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Hollywood's Lion Kings

By Russ Walker
washingtonpost.com Staff Writer
Tuesday, September 14, 2004; 9:49 AM

All the headlines this morning make clear that Sony Corp. is buying one of the most famous studios in Hollywood, but it's Comcast Corp. and the future delivery of entertainment content that may make this corporate merger more meaningful to consumers.

Sony's $2.9-billion deal for Metro-Goldwyn-Mayer Inc. wouldn't be possible, after all, without Comcast's participation, and the Philadelphia-based cable giant is involved for the same three reasons it tried to buy Disney earlier this year -- content, content, content!

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Oracle's Wish Comes True (washingtonpost.com, Sep 10, 2004)
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Cramming Features Into Phones (washingtonpost.com, Sep 8, 2004)
More Past Issues

Back in the winter when it offered $56 billion for Disney, Comcast said the deal would help the combined companies "develop more cable channels and benefit from technologies that are already in millions of homes, such as devices that provide access to movies and TV programming at the touch of a button," The Washington Post reported at the time.

Alas, the Disney buyout never got off the ground. But this morning's news coverage stresses that the MGM deal offers the same benefits -- and more -- to Comcast. As the Philadelphia Inquirer reported, the "investment would give the nation's largest cable firm rights to feature MGM movies through its video-on-demand service. ... Comcast also is entering a separate deal under which it will include certain Sony programming through video on demand and new cable channels."
Philadelphia Inquirer: Comcast Joins Sony in Buyout of MGM (Registration required)

Most big newspapers offered passing references to what the MGM deal means for DVD and cable. Take for example the Los Angeles Times, which said "Sony is particularly eager to get its hands on the MGM library, which besides movies includes 10,000 television episodes, at a time DVD sales and cable outlets have made such troves golden."
Los Angeles Times: Sony Deal for MGM Would End a Long Run (Registration required)

But USA Today was one of the few outlets to reminds its readers that the deal will help Comcast -- and perhaps the cable industry at large -- maintain a competitive edge against satellite TV providers. Comcast and other cable firms can offer video on demand, "one of the few services they can offer that rival satellite companies such as DirecTV and EchoStar cannot." And according to USA Today, Comcast's participation in the Sony acquisition of MGM marks "the first major VOD deal between a cable operator and a Hollywood studio and could be an icebreaker. Hollywood has been protective of lucrative DVD sales, offering relatively few big films to VOD -- and usually only after giving retailers and rental stores such as Blockbuster a 45-day head start. ... [Cable firms] also believe that if major movies were part of the VOD mix, lots of customers would pay the additional $10 or so a month to subscribe to the digital cable needed to watch VOD. Comcast cited this as a potential benefit from its $54 billion offer for Disney, which it abandoned in April."
USA Today: Amid Sony-MGM Deal, Comcast Scores With VOD, Movie Channel Plans

The Future of Home Entertainment

So what does all this have to do with technology? A lot, according to the New York Times, which noted that "MGM's library of films will not only give Sony additional revenue from next-generation DVDs, it will give it added weight in the looming fight over technology standards for those DVDs." The Wall Street Journal made the same point high up in its coverage: "If completed, the deal will give Sony, which is already one of the biggest movie makers in the U.S., access to Hollywood's largest movie library, creating a pool of some 8,000 titles that Sony can tap to drive new technologies for entertainment, such as the next generation of DVD players."
The New York Times: Sony-Led Group Makes a Late Bid to Wrest MGM From Time Warner (Registration required)
The Wall Street Journal: Sony-Led Group Agrees to Buy MGM for $3 Billion, Plus Debt (Subscription required)

The Philadelphia Inquirer noted that "acquiring MGM's vast library of more than 4,100 movies boosts the content Sony can offer on DVD and on portable devices, many of which Sony makes." Bloomberg stressed that the deal is all about Sony Chairman Nobuyuki Idei's "strategy of combining entertainment and technology businesses to spur growth. ... Some 15 years after buying Columbia Tristar Motion Pictures, Tokyo-based Sony is starting to make the kind of deals that may prove the importance of content for technology companies."

More from Bloomberg: "Idei's goal is to unite consumer-electronics and media businesses through products such as the PSP hand-held game machine and the Airboard portable television, which is designed for watching movies on the Internet. 'The industry is still a few steps away from having televisions that are integrated to the Internet,' Idei said in Tokyo last month. 'This is a great opportunity for Japanese companies. Any company that doesn't adjust to this change is taking a huge risk.'"
Bloomberg: Sony's MGM Purchase Advances Nobuyuki Idei's Goals

Blu-Ray or the Highway

Adding MGM to its roster could help Sony ensure that the industry adopts its vision for the future delivery of content. The Los Angeles Daily News went into detail on this point: "With more than 60 million U.S. homes projected to have DVD players installed by the end of the year, entertainment industry leaders believe the way to keep the current DVD craze alive is by introducing high-definition DVD technology that represents a clear quality improvement over the standard DVD. But there are several different types of specifications floating around, including one called Blu-Ray, which is championed by Sony Corp., and HD-DVD, being developed by Toshiba and NEC. The major studios have not publicly said which format they favor at this point."

Robert Routh, an analyst with New York-based Jefferies Group, told the Daily News "that acquiring MGM would be a huge boost in pointing the competition in the direction of Blu-Ray. This would be a reversal from the 1980s showdown between [videotape formats] VHS and Betamax, the latter of which had been developed by Sony and ultimately became useless. 'For Sony, it makes a lot of sense,' [Routh] said. 'Maybe this time they will win the war for standard setting which could provide an upside for years to come.'"
Los Angeles Daily News: $5 Billion MGM Fight Over

Reuters went to the effort to try to describe what Blu-Ray and HD-DVD are: "Both ... use blue laser light, which, with a shorter wavelength than red light used in conventional DVD recorders, can read and store data at much higher densities needed for high-definition recordings."
Reuters via Yahoo News: Sony Closer to Content/Gadget Vision with MGM Deal

A Big Loss for Time Warner?

Time Warner was also in negotiations to acquire MGM, but the mega-media conglomerate pulled out of the bidding after Sony increased its offer over the weekend. According to execs, the MGM loss is not the end of the world. "As we pledged to our shareholders, we approach every potential acquisition with strict financial discipline. Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity. We are confident that there are other capital allocation choices that will enable us to continue to build shareholder value," said Chairman Richard Parsons.
The Washington Post: Sony-Led Group to Buy MGM in $2.9 Billion Deal (Registration required)

And Variety reported: "By passing on the deal, Time Warner keeps its powder dry and focus intact as the auction for Adelphia Communications begins. Time Warner management have said repeatedly they want to expand in cable, but chief financial officer Wayne Pace said last week that Time Warner had not yet seen Adelphia's books."
Variety via Yahoo News: Lion to Learn Japanese

Comcast Footnote

Comcast's involvement in the MGM deal shouldn't be too surprising to close readers of the business pages. After all, when the company pulled its unsolicited offer for Disney in the spring, Comcast execs said they'd be taking a close look at MGM and other potential acquisition targets, The Washington Post and other outlets reported at the time.

Cindy Webb is off for a few days. She will return next week. Comments about this column can be sent here.

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