute content and they want to have quality content to distribute. Content creators, however, want to preserve their independence to create a diversity of material, and the FCC wants to ensure that industry consolidation doesn't prove harmful to consumers in the long run.

Sources: Advertising Age, Broadcast & Cable, C/Net, Hollywood Reporter, New York Times

By Andrew Dolbeck

Editor