Vivendi's New Vitality

Three years after Messier, it's cashing in on his media vision

From San Diego to Seoul, more than 4 million people shell out an average of $15 a month to wage battle against orcs, trolls, and the undead in World of Warcraft, a megahit fantasy game that's played over the Internet. In France, cell-phone users are paying $8.70 a month to watch TV shows on their handsets. Music lovers worldwide are spending more than $300 million a year to download songs, music videos, and cell-phone ringtones. After years of false starts, it's finally happening: Customers are paying to get digital entertainment, wherever and whenever they want it. And guess who's cashing in: Vivendi Universal (V ).

That name ring a bell? Mais oui -- it's the former French utility company that nearly collapsed after former Chief Executive Jean-Marie Messier tried to transform it into a global powerhouse in digital media. Three years after Messier's ouster, Vivendi has regained its financial health. Debt has been pared back from over $25 billion to $5 billion. Currency-adjusted first-half revenues were up 7%, to $11.4 billion, and the company is forecasting a 37% rise in profits for the full year, to $2.2 billion.

But more important, the Paris company is in pole position to capitalize on the rapid spread of digitized entertainment. Its Universal Music Group is already a pacesetter, having become the first music company to sign on with Apple Computer Inc.'s (AAPL ) popular iTunes venture two years ago. Now the music group is aggressively promoting music and ringtone downloads to mobile operators worldwide as a new generation of Web-enabled handsets comes on the market. The Vivendi Universal Games unit is planning to roll out games for mobile phones, too. "A significant part of our growth for the next five years will come from these intersections" between new technologies and Vivendi's digital storehouse, says CEO Jean-Bernard Lévy, who was promoted from chief operating officer last spring, when Messier's successor, Jean-René Fourtou, became supervisory board chairman.

Not long ago, such optimism would have seemed ludicrous. To pay down debt, Fourtou and Lévy sold off some of Messier's prize acquisitions, including Universal Studios Inc. and the venerable Houghton Mifflin Co. publishing house. What remained of Vivendi's entertainment portfolio looked pretty sickly. Universal Music, battered by piracy and music file sharing, saw revenues fall by 25% from 2001 to 2003. Outgunned by competitors, the video game unit plunged into the red in 2003. Meanwhile, Vivendi's pay-TV business, Canal+Group (V ), was forced to beat a retreat after a money-losing push to expand across Europe in the 1990s. If not for the reliable cash flow provided by Vivendi's French cell-phone business, the whole enterprise might have crumbled.

Yet some gems were hidden in the wreckage of Messier's acquisition binge. One was Blizzard Entertainment, the Vivendi Universal Games subsidiary that developed World of Warcraft. Acquired in 1998 as part of the takeover of the French publishing group Havas, Irvine (Calif.)-based Blizzard had produced several successful PC-based games, including Diablo and Starcraft. But it didn't have a blockbuster until last November, when World of Warcraft was launched. The product, in which players assume roles in a fantasy world, is by far the best-selling online game in history, with analysts forecasting $200 million in revenues this year and a rich 35% profit margin. Unlike most PC and console games, online games provide a long-term revenue stream. "World of Warcraft is the best game I've ever played," says Park Kwang Hoon, a 32-year-old carpenter in Seoul who is among an estimated 550,000 South Korean players. "It has an excellent plot, elaborate graphics, and lots of interesting episodes."


Part of the credit goes to Vivendi's new management, which despite dire straits did not lean on Blizzard to speed up the game's release. "They understand that it sometimes takes time to create a great game," says Blizzard President Mike Morhaime. Likewise, Universal Music executives say they were given ample budgets to sign new artists, even as revenues plunged. Universal took the potentially risky step of signing Mariah Carey after EMI Group dumped her in 2002. Smart move, considering Carey's new album, The Emancipation of Mimi, has sold more than 2 million copies since April. Other hot acts include rappers 50 Cent and Kanye West. "You can only grow revenues when you have something that folks want to hear," says Universal Music CEO Doug Morris.

Universal Music also is pushing hard into digital distribution, which accounts for 5.5% of sales. Last year, Universal launched the industry's first mobile music unit. It now has a staff of 30 marketing ringtones and music-download services, including the current top-selling ringtone, Mariah Carey's We Belong Together, to mobile-phone operators. The group also has signed deals with Yahoo! (YHOO ), MSN (MSFT ), and iTunes for music video downloads and pay-per-views. Such pacts, along with the online-games business, give Vivendi a big leg up on competitors, says Bob House, a London-based vice-president of telecommunications consultant Adventis Group PLC. "They have very good properties and very good content," he says.

If Vivendi is admired for its creativity, investors remain perplexed by its overall corporate vision. The company still draws about half of revenues from two telephone companies -- France's No. 2 cell-phone operator, SFR, and Maroc Telecom, a fixed-line and wireless operator in Morocco. Universal Music and Canal+ have both signed deals with SFR to provide music, video, and TV programming to its subscribers. But otherwise, there's little overlap between the phone and entertainments businesses. Lévy insists that Vivendi's diverse holdings create more value as a group than they would apart. Nonetheless, many analysts say the company's share price, which is up just 8% this year -- about half the rise of the Paris bourse -- suffers because investors regard it as an unfocused conglomerate.

It's a safe bet that Vivendi's turnaround won't rehabilitate the image of Jean-Marie Messier, who saw much of his empire dismantled and paid millions in fines to U.S. and French regulators who accused him of misleading investors. But maybe his prophecies about digital convergence weren't so farfetched after all.

By Carol Matlack in Paris and Ronald Grover in Los Angeles, with Moon Ihlwan in Seoul

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