Vivendi: Welcome To The Real World

Its grand design now gets put to the test

This should be Jean-Marie Messier's victory lap. Antitrust authorities have cleared his takeover of Seagram Co., the Canadian distiller turned entertainment conglomerate. And shareholders are poised to give final approval of the deal in early December. That will create the world's second-largest media group, Paris-based Vivendi Universal.

But even before Chairman and CEO Messier assumes command of his transatlantic empire, there are challenges aplenty in his backyard. Vizzavi Ltd., a European Internet portal central to his plans for tapping the mobile Internet, appears stuck on the starting blocks. Messier faces a huge task in readying his pay-TV network, Canal Plus, for the digital age. And now that rival Bertelsmann has cut a deal with online music bad boy Napster Inc., the pressure is on Messier to spell out his vision for selling music online.

PROFIT POWER. You have just stepped into the big leagues, Monsieur Messier. A consummate dealmaker, the 43-year-old French exec has been promoting the merger as an ideal marriage of Universal's rich film and music holdings with Vivendi's distribution network. Yet while Messier has access to 80 million customers through its telephone and TV holdings, they don't yet have the equipment they need--from Web-enabled cell phones to TV set-top boxes--to use the new services Messier is promising.

To be sure, media giants such as AOL Time Warner must also develop the technology to realize their Web dreams. And both Vivendi and Seagram are in good health: Vivendi's first-half earnings were up 67%, to $1.25 billion, and Seagram has been reporting good profits, thanks in part to a surprisingly good year at the film studio, which just released Dr. Seuss' How the Grinch Stole Christmas. Messier is hoping for 35% annual growth in cash flow from the merged company.

Impressive--but Vivendi's stock has drifted steadily down since the merger was announced. "Vivendi is presenting a strategy that does not make sense to investors," says a French banking executive. When he met recently with leaders of nearly 50 U.S. pension funds, this source adds, "not a single one" wanted to invest in Vivendi.

Messier's plan is to make Vivendi Universal a powerhouse in the Internet's fastest-growing markets. And Universal Music, the world's biggest recording company, is central to his ambitions. Most analysts reckon that annual online music sales will top $3 billion within three years, as music companies set up subscription services for downloading music or simply listening to it "streaming" from Web sites. Along with many others in the industry, he's betting that the convenience of cell phones will soon make them the main device for getting music over the Net.

PORTAL PROBLEMS. That's why it's urgent for Messier to get Vizzavi, a joint venture with Vodafone AirTouch PLC, up and running. Vizzavi is a Web portal designed for use with PCs, mobile phones, and interactive digital TV. The idea is to make Vizzavi the "default" portal for subscribers of Vodafone and of Vivendi's French telephone subsidiary, Cegetel--many of whom will want to download music. "Vizzavi has a competitive advantage thanks to our partner cell-phone operators, and our content," says Frank Boulben, CEO of the Vivendi unit that oversees Vizzavi.

Sounds good. But so far Vizzavi operates only in France and appears to have few subscribers. Like other European mobile portals, Vizzavi was originally designed for phones using wireless access protocol, a slow-moving technology that has flopped with consumers. So Vizzavi's expansion plans are on hold until new Web-enabled cell phones come onto the market.

Most of Vizzavi's competitors are likewise looking to the next generation of cell phones. But while Vizzavi is starting from scratch, many rivals are already well established. Yahoo! Inc. already has mobile portals ready to launch in eight European countries. "It's too late" for Vizzavi, says Zaheed Haque, the chief executive of room33, a Swedish company that provides software to portals. "They're up against tremendously strong players." What's more, Messier can't count on Universal's music riches to lure listeners exclusively to Vizzavi. To win European antitrust approval, Vivendi had to promise that Universal's content would be freely available to competing distributors.

Messier also faces a costly catchup game at Canal Plus. The pay-TV network will soon offer set-top boxes that allow subscribers to surf the Web from their televisions and so download and store music and videos. The question is who will pay for the boxes, which analysts think will cost about $400 each to make. Pay-TV companies such as Britain's British Sky Broadcasting Group PLC have suffered huge losses by providing free set-top boxes to customers. If Canal Plus followed the giveaway strategy it would have to spend $8 billion on the boxes. Canal Plus already reported a loss of $80 million in the first half of this year because of heavy investments.

Such numbers are worrying to Canal Plus employees, who fear that digital investments will increasingly draw money away from creative endeavors. On Nov. 15, former Canal Plus Chief Executive Andre Rousselet published a front-page article in Le Monde expressing his fear that the merger would be "the end" of the network. The next day, current CEO Pierre Lescure fired back with another front-page article arguing that the deal would strengthen Canal Plus. On Nov. 23, Messier is to attend a mass meeting of Canal Plus employees in Paris to answer questions about the merger.

Smoothing ruffled feathers at Canal Plus is hardly Messier's only challenge. Another is Bertelsmann's plan to finance Napster if it switches its free file-sharing service to a subscription-based model. Might Universal, which has sued Napster for alleged piracy, eventually join in that deal? For now, Universal seems to be pursuing its own Web strategy. The company already offers more than 300 titles for sale over pay-per-download sites such as, and it plans to launch a subscription-based service with Sony Corp. early next year. To be sure, Bertelsmann and Napster have more to lose than Universal does, if the industry's top player spurns their venture. But Messier can't afford to pursue a go-it-alone strategy either. Initiatives that focus on one label are doomed to fail," says analyst Matt Bailey of online music research company Webnoize Inc.

Some longtime Vivendi-watchers are dubious that Messier can clear all these hurdles. "There is more than a 50% chance that the company will eventually understand that its strength is more as a content powerhouse than as an Internet distribution powerhouse," says Edouard Tetreau, an analyst at Credit Lyonnais Securities in Paris. Messier is determined to press ahead. But for the ambitious Frenchman, this race may not be a sprint, but a marathon.

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