INTERNET—Why Hollywood Won’t Marry Yahoo

0



Studios Shun Giant Portal, Focus on Internal Growth

With its merger now official, AOL Time Warner stands today as the giant to slay in Hollywood. It’s far ahead of the pack in delivering all types of content into America’s homes and offices.

Yet, not a single competing Hollywood studio seems the least bit interested in what might appear as the most logical move to get back in the horse race, namely, buying Yahoo Inc.

The popular Internet portal has a huge population of users and incredible brand name recognition. In addition, its once high-flying stock as of last week was trading below $40 a share, a bargain compared with its 52-week high of $205.63.

But no studio is biting.

On paper, Yahoo looks like it could prove a valuable match. But, in today’s market, valuing technology’s worth in relation to content is almost impossible, so Hollywood studios are shying away and instead trying to develop Internet strategies from within.

“Certainly, re-entrenchment is a huge part of the future,” said Fox Broadcasting’s COO Chase Carey in a telephone interview. “But Hollywood is still struggling to understand the Internet business and (how to) build a successful business model. Use alone does not mean profit.”

It’s a view echoed by Wall Street analysts, who see a Yahoo acquisition as a wrong move for any studio hoping to catch AOL Time Warner.”Yahoo has hit a brick wall with growth. It’s an expensive purchase right now,” said Douglas Christopher, an analyst with L.A.-based Crowell, Weedon & Co.

Based on projected 2001 operating earnings per share of 38 cents and revenue of $1.2 billion, the stock as of last week was trading at about 100 times earnings and 18 times revenue. Such multiples would make any buyout deal highly dilutive to shareholders of any of the major Hollywood studios’ parent companies, especially in such a declining market.

“The Internet has never been a good platform for traditional content,” said Aram Sinnreich, senior analyst with Jupiter Media Metrix. “Instead, it creates supplementary content for Hollywood like the ‘Who Wants To Be a Millionaire’ Web site or CBS’s Super Bowl site letting users know when a movie comes out, merchandising, interacting beyond a 30-minute broadcast of ‘Friends.'”

French-owned Vivendi Universal and Sumner Redstone’s Viacom Inc. are major media players without a strong Internet presence. But neither company has shown any interest in Yahoo nor would either officially comment on speculation. But they are to said be “very focused” on internal solutions to the Internet conundrum, rather than on acquisitions.

“When rumor (about a Yahoo purchase) came and went, it was widely discounted,” one source at Viacom said. “It’s not an accretive acquisition, even given the current market capitalization of Yahoo.”

Vivendi Universal is pursuing a middle path. Since the French media giant took control of the studio, Vivendi has sought to develop various Web ventures such as Education.com, a Web site for students, teachers and parents, which operates along with all the other cyber ventures under its VivendiNet unit.

“VivendiNet’s task is to profitably leverage the company’s content, technology, brand equity and subscriber base online,” said Vivendi Universal spokeswoman Anita Larsen.


Content rich

Vivendi’s large amount of U.S. film and foreign television content gives it the potential to be an AOL Time Warner rival, but it currently lacks the subscriber base.

Likewise, The Walt Disney Co. has struggled mightily to establish a major presence in cyberspace, yet remains seemingly uninterested in Yahoo. Last week, Disney announced plans to dissolve its Go.com network, a portal that could not compete with the likes of AOL or Yahoo. Joining with Yahoo could leverage Disney’s unique brand of content. But not only would the deal prove extremely dilutive to earnings, Disney’s online strategy is in danger of becoming a case of once-bitten, twice-shy.

“Eyeballs don’t necessarily mean business,” said analyst Christopher. “In divesting Go.com, Disney has gotten itself out of the portal business. Why would it want to buy another one? Disney has ABC and ABC.com to push content. It has invested over $1 billion on its California Adventure theme park that will last 50 years. It should focus there.”

After all, Christopher pointed out, strong name recognition and product popularity does not necessarily make for a great acquisition, citing Quaker Oats’ disastrous purchase of Snapple Inc. as one recent example.

Disney officials declined to comment, citing corporate policy on speculation and a refusal to prognosticate on what the company’s future online strategic decisions might be.

Both Sony Corp. and Bertelsmann AG have announced that they plan to pursue aggressive internal Internet strategies that could potentially place them at the forefront of providing online content, without merging with any outside entities. Sony hopes to become a contender through its Web-based video-on-demand service. Bertelsmann plans to partner with Napster Inc. on a pay subscription service modeled after AOL’s service.

“The studios are still evolving,” says Bishop Cheen, media analyst with First One Bancorp. “They need to find a happy medium, steering between Viacom’s attitude of ‘show me how to get the shareholder value, or else I won’t invest,’ and NBC’s more pioneering path on which it has taken some arrows.”

The latter is a reference to NBC’s launching of its Internet portal, NBCi.


Dead ideas

The old model of last year, throwing up a site and spending gobs of money to promote it, appears to be dead in Hollywood.

“The studios are getting a financial conscious, finally,” said Sinnreich. “They’re beginning to consolidate their advertising and realize that online marketing is not a zero-sum game where you can just take money from the traditional marketing.”

There are other reasons besides earnings dilution that are keeping the Hollywood studios from partnering with Yahoo.

“The power of the AOL Time Warner merger is that (the combined companies) now have a tremendously valuable content library coupled with a diverse spectrum of distribution,” said Sandy Climan, managing director of Entertainment Media Ventures and former Universal and CAA executive. “AOL Time Warner can listen to the consumer and serve the consumer needs in the way the audience wants to receive and pay for the creative product whether that is a subscription service, a package of content, or an individual movie, television show, or song.”

Yahoo and similar banner ad and marketing-oriented companies can’t offer that powerful combination. Right now, it is benefiting from its position as the Switzerland of the Internet marketing realm, a neutral territory where no content provider has exclusively planted its flag. As a result, choosing a partner could also be harmful to Yahoo.

“A deal with a media giant will greatly diminish Yahoo’s presence,” said Sinnreich. “A Sony’s not going to want to do any deals with a Yahoo Disney.”

In fact, with its investment in California Adventure, Disney seems to be conceding much on the online content distribution territory to AOL Time Warner and refocusing on its core, money-making businesses, most notably theme parks. Having been burned in cyberspace, Disney is retrenching and perhaps waiting to see what the online shakeout will bring.

But at some point, in order to build dedicated subscribers to support their online content, Hollywood studios must confront the issue of online delivery.

“You need a seamless broadband pipeline as seamless as telephones or television and in at least 30 million homes,” said analyst Cheen. “Until then, the advertising dollars won’t follow.”

Another issue complicating a marriage between Hollywood and Yahoo or any other Internet giant, for that matter, is cultural dissimilarity, which is now being experienced at AOL Time Warner. Will Silicon Valley techies, who think in terms of “killer apps,” ever be able to speak the same language as Hollywood dealmakers fixated on great content and high-powered lunches? As long as the studios feel they control the names that drive the content the Tom Cruises, Steven Spielbergs and MTVs they’ll continue to shrug off the need to marry a technology-oriented Web partner like Yahoo.

Where does all this leave Yahoo, aside from hoping that its stock price will rebound?

“The question for a Yahoo is whether they can develop enough unique content internally, whether they need to merge with a traditional media company, or whether they can acquire enough content through affiliations to give themselves a differentiated position as a content provider,” Climan said.

No posts to display