HOLLYWOOD DEALS FROM MEGA MERGERS TO STRIKE TALKS, INDUSTRY TRIES TO KEEP ENTERTAINING.

Byline: Jesse Hiestand Staff Writer

Even after a year of unprecedented challenges, Hollywood has no time to rest or reflect.

The entertainment sector must brace for even more tumult in 2001 as more labor unrest, a slowing economy, fickle consumer tastes, digital piracy and other concerns collide head-on.

The past year has produced a dizzying series of surprises and setbacks, from mega-mergers to an advertising slowdown, spectacular dot-com flame-outs to a flatlined box office revived by a few late-year blockbusters.

Now comes ``2001: A Real Odyssey.''

``It's going to be a wild and woolly year for entertainment,'' said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. ``After a while in 2001, we're going to feel like we're on a wild roller coaster.''

Not that this past year hasn't had its share of thrills and spills for an industry that represents $31 billion of Southern California's economy.

America Online Inc. dropped the first and biggest bombshell of the year when it announced in January an intention to merge with Time Warner Inc., creating a media colossus that, once it received crucial government approval in mid-December, was worth $110 billion.

The combined company spans the media universe, teaming America Online's dominant presence on the Internet (26 million subscribers, the No. 1 access provider by a long shot) with Time Warner's cable systems (12 million subscribers). Those pipes were primed to deliver Time Warner's output, which are some of the most recognized brands in film, music and publishing.

The big question next year is how well the marriage goes, from the corporate boardroom to the Internet, where competitors will surely be watching to see how, and how well, the new company capitalizes on its prime programming and diverse distribution.

So far, other big media companies have resisted the urge to merge, with one exception.

``I don't think anyone else felt they had to do that out of desperation, but Seagram obviously felt they had to do it,'' said David Davis, movie industry analyst for Los Angeles investment banking firm Houlihan Lokey Howard and Zukin.

Seagram Company Ltd., the Canadian parent to Universal Studios and Universal Music Group, agreed in August to be acquired by French water utility Vivendi S.A. in a deal worth $34 million.

Vivendi Universal S.A. is also betting big on the Internet, particularly on the potential to sell music from Universal.

Downloading music was indeed popular this past year, albeit through song-swapping services like Napster that let consumers get their favorite music for free.

The Napster controversy will stretch into next year as the Recording Industry Association of America presses its lawsuit against ``wholesale infringing'' of copyright.

The music industry scored a major victory in July when a judge shut down Napster, only to have a higher court grant a last-minute stay.

No such reprieve came to Scour Exchange, a similar file-sharing service partly owned by Hollywood power broker Michael Ovitz. Scour cut off its 7 million users Nov. 16, citing ongoing lawsuits by the movie and music industry, bankruptcy and resulting layoffs.

In all, it was a grim year for many Web entertainment sites.

Santa Monica-based Digital Entertainment Network went out of business in May without revolutionizing the face of entertainment, as promised. Investors who got burned included Microsoft Corp., Dell Computer Corp., NBC and Warner Bros.

In September, Pop.com shut down before it even launched, dashing the hopes of co-founders and DreamWorks SKG partners Steven Spielberg, Jeffrey Katzenberg and David Geffen as well as Imagine Entertainment founders Ron Howard and producer Brain Glazer. Pop.com had planned to produce and broadcast short, original Internet-only programming.

The carnage continued through year's end. In just one example, Stan Lee Media Inc., the Encino-based Internet studio that created and marketed characters by its legendary namesake, abruptly ceased operations in mid-December and laid off 140 staff members after failing to get further funding.

The news was no less distressing in the tried-and-true world of feature film exhibition.

Five major theater chains filed for bankruptcy protection after going on a debt-financed building frenzy that left a glut of screens when ticket sales were flattening out. Of the 36,000 screens out now, analysts believe up to 10,000 must be eliminated to balance out the industry.

Among those optimistic about a turnaround next year is Derek Baine, movie, television and cable analyst for Paul Kagen & Associates in Carmel.

``Hopefully, there's some upside to all these bankruptcies and the industry can slim down and get rid of some of these older two-screen theaters,'' Baine said.

The exhibition business's woes are also putting the brakes on the rollout of new technology to deliver digital copies of films directly from the studios to theaters via satellite or fiber optics, saving the studios millions in print costs, Baine said.

The 2000 Hollywood box office produced its own suspense, heading into summer 11 percent ahead of the previous year's revenue before slamming to a halt and racking up 11 consecutive weekends of revenue that fell below the same period a year before. Walt Disney Pictures' ``Remember the Titans'' turned that around in late September, setting the stage for one of the year's few blockbusters, Universal Pictures' ``Dr. Seuss' How the Grinch Stole Christmas.'' At more than $200 million in revenue, the Grinch and a handful of other late-year films were expected to push the box office over last year's $7.5 billion by a slim margin.

Next year, Hollywood will put the emphasis on second helpings, with sequels scheduled for ``Dr. Dolittle,'' ``The Mummy,'' ``Scary Movie'' and ``Jurassic Park,'' now in its third installment.

While the 2001 box office could be strong, concern is mounting over the prospect of a strike by writers and actors, whose contracts with producers expire in May and June, respectively. Both groups want more revenue from foreign and home video distribution, cable and the Internet.

``A lot of films were put into production in anticipation of a strike so there won't be a lack of product, but a prolonged strike could have a chilling effect on the movie releases,'' said Paul Dergarabedian, president of box office tracking firm Exhibitor Relations Co. ``If it went on long enough, you could have a situation where the pipeline of films could dry up, but I don't think that will happen.''

In what was widely seen as a preview to the potential strike, commercial actors struck against the advertising industry for six months this year.

Hope for early, strike-averting negotiations were dashed in December when the Screen Actors Guild and American Federation of Television and Radio Artists said they will not approach the bargaining table until June 1, a month before the contract expires.

The Federal Trade Commission put the scare into Hollywood in September, releasing a report that accused the movie, music and electronic gaming industries of putting profits above all else in marketing violent content to children as young as 9 - in spite of the industries' own ratings systems.

Each segment of the industry took its own path to appeasing regulators, with the Motion Picture Association of America offering a 12-point plan seeking to prevent a relapse of these practices.

In the end, after congressional hearings and saber-rattling, the FTC said it probably cannot prosecute Hollywood for such marketing, although some lawmakers plan to monitor the voluntary compliance.

The television business in 2000 caught reality TV fever on the popularity of CBS' ``Survivor,'' which will spawn a sequel starting in January and a number of imitators that will surely test the genre's long-term prospects next year.

Game shows followed a similar arc after the surprising success of ABC's ``Who Wants To Be a Millionaire,'' which remained a strong draw despite a drop in its second-season ratings.

The networks are now bedeviled by shrinking advertising revenue. While the networks knew they could not look forward to another year of Olympics and election-driven advertising, they did not figure the economy would begin to slow and that many struggling dot-coms would slash ad budgets to cut costs.

``A lot of these media companies are becoming more and more cautious,'' said Baine of Paul Kagen. ``You've already seen the dot-com meltdown and now the media companies are laying off people in their network divisions, and on top of that you have the advertising slowdown and hiring freezes. People are saying 'Hang on - let's wait and see what happens here.' ''

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4 photos

Photo: (1 -- 4) Strikes, game shows, mega mergers, including the union of AOL and Time Warner, and paltry box office numbers were the tip of 2000's entertainment iceberg and each will continue to have an effect on the industry in the new year.