Media: Big Media Will Get Even Bigger

>>The urge to merge and a flood of digital media gizmos will keep the industry jumping
>>Music piracy is easing, but movie downloads cost Hollywood $3 billion a year

In the topsy-turvy media world, Rupert Murdoch's late-December acquisition of satellite service DirecTV was about the only predictable event of 2003. Who would have thought that Apple Computer Inc. (AAPL ) CEO Steve Jobs would be hailed as a savior of the ailing music industry with the launch of his iTunes online music? Did anyone expect prosecutors to snare a New Jersey man for distributing The Hulk on the Internet? And who would have predicted that Edgar Bronfman Jr. would rise from the ashes of the Seagram/Vivendi (V ) deal to buy the storied Warner Music Group?

More upheaval is sure to come in 2004, in no small part because of Murdoch's DirecTV deal. With TV delivery systems now achieving the scale of satellite's DirecTV and cable's Comcast Corp. (CMCSA ), the pressure for competitors to get bigger will intensify. Smaller media players such as Metro-Goldwyn-Mayer (MGM ), Cablevision Systems (CVC ), and possibly even Walt Disney (DIS ) may seek partners in their battle for subscribers and space on the TV spectrum. "You are definitely going to see an urge to merge," says Richard D. Parsons, CEO of Time Warner Inc. (TWX ).

No matter what, the improving economy means that Big Media will get bigger. Total spending, on everything from movie tickets to billboards, is expected to grow 6.5% next year, to $684 billion, from $642 billion in 2003. And it looks like the advertising recession should come to an end at last. But that won't help with a new challenge to the traditional 30-second TV spot: Fast-proliferating personal video recorders (PVRS) that enable viewers to skip through commercials.

While TIVO (TIVO ) was the first to tickle people's interest, cable operators are now offering customers competing PVR services, and they plan larger rollouts in 2004. Sanford C. Bernstein & Co. analyst Tom Wolzien sums up the appeal: "Watching Fox's 24 on a PVR takes only 40 minutes....In the digital age, the show should be called 16." That has admakers looking to embed products right in TV shows, as Coca-Cola Co. (KO ) did on Fox Entertainment Group Inc.'s (FOX ) American Idol last year. Similar product placements will probably multiply in 2004.

Meanwhile, some of the old challenges of digital media persist. Hollywood will scramble this year to protect movies and TV shows from the kind of piracy that's crippling the music biz. Sony Corp. (SNE ) of America CEO Howard Stringer calls the threat "a shadow hanging over the industry." Hollywood says it loses $3 billion a year in DVD sales because of bootleg flicks -- an estimated 600,000 copies of movies are downloaded illegally every day. But Time Warner's Parsons is confident that legitimate online alternatives will prevail: "In the history of the world, the pirates never win in the long run."

On the music front, the skull and crossbones will continue to take a beating. The Recording Industry Association of America (RIAA) filed 349 lawsuits against individual file sharers in 2003 and eventually reached 220 settlements. That, along with new legal online music services and increased RIAA publicity about enforcement efforts, has helped to curb file-sharing: In August alone, more than a million households deleted all the digital music files on their PCs, according to research firm NPD Group. All told, music sales dropped 2.2% in 2003, vs. a nearly 13% decline in 2002, according to sales tracker Nielsen SoundScan. Watch for more plot twists in 2004.

By Tom Lowry in New York and Ronald Grover in Los Angeles

    Before it's here, it's on the Bloomberg Terminal.