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SURVEY   TECHNOLOGY AND ENTERTAINMENT
Wheel of fortune


What will the digital revolution do to the entertainment industry’s emerging global oligopoly? Probably boost it, says Emma Duncan

SINCE moving pictures were invented a century ago, a new way of distributing entertainment to consumers has emerged about once every generation. Each such innovation has changed the industry irreversibly; each has been accompanied by a period of fear mixed with exhilaration. The arrival of digital technology, which translates music, pictures and text into the zeros and ones of computer language, marks one of those periods.

This may sound familiar, because the digital revolution, and the explosion of choice that would go with it, has been heralded for some time. In 1992, John Malone, chief executive of TCI, an American cable giant, welcomed the “500-channel universe”. Digital television was about to deliver everything except pizzas to people’s living rooms. When the entertainment companies tried out the technology, it worked fine—but not at a price that people were prepared to pay.

Those 500 channels eventually arrived, but via the Internet and the PC rather than through television. The digital revolution was starting to affect the entertainment business in unexpected ways. Eventually it will change every aspect of it, from the way cartoons are made to the way films are screened to the way people buy music. That much is clear. What nobody is sure of is how it will affect the economics of the business.
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New technologies always contain within them both threats and opportunities. They have the potential both to make the companies in the business a great deal richer, and to sweep them away. Old companies always fear new technology. Hollywood was hostile to television, television terrified by the VCR. Go back far enough, points out Hal Varian, an economist at the University of California at Berkeley, and you find publishers complaining that “circulating libraries” would cannibalise their sales. Yet whenever a new technology has come in, it has made more money for existing entertainment companies. The proliferation of the means of distribution results, gratifyingly, in the proliferation of dollars, pounds, pesetas and the rest to pay for it.

All the same, there is something in the old companies’ fears. New technologies may not threaten their lives, but they usually change their role. Once television became widespread, film and radio stopped being the staple form of entertainment. Cable television has undermined the power of the broadcasters. And as power has shifted, the movie studios, the radio companies and the television broadcasters have been swallowed up. These days, the grand old names of entertainment have more resonance than power. Paramount is part of Viacom, a cable company; Universal, part of Seagram, a drinks-and-entertainment company; MGM, once the roaring lion of Hollywood, has been reduced to a whisper because it is not part of one of the giants. And RCA, once the most important broadcasting company in the world, is now a record label belonging to Bertelsmann, a German entertainment behemoth.

Part of the reason why incumbents got pushed aside was that they did not see what was coming. But they also faced a tighter regulatory environment than the present one. In America, laws preventing television broadcasters from owning programme companies were repealed earlier this decade, allowing the creation of vertically integrated businesses.

Greater freedom, combined with a sense of history, prompted the smarter companies in the entertainment business to reinvent themselves. They saw what happened to those of their predecessors who were stuck with one form of distribution. So, these days, the powers in the entertainment business are no longer movie studios, or television broadcasters, or publishers: all those businesses have become part of bigger businesses still, companies that can both create content and distribute it in a range of different ways.

Out of all this, seven huge entertainment companies have emerged—Time Warner, Walt Disney, Bertelsmann, Viacom, News Corp, Seagram and Sony. They cover pretty well every bit of the entertainment business except pornography. Three are American, one is Australian, one Canadian, one German and one Japanese. “What you are seeing”, says Christopher Dixon, managing director of media research at PaineWebber, a stockbroker, “is the creation of a global oligopoly. It happened to the oil and automotive businesses earlier this century; now it is happening to the entertainment business.” This survey will examine whether the latest technology will weaken those great companies, or make them stronger than ever.

 
Elbow power
Why entertainment companies have strong bosses

 
BY WORLD standards, the entertainment business is not huge. The industry’s biggest company, Time Warner, has a market capitalisation of $52 billion, compared with $180 billion for Exxon, the largest oil company, and $173 billion for Merck, the biggest pharmaceutical firm. But entertainment does have some of the biggest egos in business anywhere. Few chief executives can match Rupert Murdoch, Ted Turner or Sumner Redstone for guts, bloody-mindedness and sheer aggression.

There are two reasons for that. One is that show business naturally attracts big egos. The other is that the global entertainment business is still at the entrepreneurial stage of development, with companies run not by hired bosses, but by the men who created them. Viacom, Sumner Redstone’s company, was built on the back of some drive-in movie theatres that Mr Redstone developed into America’s first multiplex cinema business, then leveraged into cable-television assets, and thence into Hollywood. Rupert Murdoch’s News Corp emerged from a single Australian newspaper in Adelaide.

There are exceptions. Time Warner’s chief executive, Gerry Levin, shuns the pages of the glossies, and relies less on his personality than on getting management systems into place to make the tripartite merger of Time, Warner and Turner work. The culture of Bertelsmann, with its headquarters deep in the German Land of North Rhine-Westphalia, puts much emphasis on social partnership, with the shadow of the founder still looming large. Sony remains a Japanese company in Hollywood. The rule, though, is that entertainment companies are run by powerful personalities. The boss at Disney, the doyen of America’s entertainment business, is Michael Eisner, a brilliant salesman and a tough manager. And although Edgar Bronfman, the Canadian heir to Seagram, is not a larger-than-life character, he has teamed up with a tame tiger: Barry Diller, who built the Fox network for Mr Murdoch.

Media superstars

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Because they play the part, the media bosses have become stars themselves. In America, the preoccupation with the entertainment business has reached bizarre heights. Industry gossip ranks as front-page news when large lay-offs in some dreary manufacturing business rate an inside mention. Vanity Fair, a glossy magazine, runs an annual article on “The New Establishment”, which executives kill to get into. In its latest version, only five out of 50 have nothing to do with the media business.

Perhaps the publicity helps to inflate the companies’ share prices, but more probably it just inflates the bosses’ egos. It certainly exacerbates one of the problems of this model of leadership—that competition becomes intensely personal. Every so often a vicious battle between two big chiefs—Mr Redstone and Mr Bronfman, Mr Turner and Mr Murdoch—grips the industry. These feuds are especially puzzling when the players are tied together by a complex network of production and distribution deals both in America and around the world. Time Warner and News Corp, for instance, need to be able to work together to distribute each other’s programmes; but the Turner-Murdoch row got in the way of plans for a Warner Bros channel for Mr Murdoch’s British pay-television system.

The big-ego model of leadership also makes companies particularly vulnerable to sudden death. When Steve Ross died soon after engineering the merger of Time Inc, a New York publishing house, and Warner Communications, a Hollywood studio and record company, the two constituent parts discovered they had little in common. Oddly, by adding Mr Turner to this unlikely mixture, Mr Levin seems to have found a formula that works.

Entrepreneurial leaders, like dictators, are often reluctant to groom successors. One of the market’s main grouses about Mr Eisner is that he has given no indication of who might follow him. Conversely, Mr Murdoch has left no doubt about his intentions: his designated heir is his son Lachlan, who along with two of his siblings (all of them sharp as nails) is already working in the business. But it is far from clear that Mr Murdoch junior—or, come to that, anybody other than Mr Murdoch senior—is up to the task of holding together the huge empire his father has built; nor that the other children are ready to accept his primacy.

Still, the entrepreneurial model does have some advantages. Speed is one. When Rupert Murdoch, the arch-entrepreneur, goes on one of his buying sprees for News Corp, he is able to close a deal instantly, without any of the time-consuming consultation that a conventional management structure would require. The ability to take risks is another. Because of the kind of characters they are, and because of the huge stakes they have in their companies, these men have more freedom to bet big than most corporate chiefs. “The mogul style of leadership”, says Michael Wolf, senior partner at Booz Allen and Hamilton, a management consultancy, “is the only one that can work in an industry where the playing field is constantly changing.”

Mr Murdoch’s biggest gamble, on pay television in Britain, very nearly sank News Corp in 1990. Mr Redstone spent years paying off the debt he incurred to buy Paramount. Mr Bronfman grabbed PolyGram earlier this year and has since been selling off bits of the drinks business to reduce his pile of debt. But these businesses have grown quickly, and their leverage ratios are mostly back to normal.

These companies have proved extraordinarily good at getting big. What remains to be seen is how good they are at staying big.

A brand new strategy
The industry used to produce films, TV programmes, books and music. Now it makes brands
“THE X-files”, a rather silly science-fiction series, is produced by 20th Century Fox, the Hollywood studio owned by Rupert Murdoch’s News Corp. When it was first made, in 1993, it was licensed to News Corp’s Fox Broadcasting Company, and was received without great enthusiasm. Had it been made by anybody else, it might have sunk without a trace. But it got a second run because its makers believed in it, and because they controlled its distribution outlet. The video was heavily marketed and released worldwide. It took off like a rocket in Japan. Then Fox started selling the programme to television stations abroad. In Britain, it was licensed to BSkyB, Mr Murdoch’s satellite platform, where it proved a godsend: BSkyB was short of original programming and gave it saturation showing. As “X-files” fever rose in Britain, it excited curiosity in America and helped to propel the series to success there too.

After four-and-a-half years, the programme went into syndication on American broadcast stations, 22 of which are owned by Fox. It showed on Fx, News Corp’s cable entertainment network. Fox Interactive produced two X-files games; HarperCollins, News Corp’s publisher, the books; Fox Music, the CDs; and Fox Licensing and Merchandising made sure the programme’s catchphrase, “The Truth is Out There,” was spread on to as many surfaces as the world could stand.

That, explains Peter Chernin, president of News Corp, is how it works when it works. 20th Century Fox makes a decent profit—each episode costs around $1m to make and earns around $3m in revenue—and on top of that each part of the News Corp empire involved gets its own bit of the business and at the same time promotes the product.

This is the model that all the big entertainment companies are now trying to embrace. To understand it, put out of your mind any idea that these companies are selling movies or books or television programmes. What they are selling is brands, meaning some character or idea that can be marketed in a thousand different ways.

A brand is often launched with an “event” movie, as with Disney’s “Lion King” or Sony’s “Godzilla”, but brands can start life in all sorts of ways. Viacom’s “Rugrats”, which has just been turned into a movie, came from a children’s cable channel, Nickelodeon; Time Warner’s “Batman” is an old and revered comic-book character that happened to translate nicely into a live-action movie and much, much more.

Since management theorists regard vertical integration with suspicion these days, some observers feel that the consolidation that has taken place in the industry to create the companies that can do this owes more to hubris than to strategy. But there are other, better, reasons, too.

One concerns the ability to deal with uncertainty. As technology changes, so do the power relations between different parts of the business. If, for instance, one particular method of distribution turns out to have a huge advantage over others, the power of those involved in that business will be much enhanced. If, on the other hand, there are many easily substitutable means of distributing entertainment, then much of the power will rest with whoever owns the content. “When power is moving between different bits of the value chain,” says Dick Parsons, president of Time Warner, “you need to own the whole chain.”

Free-wheeling

The best way of looking at this model is as a wheel. At the hub lies content creation. The spokes that spread out from it are the many different ways of exploiting the resulting brands: the movie studio, the television networks, the music, the publishing, the merchandising, the theme parks, the Internet sites. Looked at this way, the distinctions between manufacturing and distribution begin to blur, because the various ways of selling the brand also serve to enhance its value. So every “Rugrats” video sells another toy, and every toy gets somebody else interested in the forthcoming movie. You are starting a virtuous circle.

Adopting this model poses two sets of problems: putting the pieces in place, and getting them to work together. Over the past decade the big companies have made a grab for the bits of the business they reckoned they needed to make it work. Most of them now have got most of what they want in place (see chart 4). Businesses that did not fit into this scheme of things have been hived off. Viacom, for instance, sold the educational publishing side of its book subsidiary, Simon & Schuster, to Pearson earlier this year.


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Sony has been left behind because of regulation. As a Japanese company, it is not allowed to own the American broadcast television stations without which it is impossible to run a broadcast network profitably; and it has missed out on creating pay-television networks. “We’re weak on television distribution,” admits Howard Stringer, president of Sony Corporation of America. “We’ve been beaten off the system by cable operators who want it for their own programming.”

Mr Bronfman, the Seagram heir who in 1995 bought MCA, which included Universal Studios, and who is in the final stages of acquiring PolyGram, has film, music and theme-park interests, but his television assets were weak. So, a year ago, he handed control of the television side of the business to Mr Diller, who has put it together with a home-shopping network and some Internet properties. He may pull off his usual trick of creating something big and valuable out of not very much.

But putting together all the pieces is not enough. The bits of the business have to be managed so that they add value to each other. Most people would call it “synergy”, but the entertainment business does not much like the word: it was applied a little too enthusiastically when Japanese television makers bought up Hollywood television-programme makers. “Synergy” now conjures up images of huge quantities of money being poured down drains.

Disney, however, has been playing this game for long enough not to be embarrassed by using the word. Walt Disney himself established his happy band of “imagineers”, the core-content creators, whose job was to dream up ideas that the rest of the company could use. There is a central synergy department within Disney, with around 50 people spread around the company’s various divisions who have to ensure that everybody knows what everybody else is doing.

Disney has pushed the number of spokes to the limit and beyond. After the films came theme parks and consumer-product divisions; then book publishing, magazines, music, a cable channel, stores, cruise ships, sports teams, hotels, time-shares and a town (called Celebration, just south of DisneyWorld). The latest spoke is the biggest yet: Capital Cities/ABC, which owns the ABC broadcasting network and the ESPN cable sports networks. So far the synergies are not overwhelming, and ABC is doing no better, either financially or in the ratings. ESPN, however, is profiting from the Disney treatment: it is now spinning out ESPN Zone restaurants and an ESPN magazine. Disney had spotted the potential of the ESPN brand, and is now exploiting it to its full.

Getting the different bits of Time Warner to work together has also proved a tough job. Before Turner came along, it had barely been tried. “The first time they had a meeting of the CEOs of all the divisions was just before the merger with Turner,” says Turner Broadcasting System’s chairman, Terry McGuirk. Turner’s television and sports assets offer some synergies with both Time and Warner. Examples include a deal for Warner to supply Turner with movies much earlier than cable networks usually get them, and CNNSI, a joint venture between Turner’s CNN and Time’s Sports Illustrated which has created a cable sports news network.

One big family?

One level down in the hierarchy, executives seem to be working together to good effect. Seth Abraham, head of sports at the pay channel HBO, says that he often talks to Harvey Schiller, president of the Turner sports group, and Michael Klingensmith, president of Sports Illustrated. They are familiar with each other’s needs and resources, and they co-operate and trade favours.

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Take the Goodwill Games, says Mr Abraham, started by Mr Turner in the hope that sport could help thaw relations between America and the Soviet Union. They still take place every four years between America and Russia, most recently this year in America. HBO organised the boxing, its speciality, which was covered mainly on the Turner networks and promoted in Sports Illustrated. “We three guys did it together. Nobody told us to do it. You can’t legislate for this. You’ve got to find common ground.”

Dick Parsons is working to make sure this happens everywhere in the company. He has recently done a round of the Time Warner offices in Europe, “bringing senior management together, to encourage them to look . . . for ways they can help each other.” He has faith in stock options as a useful motivating tool. “There are six businesses in this company, but only one piece of paper. So all my managers keep an eye on the whole.”

Sceptics survive, though, and their case was strengthened earlier this year by a sharp illustration of the dangers of synergy. The hard work that Time Inc and CNN have put in to get their magazines and television assets co-operating resulted not so much in cross-promotion as cross-pollution: Time magazine ran CNN’s “Tailwind” story claiming that America used nerve gas in Vietnam, and had to share CNN’s embarrassment when the story was later retracted.

Bertelsmann starts from a different place altogether. “The key factor”, says Mark Wössner, who has just retired from the top job there, “is decentralisation. Mohn learnt this in America. The Germans did not know it because they had been centralised for many decades.” Whereas the American companies emphasise how interdependent their constituent parts are, Bertelsmann’s executives pride themselves on their independence.

Gerd Schulte-Hillen, chairman of Gruner+Jahr, Bertelsmann’s magazine business, calls independence “the motor of innovation”. The heads of the company’s different divisions, he explains, work as entrepreneurs, looking after the interests of their own businesses. As an example, he cites an occasion when Gruner+Jahr asked Premiere, Bertelsmann’s pay-television joint venture, to come up with a list of its subscribers. Premiere refused.

But the old order is changing. “Bertelsmann was decentralised to a fault,” says Strauss Zelnick at BMG Entertainment, the music division. An internal poll of managers conducted last year by management consultants from McKinsey agreed with him. What really brought home the need for change was the Internet. Bertelsmann failed to notice how much of a threat it posed to the book retailing business. The book division, managers explain, thought the Internet was the new media department’s business, and vice versa.

Change is likely to accelerate under the new boss, Thomas Middelhoff, who took over earlier this month. A conference at Bertelsmann’s headquarters in Gütersloh in late October was designed to impress the importance of co-operation on management from all over the world. But transforming the ethos will be difficult. An industry observer who knows the company well describes the divisional heads as barons over whom the king has little power. And Bertelsmann is owned by a foundation, so Mr Middelhoff does not have the stock-option tool that Mr Parsons at Time Warner finds so useful. He is, however, said to be considering some new way of linking managers’ rewards to the company’s overall performance.

The companies that have got their models working properly are beginning to see the rewards. Their margins are rising, and they have started to buy back their debt. They are well-placed to weather a recession, and their prospects look good. According to a report published in September by Paul Kagan Associates, a media consultancy, America’s entertainment business, boosted by technological change, is likely to grow by an annual average of 8% for the next decade; and Asia aside, the rest of the world is likely to see healthy growth too.

 

Don’t read all about it
 

FOR an entertainment company with a news division, synergy presents a particular problem. How should such a company cover stories about itself?

An embarrassing little tale emerged in October about Disney’s ABC News division. Its “20/20” news magazine programme had been preparing an item about the Disney theme parks’ lack of co-operation with the police in child sex-abuse cases, but the item was dropped half-way through. ABC said that Disney put no pressure on it to abandon the story, but it looks bad.

It is usually Rupert Murdoch who gets into trouble on this score. Earlier this year his publishing company, HarperCollins, rejected a manuscript for a book by Chris Patten on his years as governor of Hong Kong, which it had earlier agreed to publish. The book was critical of the Chinese government, whose favour Mr Murdoch needs to help his Star TV satellite broadcaster. The story was splattered across British front pages—except that of Mr Murdoch’s Times, where the first reference to the story, days later, was headlined “News Corp puts its side”.

In September, when Mr Murdoch’s BSkyB satellite broadcaster agreed to buy Manchester United football club, some of his newspapers said that supporters were keen on the move. In the rest of the British press, whose hostility to Mr Murdoch has been stoked by a newspaper price war he started, fans were said to be devastated and tearful. In reality, there seems to have been widespread indifference. But the episode served to strengthen suspicions that you cannot trust what you read about the media in Mr Murdoch’s papers, and you cannot trust what you read in other media about Mr Murdoch.

The moral? Where the value of a product lies in its independence, synergy can damage it. A new advertising campaign for the Guardian, a competing British daily, homes in on this: “No proprietor, no ties,” it proclaims.

 

Infinite variety
The latest technological leap means not just more choice, but better products too
MULTI-CHANNEL television is causing a social and geographical revolution in the entertainment business. The broadcasting networks, until now the ruling class of television, are everywhere losing their power to the upstarts of pay television; and American television is spreading across the globe.

Cable began to bring multi-channel television to American homes in 1975. France got its first pay channel, Canal Plus, in 1984. Multi-channel spread through Western Europe in the 1980s and through the rest of the world in the 1990s. Its effects are similar everywhere.

With more channels, programmers can cater for people’s individual interests. Networks that try to please everybody are losing out to those that target particular groups. The old formula of “bosoms, broads and fun” prescribed by Jim Aubrey, a former president of CBS, no longer works. The broads are more plentiful and the bosoms more prominent on Playboy or Spice, and the fun better tailored to particular tastes on HBO, or Black Entertainment Television, or Nickelodeon. That explains the squeals heard from the broadcasting networks in recent years as their ratings slide. Because choices have multiplied, even today’s hits command far smaller audiences than those 20 years ago. In the 1970s, the ratings of “Seinfeld” would have got it only to the bottom of the top 20.

At the same time, pay television is making the business richer than it ever was before. Until its arrival, television lived off either government subsidy or a limited amount of advertising. Once television had direct access to people’s wallets through subscriptions, the potential became far, far larger.

Having two revenue sources—subscriptions and advertising—has done wonders for the economics of multi-channel television (see chart 5). In America, well-established cable networks are the most profitable parts of the entertainment business. According to Paul Kagan Associates, a media consultancy, America’s big broadcast networks last year had revenues of $12.7 billion and profits before interest, tax and depreciation of $697m, whereas the cable networks had revenues of $9.4 billion and gross profits of $2.5 billion.
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Money is flowing away from the general to the particular. The more closely the cable networks target a bunch of viewers, the more profitable they are. Partly, that is because advertisers like to aim their advertising as precisely as possible. Partly, it is because targeted networks sell better abroad: sports, cartoons or music are all more easily exportable than are general comedy and drama. And abroad is increasingly where the American-based companies are looking.

Go global, look local

Most of the world’s top media companies operate from a rectangle 20 blocks south of New York’s Central Park and four blocks across. Time Warner, Seagram, News Corp, Viacom and Bertelsmann’s music and television interests are all run from there, as are two of America’s broadcast networks.

Entertainment is a global business run from a village. There are good reasons for that, most of them to do with language and culture. Entertainment does not cross boundaries as easily as drugs, oil or cars. America is the world’s biggest market, so global companies need to be sure they can sell their wares there. Philips’s sale to Seagram earlier this year of PolyGram, its music-and-films subsidiary, illustrated the problems of running a global entertainment company from Europe.

But America alone is not enough for these huge companies. Even though the prospects there look pretty good for most parts of the business, it is a mature market. Demand for entertainment outside America is growing faster than inside, and new technology is allowing the big entertainment companies to satisfy that demand. “Music is global already,” says John Rose, a director of McKinsey. “The other entertainment businesses aren’t. Those who don’t exploit their assets globally risk missing some huge opportunities.”

Analogue broadcasting technology limited the number of channels available. Since people generally like to watch programmes about themselves, locally produced content was given pride of place. Governments reinforced the preference for local stuff. But over the past decade, the television business all over the world has been turned upside down by the proliferation of channels.

The growth of multi-channel television has had a direct effect on American entertainment companies’ bottom lines. The early stage of a market’s development is always particularly lucrative for big content producers. For example, they did well in Britain in 1989 when Robert Maxwell’s BSB and Rupert Murdoch’s Sky were both trying to corner the best movie rights. Germany has recently proved even more profitable. Prices of movie rights doubled overnight when media mogul Leo Kirch was trying to bag them for his DF1 digital broadcaster and freeze out his competitor, Premiere. Europe is sucking in ever larger quantities of American programmes, whereas its own film and television exports to America remain negligible.

For global companies, the question is how deeply they should get involved outside their home market. Just selling programmes leaves lots of profit to local packagers and distributors. Some of them, such as Viacom and Turner, have decided that selling branded channels—such as MTV, Nickelodeon or CNN—is the best way to make money.

But flogging American culture around the world has turned out to be trickier than the big companies first thought. The global consumer, it turned out, does not exist. “Kids want to know what’s going on in the rest of the world,” says Tom Dooley, vice-chairman of Viacom, “but they don’t want it in their face all the time.” MTV reaches 320m households worldwide, but local competitors, better attuned to local ears, were beating it, so over the past two years MTV has been localising its content. That has meant cutting its staffing in centres such as London and Singapore, and setting up production offices in places such as Milan, Stockholm and Bombay, pushing up costs by around 10%.

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Some foreign markets are saturated. In Britain, for instance—a country with only 6m multi-channel homes—there are now four children’s channels: News Corp’s Fox Kids, Viacom’s Nickelodeon, Time Warner’s Cartoon Network and Disney. A local competitor, The Children’s Channel, packed up earlier this year. India, where companies have more or less given up on trying to collect subscriptions because there is so much piracy, has three music channels and three news channels.

Elsewhere, governments make life difficult. Germany, for example, with 19m cabled households, sounds like a great market for pay television, but it has (depending on the area) up to 12 free-to-air broadcast channels, so demand for pay television is limited. And then there are the regulators. Each of the 16 Länder (states) has its own regulatory board to vet channels that want access to the local cable systems. “You know those circus dogs that jump through burning hoops, and just as they’ve been through one, another one pops up?”, asks Nickelodeon’s Herb Scannell. “That’s how you feel.”

A piece of the action

Now big companies are starting to get deeper into the packaging business, through movies. Movies, along with sport, are the mainstay of every pay-television business. And although the big companies have been paid good money for their output and access to their libraries, they reckon they could get some equity out of it too. “We saw all these companies like Canal Plus and BSkyB that had built good businesses on the back of our programming,” says Jeff Schlesinger, president of Warner Bros’ International Television, “and we thought we could do it instead of them.”

Since no one company’s film library is big enough to programme a channel, bitter rivals have come together in partnerships around the world. In Latin America, for instance, HBO Ole brings together Warner, Sony and Disney; in Asia, HBO Asia brackets Warner, Sony, Paramount and Universal; in Japan, Star Channel, an amalgam of Warner, MGM, Paramount and Universal, battles against Sky, made up of Fox and Sony. “It’s really becoming an interesting jigsaw,” says Mr Schlesinger.

The next stage along the value chain is operating the platforms—satellites or cable systems—that deliver programmes to people’s homes. Only News Corp has taken globalisation that far. This is the business with the highest risks and the biggest potential rewards. So far it has paid off superbly in Britain, where heavy spending on football rights has ensured that BSkyB, News Corp’s satellite platform, dominates the pay-television business. In Asia, by contrast, Star TV is still losing money.

For the entertainment companies, the world has proved a tricky place, and its inhabitants irritatingly reluctant to be globalised. But the potential profit makes it well worth trying.


Getting better all the time
WHEREAS the broadcasters are the old aristocracy of television, pay television has been regarded as tacky and nouveau riche. That is changing, as, starting in America, pay television is beginning to produce the best original programming.

In his recent book, “Life After Television”, George Gilder spotted why the fragmentation of audiences would eventually lead to a better quality of entertainment: “Television is not vulgar because people are vulgar—it is vulgar because people are similar in their prurient interests and sharply differentiated in their civilised concerns. All of world industry is moving increasingly towards more segmented markets. But in a broadcast medium, such a move would be commercial disaster. In a broadcast medium, artists and writers cannot appeal to the highest aspirations and sensitivities of individuals. Instead, manipulative masters rule over huge masses of people.”

Take, for instance, “The Larry Sanders Show”, an HBO sitcom about a talk show. It could not have been commissioned by a broadcast network. It is far too nasty. It has no canned laughter. “We didn’t make the characters lovable,” says HBO’s Jeff Bewkes. “They behave the way people really behave—with all the duplicitousness, the back-stabbing, the acceptance of back-stabbing, of a real talk show.” The result is a satire as sharp and funny as any 18th-century play.

HBO’s advantage is its business model. It does not need ratings. “We don’t care how many people watch our shows,” says Mr Bewkes. “We just want people to decide at the end of the month that it’s worth renewing their subscription.” So if every segment of the audience was wild about one thing they screened, and hated the rest, they have done their job. If all their programmes are mildly, but not very, interesting to everybody, they haven’t. The virtues of this approach are beginning to show up in the prizes cable is winning: since 1993 it has bagged all the awards for original movies.

It is fashionable to worry that if television audiences are all segregated into little niches, people will have no common experience to talk about any more. That is surely nonsense. It is news, far more than soaps, that people gossip about in the office. At the coffee machine, Monica Lewinsky is worth any number of Seinfelds.

The main effect of audience fragmentation is something well worth having: plurality. In retrospect, the networks’ heydays are being painted with a golden glow, but their power was stultifying. Remember McCarthyism? The blacklist was effective because there were only three places in television where writers and actors could work. If you were barred from them, you changed your profession or starved. No small group could control today’s diverse television industry.

The networks’ record on programming for ethnic minorities, too, has generally been poor. Their economics demand that they appeal to the majority. With cable, by contrast, Black Entertainment Television, a fast-growing company with fat profit margins, can programme specifically for blacks. Univision caters to the Hispanic market; and this year, Sony has bought Telemundo, on which it plans to offer original programming by and about American Hispanics, including some in Spanglish. Try selling that to broadcast.

 

Electronic anthills

With digital technology, there is room for small players too

THIS autumn the struggle for big-screen supremacy takes on evolutionary overtones. The warring parties on both sides are computer-generated ants, the principal characters in DreamWorks’ “Antz” and in a joint venture between Disney and Pixar, “It’s a Bug’s Life”. But the real antagonists are, on one side, Jeffrey Katzenberg, the animation supremo at DreamWorks (and business partner of Steven Spielberg, Hollywood’s dominant male); and on the other, Steve Jobs, creator of the Apple computer and boss of Pixar, a computer-animation house reaching for studio status. Mr Katzenberg rushed to finish “Antz” first, and managed to get it into the cinemas more than a month before the bugs were released. Fair enough: first come, first served. What is not fair, says Mr Jobs, is that he has been plagiarised. He says he pitched his idea to Disney at a time when Mr Katzenberg was working there: “Jeffrey stole my idea.”

Mr Katzenberg and Mr Jobs have argumentative histories. But even the easiest-going people in computers and films sometimes find it hard to get on. Their businesses, cultures and working practices are at odds. “In Hollywood, they do lunch,” says a Silicon Valley man. “We do work.” The distance between the two worlds, says Mr Jobs, gets in the way of the business. “Studios cannot attract technical people because they treat them as second-class citizens. It’s the same, but the other way round, with the technical companies.” Pixar, he says, encompasses both worlds: its recent hirings include some Russian puppeteers and two professors of dynamics from Carnegie Mellon University.

Despite their differences, computer and film people are being forced together. Since the first Disney-Pixar collaboration, “Toy Story” (1995), computer animation has moved into the mainstream. “Toy Story”, which was intended as a little boutique movie, unexpectedly took off. Even Disney’s efficient marketing operation was caught unawares, and desperate parents queued for hours in hopes of bagging a Buzz Lightyear for Christmas.

“Antz” and “It’s a Bug’s Life” are the first full-length computer-animated features since “Toy Story”, but others are in preparation. Moreover, the ever-rising cost of making live-action movies (see chart 7) is pushing studios towards more animated features: 500 animators do not have the bargaining power of one star. And computer-generated animation is getting better and cheaper all the time. “It’s a Bug’s Life” is a world away from “Toy Story” in facial expressiveness. There is even a programme for creating the effect of wind in trees and grass: give it an instruction, and all the leaves move, individually but together.

picture

The effects of computers, and the digital technology they use, are spreading through the whole business of film production. “Whereas we used to have a thousand different machines, you can have one machine that does a thousand things,” says David Rose, president of Santa Monica Studios. For the moment the process still slips in and out of old and new technologies. Movies are shot on film; then the pictures are scanned into a computer and edited electronically; and finally the celluloid is sliced up to match the electronic edit.

Some of the effects of digital techniques show up in falling production costs. According to Mr Jobs, Pixar is the lowest-cost producer of high-quality animation films in the business. With traditional techniques, an animation feature costs $100m-125m. Pixar can do it for $75m-100m. This will soon have a knock-on effect in the animation job market. Whereas a traditional animation movie employs 600 animators at peak, Pixar does the job with 200 animators and software programmers. Mr Rose is currently negotiating to set up a computer graphics facility in Shanghai, which should cut his costs even further.

But in Hollywood, costs expand to fill budgets available, so in the big studios computers are now used for things that could not be done without them: removing a blemish on Uma Thurman’s lip, say, or eliminating one of Sean Penn’s teeth.

“Titanic”, with its estimated $235m budget, pushed directorial self-indulgence to the limit. Much of that budget was spent on computer effects. Hammerhead Productions, a successful little Hollywood computer-graphics company, proudly shows one of its Titanic shots: the ship’s bow cutting through the water, huge against the tiny dolphins leaping ahead of it. There was no library footage juxtaposing big ship and tiny dolphins, so Hammerhead made some to order. It is a beautiful, exhilarating shot, made for a high point in the movie, and it cost around $50,000 for a few seconds. That is par for the course. Digital Domain, another effects company, spent $1.1m on a 40-second shot for Titanic: the camera pulls back from a shot of Leonardo di Caprio larking on the prow of the ship to show the deck, then the stern, then the whole ship disappearing into the distance.

If in doubt, outsource

Hammerhead Productions operates from a 1920s villa overlooking the San Fernando Valley, reached by a steep, winding drive. A couple of dogs wander around the house, azaleas and bougainvilleas fill the garden, and there is a swimming pool. Hammerhead’s four partners used to work for Pacific Data Images, one of the biggest companies in the business, but got tired of working in a large organisation, so set up on their own. They have three sources of income: software for computer graphics, which they sell over the Internet; contract work for studios; and making their own movies.

Hammerhead is part of Hollywood’s growing computer-based economy. According to a recent survey by the Bay Area Economic Forum, a San Francisco-based business group, the multimedia business (computer graphics, Internet-based entertainment and CD-ROMs) employs around 130,000 in Los Angeles alone, compared with 242,000 people in movie production in the whole of America.

When it first became clear that computers were going to play a large part in the film business, most of the studios bought or built big computer-graphics facilities. Disney bought Dream Quest, for instance, and Time Warner set up Wabit. But the studios soon realised that geeks can eat money just as quickly as directors, and decided that it would be cheaper to contract out the work. Most of the in-house special-effects divisions shrank or disappeared.

That contract work has grown into a fair-sized industry, and some of its constituent companies are getting rather ambitious. Mr Rose at Santa Monica Studios, together with his son Josh, is creating a computer-animated children’s movie, “Rabbit Tales”. Hammerhead’s Dan Chuba has written a script, “Supernova”, which is being co-produced with United Artists as a full-length feature combination of live action and computer graphics. The company has also produced a direct-to-video horror movie, “Shadowbuilder”, based on a short story by Bram Stoker, which went straight to number three in the direct-to-video charts. The total budget was $4m, far lower than if the movie had been made at a studio.

Digital technology is changing the shape of the business, making room for the little production companies that serve the big studios. It is also changing the way movies are made. But the fundamental economics of the industry have not changed. Making entertainment is a hugely expensive business, in which big companies have a big advantage. True, Pixar has broken into the business—but it has taken ten years of Mr Jobs’s money and determination to get there.

 

A digital future
Distribution will never be the same again

“TELEVISION? No good will come of it,” said C.P. Scott, a great editor of the Manchester Guardian. “The word is half Greek and half Latin.” But guessing television’s future was relatively easy. It was one new form of distribution. Digital technology affects all existing ones, as well as making new ones possible. It is like introducing the internal combustion engine into a horse-drawn economy.

The three areas where its effect on distribution will be felt most are digital video (or versatile) discs (DVDs), digital television and the Internet.

•  DVDs. These are, in effect, CDs with movies on them, and they will probably do for the film business what CDs did for the record business: make some easy money as consumers and video rental shops replace their stock of old, blurry tape with sharp new discs whose quality will not degrade. All the studios are beginning to offer their movies on DVD. “Man,” says Steve Heyer, president of Turner Broadcasting System, “what a windfall.”

•  Digital television. The technology—more channels in the same amount of bandwidth—is the same everywhere, but its implications are different in different markets.

In France, for instance, digital television spells multi-channel. Canal Plus has been selling digital television to the French, rather successfully, since 1996. That is not altogether surprising, since the choice is between one analogue pay-television channel or 60 digital ones.

In Germany, by contrast, Leo Kirch has found it a struggle to get people to sign up to his DF1 digital platform. Pay television in Germany starts at a disadvantage because it is competing against up to 12 free-to-air broadcast services. Mr Kirch wanted to merge his digital offering with Premiere, the competing joint venture with Bertelsmann and Canal Plus of which he also owns a stake; but the EU vetoed the merger, and Canal Plus has left in disgust.

The British market is more competitive than the French, but less disastrous than the German one. Digital television arrived on October 1st, courtesy of Mr Murdoch’s BSkyB. ONdigital, a service put together by two of the big terrestrial broadcasters, launched its service on November 15th. The competition will be fierce, the demand uncertain. Since Britain already has a good helping of pay channels, delivered by both cable and satellite, nobody knows whether consumers will want to shell out for more. The most promising-looking application is Sky’s near-video-on-demand service, which offers a range of films starting at 15-minute intervals. But to make the service attractive, Sky is having to subsidise the installation of the necessary hardware in people’s houses.

In America, digital satellite services have been broadcasting since 1994. They serve mostly people who live too far out in the sticks to be cabled, though they are also popular with sports fanatics who will pay for innumerable obscure games. Cable operators are beginning to offer digital services. According to Glen Britt, who runs Time Warner’s cable operation, the most compelling offering is real video on demand, provided costs can be squeezed down. “We’re very close now to being competitive with rental. It could be in 2000.”

The broadcast networks are due to launch digital before the end of this year. They have to offer high-definition television, because that was the quid pro quo for being given free extra bandwidth to start digital services. The trouble is that the cable companies (through which most people receive their broadcast television) say they will not carry the signal because it takes up too much capacity. And even if they did, the price of an HDTV set—between $2,000 and $8,000—would put most people off.

•  The Internet. Most of the entertainment companies have spent freely on building a presence on the Internet, some more successfully than others. All the sites get plenty of visitors, but nobody can work out how to make any money out of them. “Like building shopping malls in the desert,” says James Murdoch, Rupert’s youngest son, who is in charge of the new-media division of News Corp.

The exceptions have been the sports and news sites. For CNN, NBC, the BBC and every other big provider of news, the Internet is both a threat (because it contains so many new sources of news) and an opportunity (because it offers instant, low-cost global distribution). Now the entertainment companies are changing their strategy. Time Warner seems to be giving up on advertising revenue and is about to launch a big online retail outlet. At first this will sell only Time Warner products, but it may branch out later. The company reckons it should have a head start from an infrastructure that already bills people for $2 billion-worth of goods sent by mail, and has a database of 60m customers.

Disney is getting deeper into the Internet than any of the other big companies. The impetus comes from Mr Eisner, who has declared himself “obsessed by it.” On his initiative, Disney has started employing some of the grandest names in information technology as “Imagineering Fellows”: Alan Kay, one of the founding fathers of the personal computer; Marvin Minsky and Seymour Papert, who co-founded the Artificial Intelligence Laboratory at MIT in the mid-1960s; and Danny Hillis, one of the inventors of parallel computing.

On the Internet, Disney already has Disney.com, a standard entertainment company site with movie and television news. It also has Disney Blast, a children’s magazine, which charges $5.95 a month, and an online shop that sells 2,000 Disney products. But the best of its sites is ESPN, a model of technology tailored to please consumers. Baseball fans, for instance, can spend happy hours making it calculate the number and frequency of their favourite player’s hits against anyone, at any time, anywhere. Now Disney is building a portal—the sort of gateway to the Internet that its owners hope will make money from advertising and commerce deals.

The general principle at work behind these particular uses of digital technology is known by the dreadful name of disintermediation. Cheaper and easier distribution is bringing producers and consumers closer together, making many of the middlemen redundant. This creates big new opportunities for entertainment companies.

More capacity means more revenue from the same content. Everything-on-demand means greater convenience for consumers, and hence bigger sales. Interactivity allows consumers to follow up on something that tickles their fancy, by asking for more information or even by ordering it. It already works on the Internet, and should be even more effective on digital television, because television reaches so many more potential car buyers.

Retailers are under threat. Already those products of the entertainment business that have traditionally been sold in shops—mainly books and music—are migrating fast to the Internet. Take this a stage further, and producers will be able to cut out intermediaries altogether and sell directly to consumers. Record companies are still nervous of doing this, partly because they fear piracy and partly because they do not want to antagonise powerful retailers. But the retailer’s margin is up for grabs.

Businesses that depend on the scarcity of information about consumers are in trouble, because interactivity makes collecting such information much easier. For instance, the information about their customers that book and music clubs painstakingly have to seek out can be collected automatically on the Internet. This is what prompted Bertelsmann, the world’s biggest book-club company, to put in a $200m bid for 50% of bookseller Barnes & Noble’s site last month: the Internet had destroyed Bertelsmann’s old business model.

Businesses whose profits depended on controlling scarce distribution are also in trouble. Broadcasting networks are feeling it first. The value of their main asset—the slice of bandwidth they inhabit—is disappearing fast, and their business model is crumbling as competition for advertising revenue grows. But pay-television networks, currently the most profitable bits of the business in mature markets, will also suffer. Their profits depend on a capacity shortage on the networks that keeps off newcomers. When there is no shortage, competition will hot up and their profits will shrink.

Added attractions

Middlemen throughout the industry (and in many other industries too) can expect leaner times. How much leaner depends on how much value they add to what they sell: the less, the worse off they will be. As producers, the entertainment companies do add value to the content they sell. In most video entertainment they add a lot by making the film. In sport they generally do not add much, which is why they have to pay so much for sports rights, why so many entertainment companies have seen fit to buy sports teams, and why Rupert Murdoch is so determined to overcome political hostility to his bid for Britain’s Manchester United. In music the entertainment companies add little, which makes the record business much more vulnerable to the disintermediating effects of digital technology than the video business.

As brands, and creators of brands, the entertainment companies add value across the range of entertainment businesses. They do this partly because they are, or have, brands that act as a stamp of quality. And the backing of a big, diversified entertainment company helps to reinforce the brands. “The X-files” would not have conquered the world without the might of News Corp’s subsidiaries. Batman would have disappeared into the mists of time if Time Warner had not applied the full force of its film, television and publishing divisions to resurrecting it.

Brand creation, remember, is what the big companies are for. And this function becomes ever more important as digital technology increases the number of products on offer in the entertainment industry. When there are only one or two types of breakfast cereal available, it does not matter much whether they are recognisable. When there are a hundred breakfast cereals, or teen magazines, or children’s channels, getting recognised is what it is all about.

 

Vivid imagination
 

ONE of the best places to study the effect of technological change on the entertainment industry is off the 405 freeway, north of the Hollywood studios. Here, in a small complex of offices and warehouses, is Vivid Video, the biggest producer of pornographic films in the world. It is run by Steve Hirsch, an American, and David James, a Welsh ex-miner who spent 14 years in the British army before setting out on his new career.

Adult entertainment is often in the vanguard of new technology. As Ian Watt points out in his book, “The Rise of the Novel”, one reason for the novel’s early popularity was the freedom to use erotic content that would not be acceptable on stage. Similarly, it was porn that started the video-rental business, and porn that popularised the Internet.

Vivid, with revenues of $25m, makes 12 big movies a year, and releases a total of 150. Most of these are different versions of the same thing. The version for video rental will be the most hard-core; that for cable will be softer, with no penetration; and the version for hotels will have penetration but no anal sex or searching close-ups. Some movies are compilations of shots, which allows the same shot to be used several times over—a blonde outdoors, for instance, will go into both the blondes compilation and the outdoors compilation.

Digital technology has been a mixed blessing. Lower production costs have made movie-making cheaper not just for Vivid but also for its competitors. Around 10,000 porn films are now being produced in America every year, compared with 3,000 five years ago. Vivid has been working hard to raise itself above the crowd. “We want brand-name recognition as a quality company,” says Mr Hirsch. The company’s budgets are well above the industry average. “The Masseuse III”, for instance, their biggest movie this year, cost $150,000 to make. The rows of Adult Video News awards in Mr Hirsch’s office attest to the quality of the product.

But technology has also provided Vivid with new sources of revenue. Until three years ago, there was only video, cable and international sales. Cable is not very lucrative because there are too many porn movie companies and too few porn cable networks; and the international market is difficult because local rules vary so much. The Germans, for instance, disapprove of group sex, and the British prohibit the sale of hard-core porn altogether.

The Internet is providing some new revenue, contributing around 5% of the total at present. Vivid does not have its own site because it reckons there are plenty already; it simply provides material for others.

But for Vivid the most important new technology is DVD. Along with CD-ROM, DVD now provides 30% of Vivid’s revenue. People are attracted by the quality of the picture, says Mr James, and they like the “multi-angle” facility DVD offers. The film is shot on four cameras, and the viewer can switch tracks and see the same scene from one of the three other angles at any time. “For us,” says Mr James, “it’s the perfect marriage of technology and product.” “Bobby Sox”, the first multi-angle DVD Vivid released, sold 27,000 copies, compared with the usual figure of 2,000-3,000 for DVDs without the multi-angle facility.

Ever keen on further innovation, Mr James is now developing a suit which, worn by one partner and wired up to the Internet, allows the other partner, anywhere in the world, to send electrical pulses to their loved one’s sensitive spots. Trust Vivid to put the spark back into your love life.

 

Fear governments, not geeks
The big companies won’t have it all their way
 

THEY are big, rich men, the leaders of the entertainment business; but there is a bigger, richer man still whose shadow falls across their business: Bill Gates. Michael Eisner, in his recent biography, considers Bill Gates as his number one competitor. According to a well-placed Silicon Valley watcher, so does Mr Gates himself: “He’s trying to insert Microsoft’s DNA into every bit of the business.”

As the entertainment business turns digital and starts to talk in the same zeros and ones as the computer business, so it bumps up against both the computer and the telecoms industry in all sorts of different areas. The telecoms people own the wires along which the pictures and music travel, and the computer people produce the systems that allow the pictures to be seen and heard. What the entertainment companies fear is that one or other of these industries will establish a stranglehold somewhere along the line.

This makes the big chiefs in the business understandably nervous. They compare their industry’s growth rate over the past couple of decades with that of the computer business, and its size with that of the telecoms industry, and they wonder whether the much-talked-about convergence of all these businesses will in reality mean that the other two will walk all over them.

Yours or mine?

One obvious area of overlap between the entertainment and the computer business is the Internet. “The entertainment companies are terrified of being blindsided by the Internet, as the broadcasting networks were blindsided by cable in the 1980s,” says Peter Kreisky of Mercer Management Consulting. Both sides see it as an extension of the kind of thing they do already. For the content people, the Internet offers another form of distribution. For the computer people, the Internet is just another sort of application.

Fortunately for the entertainment companies, the computer companies are not much good at content, a lesson they took some time to learn. Microsoft poured money into creating original content on the Internet with little to show for it. These days the computer people are more likely to go in for joint ventures with content providers.

What about some of the companies that have grown out of the Internet, to which the market is now attributing huge values? This year, all eyes have been on the “portals”, companies such as AOL and Yahoo that collect up content, thereby attracting the eyeballs that bring in advertising revenue and commercial deals. They are often described as the broadcasting networks of the Internet. Their earnings are piddling or negative, but, according to a calculation by Mercer Management Consulting, by the middle of this year the capital value of the top four portals was slightly more than that attributed to CBS, NBC and ABC.

Yet even if the portals turn out to be more than a passing fad, they will not gobble up the entertainment companies either. The two sets of companies barely compete. The Internet is not a good way of distributing entertainment. General news, sports news and music, yes; but print and video, no. People do not like reading on screen, and moving pictures use up too much bandwidth and server capacity. Geeks may squeal with pleasure as video creaks across the Internet at two frames a second; but most people turn on the television.

Time and money could improve the Internet’s video performance, but why bother? True, it is ahead of television in some respects—you can call up video, for instance, instead of having to wait for it—but as television switches to digital, it will acquire some of the Internet’s virtues. Anyway, as Steve Jobs, himself a rare example of genuine convergence, points out, the two boxes have different roles, and therefore different identities. “For one, you switch your brain on, and for the other, you switch it off.”

Digital television provided Mr Gates with another opportunity to insert his DNA into the entertainment business. To convert the digital signal into pictures, to store information, to get interactivity and to enjoy fast Internet access through cable modems, consumers need a set-top box—a kind of computer—on top of their television sets. If all those set-top boxes had a Microsoft operating system, then Microsoft could surely win the same supremacy over people’s television sets as it already had over people’s PCs.

Unfortunately for Microsoft, America’s television industry had also noticed this possibility. In an unprecedented display of unity, the cable operators, who had never before been able to agree on industry standards, agreed to ensure common standards and a multiplicity of suppliers. There now seems little chance that any one manufacturer will control the software for the set-top box.

Having seen off the computer industry, for the moment, the entertainment business is looking nervously at the other threat, from the companies that own the wires. The relationship between the people who make the programmes and the people who push the stuff into consumers’ homes has always been an edgy one, as the relationship between manufacturer and retailer is in any business; but as digital multiplies the quantity of services that can be pumped into people’s homes the stakes become higher than ever.

The entertainment industry’s worry is that, if one means of reaching people has a huge advantage over others, then those who own that means of transmission hold power over the content providers. The current bogey is cable, which is generally, but not exclusively, owned by the telecoms industry. A lot of people now seem to believe that cable is the way to bring the broadband future into the home. The billions of dollars of debt that the cable companies accumulated while upgrading their systems now seem justified. The entertainment companies’ worry is that although digital technology may have widened the gate, there is still a gatekeeper, and it is the cable industry.

This is not a problem for Time Warner, which is America’s biggest owner of cable systems. Hence Mr Parsons’ confident belief that, no matter where power moves to in the value chain, Time Warner has a bit of it. But the other six big entertainment companies, none of which owns wires, are troubled.

They are wrong to worry, though. Communications technology is moving too fast for any one means of distribution to be declared the winner for long. The beauty of digital technology is that zeros and ones can be transmitted in all manner of ways. Electricity companies are working on sending them down their cables. Wireless communications companies are talking about offering Internet access. The falling cost of memory will allow satellite distributors to download hundreds of hours of programming and thousands of Internet sites into set-top boxes so that people can retrieve them on demand. The chances that any one form of distribution will gain power over the content companies seems small.

So as the digital revolution unfolds and demand for entertainment increases, the winners look like being those big companies that have got all their spokes in place. They have the economic power to make the huge, increasingly expensive movies that the crowds prefer; they are best positioned to distribute and promote their content; and they can most easily ensure that the brands they create stick out from the crowd. Of the seven giants, Disney, Time Warner, Viacom and News Corp look in best shape; Bertelsmann, Seagram and Sony still have some work to do.

The losers will be the broadcast networks. In America, ABC has already been absorbed into Disney; and there is much speculation now about what will happen to NBC—owned by GE—and CBS Corporation. Elsewhere in the world, politicians may choose to sustain broadcast networks for a while; but broadcasting to the masses does not have a long-term future.

If the computer and the telecoms industries are unlikely to get in the entertainment giants’ way, what will? Governments, possibly. At present the climate is generally liberal. Inside America, deregulation has made life easier for the entertainment companies; elsewhere, the collapse of communism has created whole new markets, and deregulation of television systems has expanded existing ones. Yet there are signs that governments are becoming increasingly concerned about the economic and cultural effects of the big companies’ dominance.

Such concerns are most sharply articulated by Europe’s politicians. In the EU the debate concentrates on how to counter two particular problems. Monopoly is one: that is why, earlier this year, the EU prevented Bertelsmann and Kirch from merging their pay-television operations. American cultural hegemony is the other: that is why, last year, it passed a directive to try to stem the increasing flow of imported culture.

As technology makes it ever easier for the entertainment giants to push their products around the world, these fears will deepen. Technology may open the gateway to the world; but politicians can still slam it shut.