Hollywood Scuffle

For Jeffrey Katzenberg, quitting Disney opened up a whole new world. Within hours of his Aug. 24 resignation as chairman of Walt Disney Studios, Katzenberg was fielding phone calls from such moguls as William H. Gates III and John C. Malone. Some simply wanted to talk. Others offered to invest in Katzenberg's next venture. First among the callers was Robert A. Iger, who was soon to be named president of Capital/Cities ABC Inc.

Iger's promptness paid off. On Nov. 28, Cap Cities announced it had bagged the "Dream Team." The network will start a television studio in partnership with the new entertainment company owned by Katzenberg and his teammates, David Geffen and Steven Spielberg. The two sides will kick in $100 million each to develop programs for network TV, cable, and syndication. Iger notes that the money is going into the shows themselves, not to build an elaborate studio lot or hire platoons of executives. "We want to build something for today's business environment," he says, "not yesterday's."

LOOSER REGULATION. Katzenberg & Co. are only the latest in a steady stream of players who are making yesterday seem like a long time ago in Hollywood. The prospect of a New Hollywood also has drawn the likes of cable-TV baron Ted Turner, Viacom chief Sumner M. Redstone, and Bell Atlantic Chairman Raymond W. Smith. All these heavyweights see--or think they see--a series of regulatory and technological trends that are converging to make the film and TV business virtually irresistible.

But the players who are remaking Hollywood are in for a bumpy ride. That's because the economics of entertainment are changing so rapidly. In the Old Hollywood, seven major studios dominated film and TV production, while a handful of networks delivered the programming to mass audiences. Now, the number of distribution channels is exploding, and the historic relationship between producers and distributors is eroding. Worse, consumers simply may not want to watch more TV or see more movies. The danger is that a Darwinian struggle will develop in which too many players fight over video-saturated viewers.

Spotting the next big hit, of course, will still guarantee success in show business. But several trends are intensifying the competition. First, government regulations that bar broadcast networks from owning TV programs are being phased out. That's what enabled Cap Cities to strike its deal with Katzenberg. It's also the reason that major TV producers such as Warner Bros. Inc. and Paramount Pictures are starting their own networks. Second, the rules that prohibit telephone and cable companies from invading one another's turf are quickly being eliminated, prompting the Baby Bells to deliver video services.

On top of those changes, emerging digital technology has vastly expanded the carrying capacity of cable and telephone networks. With hundreds of channels in the offing, the search is on for high-impact programming to break through the clutter. "Whether they want to own, buy, or invest, they have to come to us," says Tom Pollock, chairman of Universal Pictures, which made the blockbuster, Jurassic Park.

Hollywood's new players, however, are plotting strategies to transform the way future hits are delivered (table). Six of the seven Baby Bells, for example, have allied with Walt Disney Co. or Hollywood agent Michael Ovitz to buy or invest in programs that existing studios will turn out. The Bells plan to distribute the shows over their souped-up telephone networks. "The Ovitz partnership is really designed to make us some valuable connections in the creative business," says James G. Cullen, president of Bell Atlantic Corp., which has allied with Pacific Telesis Group and Nynex Corp. to develop TV programming.

GRAND GESTURES. Iger has a similar goal in linking up with Katzenberg & Co. He wants ABC to own more programs, preferably hot shows such as E.R., the emergency-room drama that Spielberg's Amblin Entertainment currently produces for NBC Inc. Iger believes the Dream Team will be a powerful source for such creative programming concepts. ABC will need plenty of hits, because even in plain-vanilla broadcasting, the competition for viewers is escalating. Warner and Viacom Inc.'s Paramount studio are spending millions on new TV networks to compete with the Big Three and Fox. Indeed, Viacom on Nov. 30 announced that it will pay $100 million for a Boston TV station, WSBK, to bolster its United Paramount network.

Iger says Cap Cities might be interested in some of the other legs of Katzenberg's new company, such as its multimedia unit. Katzenberg, who's not dropping hints, is also rumored to have talked about potential investments with Microsoft Corp. Chairman Gates and cable titan Malone, who is CEO of Tele-Communications Inc. Katzenberg also intends to produce music and live-action and animated films.

For some distributors, the need for content is so great that they've bought into Hollywood lock, stock, and barrel. Viacom Chairman Redstone paid $10 billion for Paramount Communications Inc. And Turner Broadcasting System spent $1 billion to buy and combine two movie-production companies, New Line Cinema Corp. and Castle Rock Entertainment. Turner has funneled millions more into ramping up production to feed its clutch of cable networks with fresh films. New Line recently plunked down $4 million to acquire a screenplay by Lethal Weapon writer Shane Black.

Such grand gestures raise the fear that Hollywood will chew up this new crop of players, much as it mulched Japan's Sony Corp. and other outsiders that bought studios. New buyers, such as Turner, hope to avoid the pitfalls of their predecessors by doing without studio lots and their high overhead. Others are considering buying only minority stakes in studios such as Sony's troubled Columbia Pictures.

JUST A VENDOR. Indeed, some observers predict that minority investors and owners of "virtual" studios will proliferate along with the number of distribution channels. "Distribution is so much easier to have today that the old barriers to creating a studio just don't exist any longer," says John S. Suhler, president of investment brokerage Veronis, Suhler & Associates Inc.

The field already is getting more crowded. Being able to compete without buying a studio outright has enticed foreign companies such as PolyGram to enter the business. Rather than buy a studio, PolyGram has spent $250 million over a three-year period to ally itself with such filmmakers as Jodie Foster. Next year, PolyGram intends to boost its production to 20 films from its current 15, according to PolyGram Filmed Entertainment President Michael Kuhn.

Still other players are dipping their toes into Hollywood--convinced that they need programming but unsure of the best way to get it. Microsoft's Gates, for example, opened a small Hollywood office to track industry developments and to look for business opportunities. He also recently hosted Katzenberg for a daylong visit to Microsoft's Redmond (Wash.) headquarters. "We are committed to supporting Hollywood in a big way," says Jonathan D. Lazarus, Microsoft's vice-president for strategic relationships. More recently, though, Gates has said he would rather be just a vendor, selling his software to companies that deliver interactive services.

Such an approach could serve Gates well. In the short run, Hollywood's new producers will thrive amid the frenzy of activity. With so many new distributors vying for content, the price for programming will be bid up to the rafters. But on the distribution side, the competition promises to be ferocious. Distributors require increased consumer spending to bankroll their expansion. Suhler predicts that consumer spending on filmed entertainment will grow at a compound annual rate of 6.1% between 1993 and 1998. Even so, some observers doubt this is enough growth to sustain all the new players.

Pollock is one of the skeptics. He points out that Americans watch roughly the same number of hours of television per day as they did two decades ago. They also buy roughly the same number of theater tickets per year, even with a growing population. Entertainment boosters say those numbers are understated because of the public's increased consumption of home videos and video games. But all told, Americans aren't likely to devote significantly more time to entertainment than they do now. Says Pollock: "The pie doesn't have much room to grow."

That's a sobering thought for Hollywood's new players. The industry may be booming now, but it could face a wrenching shakeout in a few years if new distribution services fail to catch on with consumers. At that point, heavily leveraged studios and other producers may suddenly find demand for their product drying up. The New Hollywood could look downright Jurassic even before the sequel comes out.

              TINSELTOWN: TAKE TWO
      Five years after the Japanese invasion, a new cast of players is once again reshaping the entertainment industry
      This "dream team" is building an entertainment company from scratch. Their first step: a partnership with ABC to create a TV studio. Later on, Katzenberg and his colleagues intend to produce live-action and animated films, music, and interactive media products. The venture has drawn interest from cable titan John C. Malone and Bill Gates.
      Bell Atlantic's Smith has teamed with Pacific Telesis, Nynex, and talent agent Ovitz to develop video networks delivered over phone wires. Southwestern Bell, Ameritech, and BellSouth have allied with Disney in a similar venture. In Disney's tentative deal, the company may be a part-owner of the video network. Ovitz will help develop programs for his Baby Bell partners.
      Turner Broadcasting paid $1.06 billion in equity and assumed debt for New Line Cinema and Castle Rock, while Redstone's Viacom acquired Paramount Pictures for $10 billion.
      Microsoft's chief recently set up his own office in Hollywood. He's seeking ways to marry entertainment and software technology.
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