The Worldwide Web Steve Ross Is Weavingby
It's eerie. A motorcade moves through the streets of Dallas with John F. Kennedy sitting next to his wife in the back seat of a big Lincoln Continental convertible. Shots are fired from the window of the Texas School Book Depository. A horrified Jacqueline reaches out to her mortally wounded husband, covering him, cradling his head in her arms.
The order "Cut!" breaks the spell. The scene from the movie JFK, starring Kevin Costner and directed by Oliver Stone, is over.
This indelible American moment--so shocking and powerful that "Where were you when JFK was shot?" has become the password for an entire generation--will be brought to the screen this Christmas by an international entertainment partnership like no other. The largest transatlantic production-distribution financing alliance ever forged includes a Frenchman, an Israeli, several Germans, and a tall, snow-white-haired American: Steven J. Ross, chairman of Time Warner Inc.
COMPLEX WEB. In Hollywood, Ross is known for hobnobbing with Steven Spielberg, Clint Eastwood, and Barbra Streisand. But in Paris, Munich, Budapest, Stockholm, Tokyo, and Moscow, the 63-year-old Ross is seen as a dealmaker playing on a global scale, ready to enter international alliances in a whole range of businesses. So ready is he that Time Warner, the world's biggest entertainment corporation, is currently engaged in nearly two dozen discussions in Europe and Asia that could link most of the world's entertainment and media companies in a complex web of relationships.
"To succeed in this business today, you must be in all the major markets of the world," says Ross during an interview at the company's Rockefeller Center headquarters. "Our objective is to build global partnerships. Europeans and Japanese are annexing American properties, buying them outright. We are making alliances at the subsidiary level with the partners keeping their national identities and bringing their respective strengths to bear."
Ross is playing to Time Warner's strength by focusing overseas--particularly in Europe, where privatization of government-owned television, the expansion of pay TV, and the opening of the East have generated some of the world's fastest-growing markets. The company is the largest U. S. exporter of entertainment, an industry that, at $8 billion last year, was the second-biggest net exporter, after aerospace.
The importance of foreign markets was brought home in the first quarter of 1991 when profits from Time Warner's strong worldwide home-video, international TV syndication, and movie distribution operations helped offset its weak performance in domestic magazines, books, and records. The decline in advertising saw Time Warner's publishing profits drop 41%. And with box-office disappointments such as If Looks Could Kill, domestic movie sales were hit hard, too.
Even with strong showings in pay-TV, Time Warner's cash flow dipped to $530 million from $536 million the previous quarter, the first decline since Time and Warner joined forces in January, 1990. That merger saddled the company with $11.1 billion in debt. Ross is counting on his global strategic partnerships to provide not only cash to service the debt but also large chunks of equity to pay it down.
The biggest deal so far is the megapartnership linking U. S. and European film production and distribution. Set up in January, the agreement calls for Dutch-based Regency Enterprises to spend $600 million to develop and produce 20 major motion pictures. Warner Bros. Inc., the Time Warner film studio, will then chip in about $300 million to distribute and market the films worldwide. Regency is a creation of Arnon Milchan--the Israeli-born producer of such blockbusters as Pretty Woman and The War of the Roses--and two partners: Canal Plus, France's biggest pay-TV communications company (box), and Scriba & Deyhle, one of Germany's largest media corporations.
For their part, the French and German companies get what they desperately need: product. Both have been growing so fast over the past five years that demand for "software," meaning action movies, comedies, and TV shows, has far outrun the supply. It's a sweet deal for them. Canal Plus and Scriba get the right to run the new films on their domestic pay-TV channels. Then, they use Warner's hefty international distribution muscle to show the movies in theaters and rent them as home videos in Europe. Warner gets the 20 movies and doesn't have to dip into its own pocket for most of the financing. And it retains the considerable creative talents of Milchan.
The deal also puts Warner in partnership with two powerful European communications companies with excellent political connections. With the economic unification of Western Europe just around the corner, there is talk of new quotas and restrictions on American entertainment. "If there are new regulations in 1992, we'll have strong partners on our side," says Terry S. Semel, the tough-minded Warner Bros. president who negotiated the agreement. For his part, Milchan now gets to play for higher stakes. For his blockbuster Pretty Woman, which grossed $250 million worldwide, Milchan got a tidy percentage of the gross. But the rights were held by its distributor, Walt Disney Co. This time, Milchan and his partners take the risk and keep all the rights. "I wanted to come to the net and play the point," says Milchan, an avid tennis player.
Time Warner is playing the joint-venture game all over Europe. Warner Bros. Inc. has a $100 million deal to build 10 multiplex cinemas in Germany and Austria with Munich-based Neue Constantin. It also has contracts to build cineplexes in the Soviet Union, Hong Kong, Portugal, and Spain, as well as three theme parks in Australia.
NO SUBTITLES. One new market that promises to be very profitable is Eastern Europe cable TV. In Hungary, Time Warner is joining Denver-based United International Holdings to develop programming and operate cable services. Surprisingly, Hungary already has half a million subscribers--even though all the programming is in German or French. The new joint venture will develop shows in Hungarian. UIH is the largest franchisee of Blockbuster Video stores in the U. S.
Once it masters Hungarian, Time Warner plans to produce programs in Swedish. The company recently launched a pay-TV service in Scandinavia with Svensk Filmindustri, Sweden's largest motion picture and television producer,and Tidnings AB Marieberg, the publisher of Sweden's two largest daily newspapers. Canal Plus just joined the partnership.
So far, so good. But to make his grand strategy work, Ross is still waitingfor The Big Deal, or a series of big deals. Ultimately, says Ross, he wantsto take Time Warner's best assets,put them into newly created subsidiaries, and establish joint ventures with European and Asian partners in a tricontinental alliance. "Management control in America would be American, in Europe it would be European-style, and in Japan, Japanese-style," says Ross. American companies could buy in as well. One new subsidiary would most probably be in film, another in pay-TV, another perhaps in recordings.
By bringing in billions of dollars in new equity, Time Warner would make Wall Street happy and help ratchet Time Warner's stock up toward the $200 zone where it was trading before the merger. The stock currently sells for about $112. Ross, his co-chairman, N. J. Nicholas Jr., and half a dozen other key Time Warner executives are now talking with companies all over the world. Canal Plus and Toshiba Corp. are involved. So is Milchan, who is bolstering Regency's capital to the tune of $3 billion. "The talks are like anauction with all kinds of assets being offered up," says one European involved in one set of negotiations. "Nothing is off-limits to Time Warner."
With $2.3 billion in annual cash flow, a 19% stake in CNN, and billions invideo, film, cable, magazine, and recording assets, Ross has a strong hand. But every day as he goes to work, there is a sobering reminder of the ever-present alternative to his strategy. A year and a half ago, Rockefeller Center was "annexed"--to use his term--by Mitsubishi Estate Co. For Ross, it's deal or be dealt.
MOVIES BY WARNER-- AND CASTS OF THOUSANDS To spread the financial risk and bolster distribution-- Warner is linking up with foreign film and media companies. The biggest, a $900 million transatlantic partnership formed in January, has French, German, and Dutch players. Coming attractions: Movie Cost Director Star Millions JFK $42 Oliver Stone Kevin Costner THE MAMBO KINGS 18 Arnold Glimcher Armand Assante MEMOIRS OF AN 35 John Carpenter Chevy Chase INVISIBLE MAN POWER OF ONE 25 John Avildsen Morgan Freeman SUMMER'S BEE 30 In negotiation Richard Gere DATA: WARNER BROS. INC., REGENCY INTERNATIONAL PICTURES