Why do Viacom and QVC want materiel to fight the last war?

No matter what the outcome in the bidding war, many people in the new media business are scratching their heads over the intensity of Viacom International and QVC Network, Inc.’s desire to acquire a big, old-fashioned media company such as Paramount Communications.

Leaving aside stock-price machinations and “mirror, mirror, on the wall” speculation, what’s really interesting about the pending sale of Paramount is what two innovative companies such as Viacom and QVC, both well along the path of creating 21st century entertainment from whole cloth, have to gain in the deal.

As one person close to the battle zone said, “(Paramount’s) assets are materiel to fight the last war, not this one.”

PARAMOUNT ON PAPER, AN IMPRESSIVE SHOWING

Certainly Paramount’s assets are impressive on paper. In motion pictures, it owns Paramount Pictures (for production and U.S. distribution); United International Pictures (50 percent ownership, with MCA Universal, for foreign distribution); Paramount Home Video (U.S. distribution); CIC Video (with MCA, international distribution); and a motion picture library of 890 titles.

Paramount Television produces or syndicates 18 series or continuing programs for the 1993-94 season, including Star Trek: The Next Generation and Deep Space Nine, Entertainment Tonight, Hard Copy and Maury Povich. It owns 50 percent of USA Networks (which includes the Sci-Fi Channel), and wholly owns Wilshire Court Productions (which develops and produces films for cable), Premier Advertiser Sales (a TV syndication barter advertising division), and a library of 6,100 TV programs.

Paramount owns seven TV stations, with an overall U.S. TV household reach of more than 11 percent. It owns the Famous Players motion picture chain, and jointly owns both the Cinamerica theater circuit and United Cinemas International. It owns five theme parks in the U.S. and Canada. The company also owns the 20,000-seat Madison Square Garden and a 5,600-seat multi-use theater located at the Garden, as well as two professional sports teams, the New York Knicks and the New York Rangers. It also is developing pay-per-view programming using its Madison Square Garden Network cable sports network (with 5 million subscribers) in conjunction with Capital Cities/ABC Video Enterprises.

Paramount believes that “publishing holds significant growth opportunity because

Paramount Publishing appears to be the source of the company’s steadiest cash flow. It claims that investing heavily in educational publishing and niches such as travel, children’s books, business, technical and professional publications, as well as educational technology and computer publishing, pushed the publishing group’s revenues to $1.6 billion last year from $200 million in 1982. Paramount’s imprints include Simon & Schuster, Prentice Hall and Pocket Books, and the company claims it publishes more than a thousand consumer titles annually.

WHEN IS AN ASSET NOT AN ASSET?

Paramount’s heavy expansion into publishing 10 years ago, it says, was based on its belief that “(p)ublishing, like motion pictures and television, holds significant growth opportunity because it is characterized by creative, proprietary products that can be repackaged and delivered through a wide variety of media.”

A weighty assumption. This is a critical assumption that is arguable, at the very least — especially at this moment in time, when all bets are off when it comes to which media will even continue to exist into the next century. Certainly no one is betting on print as a growth business. (And in fact many speculators think this business would be the first to go if either company prevails.) Thank God the company doesn’t own any newspapers — that would certainly be the kiss of death — but even without that particular millstone around the neck, the ability to carry forward such weighty properties will be difficult at best. Just ask those who are trying to do it today.

It’s not that books won’t continue to be published; of course they will, and we will still buy them and read them. But the economics of old-style publishing are becoming increasingly brittle, and no one has yet been able to figure out a graceful transition to the “electronic book” format, since most people still hate anything resembling a computer.

That’s entertainment. Then let’s look at its entertainment assets. Depending on how you view them, Paramount’s distribution properties alone might be considered priceless in an era when vastly more entertainment products are trying to find viable channels.

But again, these distribution companies are designed for old media, not new. The so-called information superhighway that’s in the process of being built is a perfect delivery vehicle for entertainment products; movies-on-demand that eliminate the middleman between studio and viewer are always cited first as the best example of the benefits of interactive TV. Paramount would have to sell an awful lot of movies to pay for both the loss of its old distribution business and the costly retooling to a high-speed digital delivery system.

The myth of repurposing. Paramount’s movie and TV libraries are almost always cited as major assets in the deal at hand. However, not much is said about what value they provide the company today. Even considering their potential as programming fodder for a zillion-channel cable system, it’s hard to see how 900 old movies and 6,000 old TV shows could pull a profit — especially after one subtracts the cost of digitizing these archives for electronic distribution over an interactive TV network.

The concept of repurposing old media for new is a myth. In great measure, consumers buy what is new. If we don’t rent a movie now, it’s even less likely we’ll want to rent it tomorrow, even if we don’t have to drive to the video store.

Neither is it likely that we will want to see old movies chopped up into video games. The idea isn’t all that compelling, whether or not the original artists and directors were inclined to release their intellectual property rights (which they likely are not, unless they’re desperate for money). The idea of shooting sequences for a companion video game during the filming of a movie is just now starting to become useful, but then we wouldn’t be talking about existing assets, would we?

TV, theme parks, theaters. What about Paramount’s TV stations? In an era of declining ad revenues, the anticipated cost of upgrading to digital broadcast equipment, and an increasing emphasis on narrowcast programming, owning a TV station could easily be considered as much a liability as an asset.

Much the same is true of Paramount’s theme parks and theater chains. People are still going like gangbusters to the movies, but high-end digital delivery systems for theaters are under development to control piracy and eliminate material costs for printing and distributing expensive film stock. And there is much excitement in the digital world about the development of interactive, “virtual reality” attractions at theme parks, but they also require non-trivial investment to bring them up to snuff for digital technology.

As a large cable operator, Viacom can already provide electronic distribution for analog media products. Its commitment to a full service, interactive TV system (via its Castro Valley project) is likely to make it a leading contender as a distributor of digital media products in the future as well.

It also rightfully considers itself a pioneer of new forms of entertainment: MTV has already become a cliché as the perfect example of what can be gained by taking creative risks with innovative, little known artists. Viacom New Media is extending that paradigm into the digital world as well, by focusing on creating a new entertainment experience rather than using interactive technology because it happens to be the industry’s latest buzzword (see Vol. 2, No. 5, p. 12).

The Diller factor. Though the nature of its business is different from Viacom’s, QVC is also a major electronic distributor of interactive media today. With its phenomenal computer network and its connection to TeleCommunications, Inc., the largest cable provider in the U.S., QVC is in an excellent position to become a major player in digital distribution as well.

Even more significantly, QVC’s chairman, chief executive officer and publicity magnet Barry Diller is already making moves — notably via QVC’s new Q2 network, and his recent hiring of an executive in charge of new media — toward creating the next generation of entertainment products.

In possession of certainty. Since both companies already have so much going for them, it’s hard to figure any other (rational) motive than absolute certainty they could deliver significant returns on a $9.8 billion investment. Both companies swear they won’t take on debt to finance the Paramount purchase, but in exchange for bringing in partners, the winner becomes cowboy to an unruly herd of conflicting interests.

As Diller has often said, synergy simply doesn’t exist in these environments. And considering the fluid state of media investments (not to mention cable-telco alliances) these days, not only would such a strategy be extremely risky, but very little innovation is likely to take place in such a splintered environment. In some ways taking on debt might be a preferable alternative, but constant focus on debt repayment has been an ongoing and visible struggle for many of the world’s largest media conglomerates, including MCA/Universal, Time Warner and Sony.

CONTENT VS. SUBSTANCE IS THE NEXT FRONTIER

With all this in mind, it’s a mystery why either Viacom or QVC want to take on either the financial or the creative burden of taking Paramount into the 21st century.

An American friend recently visited Japan and sat down to dinner with an entrepreneur interested in new media technologies. The young man asked if the American was in the “substance” business — a slightly askew but charming translation of the term “content.” Upon retelling the story, the perfection of his question struck us both: the biggest problem in the transition to new media is that too many people don’t know the difference between the two.

Square pegs, round holes. This is not to say that Paramount is not making a great effort to move its properties into the 21st century. Keith Schaefer, the head of Paramount Technology Group, is smart and earnest and with great support from Paramount, he is working on a number of fronts to help the company leverage its assets into new media (see Vol. 2, No. 8, p. 16).

But in a time when people don’t have a clue what is compelling about interactive media, his group is often in the unenviable position of taking a linear property, such as a book, and transforming it into an interactive CD-ROM, the quintessential case of a square peg in a round hole. Paramount’s own public statement, noted earlier, bears out this corporate strategy in most of Paramount’s known new media projects: for example, Richard Scarry’s Busytown was recently released from Paramount on CD-ROM, and the company is working with Spectrum Holobyte on a VR theme park attraction based on Star Trek: The Next Generation.

Cracking the status quo. Based on history and what we’ve seen so far, it is already axiomatic that no existing studio or other large media entity will create the Next Big Thing in the world of new media. Most of these companies, Paramount included, are too focused on wringing every last dime out of the investments they’ve already made to truly be free thinkers.

Innovation inevitably wriggles out of a crack in the status quo; the only way to hasten its arrival is to find a way to widen the crack. In the case of new media innovation, the best method is to pour money on it. Before very long, interesting things will start to happen.

Almost everyone working in the new media trenches shares the same puzzlement at this firestorm of desire for Paramount. What would happen, they ask, if QVC or Viacom took the same staggering amount of money they’re willing to spend on Paramount’s old media and invested in a few hundred worthy startups? If what both companies really want is a piece of the future, it’s the only sure bet.

Denise Caruso

Editor’s note: Some believe the purchase of TCI by Bell Atlantic will affect the Paramount deal. That story begins on p. 12.