April 22, 2004

The key question this morning is, what will Sony do with MGM's library and other assets? Or is it?

Perhaps the key question is, how much higher can the price tag go on MGM, which apparently is getting to close to what Kirk Kerkorian's wanted for years… yet another sale of the company he just can't stop buying and selling.

Or perhaps the real question is, why is this deal suddenly heating up?

I'm going to bury what I think is my lead and look at where MGM's assets are at the moment…

Alex Yemenidjian and Chris McGurk have played their parts to perfection over the last year. MGM's strategy of paring down their production slate to existing and renewed franchises has paid dividends, albeit not flashy ones, in recent months, with titles like Walking Tall and Barbershop 2, as well as the anticipated Beauty Shop, Steve Martin's version of The Pink Panther and the next Bond. For an industry always anxious to build franchise opportunities at a price, MGM has made their case as a value there.

Of course, the real value at MGM is the library, which not only consists of their own product from the golden age of Hollywood, but also libraries that they have picked up rights to, particularly over recent years, another successful Yemenidjian/McGurk strategy.

If Kirk Kerkorian is really willing to cash out for as little as $5 billion for the entire company, it is probably because of his age. But more likely, the call to The Hollywood Reporter, which broke the news on Wednesday, came from a number with a 449 prefix (that would be the MGM offices) and the hope is that a not-too-public public auction can
add at least another billion dollars to the offer, whoever the final offerer is.

So, why Sony? "Sources" told The Reporter that Sony made the call to MGM recently. Sony denies it. But Sony would deny it if you asked them if Spider-Man would be wearing red in the upcoming movie… at least until they were good and ready to talk.

This is what I think…

Sony isn't in the TV network business, cable or broadcast, which would normally be expected to be the main avenue of exploitation for the MGM library outside of DVD sales. The odds that they are now deciding to go that direction seems slight. Sony, like MGM, pretty much got out of the TV production business a few years ago when everyone realized that having a production business without a broadcast network has become nearly impossible - Warner Bros. being the only major exception these days - though obviously they have cable networks to play with. The window on Rainbow Media's efforts to sell off IFC and AMC seems to have closed as Cablevision has made clear their intentions to expand their cable net interests with their attempted backdoor buy of Disney. I don't really know how much control GE/NBC/Universal has over USA Networks, but I wouldn't expect Barry Diller to sell to Sony either. So unless Sony is going to start from scratch, which is always possible, that is not their target.

Sony's very ambitious and very successful Home Entertainment division could make a big push with the MGM catalog. But most of the key titles have already been exploited on DVD. So that as a central strategy could yield slow results.

One of Sony's central feature production strategies of the last few years has come to focus more and more on creating and exploiting franchise titles. And an MGM purchase would afford Sony an opportunity to mine the remake possibilities of multiple generations of excellent films. But again, with the exception of Bond - which ironically was the subject of a takeover effort by now-producing John Calley a few years back - none of those opportunities are surefire winners, anymore than product emerging from the Columbia library is.

So what's my punchline?

Blu-ray technology. Sony just released a Blu-ray optical disc player/recorder in Japan, with a $3800 price tag. The price will come down. But the purpose of the technology, which has a red-ray competitor, is to deliver 4000 line images via DVD-style technology, equaling or surpassing the visual density of celluloid.

If you recall, Sony bought Columbia Pictures in the first place in an attempt to corner enough exclusive "software" (movies) to force the Betamax issue. It didn't work and the studio has been a financial weight around the electronics company's neck for most of its years as a division. (Things on the movie side have been better recently.)

To be fair to Sony's motives, this Blue-Ray technology has support from Hitachi, LG Electronics, Matsushita Electric Industrial (Panasonic), Philips Electronics, Pioneer Electronics, Samsung Electronics, Sharp, and Thomson Multimedia as well. But Sony did get the first actual player onto the market. And with MGM's library and their own library under control, they could be trying a new generation Betamax strategy.

Or, more simply, Sony could be anticipating the next round of the "DVD" business (who knows what the new technology will be called?)… a round that calls for another huge purchasing boom from movie lovers and that will also likely slow down the move from hard media (DVDs, videotapes, etc) to easy access on-call wired media (VOD, PPV) because of the massive increase in bandwidth required for this level of quality. Just the notion of a real growth spurt for the actual HD televisions so that people can watch 4000 line movies at home will take more than 5 years to reach critical mass.

This seems to me to be the only logical synergy that would make Sony leap at picking up MGM… the assumption that the Home Entertainment market, as slightly over its apex as it probably is, is actually undervalued at this very brief moment because of this new and truly revolutionary step which we all saw chronicled in the NY Times just this last Sunday. And let's not forget… MGM's Bond series is the first expected home entertainment exploiter of this 4000-line technology. Plus, Alex Yemenidjian was quoted just the other day saying that he didn't think that DVD had come close to peaking yet. Hmmm….

The other players out there should take a good long look at this opportunity. GE, Viacom, News Corp, previous suitor Warner Bros. and yes, Disney, all have opportunities to exploit all of MGM's assets more effectively than Sony. And if the "future DVD" play is in effect, they stand to benefit almost as much as Sony from that as well.

Meanwhile, the next play for Sony, if they are serious about moving in the strategic direction they seem to be moving in, would be DreamWorks, which ironically would be an even better fit than is MGM in every area other than the library. Sony ImageWorks is pushing hard to get into the feature animation world and Jeffrey Katzenberg and the DreamWorks Animation properties would take them to the A-list right away. And the DreamWorks library, though small, is full of big-name-talent titles that all have a built-in following.

We can talk about a company that has Geoff Ammer, Terry Press and Peter Adey under the same roof at the same time a little later…

E ME: What's the haps?