Vivendi: French Connection

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• RAY SUAREZ:

  Only a few years ago, Vivendi was a little-known French water utility company. Today, after completing two big deals in the last four days, it's a growing U.S. and global media and entertainment power. The company, which already owned Universal Studios and the Universal Music Group, announced Friday it was acquiring a 10% stake in EchoStar Communications Corporation, the second biggest U.S. satellite television service with about six million subscribers. In the deal announced today, the new Vivendi Universal Entertainment Company will add USA Networks, which includes the USA and Science Fiction Channel cable networks, USA films, which produced the Oscar- winning movie Traffic, and USA's television studio, which produces Law and Order and the Jerry Springer Show.

  For more on the deal, we're joined by Jim Stroud, a media analyst with the Carmel Group, a media consulting firm based in Monterey, California; and David Bennahum, a writer and contributing editor at Wired Magazine.

  Well, the married companies are vast and have properties ranging from Ticket Master to Houghton-Mifflin Publishing. They kept the water company, their theme parks. Jim Stroud, what did these two big companies want from each other? What made this marriage happen?

• JIM STROUD:

  What made this marriage happen was that Universal and Barry Diller really wanted a distribution platform for their studios, their movies, and the cable side of it really gave Vivendi and its films a distribution platform to get into the U.S. market? They had wanted to get into the U.S. market for quite a while. This gives them a great distribution platform for that.

• RAY SUAREZ:

  So Vivendi had the entertainment products themselves and USA had a way to get them to people's eyeballs?

• JIM STROUD:

  That's correct. To really take a good look at what Vivendi has done over the last two weeks, it's very important also to include what they've done with EchoStar and their $1.5 million investment in EchoStar because that gives them another way to get their distribution and five new channels on to the EchoStar platform, which has six million subscribers. So I think in total that this is a very good avenue for Vivendi to make its mark into the U.S. market where it's already well known in the European markets.

• RAY SUAREZ:

  David Bennahum, you've got a company now that includes the machines, the way people get various kinds of entertainment and also the companies that produce the things they listen to and see. A good fit?

• DAVID BENNAHUM:

  It's a good fit but it's not going to get them all the way to where they have to be. The problem that they're facing right now is that they're competing with a bunch of media giants in the United States specifically AOL/Time Warner, ABC, Disney and Viacom that are just leaps and bounds ahead of Vivendi in terms of the next generation of integration when it comes to media. And what that means specifically is that we're really moving into an era where traditional media, which is ad supported, is increasingly shifting into a direct marketing and pay-per- view environment. And that has a lot to do with owning cable networks and owning other kinds of methodologies for actually marketing directly to consumers like magazines is another way to do that, for instance, Time Warner has a lot of magazine properties. All of these help media companies get into relationship with consumers and sell to them directly, which is increasingly important as we move into an era where advertising on TV is less and less effective. So you've got a company like Vivendi doing a very traditional deal to get access on to cable networks when cable networks themselves are being increasingly cluttered and devalued as we get more and more channels on these things.

• RAY SUAREZ:

  But you compare the new Vivendi to a big company like AOL/Time Warner, could it be that Vivendi is sort of looking down the road beyond the conventional media giant package with its use of vote-a- phone to use wireless broadband to deliver content, using satellites instead of cables? I mean, could it be that it's ahead in some areas while it's still much smaller as you mentioned?

• DAVID BENNAHUM:

  I don't think so. I mean in the cases you're mentioning satellite is a very hard two-way medium and it's very hard to transmit up to a satellite. Compare that with Time Warner's digital cable system, much more effective in terms of sending signals back and forth from consumers. The same is true with wireless networks. They're very far behind the traditional Internet and fixed line networks. So you've got a situation where they have increasingly higher barriers to penetrating those kinds of technologies and those kinds of assets. They're increasingly locked up by the top three media companies. How does Vivendi get into that? How does Vivendi compete with something like AOL, which has a tremendous database of consumers? How does it compete with cable networks that have subscriber lists and actually know where you live and eventually will be able to market directly to you? This is clearly where everything is heading. The gap between someone like a Vivendi and even for instance a Newscorp and some of these other players is widening not decreasing. And these deals aren't pushing them further. Yes it's a toehold but by no means is it a serious beachhead into this country when you look at it on the bigger scale.

• RAY SUAREZ:

  Jim Stroud, how do you respond to David Bennahum's skepticism?

• JIM STROUD:

  Well I certainly think it could be a much bigger beachhead than David first mentioned. EchoStar is in talks and has announced a merger with DirecTV, which would make it the number one multi-channel video provider in the country with over 17 million subscribers. The irony of this deal is it may indeed put the EchoStar DirecTV deal in jeopardy. EchoStar has told the FCC it is not a content provider. With this deal with Vivendi it has made them a content provider and made them vertically integrated. That may put the much bigger deal of the EchoStar DirecTV deal in jeopardy. But, again, if EchoStar gets its hands on DirecTV it's a great way to get into millions of home in the United States. That's something that Vivendi has clearly wanted for years.

• RAY SUAREZ:

  People at the top of both USA and Vivendi were excited and had gone some distance in inter-active TV. What is interactive TV?

• JIM STROUD:

  Interactive is any number of things. It can range from being able to interact with your television to get more information on an advertisement or commercial to being able to record any program on your digital video recorder like a TIVO or replay TV. It can also be where you can switch camera angles from your own television set while watching a sports program. In other words you could be matching an NFL game and watch it from the 50-yard line or switch and watch it from the end zone. There's any number of applications on interactive TV. That's another aspect of the Vivendi buy-in to EchoStar and that they're going to launch Canal pluses, which is a subsidiary of Vivendi's middle wear system on to the EchoStar platform and give them a real interactive channel and presence in the United States.

• RAY SUAREZ:

  David, entertainment products were once thought to be fairly parochial, based in one country, pop songs that worked in France didn't necessarily work in Romania and vice versa. And neither worked in the United States. What is the new thinking around companies like Bertelsmann, Vivendi and American-based giants that are trying to get a foothold in Europe? Is culture more movable, more borderless than it used to be?

• DAVID BENNAHUM:

  Well, certainly we're seeing that effect. And it's increasingly important to create content that is borderless because as we move into these interactive environments you start to really cheapen the value potentially of traditional advertising and marketing so you need to begin to aggregate more and more of what's actually valuable which is human attention. And so the question is how do you capture someone's attention across different cultures and monetize it with enough scale that you can derive significant revenue. That requires a universal so to speak entertainment. You're going to see an increasing push towards entertainment that can work in multiple cultures, that doesn't really speak to differences as much as it speaks to commonality because if you don't do that your product doesn't have the necessary scale to generate a return on the investment that you're going to have to have in this increasingly fragmented and diversified media world.

• RAY SUAREZ:

  Well, now at the top of the newly married company are two cross-cultural partners, Jean Marie Messier and Barry Diller. Are they going to live comfortable inside the same tent?

• DAVID BENNAHUM:

  You know, it's a great question. You've got two very strong egos obviously and you look at someone like a Ted Turner at Time Warner, you know, that had a tremendous influence and ego and the sort of duels that have happened there. You look at other media companies people like Rupert Murdoch who have equally large egos, and the history of these things is littered with all kinds of ego clashes. If you factor in that variable, who knows how this is going to work out? There's a chance there will be friction and it won't be smooth-sailing management handover.

• RAY SUAREZ:

  Jim Stroud, do you think they can divide the responsibilities in such a way that they can co-exist peacefully? These are two pretty head strong guys by reputation.

• JIM STROUD:

  They certainly are two head strong guys. When you throw in another third head strong guy in Charlie Ergen with EchoStar, the best way to describe Vivendi's move over the last week is a gamble. I think it's a gamble. They're betting on getting into the American market in a very big way with their agreements with EchoStar and USA Media. I think the three of them together know the potential for this market. That's why they're all willing to stake their reputations and their names on this deal is because they see a big potential. But whether it works out or not, that remains to be seen.

• RAY SUAREZ:

  One last quick question. Is there any regulatory barrier to this? There used to be pretty tight regulations about selling these sorts of properties internationally. Is this going to have any problems in Washington or in Paris or anywhere else?

• JIM STROUD:

  I don't necessarily know if the Vivendi-USA deal will have any real government hurdles or legal regulatory issues to overcome, but I definitely think that this puts a real question mark on the EchoStar- DirecTV deal because again from day one EchoStar is not vertically integrated and now they are. I think that the FCC may well require full disclosure with what's going with EchoStar and Vivendi before moving forward on the EchoStar/DirecTV merger.

• RAY SUAREZ:

  Jim Stroud, David Bennahum, thank you both.