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. Location Time Shifting Multiple Use Multiple Media Example Venue None 1 No Theater, sporting event, concerts Venue Yes 1 No Theatrical movies Home None 1 No Historical TV Home None 1 No Radio Home Yes Some No Rental Home Video/DVD Home Yes 1 No Movielink Home Yes Yes No Purchase DVD; Home-recorded DVR; books, newspapers Any Yes Yes Yes Downloaded Digital Music and Video 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. Tangible Intangible Production facilities: studio lot Rights: Library; copyrights on books and newspaper stories; options, screenplays, music Real Estate (land, offices, theme parks) Client/subscriber lists Transmission facilities FCC Licenses with FCC Station facilities Franchise Agreements w/ local governments Set-top boxes in homes Output Deals with Distributors Coaxial Cable & Fiber Leases & Credit Facilities with Banks Satellites “Relationships” Distribution and sales offices Unused Leverage – Debt capacity 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, JV’s, local contracts

10. How Did Media Corps Get So Big? • FinSyn (started in late 1960’s) 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. Sony’s 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 US$3.4bn • 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 G+W • 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 -- Gulf+Western conglomerate buys Paramount • 1989 -- G+W 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 US$8.4bn 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 1970’s and early 1980’s • 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 LBO’s 83% majority interest in Viacom in a bidding war with Carl Icahn and management • 1993 -- Blockbuster invests US$600m in Viacom, telecommunications group NYNEX invests US$1.2bn • 1994 -- Showtime Networks and Castle Rock Entertainment enter into multi-year, 50-picture exclusive output deal • 1994 -- Blockbuster invests US$1.25bn in Viacom, which then buys Blockbuster for US$8.4bn • 1994 -- Viacom and Paramount announce US$8.4bn 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 US$1.075bn • 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 US$4.6bn, with Viacom retaining the consumer operations (including the Simon & Schuster name) • 1999 -- Viacom buys CBS for US$50bn

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 US$2,920 • 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 US$1.5 million • 1940 -- Walt Disney Productions goes public to repay US$4.5 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 US$500 000 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 US$7.5 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 US$3.5 billion to create Capital Cities-ABC • 1987 -- first Disney Store opens • 1990 -- first Hollywood Pictures release • 1992 -- Disneyland Paris opens • 1993 -- buys Miramax for US$80m

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 US$19bn • 2001 -- buys Fox Family Worldwide from Murdoch and Saban for US$5.3bn • 2003 -- sells Anaheim Angels for US$180m ($240m invested) • 2004 -- Pixar ends relationship after 2005 • 2004 -- Comcast makes unsuccessful US$54bn 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 – Warner’s 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 Warner’s 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 US$2.6bn • 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 – 1980’s expansion • 1985 -- News Corp buys TCF Holdings (parent company of Twentieth Century Fox Film) • 1985 -- buys seven US television stations from Metromedia for US$2bn 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 US$3bn • 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 US$6bn 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 US$525m 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 US$500m 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 US$580m • 1997 -- buys Heritage Media coupon insert business for US$1.4bn • 1997 -- buys remaining 80% of New World Communications (10 US television stations) for US$2.5bn • 1997 -- buys LA Dodgers baseball team for US$350m

39. News Corp – It Keeps Growing • 1997 -- agrees to buy International Family Entertainment cable network (renamed Fox Family Worldwide) for US$1.9bn • 1998 -- sells Heritage’s radio and television broadcast properties to Sinclair for US$630m • 1998 -- floats 18% of Fox Entertainment Group • 2000 -- buys Chris-Craft Industries, BHC Communications and United Television (10 television stations) for US$5.35bn • 2001 -- sells 49.5% stake in Fox Family Worldwide to Disney for US$5.3bn • 2003 -- buys 34% controlling stake in Hughes Electronics (satellite broadcaster DirectTV) for US$6.6bn

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 US$50m • 1958 -- MCA buys Universal's 750 acre back lot for US$11m • 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 US$6.1bn • 1990 -- MCA buys Geffen records • 1993 -- Polygram buys Motown records • 1995 -- Seagram sells Du Pont stake, buys MCA from Matsushita for US$5.7bn and renames it Universal Studios • 1997 -- Seagram buys remaining 50% of USA network from Viacom for US$1.7bn • 2000 -- Vivendi buys Seagram for US$34bn, 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 -- Heaven’s 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 • Wal*Mart (!), Best Buy, Costco • International Media Conglomerates • Bertelsmann • Globo