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News Analysis: Sony's MGM Deal Hedges All Bets

17 Sep, 2004 By: Thomas K. Arnold

No sooner had the ink dried on Sony Corp.'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 should a future technology — be it packaged or electronic — take hold. Sony is buying MGM chiefly for its rich catalog of classic movies and plans to exploit that catalog however it can.

“It's been shown, over and over through the years, that content has value, whatever the delivery vehicle,” said veteran industry analyst Tom Adams, president of Adams Media Research. “And, in fact, that content increases in value as more delivery pipelines are developed.”

On the one hand, as the Wall Street Journal reported last week, 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 total for sales-only 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, as spending on DVDs for the first half is already at $6.6 billion, according to Video Store Magazine Market Research.

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. Household penetration is still well short of the 70 percent mark, which is a key indicator of a mature market. New collectors are joining the market 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).

The fact that MGM has already released many of its sellable titles on DVD is hardly a deterrent, analysts said; the folks at Sony are convinced there's more money to be squeezed out of the library.

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 Disc, 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 format 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 format it had developed with Philips was integrated with Toshiba-Warner's.

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 tactic than to buy one, analysts said — particularly one with as formidable a library as MGM? After all, according to analyst Adams, in DVD's first year, catalog sales amounted to more than two-thirds of total sales, underscoring the importance of library titles in the early stages of a format launch.

With MGM, Sony will command a library of some 8,000 movie titles — ripe for the next-generation launch, and a gauntlet thrown down to HD-DVD. Still, the latter's chief public backer, DVD “father” Warren Lieberfarb, downplays the significance of the MGM-Sony union, pegging the combined catalog market share at less than 20 percent and insisting “the combination of Sony and MGM still does not have a significant market share in back catalog to create a de facto standard.”

According to Video Store Magazine Market Research, however, the combined MGM-Sony catalog would have had the second-biggest market share in DVD library sales in 2003, behind Warner, with 25 percent.

There are plenty of skeptics who question Sony's wisdom in buying MGM for so much money. The Wall Street Journal touted 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 Sony isn't oblivious to any of this — which is why the company is hedging its bets even further. Sony has said it intends to license its movies for a new video-on-demand service and develop channels with Comcast Corp., America's biggest cable provider.

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