What is behind the wave of major media company mergers? Is it likely to continue, and will value be created for shareholders?

Clearly, media and entertainment companies are searching for ways to achieve scale and drive growth. We see leading companies like AOL Time Warner, Bertelsmann, Disney, Liberty, Sony, Tribune, Viacom and Vivendi Universal all looking for ways in which they can piece together the puzzle that will, once combined, create profitable platforms for the creation and delivery of content. The media industry many of them family-held last years. Many of these once closely-held companies are now becoming parts of larger, global enterprises. The rationale behind these mergers is the ability to leverage the scale and scope of larger media companies, to build strong relationships with consumers across formats, cross-promote, enter new markets, create cross-media deals with major advertisers and cut costs. Most of these media properties are scarce assets theme park, a daily newspaper, or a movie studio. So, each deal is a unique opportunity. And the prize for the companies which ultimately control the right sets of assets will be tremendous growth and shareholder value.

What role do consumers play in shaping this emerging media landscape? Do they have any say?

Absolutely. Ultimately, it's the consumer who gets to choose. Therefore, even if we emerge with a smaller group of media and entertainment companies, consumers get to make discrete choices, deciding what television programs they want to watch and what songs they want to listen to. So the concentration issue has more to do with ownership than with diversity of programs. What is forever changed is that we increasingly have more and more channels, more and more outlets for consumers to get information in media and entertainment. Consumers have become used to getting to tune to one channel and watch shows about cooking, turning to another for golf and a third for movies. They want variety in the magazines, radio stations, Web sites and newspapers. They won't stand for a limited number of options. Inevitably, those options will end up being owned by fewer companies, because the economics just make it much more viable for a small number of companies to be able to produce and distribute this content. However, that doesn't mean less choice for consumers. At the end of the day, consumers have free will and, more importantly, remote controls.

What are some of the opportunities for creating value through these mergers?

Significant value has been created by media mergers, such as the marriage of content and distribution. Bringing together strong content and distribution benefits both, as the content finds more avenues for exploitation, and the distribution channel itself is more valuable and more in demand. Value has also been created through cross promotion in companies that bring together different businesses. For example, the merger of Viacom with Paramount, and then later with CBS, provided a whole set of channels which can drive across different outlets. So, for example, they can take a character like Jimmy Neutron that was created on Nickelodeon, make it into a hit Paramount movie and then make a new television series back on Nick. That would be difficult to accomplish if the company were just operating one or two channels without a film and television production business. Another opportunity is the creation of new businesses. The companies need to insure that they're not just getting bigger, but that they're also finding new ways to use content and assets to be entrepreneurial and to create new outlets. Technology will give us the great platforms to be able to make these next steps happen.

What is the market potential for some of the new technologies like interactive TV and interactive PC?

Interactive television is clearly going to find a place in people's lives. The real question is how quickly the technology to deliver it will arrive, and if it will be delivered through a PC or television. I believe that what will end up emerging is neither. It won't quite be the Internet, and it won't quite be television. Look for a fusion of the two that creates the kind of effortless viewing that people want to have.

Which technology do you think is more likely to succeed interactive PC and why?

Among the reasons we believe that interactive television is likely to succeed over any interactive PC is the technology, including the ability of cable television experience. Second, are the habits in people's lives. Consumers are accustomed to using the television as an entertainment device, and the PC is still very much about information. The PC experience is generally just one person sitting in front of a PC. It's not as comfortable as people and their families and friends sitting around watching television.

Will the new technologies threaten the existing TV and PC market?

One of the fascinating things about new technology is that each new technology that has appeared threatening ultimately created new markets, exploitations and new revenue streams for media and entertainment companies. If you rewind the tape all the way back to the invention of the phonograph record, there are very few examples where the technology has not been additive. The motion picture companies were very suspicious and upset about television. Yet movie admissions continue to rise over the years. Of course, both television and the motion picture industry were very worried about videotape, and yet home video has been their saving grace. Satellite television? Cable television? They've all created new services, new opportunities for people to experience entertainment. Look to new technologies that are clearly on their way. They, too, will produce the same positive results.

What are some of the key elements that will characterize this new technology?

There are three things that will characterize technology. One is convenience. The second is true interactivity. The third is the ability to provide a shared experience with other consumers. While we can download music and we can stream video on the Internet, nothing is quite as good as the experience that we have by simply turning on the television set. Nothing is that easy, nothing is that high quality. The PC is still a device that many find mysterious. There are a lot of people who can't figure out how to program their video tape recorders, much less use their PC for a lot of complex tasks. And it comes back to that hallmark of what will distinguish and characterize those new services that will be successful: convenience. Consumers will use those devices that they find easiest to use. It will take a long time for people to change their habits, and it will take more time for the technology to get to the point where it's practical for a large percentage of the population. Technology combined with content is dramatically altering the consumer experience. And it's looking better and better for the consumer

How is the media landscape evolving in the international market?

We shouldn't expect that the same sets of players will be in each market. There are very strong local media companies in Latin America and Europe and Asia, and many have deep consumer relationships, strong local content and very recognized consumer brand names. So it's likely that those companies will either be successful on their own, or by partnering with either European or US companies.

Will the media content there differ vastly from the US media content?

Most unexpected to many ventures has been the extent to which local audiences truly desire local content. For example, if you were to look 10 years ago in Germany, you would have seen that most of the television programs during prime time were American shows. Today, there are very few American television shows that are prime time. People in India, or China, or in Italy want to see stories, characters, content, articles and news that relate to them. Therefore, this will continue to be about strong local companies, maybe as part of larger conglomerates, but content that is customized for them.

So you're saying that there's no merit to the argument that the major media conglomerates coming together are going to be producing a homogeneous global product that will be exported to international markets?

I see little risk of homogenization of content within the English and non English speaking worlds. Consumers want to see the best of everywhere. At the same time, consumers within each country want to see the best of their own country and the best of others. The consumer doesn't care who is producing the movie or the magazine. They want it to be exciting, they want stories they can relate to and characters they can believe in enjoy reading or seeing. They want it to have an impact on their lives. There is a trend towards a much more multi-global company, the companies that have strong content in many parts of the world, with a flow of content that is not in one direction. That's more than just a set of American content world surprised to see strong content from countries transcending borders. We've already seen some of that with a strong Chinese film like Crouching Tiger, or Italy's Life Is Beautiful. A few years ago these films would not have captured the imagination of so much of the world.

Do you anticipate the advertising revenue to pump back in the media industry by the end of the year?

The media industry is currently experiencing an unprecedented advertising recession, the worst since the Great Depression. But I'm convinced that the industry has also experienced a little bit of the canary in the coal mine syndrome. The advertising spark of the media industry started flickering way before the rest of the economy turned down. It's likely to come back because advertisers and marketers need to be able to show that they can grow revenue. In the last year, many companies have cut costs. They very quickly displace lots of people in their companies and cut back on their spending. But in order for the economy to come back, for them to regain their share of the pipeline, they're going to need to show growth in the top line. The only way they can do that is through their marketing partnerships with media companies, through creating the awareness and the desire and the traffic that comes through advertising. The second half of this year should be robust for media companies, as those advertisers which retreated from the market and reduced their spending, recognize that they need to come back and have a very strong finish to the year. Already our clients in the media business are saying that they're seeing a tremendous amount of interest. Across the board, with magazines, television or radio stations, they're seeing a great deal more desire on the part of marketers to work together to solve their most critical sales problems, so that they can grow their revenue.

Who will be the winners and losers in the advertising game and why?

Those magazines, television shows, television stations, networks and radio stations with the strongest audiences< and the audiences that are clearly definable The more marginal are going to find that they're going to have a harder time, especially in comparison to the previous seven years that were so strong for companies in the media business. When the advertisers come back, they're going to be much more discerning. They're going to stick to those companies that can offer them the best proposition. To the earlier point on scale, it will be those companies that are able to offer a whole set of vehicles through which to advertise emerge as big winners. Advertisers are looking for overall relationships with media companies, rather than a relationship limited to just one property. Major companies or Hearst across their different properties. And they're able to offer the different outlets, in the form of a group of magazines, or a combination of television programming vehicles, magazines, newspapers and broadcast networks. It's that combination that advertisers are looking for more than one-stop shopping can offer what will truly be winners for the next couple of years.

What are the regulatory aspects of going forward in the media industry? Are there any potential hurdles to the media mergers?

There are several rules which have held the industry back. One was the cross-ownership rule; another has been the ability of a company to own a cable system and a broadcast station in the same market; a third has been the ability of one company to own a newspaper and a television station in the same market; and another has been the ownership cap one company to own interests more than a certain limited size in the United States. Finally, there is the foreign ownership rule, which dictates that foreign companies cannot own a US television network. I'm hopeful that all the US rules will be lifted over time, and that some of the similar rules that exist in other countries will be lifted as well, because most of them are anachronistic, crafted during a time when there were other concerns. Today, the concerns range from national security to control of the media. Today's different options for consumers that a lot of those rules no longer make sense. I believe they need to be lifted because the benefits of joint ownership of some of these businesses or foreign ownership far outweigh any of the risks.

How are the new services and products going to be paid for? What will the pricing strategy look like for the media industry?

Consumers keep demonstrating that they're willing to pay more for entertainment, choice and convenience. What's fascinating is that entertainment is still financed more than 60 percent through advertising. But more and more we're moving to a world where people are also paying for the option of being able to receive services. Therefore, I think we'll see more subscription-service models develop. And it can only go up. We haven't seen anywhere close to the high end of what consumers will pay, especially since consumers are spending more and more time with media and leisure. These two business models will coexist side by side, and there will be others. A third business model is people paying not just for subscriptions, but also for individual product. They pay for music videos and books, and they will pay for good content that is offered. Whether advertisers subsidize entertainment, or subscriptions are offered, or even using the pay-per-drink or pay-per-view model, there is plenty of opportunity for added revenues.

How will the issue of intellectual property rights affect the future of the media industry?

The emergence of programs like Napster and Gnutella have already changed the present and future. The fact that the sales of blank CDs have now overtaken the sale of pre-recorded media is of great concern to everybody in the media and entertainment industry. Ultimately, what these companies own is intellectual property. A combination of technology and government, as well as the cooperative efforts of the different companies in the media business, will be required. Companies must insure that some consumers don't have to pay for entertainment, while others are getting it for free, and/or illegally. Until now, a lot of the efforts have not paid off. Yet I'm hopeful that, as the piracy gets to be much more widespread, governments will see the need to intervene. The industry has a responsibility to ensure that the technology will make it sufficiently difficult for people to steal music or steal movies.

What are some of the challenges going forward in the media industry that will impact its growth and profitability?

There are some big challenges for media companies going forward. First and foremost is that the industry is really learning to drive on a digital and reshaped consumer highway. The 21st century is the place where technology creates new outlets, new exploitations, new experiences, but at the same time places the onus on them to make sure that their content and their companies are prepared to take advantage of that technology. The second challenge is really continuing to create great content. Great music, great magazines, great radio stations, great television stations, news and newspapers. That means attracting the talent who are able to do that. The talent who create stories, and produce and direct and act, is still in very limited supply. These media and entertainment companies need to create very talent-friendly environments that are also friendly to managerial talents that will want to work with them. A third challenge for entertainment and media companies is to really figure out ways in which they will continue to grow by creating new businesses and also incorporating other businesses that they buy. That means growing not just within the biggest industrialized countries like the United States, Germany and the United Kingdom, but also around the world media are becoming very big parts of the societies. Finally, of course, is protecting their birthright, their gems of this truly big threat of piracy. The mantra of the late 1990s was "content is king." That's one fact that has not changed.