It was hard to contain the optimism at the Western Cable Show in Anaheim, Calif., in early December. One after another, media moguls preened in the bright light of a digital future.
"The possibilities are so overwhelming," said NBC Chairman Robert C. Wright, "that the challenge is going to be to prioritize them." It fell to money manager Gordon Crawford, whose Capital Group Cos. owns stakes in a string of media giants, to bring the room back to earth. "I just hope no one is getting too complacent," he said, clicking off challenges that will include changing regulations in Washington, intense competition, and uncertain technologies.
Crawford's list of worries pretty much sums up 1999 for media and entertainment companies. After several overhyped false starts, the Digital Age has arrived with the first rollouts of cable modems and high-definition TV. But the race to put digital media into America's homes has also brought an army of competitors that will slash revenues for the traditional powers and further divide an advertising pie that is likely to grow less in 1999 than at any time in the past five years. And there is nearly as much uncertainty as promise, especially in Washington, where Congress will consider extending rate regulation and requiring cable operators to carry thousands of new, digitally created channels that broadcasters will soon have at their disposal.
Much of the attention this year will be centered on cable. By spring, AT&T is expected to close its $48 billion takeover of cable giant Tele-Communications Inc. and gain the "last mile" connection to homeowners--superfast fiber and coaxial cable over which it can sell online access and Internet phone service. AT&T is also negotiating with other cable companies, including Time Warner and MediaOne Group, for access to their lines. It may even make another bid to buy a cable operator. One potential acquisition target is Comcast Corp., says NationsBanc Montgomery Securities Inc. analyst John Tinker.
The long-awaited convergence of TV and the Internet isn't expected to become a widespread phenomenon until 2000 at least. Still, as many as 5 million cable subscribers this year will likely sign up for high-speed cable modems that will give them access to the Internet, predicts New York investment banker Veronis, Suhler & Associates. That should translate to $432 million in added revenues for cable companies.
Convergence may also bring about the merger of cable's two major online services: TCI-backed @Home and the Road Runner/MediaOne joint venture backed by Time Warner, MediaOne, Microsoft, and Compaq. America Online Inc. may also cut a series of deals to use cable wires to provide high-speed access to its own service, says Salomon Smith Barney's Lanny Baker.
DISH WARS. Cable will need the new services to offset a slowdown in new customer traffic. After averaging 3.4% growth for the last five years, cable subscriber growth in 1999 will slow to 1.8%, or 66.6 million homes, projects Veronis Suhler. Cable operators, worried that Congress or the Federal Communications Commission might reimpose rate regulations when premium-channel curbs expire on Mar. 31, aren't likely to hit consumers with the same major increases many levied in 1996. "We would make a serious mistake to go down that road again," admits TCI President Leo J. Hindery Jr.
Cable will have to weather a renewed battle for those customers in 1999 from small-dish satellite-TV companies. Direct-broadcast satellite operators increased their subscriptions by a robust 39% in 1998, to 8.9 million, according to the Carmel Group. The industry will add 2.6 million subscribers in 1999, the Carmel (Calif.)-based media analysts predict. To gain more subscribers in a hurry, both DirecTV Inc. and EchoStar Communications Corp. are expected to bid for the 2.3 million customers owned by faltering PrimeStar Inc., which is backed by a cable consortium.
The most worrisome sector of the TV industry remains the nation's broadcast networks. Their ratings are likely to slide in 1999, as viewers continue to migrate to cable and satellite. In 1998, ratings for the four largest networks were down by 8%, with only Fox showing a modest improvement. That means ad revenues in 1999 will increase only 4%, to $14.5 billion, forecasts McCann-Erickson Vice-President for Forecasting Robert J. Coen, after a 7% gain in 1998. By contrast, cable channels will see a 12% hike in ad revenues, says Coen, to $6.9 billion.
The result is that network earnings this year will be slashed. ABC, for example, will show a $150 million loss in 1999, says Salomon Smith Barney analyst Jill S. Krutick. The Walt Disney Co. unit earned $100 million in 1998.
The networks' gambit will be to emphasize cheaper news programs, such as CBS's second weekly episode of 60 Minutes. Most networks will try to own the shows they air and seek diversification into Internet companies.
But the networks' biggest relief could come from Washington, which is contemplating forcing cable operators to carry the networks' digital channels. With six digital channels in place of the current single analog channel, the networks could generate new revenues by using the channels for new programs, for repeats, or by selling products over the air. Without waiting for Washington, Time Warner recently agreed to carry CBS's digital channels for free. But other cable operators and networks are battling over whether cable should pay the networks to air the new channels.
At least one network is likely to change hands in 1999. NBC, which negotiated in early 1998 to merge with Barry Diller's USA Networks Inc., is looking for another partner. It is again likely to talk with Diller and his 46%-owned Seagram Co., which owns Universal Studios Inc. NBC parent General Electric Co. may also spin off the network to the public.
While more viewers are tuning out networks, they're logging onto the Net. In 1999, 43.9 million American households will be able to go online, roughly 43% of the country, says forecaster Jupiter Communications. That will help raise online-shopping revenues by 69%, to $11.9 billion, says Jupiter, while advertising revenues will increase by 62%, to $3.3 billion. "Truth is, this is an area that is growing faster than any of us can believe right now," says Diller. "I'm not sure we know how big it can be."
MOVIE CRAZY. The jury is still out as to whether Internet usage diminishes interest in more traditional media. U.S. daily newspaper circulation will hold steady at roughly 58.4 million, says media economist Arthur Gruen, president of Wilkofsky Gruen Associates, thanks to the aging population--the over-40 crowd tends to read more. Still, a general slowdown in retail markets will likely limit local advertising to a 4.5% growth rate in 1999, or $40.6 billion, down from a 6% increase in 1998.
One thing that isn't slowing down is the box office. In 1998, Hollywood sold a record $7 billion in movie tickets, 10% ahead of 1997. And with such low-budget blockbusters as Fox's There's Something About Mary and Walt Disney's The Waterboy, profitability is also up. In 1999, the big winner will almost certainly be George Lucas' hotly anticipated Star Wars prequel, due out on May 21, says Paul Dergarabedian, president of box-office analysts Exhibitor Relations Co.
Star Wars won't be the only familiar territory. Among the expected hits are remakes of TV shows like Warner Bros.' The Wild Wild West, with Will Smith and Kevin Kline, and MGM's The Mod Squad. Among the tried-and-true formulas will be the latest James Bond flick and Tom Cruise in Mission: Impossible 2 from Paramount Pictures Corp.
Like Cruise, the media industry seems eager to accept its next mission: getting couch potatoes to ante up for a building wave of Digital Age products. The big show may be in 2000, but the curtain is already rising.