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Universal Sale Could Yield Video Powerhouse

5 May, 2003 By: Stephanie P. Joan V.

In a move that could significantly change market share in the video business, Vivendi Universal chairman Jean-Rene Fourtou announced publicly the company's intention to sell Vivendi Universal Entertainment this year.

Among the reported suitors -- which include Liberty Media, Barry Diller and his USA Interactive, NBC parent General Electric and former-Fox owner Marvin Davis -- are MGM and Viacom, which owns Paramount.

A combination with an existing studio would create a formidable home entertainment powerhouse.

Universal Studios Home Video's market share of home video sales and rentals for 2002 (including DreamWorks) was 13 percent or $2.73 billion, according to Video Store Magazine market research. Paramount Home Entertainment titles accounted for 8.5 percent of the video market and $1.78 billion in rentals and sales, and MGM accounted for 5.5 percent of the market and $1.15 billion in rentals and sales. Either combination would create a third big player with a market share comparable to Disney (17.2 percent in 2002) or Warner (21.9 percent).

“It would be a major market share leap for any of the smaller companies that might acquire [Universal],” said analyst Tom Adams of Adams Media Research, who pegs Universal with DreamWorks at 12 percent of the market, “ … [so] they're actually bigger than any of their suitors in the video business.”

For 2002, Adams estimates Paramount captured 6 percent market share in gross revenue from the sale of video, while MGM's share is 5 percent. A combination with either would put the merged company more on par with Disney and Warner, each with more than 20 percent market share. “It would dramatically increase the number of new titles they're putting out -- that would be the biggest change,” Adams added.

Analyst Dennis McAlpine with New York-based McAlpine Associates agrees that a combined studio company would derive strength from having more titles in the pipeline. “You'd have a studio that had a lot of product to distribute all of a sudden,” he said.

On the negative side, consolidation would leave fewer outlets for content creators to turn to, McAlpine said. Plus, unresolved issues would include the fate of Universal's third-party distribution contracts, its music distribution arm and the duplication created among production, marketing and sales staffs, McAlpine and others noted.

If a non-studio player buys it, “I don't see much of any impact” on the home entertainment business, said Ralph Tribbey, who monitors studios' market shares and releases as editor of the DVD Release Report.

“Paramount makes sense because they sold off their library [in the 1950s],” he said. That library went to MCA, now VNU. “Paramount would get their library back.” That would include the Bob Hope-Bing Crosby road movies that Universal Studios Home Video just re-released and repromoted on DVD, he said.

“If Paramount were to end up with the Universal library, it would certainly make for a major competitor with the Warner group, New Line and HBO, and Disney, which over the last year has become very aggressive in terms of building its commitment to DVD,” he said. The Paramount-Universal combo “could have 20 percent market share, which means three companies essentially controlling 60 percent of the business.”

MGM does not need the distribution network, so it would strictly be an asset play, Tribbey said.

But whoever steps up to the plate will get a real asset since DVD is still in less than half of U.S. households, leaving enormous growth potential in the home entertainment market, Tribbey said. “If you step back and look at where the packaged goods market and the demand for product could be five years out, with these interest rates right now, financing this deal could pay huge dividends for anyone who could pull it off,” he noted. “Whoever's riding that pony could do quite well.”

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