Disney enter a new kingdom.

Deal for ABC reflects regulatory, tech changes

The fact that Wait Disney Co. and Westinghouse Electric Corp. announced their intentions to buy television networks last week was no mere coincidence in timing.

Instead, the planned purchase of ABC and CBS speaks volumes of a changing regulatory environment and evolving market forces that have suddenly combined to make broadcast networks - considered dinosaurs for their antiquated technologies - the hottest properties in the entertainment industry.

Call it vertical integration, said Mike Adler, an entertainment attorney with the Century City law firm of Mitchell, Silberberg & Knupp. The more segments of the entertainment business that one company can own, the better, he said.

In addition, Adler said, changes in Washington have made it easier for single companies to own more pieces of the entertainment industry puzzle.

Put that all together, and "there's is a huge movement for consolidation right now," he said.

On July 31, Disney announced plans to buy Capital Cities/ABC Inc. for about $19 billion, exchanging $65 and one share of Disney common stock for each share of Cap Cities/ABC stock.

Cap Cities/ABC will become a wholly owned subsidiary of Walt Disney Co. Michael D. Eisner will remain chairman and CEO of Disney, headquarters will remain in Burbank and Cap Cities/ABC will retain its New York headquarters with Robert A. Iger staying on as president.

Thomas S. Murphy, chairman and CEO of Cap Cities/ABC, will relinquish those titles and join Disney's board of directors.

Though there are a few regulatory hurdles to be crossed, most expect the deal to close sometime next year, making it the second largest takeover - behind Kohlberg Kravis Roberts & Co.'s 1989 buyout of R JR Nabisco Inc. - in the nation's history.

For its $19 billion, Disney will get the No. 1 U.S. television network and its 10 owned and operated TV stations.

Disney also will get Cap Cities/ABC's significant cable TV holdings - 80 percent of ESPN Inc., 50 percent of Lifetime Television, 37.5 percent of A&E Television Networks, and 21 radio stations.

On the publishing side, Cap Cities/ABC has seven daily newspapers and a group of weekly newspapers and magazines, including Los Angeles magazine. It also has stakes in media outfits in Germany, Japan, France and Scandinavia.

"This transaction is a once-in-a-lifetime opportunity to create an outstanding entertainment and media company," Eisner said.

But there were many forces working behind the scenes making this time that once in a lifetime.

On the regulatory side, rules limiting how much of their programming television networks can own will be eliminated by year-end. Thus, a company like Disney, which is in the business of producing such programs as "Home Improvement" and "Ellen," can now safely own a network and keep its programming too.

And then there's syndication ...

What's more, these programs often rake in big bucks once they go into off-network syndication. Allowing networks to own programming, and thus to tap into the syndication revenue stream, makes them more valuable properties, and therefore more attractive takeover targets.

Another restriction on networks that was just lifted is the prime time access rule, which forced network affiliates to run one hour of non-network programming in the 7-to-11 p.m. time spot. Eliminating this rule means more network programming and, therefore, more money to the network.

Other changes being contemplated by Congress as it considers changes in telecommunications legislation would scrap or weaken rules limiting to 12 the number of stations one company - such as a television network - can own.

While providing programming to stations owned by others is a good business, providing programming to stations that the network itself owns is even better business, and increasing how many stations a network can own will surely strengthen its financial footing.

Westinghouse, whose Group W already owns eight TV stations, no doubt thinks this change will be a factor in its planned $5.4 billion purchase of CBS Inc., which owns seven stations.

Also being considered in Congress is a plan that would let one company own two television stations in some markets - perhaps allowing Disney to keep KCAL in Los Angeles while picking up Los Angeles' KABC in the Cap Cities/ABC deal.

Vertical integration

Aside from regulatory changes, economic factors have also contributed to the acquisition frenzy.

TV production costs have skyrocketed in recent years, with TV episodes running upwards of $1 million. Thus, the idea is to squeeze as many dollars out of the entertainment product as possible, and that means being involved in as many steps of the process as possible.

For Disney, it means making money from producing "Home Improvement," as well as making money off advertising sales for the show on the soon-to-be-Disney-owned ABC network. Disney can now cross-promote that same show in Cap Cities/ABC's newspapers and magazines, and on each station's local news show.

And analysts recognize that broadcast networks even have a place on the much-touted Information Superhighway - a thoroughfare that Disney itself is helping to build in a joint venture with three regional telephone companies to deliver video images to homes.

"Disney is buying a brand name in ABC," said Christopher Borde, associate analyst with entertainment research firm Paul Kagan Associates' Los Angeles office. "Say the telephone companies provide TV programming to the public," he said. "You would need some name-brand programming to attract those consumers. The ABC name adds to that."

RELATED ARTICLE: Studios race for network time

GREG SPRING - Staff Reporter

Owning both a program-producing unit and a network will give Walt Disney Co. a guaranteed way to bring its programs to TV-viewing audiences.

The flip side of that coin, however, is that programmers who don't also own a network may find it increasingly difficult to find places to show their programs in a market full of programmer-owned networks. After all, Twentieth Century Fox owns a network as well, and there are just so many networks to go around.

The fear of being shut out in the race for network air time helped spur Paramount Pictures and Warner Bros. into launching their UPN and WB networks earlier this year.

The United Paramount Network recently added 10 new affiliates to its web, boosting its coverage to more than 88 percent of all U.S. television-viewing households.

Market coverage

Of that total, about 73 percent comes from UPN's primary affiliates - those that broadcast all UPN programming "in pattern" at the network's scheduled time periods - and the other 15 percent comes from secondary affiliates, those that show all UPN's programs, but not necessarily in the network-dictated time periods.

The WB Television Network has coverage in about 81 percent of the TV-viewing market, virtually all of it through primary affiliates. But some 18 percent of that coverage comes through WGN, the super station in Chicago that is carried on most cable systems, including many in areas where WB does not have an affiliate.

In about a year, the WGN segment will be replaced by new affiliates in those markets, said network spokesman Jim Yeager.

By comparison, ABC, CBS, NBC each covers about 100 percent of all U.S. television-viewing households. The Fox network has coverage in 93 percent of the country in prime time.

Now speculation in Hollywood has turned towards network-less movie studios and program producers.

Some think that NBC is ripe for the picking by another entertainment concern. Others said program producers may try to form an alliance or partnership with CBS, which Westinghouse Electric Corp. plans to purchase.

Simply put, said Mike Adler, an entertainment attorney at Mitchell, Silberberg & Knupp, companies that don't have access to television networks will find it much more difficult to complete.

"Sony and MCA don't have a network," he said, "and they're hurting."