Where is U.S. TV Going? Q&A with Chris Lancey

At 62, Gerald Levin will step down as CEO of AOL-TW, the world's largest media conglomerate, in May. Similarly, Edgar Bronfman, 46, will step down in March from his position as executive vice-chairman of Vivendi-Universal. Obviously, if two relatively young major players get out of the field, the game could not be worth playing anymore.

But that's not all. Rupert Murdoch lost some sleep over the prospect of a merger between AOL-TW (the second largest U.S. cable-TV operator) and AT&T (the largest). Plus, AOL-TW is afraid that Microsoft's cable interests (Cox and Comcast, with the latter buying AT&T Cable) will keep it from consolidating its hold on the cable TV sector. Meanwhile, other media conglomerates are relieved that Murdoch won't be adding a U.S. satellite distribution powerhouse to his global empire. Jean Marie Messier of Vivendi-Universal for one, acknowledged that he feared that Murdoch would acquire Direct-TV. Now, with EchoStar and Direct TV combined, it creates real competition for cable-TV. The NAB, however, blasts the $26 billion EchoStar-Direct TV merger, and Ted Turner of AOL-TW told delegates at the Western (Cable) Show in Anaheim, California, that concentrating cable and satellite TV control in a few companies would prove disastrous for consumers.

At this point, the industry seems lost in a wind tunnel, with no direction and no protection. Indeed, FCC, FTC and Justice Department rules, in addition to antitrust and abuse of dominant positions are not even taken into consideration, because these regulators seem so ineffectual. Now, in order to assure the same lawlessness of the Far West, would-be monopolists invoke the First Amendment: infringing on their quest for unlimited control undermines their freedom of speech. In order to make some sense in a series of nonsensical developments, VideoAge asked Chris Lancey, CEO of Western International Syndication (WIS), where the industry is at and where it is going. WIS is a Los Angeles-based production and distribution company.

VideoAge. What are the advantages and disadvantages of vertical integration ?

Chris Lancey. Control over the distribution chain, from the manufacturing process to the consumer, is the main advantage. With vertical integration you can create a somewhat reliable and repeatable revenue model that can serve as a baseline for all the production, thus minimizing risk while insuring access to the consumer. This can be a tremendous competitive advantage when compared to an independent who has no direct access to the consumer product strictly on its merits.

There are only so many entertainment pipes into the home and retail outlets for consumers, so if you own those pipes then you have a great advantage.

The main disadvantage (besides the debt load required in building or somehow accumulating each piece of the production and distribution chain, and the inherent problems of managing the process of rolling a number of divergent yet related companies into one structure in order to create a production and distribution chain), is that vertical integration constrains competition in the marketplace, which is very bad for the creative community that feeds our business. In an integrated model the access points for the creative community are fewer. And in times of a contracting economy the debt service becomes so difficult that the vertically integrated entities will no doubt look to their own libraries for product rather than create new product. It's a very complicated issue but the creative community is certainly feeling the effects of vertical integration.

VA. What are the advantages and disadvantages of horizontal integration (e.g. buying into the same business)?

CL. The same companies who are vertically integrating are also pushing for horizontal integration. In broadcast and cable there continue to be certain restrictions on ownership. The elimination of these restrictions has caused much of the equity in our industry to be replaced by debt. The advantage is that the equity which has historically been extracted from the television station business has been reinvested in our economy. The disadvantage is that these same stations, since they have turned over several times in the last decade or so, may have trouble servicing their debt should the economy continue to sputter and contract.

As the forces of horizontal integration continue forward we will see two or three companies controlling each pipe into the home. Network ownership may be reduced to four or five companies with those same companies owning all the valuable advertising markets that are necessary to insure the health of those networks. We see the fight continuing over DBS; the state of the radio business is self-evident; cable network ownership is pretty well consolidated and horizontally integrated; and the cable MSOs are working on their own deregulation of ownership caps.

This process simply reduces creative access to the consumer and limits the number of voices in the marketplace. For better or worse, that is the way it has gone to this point and I don't see it changing any time soon.

VA. Is Wall Street a godsend or a curse when it insists on quarterly performances instead of long-term results and planning?

CL. We have a cyclical business that doesn't necessarily translate to the needs of Wall Street. That being said, regardless of the quarterly reporting standard, we are a very healthy business with great upside over the long run and as such a very good investment for Wall Street.

VA. Do you think that the "market knows best" when it has valued assetless companies more than GM?

CL. The market has undervalued some companies while overvaluing others. It is hard to argue with long-term profitability such as GM's when contrasted to, say a dotcom with little revenue, no assets and lots of hope. Yet people bought off on the argument ... for a while. However crazy it may sometimes seem, the market is still the best way that we have to value and fund companies. Some mistakes will be made along the way and some business trends may be overemphasized but the market will correct and refocus on the fundamentals.

VA. With vertically integrated companies, a good portion of the revenue flow is internal. What is the safe level (percentage) of internal revenue flow?

CL. That is difficult to say. The best answer is that it depends upon the entity and how they are integrated. Each case will have its own tolerance based on their internal assumption and risk tolerance.

VA. Do top-level execs of large TV conglomerates have clear ideas or plans for the future?

CL. Long-term? I'm assuming that you mean the next six to 18 months and not the next three to five years. In some businesses it seems that long term has become a difficult matter. Predicting the economy is a huge part of long term planning and right now I see many companies downsizing and preparing for an extended downturn in the economy. They are likely planning for flat to minimal growth just to be safe and if they out-perform their projections then business is good. As a business we are so reliant on consumer spending and advertising, which are down, that projecting absolute growth for any very large company is going to difficult.

I believe that most top level executives have a good understanding of how they like to leverage their infrastructures going forward. In our business it seems that long-term has become a difficult matter. What we do know is that television is being watched in every city in the world 24 hours per day, 365 days per year. It is a machine that never stops. So to satisfy this machine we will be producing programming from now until the end of time. The question is how much programming and for how much money. We all have a pretty good idea of how our infrastructure will be applied to that task. What we don't know is how the economy will react and how various governments around the world will support the process.

VA. If vertical and horizontal integrations are causing problems (e.g. downsizing, large debt loads, reduced creative innovation, fewer choices for the consumers, short-term plannings, etc.) why continues to be fashionable in economic circles?

CL. It is not causing problems for everyone. If you own several networks or are a major MSO then you control the access to the viewer. That access is the commodity which everyone is seeking. That is how you make money. It has become a business of the haves and have nots. Is this good for the consumer? I would have to say that sometimes it is good. The major networks in the U.S. are impressive operations that manufacture extremely high-quality programming. Could they do this in a more diversified marketplace? Absolutely. They have for years, and consolidated or not will continue to do so because, for the most part, consumers are supporting them and their efforts. It's not so bad that the big get bigger so long as they are not allowed to kill the entrepreneurial base that has built the entertainment industry. Right now they are coming dangerously close to killing that entrepreneurial base in the spirit of consolidation. That is the real danger of horizontal and vertical integration