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Media/Entertainment


Industry Outlook -- Services: MEDIA/ENTERTAINMENT

MEDIA/ENTERTAINMENT

Reality check! From telephony to TV, high-tech gains will take more time. And hold the megamergers, too. Winners will learn to adapt

For media executives, new technologies are looking a lot less exciting than they did only months ago. Remember digital compression and cable modems? How about shopping by television? Or cable TV from your phone company? They're still coming, but not as fast as once promised. Even backers of direct-broadcast satellite TV are downsizing expectations. Reality has set in.

Telephone companies, worried these days about defending their traditional turf, will scale back their attack on cable in 1997. And cable--larded with hefty debt burdens and frustrated by the slower-than-anticipated development of digital technologies--will be cautious about offering new products. Consumers don't seem to have the money to buy them.

SKY STRIKE. After a rush of megadeals that coupled Walt Disney with Capital Cities/ABC and Seagram with MCA, dealmakers will have less to do in 1997. "This will be a year to sort things out," says Harold L. Vogel, an entertainment analyst at Cowen & Co.

However, not all will be quiet on the media front. By October, News Corp. Chief Executive Rupert Murdoch plans to launch his satellite-delivered American Sky Broadcasting service, his most aggressive assault on American airwaves since the 1987 introduction of the Fox Broadcasting Co. network. To get his bird aloft, however, Murdoch needs someone to share the $2 billion price tag now that joint-partner MCI Communications Corp. wants to reduce its stake so it can merge with British Telecommunications PLC. Among the companies Murdoch has been talking to are Disney and regional Bells Ameritech and Bell Atlantic.

After more than doubling the number of subscribers last year, satellite-TV companies will settle for more modest growth this year--perhaps a 40% rise, to 4.8 million, predicts Jimmy Schaeffler, a digital analyst at The Carmel Group. Even with hefty price cuts, General Motors Corp.'s Hughes Electronics recently downgraded projections for 1996 sales of its DirecTV system by 23%. Startup EchoStar Communications Corp., with 285,000 subscribers, will likely go looking for a well-capitalized partner, such as Murdoch, a regional Bell, or even a cable giant such as Tele-Communications Inc., Schaeffler figures.

TCI, like much of the cable industry, could use an injection of subscribers from satellite TV. The cable industry added a lackluster 1.5% to its 64 million households in 1996 and will do about the same this year, says Paul Kagan Associates analyst Sharon Armbrust.

Other services that cable had been counting on for a revenue boost aren't likely to pay off in 1997. High-speed services provided by cable modems will get tests, such as TCI's Hartford effort, but it will hardly be the $200 million-a-year business this year that Armbrust predicted earlier in 1996. Instead, she sees it adding a mere $50 million.

TCI has become the industry's amazing shrinking company, spinning off its satellite unit and preparing to spin off its foreign and programming units. It will likely use them to raise capital in '97. Time Warner Inc., the nation's second-largest cable system, will likely spin off its entire 13 million-subscriber system. As for buyers, that's anyone's guess.

The one silver lining for the cable industry is that the phone companies, once considered Cable Enemy No.1, aren't engaging in hostilities. Tele-TV, a consortium of telephone companies, has scaled back and might soon disband. Only one of its three partners, Pacific Telesis Group, will move forward aggressively with wireless cable--offering the TV service in March to an estimated 5 million homes in Southern California.

Traditional broadcast networks will enjoy a continued revival, despite losing a bit more market share. Even without the benefit of the Olympics and a Presidential election, network ad sales will rise by 4%, to $13.6 billion, predicts Robert J. Coen, senior vice-president of McCann-Erickson Worldwide advertising agency. "The era of downsizing is over. Companies are looking to expand their brand names," says media economist Arthur Gruen, president of Wilkofsky Gruen Associates.

General Electric Co.'s National Broadcasting Co. will expand internationally and add cable channels. CBS is also on the prowl for cable networks but needs more cash. After being spun off from Westinghouse, the network might seek investments from programmers seeking distribution. One likely cash-rich partner is Seagram unit Universal Studios Inc., which wants to guarantee air time for its newly revived TV-programming arm.

The film industry will set spending records in 1997. Seven films will carry $100 million budgets, including director James Cameron's $125 million Titanic for Paramount and two volcano films that will compete in February: Fox's Volcano and Universal's Dante's Peak.

About the only ones not complaining are the top-tier actors and directors. Arnold Schwarzenegger will take home $1 million a minute for his estimated 25 minutes of film time as the villain Mr. Freeze in Warner Bros. Inc.'s Batman and Robin. Director Steven Spielberg will likely earn twice that amount after collecting royalties for his Jurassic Park sequel, The Lost World, for Universal.

Studios will pursue moviegoers with an estimated 440 to 460 films, says box-office follower Exhibitor Relations Co., as many as 29 more than the 431 released in 1996. Foreign markets will again be strong, and there's always the home-video market.

BALLOONING. About the only thing that seems to be growing faster than movie budgets these days is the sign-on rate for online services. The numbers of U.S. households logging on jumped 60% in 1996, to 15.4 million homes, says Jupiter Communications Co. In 1997, online subscribers will jump by an additional 46%, to 22.3 million, and generate a robust $5.7 billion in revenues, says Jupiter Managing Director Kurt Abrahamson.

Advertising will make its first noticeable impact on the industry, nearly tripling to become a $1.1 billion business, says Jupiter's Abrahamson. But the big money must wait until consumers are willing to pay for specific programs, such as games, or for service charges. Ticketmaster and American Express Co. will experiment with service fees in 1997, but the business will barely pass $300 million in 1997, says Abrahamson.

While consumers sort out their preferences, online access companies will continue to struggle. Compuserve has exited the consumer business and may shrink further. Prodigy Services Co. is on shaky footing, too. Even America Online Inc., the nation's largest service, could find life vastly different in 1997. One scenario: AT&T buys AOL's network system, leaving the content-crazed company to focus on delivering new services to its public. Disney may want AOL as well, speculates David Simons, managing director of Digital Video Investments.

The nation's newspapers, meanwhile, will return to profitability by going back to basics. Newsprint prices will fall by 15% to 20%, helping to prop up newspapers that weathered the circulation downturn of the early and mid-'90s. In 1997, overall circulation losses will largely bottom out, figures investment bankers Veronis, Suhler & Associates. Advertising will increase by 6%, to $46 billion, predicts McCann-Erickson's Coen. Adding subscribers has taken on new urgency for major newspapers including The Los Angeles Times, The New York Times, and Chicago Tribune. Each predicts larger operating profits in the coming year.

The media industry's future isn't arriving as quickly as everyone predicted. Companies that can adapt should do fine. For others, it could be a difficult year.By Ronald Grover in Los Angeles, with Amy Barrett in WashingtonReturn to top


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