Conglomerates and Integration How Big Is Too Big

1
Conglomerates and Integration How Big Is Too
Big?
Gigi Johnson Communication Studies 197C Media
Madness? August 16, 2004
2
Types of Media Business Models

• Experience (live)
• Rental/Subscription multiple viewings, limited
  period of time
• Purchase physical good infinite viewings, 1
  medium
• Purchase digital good infinite viewings, all
  media in format
• Syndication (B2B/business-to-business)

3
Different Attributes for Different Products
Interactivity? Editability?
4
Asset Types

• Library Assets residual value, low cost per
  additional copy cash flow support most debt
  structures
• Licensing (e.g. Classic Media, Marvel, Jim
  Henson?) low COGS
• Production Assets
• Distribution Assets
• Real Estate historical cushion for historical
  downturns
• New Assets highest risk/reward

5
What Are Media Companies Made Of?
6
Regulation Key Business Drivers

• The Consent Decree of 1948 -- the "Paramount
  Case and the resulting breakup of the studio
  system
• Financial Interest and Syndication FCC ruling in
  1970 (aka FinSyn)
• United States Supreme Court ruling in Universal
  City Studios et al. (including Disney) vs. Sony
  Corp. in 1984 the Betamax Case
• 1996 US Telecommunications Act results in
  billions of dollars of broadcast properties
  changing hands

7
U.S. Strong, But Local Power Abounds
Source Public Filings
8
and Abounds
Source Public Filings
9
Common Elements? Local Dominance in Other Media

• International heritages in publishing, then
  radio, TV, new media
• Lower risk cash flows to redeploy and lever with
  new media to diversify
• For all -- need for local partners, JVs, local
  contracts

10
How Did Media Corps Get So Big?

• FinSyn (started in late 1960s) repealed in 1995
• Deregulation/removal of ownership caps
• Appetites of public capital markets

11
FinSyn Continued

• Fox bought Chris-Craft stations for 4.4 billion,
  giving it 41 coverage and ownership in UPN
• FCC ignored the 35 coverage cap after this
  deal
• NBC was the only network without a major studio
  connection until they closed the Universal
  transaction
• Repeal of FinSyn means production companies often
  compete with their own clients
• Telepictures must sell to NBC stations and
  competes with product from NBC Studios
• Also run into self-dealing, like X-Files on FX

12
FinSyn Impacts

• Led to formation of UPN (1992) and WB (1994)
• Disney bought Cap Cities/ABC for 19 B in 1995
• CBS acquired King World in 1999 for 2.5 B, then
  merged with Paramount in a 36 B deal
• Viacom spun off in 1971 as syndication arm of
  CBS ended up buying CBS in 1999 for 50 billion,
  Paramount in 1994 owns MTV, VH1, Nick, Spike,
  etc

13
How Did Media Corps Get So Big?

• Station ownership cap continually relaxed
  (currently at 35, FCC proposal just defeated by
  the courts would change cap to 45) huge fight
  over this right now
• Other rules up for discussion
• Newspaper/TV cross ownership
• TV duopoly rules (only permitted when 8 other
  stations remain only 1 station can be among top
  4 rated)

14
U.S. Banks/Libraries -- Content Companies
15
Sony Pictures
16
Columbia Pictures

• 1920 -- Harry Cohn founds CBC Pictures
• 1924 -- CBC renamed Columbia Studios
• 1951 -- Columbia Pictures establishes Screen Gems
  television program subsidiary
• 1982 -- Tri-Star Pictures formed by CBS
  Television, HBO and Columbia Pictures
• 1982 -- Coca-Cola buys Columbia Pictures
• 1987 -- Columbia Pictures merges with Tri-Star
  Pictures under the ownership of Coca-Cola

17
Sonys Attempts for New Media

• 1975 -- Sony launches Betamax VCR
• 1982 -- CD hardware and software launched by Sony
  and Philips
• 1988 -- Sony buys CBS Records' global business
  for 2bn
• 1989 -- Sony Corp. buys Columbia Pictures and
  Tri-Star Pictures from Coca-Cola for US3.4bn
• 1989 -- Sony buys Loews cinema chain
• 1992 -- Sony launches Mini Disc
• 1997 -- Sony/Loews cinema chain merges with
  ailing Cineplex Odeon
• 2001 -- Loews Cineplex (inc Sony-Loews) acquired
  by Onex and Oaktree Capital Management after
  financial crisis
• 2004 Sony Music merges with BMG Music Sony
  makes 5bn offer for MGM with Providence Equity
  Partners, Texas Pacific Group and Credit Suisse
  First Boston why?

18
Viacom
19
Paramount Pictures

• 1912 -- co-founder Adolph Zukor started his
  Famous Players Company in New York
• 1913 -- Cecil B. DeMille, Jesse L. Lasky, and Sam
  Goldfish (later Goldwyn) started the Jesse L.
  Lasky Studios in Hollywood 1914 March The Squaw
  Man released
• 1914 -- Paramount Pictures Distribution Co. was
  formed W. W. Hodgkinson
• 1916 -- Firms merge as Famous Players-Lasky Co.,
  then bought Paramount
• 1928 -- Wings received the very first Academy
  Award for Best Picture

20
The Consent Decree and GW

• 1940 -- Paramount puts first TV station on the
  air in Chicago
• 1949 -- US Department of Justice forces Paramount
  and other studios to spin off their cinema
  operations. United Paramount Theatres is
  established (later buys ABC television network)
• 1966 -- GulfWestern conglomerate buys Paramount
• 1989 -- GW was renamed Paramount Communications
  Inc.
• 1993 -- Paramount and Chris-Craft Industries
  announce plans to launch new broadcast network
• 1993 -- Paramount Publishing announces plans to
  acquire Macmillan Publishing Company USA
• 1994 -- Paramount merges with Viacom an
  US8.4bn deal

21
Viacom

• 1971 -- Viacom formed when FCC rules force CBS to
  spin off some of its cable TV and
  program-syndication operations Viacom buys TV
  radio stations through 1970s and early 1980s
• 1978 -- co-founds pay-TV network Showtime. Viacom
  
• 1982 -- becomes full owner of Showtime
• 1983 -- combines Showtime with The Movie Channel
  to form Showtime Networks
• 1986 -- buys MTV Networks in 1986    

22
Viacom and Redstone

• 1954 -- Sumner Redstone gains control of National
  Amusements Inc (NAI), builds multinational cinema
  group
• 1987 -- NAI LBOs 83 majority interest in Viacom
  in a bidding war with Carl Icahn and management
• 1993 -- Blockbuster invests US600m in Viacom,
  telecommunications group NYNEX invests US1.2bn
• 1994 -- Showtime Networks and Castle Rock
  Entertainment enter into multi-year, 50-picture
  exclusive output deal
• 1994 -- Blockbuster invests US1.25bn in Viacom,
  which then buys Blockbuster for US8.4bn
• 1994 -- Viacom and Paramount announce US8.4bn
  merger after Viacom wins bidding war with USA
  Networks/QVC  

23
Viacom Buyer and Seller

• 1994 -- sells its 33 of Lifetime Television to
  Hearst Corporation and Capital Cities/ABC
  (subsequently acquired by Disney)
• 1994 -- sells Madison Square Garden for
  US1.075bn
• 1995 -- spins off its cable systems to
  Tele-Communications (TCI)
• 1996 -- announces it will exercise its option for
  50 ownership interest in UPN
• 1997 -- equity in Spelling increased to 80
• 1997 -- sells interest in USA Networks to Seagram
• 1997 -- CinAmerica Theaters joint venture of
  Viacom and Time Warner sold to WestStar Holdings
• 1997 -- sale of educational, professional and
  reference publishing businesses to Pearson for
  US4.6bn, with Viacom retaining the consumer
  operations (including the Simon Schuster name)
• 1999 -- Viacom buys CBS for US50bn  

24
Walt Disney Company
25
Disney 1928-1940 Animation Roots

• 1928 -- Iwerks modifies Disney's "Oswald The
  Lucky Rabbit" character, turning it into Mickey
  Mouse
• 1928 -- first silent film featuring the Mouse
  premieres
• 1930 -- Disney buys Iwerks' 20 share of company
  for US2,920
• 1934 -- Three Little Pigs wins Academy Award
• 1937 -- Disney's first full-length animated
  feature film Snow White the Seven Dwarfs
  premieres at cost of US1.5 million
• 1940 -- Walt Disney Productions goes public to
  repay US4.5 million in debt

26
Disney 1950-1960 Beyond Animation

• 1950 -- first Disney TV special One Hour in
  Wonderland airs on NBC
• 1952 -- Walt Disney develops ideas for a "family
  park" to be called Disneyland
• 1953 -- Disney establishes Buena Vista
  Distribution Company as Disney's film distributor
• 1954 -- ABC invests US500 000 in cash,
  guarantees all WED bank loans and gets 35
  ownership of Disneyland (with all profits from
  park's food concessions for 10 years
• 1954 -- Disneyland show on ABC network
• 1955 -- Disneyland opens in Anaheim 1 million
  visitors within 6 months
• 1955 -- Mickey Mouse Club, Disney's second TV
  show, is launched
• 1960 -- Disney buys ABC's one-third interest in
  Disneyland for US7.5 million and pay off all
  loans
• 1966 -- Walt Disney died (frozen?)

27
Disney 1980-2004 Further Expansions

• 1983 -- Disney Channel Tokyo Disneyland
  licensed
• 1984 -- Michael Eisner, from Paramount, became
  CEO of Disney after failed takeover bid for
  company by Bass Bros. First Touchstone release
• 1986 -- Capital Cities Communications buys ABC
  network for US3.5 billion to create Capital
  Cities-ABC
• 1987 -- first Disney Store opens
• 1990 -- first Hollywood Pictures release
• 1992 -- Disneyland Paris opens
• 1993 -- buys Miramax for US80m

28
Disney 1994-2004 -- Frustration

• 1994 -- Frank Wells (COO) dies
• 1994 -- Jeffrey Katzenberg leaves, starting
  Dreamworks with Steven Spielberg (famed film
  director/producer) and David Geffen (recording
  industry maven)
• 1995 -- Pixar relationship pays off with Toy
  Story release Pixar goes public
• 1995 -- Disney buys Capital Cities-ABC for
  US19bn
• 2001 -- buys Fox Family Worldwide from Murdoch
  and Saban for US5.3bn
• 2003 -- sells Anaheim Angels for US180m (240m
  invested)
• 2004 -- Pixar ends relationship after 2005
• 2004 -- Comcast makes unsuccessful US54bn
  hostile takeover bid for Disney

29
Time Warner
30
Time Warner

• 1907 -- four Warner brothers establish film
  distribution business and move into production
• 1918 the brothers open their first West Coast
  Studio on Sunset Boulevard
• 1925 -- Warner establish Vitaphone Co., begin
  experimental sound pictures at Warner Vitagraph
  studio in Brooklyn
• 1926 Warners Don Juan, starring John
  Barrymore, features music but no spoken dialogue
• 1927 -- Warner moves Vitaphone to Hollywood,
  release Al Jolson's The Jazz Singer

31
Time Warner Warner Bros. 1935-1950

• 1935 -- first Porky Pig cartoon from Warners
  animation unit
• 1940 -- Bugs Bunny introduced by Warners
• 1944 -- Court ruling that Warners must release
  Olivia de Havilland after 7 year contract
  beginning of end of Studio System
• 1948 -- much of Warners film library sold to MGM
• 1949 -- Warner ordered to divest cinemas sells
  chain in 1951 to Mann Theaters

32
Warner Frustration 1958-1970

• 1958 -- Warner Bros. Records founded, later
  renamed WEA
• 1963 -- Warner closes animation unit
• 1963 -- Warner buys ailing Reprise records
  (Sinatra)
• 1967 -- Jack Warner sells his stake in Warners to
  Seven Arts
• 1967 -- Atlantic records bought by Warner-Seven
  Arts
• 1969 -- Warner-Seven Arts acquired by Kinney
  National (Steve Ross) and becomes Warner
  Communications

33
Time Warner/AOL/Turner

• 1980 -- CNN founded by Ted Turner
• 1986 got back into theater business with
  Paramount, buying CinAmerica (Mann Festival
  Theaters) sold out in 1997
• 1988 -- Turner founded TNT, a movie channel
• 1989 -- Time Warner created with Time's
  acquisition of Warner Communications
• 1992 -- Turner founded Cartoon Network
• 1996 -- Time Warner takes over Turner
  Broadcasting System
• 2000 -- AOL merges with Time Warner
• 2003 -- 'AOL' dropped from AOL Time Warner
  corporate name
• 2003 -- Warner Music arm sold to consortium led
  by Edgar Bronfman (former head of Universal) in
  Nov. for US2.6bn
• 2004 Time Warner makes 4.7-4.8 billion offer
  for MGM

34
News Corporation (Australia)
35
Fox

• 1904 -- William Fox (clothes dealer) forms
  Greater New York Film Rental Company
• 1916 -- William Fox starts film production in Los
  Angeles
• 1930 -- Fox loses firm in 18 million to
  bankruptcy to his banks
• 1935 -- Merges with Twentieth Century Pictures
  Company (founded in 1933 by Darryl Zanuck)
• 1936 -- Fox tries to bribe the bankruptcy judge
  and goes to prison
• 1963 -- much-heralded Joseph L. Mankiewicz film
  Cleopatra was a disaster and cost a record 44
  million.
• Fox was saved from financial disaster only by the
  release of the fact-based war epic The Longest
  Day (1963) and the unexpected success of The
  Sound of Music (1965).

36
News Corp 1980s expansion

• 1985 -- News Corp buys TCF Holdings (parent
  company of Twentieth Century Fox Film)
• 1985 -- buys seven US television stations from
  Metromedia for US2bn to form Fox Television
• 1985 -- Murdoch becomes US citizen in line with
  regulations barring foreign ownership of
  television stations
• 1986 -- launches Fox television network in US
• 1987 -- buys Harper Row, later merged with
  William Collins as HarperCollins
• 1988 -- buys Triangle Publications, which
  includes TV Guide, from Walter Annenberg for
  US3bn
• 1989 -- launch of Sky Television - reaches
  million viewers within year
• 1989 -- The Simpsons premieres on Fox Television
  Network
• 1990 -- BSkyB formed through merger of Sky
  Television and British Satellite Broadcasting

37
News Corp Regrouping

• 1990 -- News Corp nearly goes bankrupt with over
  US6bn in debt on three continents
• 1991 -- sells most US magazines - including New
  York, Seventeen, Soap Opera Digest, Soap Opera
  Weekly, Seventeen, Automobile, New Woman,
  Premiere and Daily Racing Form - to Primedia
• 1992 -- family's stake in News reduced from 43
  to 35
• 1993 -- pays US525m for 63.6 stake in Hong
  Kong-based satellite broadcaster Star TV

38
News Corp. Expansion Continues

• 1993 -- pays 1.6bn for rights to broadcast US
  pro football on Fox
• 1994 -- agrees to pay US500m to New World
  Communications Group for affiliate agreements
  from its 12 current network affiliates, takes 20
  stake
• 1994 -- BSkyB floated with value of 4.5bn
• 1996 -- sells HarperCollins US education
  interests to Pearson for US580m
• 1997 -- buys Heritage Media coupon insert
  business for US1.4bn
• 1997 -- buys remaining 80 of New World
  Communications (10 US television stations) for
  US2.5bn
• 1997 -- buys LA Dodgers baseball team for US350m

39
News Corp It Keeps Growing

• 1997 -- agrees to buy International Family
  Entertainment cable network (renamed Fox Family
  Worldwide) for US1.9bn
• 1998 -- sells Heritages radio and television
  broadcast properties to Sinclair for US630m
• 1998 -- floats 18 of Fox Entertainment Group
• 2000 -- buys Chris-Craft Industries, BHC
  Communications and United Television (10
  television stations) for US5.35bn
• 2001 -- sells 49.5 stake in Fox Family Worldwide
  to Disney for US5.3bn
• 2003 -- buys 34 controlling stake in Hughes
  Electronics (satellite broadcaster DirectTV) for
  US6.6bn

40
20th Century Fox Production -- Today

• Units
• Twentieth Century Fox 10 films per year
• Fox 2000 6-8 films per year
• Fox Searchlight 8-10 films per year
• New Regency 2-4 co-financed films
• Partners/Key Distribution
• MGM 5 films per year
• Lucasfilm 2 films over four years
• New Regency 3-4 films per year

41
NBC Universal
42
MCA/Universal Monster Movies Music

• 1906 -- Carl Laemmle started in nickelodeons in
  1906 after migrating from Bavaria
• 1909 -- with support from several minor studios
  opposed to the Edison monopoly, he established
  the Independent Moving Picture Company of America
  (IMP)
• 1912 -- Universal Film Manufacturing Co formed in
  New York by, later becomes Universal Pictures
• 1946 -- Universal Pictures merges with
  independent production company International
  Pictures to become Universal International
• 1952 -- Universal International is sold to Decca
  Records
• 1957 -- MCA buys Paramount's pre-1948 film
  library for US50m
• 1958 -- MCA buys Universal's 750 acre back lot
  for US11m
• 1962 -- Decca sells Universal to MCA
• 1975 -- Spielberg's Jaws first Blockbuster
• 1986 -- MCA buys 42 stake in Cineplex Odeon
  cinema chain

43
Universal to NBC Universal 1990-2004

• 1990 -- Matsushita buys MCA for US6.1bn
• 1990 -- MCA buys Geffen records
• 1993 -- Polygram buys Motown records
• 1995 -- Seagram sells Du Pont stake, buys MCA
  from Matsushita for US5.7bn and renames it
  Universal Studios
• 1997 -- Seagram buys remaining 50 of USA network
  from Viacom for US1.7bn
• 2000 -- Vivendi buys Seagram for US34bn, becomes
  Vivendi Universal
• 2003 -- Vivendi combines US film studios, theme
  parks and cable tv channels with NBC to form NBC
  Universal

44
Metro-Goldwyn-Meyer
45
MGM

• 1919 -- United Artists formed by Charlie Chaplin,
  D.W. Griffith, Mary Pickford, Douglas Fairbanks
• 1924 -- Merger -- Metro Picture Corporation
  (1915), Goldwyn Picture Corporation (1917), and
  Louis B. Mayer Pictures (1918)
• 1929 -- attempted to sell the properties to Fox
• 1939 -- Gone with the Wind AND Wizard of Oz
• 1957 -- studio lost money for the first time
  shut down animation Hanna and Barbera left to
  found their own company
• 1959 -- Loew's was forced to sell its theaters
• 1980 -- Heavens Gate -- 40 million UA -- US
  box-office was about 1.5 million

46
MGM 1969-2004 The Yoyo

• 1969 Purchased by Kirk Kerkorian
• 1973 sold distribution system
• 1981 purchased United Artists
• 1986 sold studios to Ted Turner, who then sold
  all of United Artists and the MGM trademark back
  to Kerkorian. Sold studio lot to Lorimar, which
  was later acquired by Warner Bros.
• 1990 the lot sold to Columbia Pictures, in
  exchange for the half of Warner's lot they'd
  rented since the 1970s. Turner kept the MGM back
  catalog, however, which passed on to Warners as
  well in 1996.
• 1990 purchased by Italian financier Giancarlo
  Parretti
• 1992 Credit Lyonnais foreclosed on him
• 1996 sold back to Kerkorian (as part of a group
  composed of his Tracinda company and the
  Australian Seven Network)
• 1997 MGM purchased Metromedia International's
  studio properties (Orion Pictures, Goldwyn
  Entertainment, and the Motion Picture Corporation
  of America), further enlarging their movie back
  catalog.

47
Other Major Players

• Liberty Media (Malone)
• Cable Companies (Comcast, et al)
• Microsoft
• Telecom Companies
• WalMart (!), Best Buy, Costco
• International Media Conglomerates
• Bertelsmann
• Globo