Chapter 28
Media Consolidation: Content Synergy
Mergers and alliances have been the code words for the relationship between content providers and the companies controlling the means of distribution for the past 15 years. Foremost, the cost of content drives parties together. It is so expensive to fill up a broadcast day with attractive content that unaffiliated players can rarely accomplish the feat. Furthermore, there is a desire to leverage the goodwill that comes from public associations in one market with another. For that matter, trademarks, which brand content or pipelines, provide an important lever in the swing to secure the loyalty of viewers.
Turner and MGM
In the 1980s, borrowing money was easy, whether in the form of direct loans from banking sources or public financing through junk bonds. Some entrepreneurs, chief among them Ted Turner, expanded their base accordingly. By the mid-1980s, Turner's cable strategy was paying off. WTBS was established in over 90% of the cable homes, and cable was reaching half of all U.S. households. This meant that his local station in Atlanta had access to 45% of U.S. homes, over six times the number of homes reached by stations in New York City, the largest broadcast market in the United States with more than 7 million homes. WTBS was spending over $25 million a year in license fees for telecast rights. Turner needed more programs, because he was competing not just against Atlanta stations but against the national networks and local independent stations throughout the country. To attract enough viewers to be able to increase his advertising rates, Turner needed content.
His approach was focused and designed to attract mass audiences. Turner sized up the two big content markets—sports and movies. He acquired sports franchises in baseball and basketball, the Atlanta Braves and the Atlanta Hawks. These acquisitions gave him year-round sports coverage of two of the top national games. Then, he bought a movie library, and not just any library. Turner made a bold decision to buy the MGM Studio and Film Library. It represented the richest lode of moviemaking, over 3,600 films, including classic works like Gone with the Wind and Casablanca, and the greatest American movie, Citizen Kane. The net cost was $1 billion, after selling off the MGM studio and lot. To fund this programming appetite, Turner sold junk bonds on Wall Street. He became so indebted that he was forced to turn part control of his business over to the cable companies that carried his channels, including the largest cable operator at the time, TCI.
The purchase of the library, later complemented by acquisition of the RKO library, turned Turner Entertainment into one of the great treasuries of film, which it used to expand its place in the cable marketplace. Turner launched new movie channels, Turner Network Television (TNT) and Turner Classic Movies (TCM). He became a catalyst of controversy by colorizing many of the premier 1,800 classic black-and-white films in the MGM library, remaking them in his vision, so they would be palatable to the MTV generation. (Remember the discussion of colorization in Chapter 25.)
Time Warner Takes Turner and Gets Taken By AOL
Ironically, Turner's success brought him into the target range of other bigger players in the media marketplace. While he lusted after CBS (making an offer for the company in the 1980s), Turner built CNN and Headline News. In 1995, Turner agreed to merge with Time Warner. Time Warner itself was a company formed by the merger of two great companies, the Time publishing house and Warner Bros. film studio.
It took the merged Time Warner company almost a decade to blend its disparate corporate cultures and resources into a unified whole. The planned union with Turner was the next ultimate merger of content-based industries. Because the concentration of content was so substantial, the FTC and the Department of Justice very carefully reviewed the impact of the merger on the information and media marketplace. (See Chapter 17 for the discussion of antitrust issues.) In the end, those agencies signed off on the deal, which placed more content-based properties under one roof than has ever been owned by a single source.
Less than 5 years later, Time Warner agreed to yet another megamerger, this time with America Online (AOL), the most conspicuously successful Internet service provider in the world. Conceived at the height of the Internet boom, this merger was the fulfillment of the next stage of visionary imagination, joining old media (print publications) with new media (cable, satellite, and film/TV/video production) and new, new media (Internet/broadband). AOL Time Warner stands today as the symbol of the source of all media content our nation has known, a remarkable accomplishment.
Consolidations and Alliances
These acquisitions, however, are in keeping with two trends. One is the rapid consolidation of media entities during the last 5 years: Westinghouse taking over CBS; Viacom buying Paramount Studios, Blockbuster, and then Westinghouse (CBS); Disney acquiring ABC-CapCities and Miramax; AT&T buying TCI Cable; Comcast buying AT&T Broadband. The other is the movement toward alliances, such as Microsoft and NBC, various Baby Bells, Fox and TCI, and all kinds of software firms with programmers and distributors.
In the late 1990s, at the moment when telephone was thought to be the next media distribution system, AT&T announced a bold plan. Recall, AT&T was the mother of all local telephone companies, which were forcibly separated from their parent by strict application of antitrust principles in 1984. Following divestiture, AT&T became strictly a long distance service, with local telephone service provided by seven newly created regional phone companies. As they grew in strength and long-distance telephone service competition materialized in the form of MCI and Sprint, AT&T looked for a new strategy. It saw cable television as a logical direction. Led by an aggressive new chairman, Michael Armstrong, AT&T went on a bidding spree for large cable operations. It did not start small but bid for and won Media One, the successor of TCI, the nation's largest cable company.
For several years, AT&T tried to meld its telephone-cable strategy, which envisioned consumers using a single company for both services. But the burden of rebuilding the antiquated Media One infrastructure, coupled with the reluctance of the market to accept the telephone company as the provider of video services, proved devastating, even for a company as large as AT&T. Initially splitting itself into separate companies for wireless, long distance, and broadband, AT&T set off a bidding frenzy for its broadband division in late 2001. Those vying for the division include the largest cable operators (Comcast, AOL Time Warner, and Cox). Spicing up the hunt was Microsoft. Several years earlier, Microsoft had made a strategic investment in Comcast, and it looked at both Comcast and Cox as preferred alternatives to AOL Time Warner, with which Microsoft was engaged in several high profile business and legal battles. In the end, Comcast prevailed, promising to create the newest, largest cable operation, reaching over 22 million homes. Henceforth, any serious content provider would have to walk through the doors of Comcast if it hoped to have sufficient access to the cable subscriber universe.
While we have already discussed the plan of GMHughes, owner of DirecTV, to merge with EchoStar, another reality is international consolidation. The world, not just the United States, is the media marketplace. Vivendi of France, led by its own visionary, Jean-Marie Messier, foresaw the need to acquire U.S. content as part of a global plan. Vivendi first acquired Universal Studios, with its vast film library and film production and distribution operations, from the Bronfman family. Then, it added USA Studios, with a stable of cable networks, including the Sci-Fi Channel, USA Network, and television production operations. It also purchased Napster.com during its legal challenge and added other dot.com ventures. To compete on the world stage, Messier believed the chief players need to assemble world-class resources. But Vivendi paid a huge price for those assets, buying at the zenith of the stock boom. When world entertainment and Internet markets dropped dramatically in 2001–2002, Vivendi shareholders rebelled. Messier was forced out in the summer 2002, replaced by a less flamboyant and more traditional executive. An era of international retrenchment may be initiated. Nevertheless, the trend toward globalization of content will continue, because sales of content are worldwide in all media, especially entertainment.
There is no question that the leadership of American companies has created a new look in the international content marketplace. With new technologies and modes of communication opening up, most notably the Internet and satellite, it is urgent that major players have a global strategy for developing content and marketing it. This does not mean there is no room for individuals. In fact, it remains a truism that the individuals who create visionary businesses or content can succeed and, indeed, succeed on an international scale. The creators of the Home Shopping Channel, for example, defined a popular programming niche with international appeal. They walked away from their creation with great wealth.
Yet, the most impressive combination remains strong content linked to international and multidimensional means of distribution, in short, the studio system grown up: The moviemakers and movie distributors, the broadcast programmers and broadcast networks, and the cable and satellite systems were interconnected and ready to exploit new markets. In the 1970s, the broadcast program and network combination created by CBS, NBC, and ABC was so powerful and such a barrier to entry that the big three broadcast networks were ultimately prohibited from syndicating programming that originally aired on their facilities. Viacom, a media powerhouse, was born from the rib of CBS when the FCC's financial syndication (FinSyn) rules required CBS to divest itself of CBS-produced programming.
As the 1990s drew to a close, the networks were allowed back into the business of syndication by an FCC that concluded that the programming industry no longer needs regulatory protection. The FinSyn rules, which restricted the networks for almost 30 years, were inspired by the concern that off-network programming tends to dominate the syndication marketplace and the broadcasting networks could, by controlling original network release, artificially preclude third parties from marketing syndicated programming. The elimination of the FinSyn rules led to the mergers of Disney and ABC and CBS, first with Westinghouse, then with Viacom. Combinations of program producers and distribution networks, which always make sense, now dominate network broadcasting.
To bring the movement full circle, we now turn to the newest media, the world of the Internet. In this interactive marketplace, old content issues are being challenged by the very force of technology.