Industry Feeling Presence of the 800-Pound Google
By Sallie Hofmeister, Times Staff Writer
Just five years ago, Microsoft Corp. was considered the Big Bad Wolf of the media business.
Armed with a stockpile of cash and the Windows operating system that dominates office computing, Bill Gates' company was expected to huff and puff its way into America's living rooms as well, with video game consoles, home networking systems and TV set-top boxes.
But today, there's a different wolf at the door. Although Microsoft is still flush with $40 billion in cash, it is Google Inc. that the media industry fears most. So intense is Google-fueled paranoia, in fact, that industry watchers believe the Internet search giant could drive profound changes in the media, entertainment and technology landscape in 2006.
Already, old media are investing heavily in new-media ventures. Newspapers like this one are defending their bread-and-butter income — classified advertising — by stepping up their Web offerings. Media conglomerates such as News Corp. are buying Web properties like MySpace.com that connect them to young audiences, who are forsaking television and radio in favor of the Internet.
This year, new media could return the favor by investing in old media — the folks who know the most about producing entertainment content.
Here are some predictions for the media industry for 2006, based on interviews with industry analysts, executives and investors, along with a little intuition.
Cheap PCs, anyone?
Google will unveil its own low-price personal computer or other device that connects to the Internet.
Sources say Google has been in negotiations with Wal-Mart Stores Inc., among other retailers, to sell a Google PC. The machine would run an operating system created by Google, not Microsoft's Windows, which is one reason it would be so cheap — perhaps as little as a couple of hundred dollars.
Bear Stearns analysts speculated in a research report last month that consumers would soon see something called "Google Cubes" — a small hardware box that could allow users to move songs, videos and other digital files between their computers and TV sets.
Larry Page, Google's co-founder and president of products, will give a keynote address Friday at the Consumer Electronics Show in Las Vegas. Analysts suspect that Page will use the opportunity either to show off a Google computing device or announce a partnership with a big retailer to sell such a machine.
And that's not the only Google theory out there. Content producers wonder whether Google's push into video search will unravel the economics that make Hollywood hum. If viewers can find and legally download an episode of "Seinfeld" through Google, will that cut into cable and network television's profits?
And what if Google, after equipping cities, starting with San Francisco, with Wi-Fi wireless technology, starts to offer pay-TV service for free?
Still, to date, the company's $123-billion stock market value is based almost entirely on its dominance of one business: global text searches on the Web. Some investors worry that Page and co-founder Sergey Brin could be done in by their penchant for seeing themselves as do-gooders rather than profiteers. But those naysayers are in the minority. Most industry executives and Wall Street analysts believe that Google's search engine business is robust enough to give the young billionaires two or three years of wiggle room to build nifty services first and worry about making money on them later.
Microsoft comes out swinging
When Microsoft lost its yearlong battle to replace Google as the provider of advertisements on Time Warner Inc.'s AOL Search last month, one analyst described the defeat as "the death knell" for MSN, Microsoft's Internet service.
Within days, speculation was rampant that Microsoft, determined to keep itself in the game, had offered to buy Yahoo Inc. for $80 billion. If rumors were to be believed, the Microsoft bid — a premium of more than 30% over the Web giant's current market value — was rejected by Yahoo as too low.
Will Microsoft spend $90 billion or more to buy Yahoo or, alternatively, AOL parent Time Warner? Maybe not, especially when the software giant could buy Barry Diller's IAC/InterActiveCorp at a fraction of the price. If owned by Microsoft, Diller's collection of websites such as Ask Jeeves, Expedia, HSN.com, LendingTree and Ticketmaster could help drive traffic to MSN.
Wall Street sources said that upon learning of the Google-AOL alliance, bankers at Lazard Ltd. who represented financier Carl Icahn asked Gates to join their team.
The hope was that Microsoft would aid Icahn in his proxy battle to unseat the Time Warner board, split up the company and win control of AOL.
Most media experts, however, are betting that the opposite will occur: Icahn, lacking support from the entertainment giant's institutional investors, will fold his cards in defeat even before Time Warner's annual meeting this spring.
It seems like a long shot that Microsoft would throw its lot in with a likely loser. Still, by year's end, with its Windows operating system buffeted by a low-cost or free Google alternative, Microsoft may think twice about not having pursued a jewel like Time Warner.
Diva wars at NBC Universal
NBC Universal's Jeff Zucker, who last month pulled ahead of rivals such as sales chief Randy Falco to become the heir apparent to 62-year-old Chief Executive Bob Wright, may not have the throne locked up after all.
Beth Comstock is a dark horse in the race, according to sources close to Jeffrey Immelt, chief executive of General Electric Corp., NBC Universal's parent.
Comstock was promoted the same day Zucker was, although her elevation to president of digital media and market development earned hardly a postscript in most coverage about the management shuffle.
According to company insiders, Immelt had planned to give Comstock an even larger role: oversight of the all-important advertising and affiliate sales group. Her duties were scaled back, however, when Falco threatened to resign if he was forced to report to her.
But she retained one key perk: a direct report to Wright. Just like Zucker. Is there a turf battle in the offing? Stay tuned.
Jobs (as in Steve) for Disney chairman
Everyone believes that among Walt Disney Co. Chief Executive Bob Iger's New Year's resolutions, securing an extended distribution agreement with Pixar Animation Studios is near the top of the list. In fact, the new Disney CEO will consider — albeit briefly — an even bolder move: outright acquisition of the animation superpower behind "Toy Story" and "Finding Nemo."
Such a purchase would revive the luster of the Burbank-based entertainment giant's own animation division. It would also be a coup for Iger, given that friction between his predecessor, Michael Eisner, and Pixar Chairman Steve Jobs nearly drove Pixar from the Disney fold.
Ultimately, though, Iger's instinct for self-preservation will kill the deal as he weighs how Pixar's purchase price of nearly $10 billion might rattle Wall Street.
What might be harder to swallow for Iger is this: Jobs, who is also chief of Apple Computer Inc., will demand a seat on the Disney board, becoming the leading candidate to replace George Mitchell, who plans to retire as Disney chairman at the end of the year.
Before 2006 ends, Iger will finally name a No. 2: Anne Sweeney, the cable executive whom he credits with reviving the ABC television network.
Former ABC executive Lloyd Braun, who was hired by Yahoo more than a year ago to oversee the Internet leader's foray into original programming on the Web, will exit after clashing repeatedly with Silicon Valley's laid-back culture.
He will have a soft landing, though, as Paramount Pictures chief Brad Grey hires him to turn DreamWorks Television into a major prime-time TV supplier. That will put Paramount in direct competition with its former division, Paramount Television, which will be absorbed into CBS Inc. when parent company Viacom Inc. splits itself in two Monday.
Les wants to be more
When Chairman and CEO Sumner Redstone announced his intention to split Viacom and put former CBS chief Leslie Moonves and former cable chief Tom Freston atop the two new companies, it didn't take long for pundits to dub those ventures "Lesco" and "Fresco." Late last year, however, Viacom insiders adopted new nicknames: "Via-les" and "Via-more."
That's because the assets that Moonves will inherit, including radio, billboard and TV stations, have slower growth potential than those that Freston will take on, including MTV, Comedy Central, Nickelodeon and Paramount Pictures.
In 2006, though, Moonves will move to turn "Via-slow" into "Via-grow" through acquisitions in cable, the Web and even movies. Among other things, the former actor, who has long pined to get a foothold in the film business, will make a play for independent studio Lionsgate, which is on a hot streak with such low-budget hits as the "Saw" horror franchise and "Crash."
But worries about the low returns of the movie biz will cause Redstone to nix Moonves' attempt to gobble up Lionsgate. The studio instead will be acquired by Yahoo, which will need to send a strong message to the creative community in the wake of Braun's departure.
MGM changes hands — again
Sony Corp. and the private equity partners that purchased Metro-Goldwyn-Mayer last year will split up, ending an acrimonious alliance marked by missed financial targets and a strategic stalemate. Providence Equity Partners and the Texas Pacific Group, which control a majority of the board, will exercise an option in their agreement to dump Sony as a distributor of the MGM movies.
Comcast Corp., the nation's largest cable operator and a minority player in the deal, will win a bidding war against CBS, proving that its dire need for original content is a more powerful motivator than Moonves' desire to become a movie mogul.
Putting the K back in SKG
Paramount Pictures, which in December bought DreamWorks SKG's live-action operation, will add the publicly traded DreamWorks Animation to its holdings. Grey, the Paramount chief, will offer Jeffrey Katzenberg the same three-year contract Grey negotiated with the S and G of DreamWorks: partners Steven Spielberg and David Geffen.
Katzenberg, who has been antsy for a sale, will accept. To say no would mean running DreamWorks Animation until 2012, when its distribution deal with Paramount expires. And K is too restless, sources say, to wait that long.
AT&T hears an EchoStar
News Corp. Chairman Rupert Murdoch will continue to be at the forefront of the major media giants' push into new media. But his short attention span will begin to get the better of him as his last pet project — DirecTV Group Inc., the nation's leading satellite provider, which he purchased two years ago — begins to struggle in the face of cable's superior bundle of products. Murdoch will consider taking a run at DirecTV's chief rival — EchoStar Communications Corp., operator of Dish Network — to increase his capacity for providing video enhancements such as high-definition TV.
But he will remain on the sidelines when phone giant AT&T Inc. (formerly SBC Communications) expresses interest. In a bid to provide television in addition to phone and high-speed Internet service, AT&T will abort its high-stakes gambit to wire the country and will buy EchoStar for $20 billion instead.