MGM Acquisition a Good Move by Sony16 Sep, 2004 By: Thomas K. Arnold
No sooner had the ink dried on Sony's “agreement in principle” to buy MGM for nearly $5 billion than the industry was abuzz over the motive.
Generally, analysts concur Sony is both gambling on DVD's staying power and betting against it.
On the one hand, as the august Wall Street Journal puts it, Sony “is betting that Hollywood's DVD cash cow will continue gushing money.” Consumer spending on DVD has risen steadily each year, with last year's spending total estimated at $11.8 billion. That's more than consumers ever spent on movies in the VHS era, and a record that's likely to be shattered this year, when spending on DVDs for the first half is already at $6.6 billion, according to Video Store Magazine Market Research.
Indeed, DVD has proven so lucrative that studio executives have become a lot less nervous when movie production budgets balloon, so confident are they that the risk will be mitigated through boffo DVD sales on the back end.
MGM has a huge library, one of the biggest in the business, and while many of these have already been released on DVD, the number of new DVD households keeps growing. We're still nowhere near the 70 percent mark, which is a key indicator of a mature market. New collectors are being born every minute, and at the same time Sony's home video division, perhaps more than any other studio, knows how to double-dip (score twice by releasing a superior DVD weeks or months after a regular one).
Thus, the fact that MGM has already released most of its sellable titles on DVD is hardly a deterrent; the folks at Sony are ready and willing to do it again, convinced there's more money to be squeezed out of classic library titles from John Wayne's The Alamo to the “James Bond” collection.
That said, Sony is also betting against DVD with its proposed acquisition of MGM. Sony heads one of two competing next-generation optical disc formats, Blu-ray, which is vying to become tomorrow's high-definition standard. The opposing camp, HD-DVD, has the backing of Toshiba.
There's a lot at stake. Sony has been left in the dust once before — in the early 1980s, when its Beta cassette lost out to Matsushita's VHS. Sony was at the vanguard of developing DVD as well, but walked away with only a partial victory when the MMCD format it had developed with Philips was integrated with Toshiba-Warner's SD after computer companies demanded a single, standard format.
Both competing next-gen camps are currently in a race to the market. All the studios except Columbia TriStar Home Entertainment, owned by Sony, are still on the fence. If Sony is having a hard time convincing a second studio to line up behind it, what better tack than to buy one — particularly one with as formidable a library as MGM?
With MGM, Sony will command a library of some 8,000 movies titles — ready and ripe for the next-gen pluckin', and a snub in the face of HD-DVD, which as of yet has no major studio behind it.
There are plenty of skeptics who question Sony's wisdom in buying MGM for so much money. Even the Wall Street Journal is raising eyebrows, touting the fact that some analysts believe DVD growth will slow and that eventually the entire packaged media category will fade “as more viewers turn to movie-on-demand services and run out of old favorite video flicks to replace.”
But I disagree. I see DVD sales maintaining their robust clip well into the future, fueled by such out-of-nowhere niche markets as TV DVD and music DVD, and also by the continued shift of consumers toward buying and collecting movies the way they buy and collect CDs and books.
And if and when DVD sales fade, there will be a new packaged media format to pick up where DVD left off.
Whoever's got the content will win, and with MGM under its belt, my money's on Sony to secure many, many happy returns.