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By Ben Fritz 

A federal judge's verdict this coming week on whether AT&T Inc. can acquire Time Warner Inc. will shape a much broader drama: a radical reordering of the entertainment business that's reaching every corner of Hollywood.

Technology giants are rapidly devouring a media industry that has long been dominated by the same group of entertainment companies -- storied Hollywood studios, television networks and cable giants. Now, many of those incumbents are scrambling to transform themselves so that they can stand up to the powerful invaders from Northern California.

"I've never seen this much uncertainty and insecurity in the legacy entertainment businesses before," said Bruce Berman, a veteran studio executive who heads Village Roadshow Pictures.

Netflix Inc. is leading the charge. The company has 131 million subscribers world-wide, drawn to its massive array of programming available to watch anytime and anywhere. But the true threat it poses to traditional media firms is behind the scenes. It is this year streaming about 700 pieces of original content -- television series, movies, stand-up specials and more -- to consumers with whom it has direct relationships, making it a new type of media superpower possible only in the digital age.

Its success, along with similar looming threats from tech giants like Amazon.com Inc. and Apple Inc., are leading other major media players to press for the scale and breadth necessary to remain relevant.

If AT&T's purchase of Time Warner goes ahead as planned, it would combine a wireless-data giant with the parent of premium-cable powerhouse HBO, film and television studio Warner Bros. and cable networks like TNT and CNN.

Next in line is Walt Disney Co.'s $53 billion agreement to buy most of the assets of 21st Century Fox Inc., intended to create an entertainment behemoth big enough to launch new digital businesses that could compete with Netflix -- unless Comcast Corp. snags the deal with its own competing offer for the assets. (21st Century Fox and Wall Street Journal-parent News Corp share common ownership.)

CBS Corp and Viacom Inc. have held on-and-off talks about combining, complicated by clashes between CBS's management and the two companies' common owner.

Practically every other major Hollywood company has spent the past year more quietly considering potential purchases, sales or mergers, according to people close to them.

Sony Pictures Entertainment is often named as a potential acquisition target, but the Japanese-owned studio isn't currently for sale, its top executives have said. That's in part because its management is attempting to improve its previously weak performance and increase its value to be in a stronger position as a buyer or seller, a person close to the studio added. Sony has considered going after Metro-Goldwyn-Mayer Inc., an independent studio that bought the pay-cable channel Epix last year, the person said.

MGM has also long been a target of Lions Gate Entertainment Corp. Lions Gate, meanwhile, in 2016 acquired pay cable channel Starz and recently bought majority control of a large talent management and TV production company, 3 Arts Entertainment.

In some cases, media companies are also seeking more global exposure in these deals -- something Netflix already has in virtually every country except China. And then there's the pressure to compete against digital powerhouses Facebook Inc. and Alphabet Inc.'s Google, which are gobbling up the market for advertising dollars.

Buying and selling companies has long been standard in Hollywood, where deep-pocketed investors sought to capitalize on celebrity glamour and would-be disruptors arrived looking to develop new synergies. Universal Studios has had five owners over the past 30 years. And Sony Corp.'s acquisition of Columbia Pictures in 1989 and America Online's purchase in 2000 of Time Warner -- itself the product of years of deal making -- are both remembered as among the most misguided tie-ups in corporate history.

This time, however, virtually all the deals in progress are a reaction to one catalyst -- a seismic shift in the media business that has been driven primarily by Netflix.

From its early days in the late 1990s and 2000s as a distributor of DVDs and then, starting in 2007, as a streamer of old movies and television shows, Netflix was a lucrative source of income for the traditional Hollywood companies from which it bought content. It was right on the cutting edge of changing consumer behavior, offering value-conscious and digital-savvy consumers exactly what they wanted: unlimited viewing on-demand for a flat monthly fee.

In 2013, Netflix produced its first original series, "House of Cards," and started to become a competitor to the very networks and studios from which it had been buying content. Now, just five years later, the company says it spends close to $8 billion producing and licensing content. Some analysts calculate the company's content expenditures differently and peg the number even higher. The streaming giant last year spent more than any other media company producing and licensing nonsports content, according to media analysts at Bernstein Research.

Hollywood was able to coexist with Netflix as the biggest online distributor of movies and TV shows so long as Netflix was also the biggest buyer. But now, it's a major producer in numerous categories, from dramas to comedy to reality shows to stand-up specials to feature films. It is signing exclusive deals with top talent like "Scandal" creator Shonda Rhimes, who was previously affiliated with ABC. Netflix doesn't need anyone else in Hollywood to function, and consumers may not need any other provider to get their total entertainment fix.

Amazon hasn't been as successful as Netflix, but it recently hired a new entertainment chief and is determined to make its Prime Video service, with an annual budget of nearly $5 billion, a powerhouse in entertainment. It recently agreed to pay hundreds of millions for the rights to make a "Lord of the Rings" TV series, people with knowledge of the deal said. This past week, Amazon signed a deal with Jordan Peele, the producer and director of the hit movie "Get Out" that will give the company a first look at potential series from him. Apple is also making deals for TV shows from top talent like actress Reese Witherspoon and is committed to spend $1 billion just to get started.

Some legacy studios are moving to lock down their talent. Time Warner's Warner Bros. this past week signed a $300 million, long-term agreement with Greg Berlanti to keep the prolific TV producer in its stable.

"It's a message not only to our creative community but the creative community at large," Kevin Tsujihara, chief executive of Warner Bros., said of keeping Mr. Berlanti's services amid the talent wars fueled by Netflix.

Netflix recently surpassed Disney and Comcast in market capitalization, while Amazon and Apple each have bigger market caps than every major media company combined.

And because media is not a core business for Amazon and Apple, both can spend freely without worrying as much about profits as studios and networks whose existence they threaten.

The nightmare scenario for incumbent studios is one in which a handful of giants that fuse digital distribution with massive production essentially own media. This would be a landscape in which all movies and TV shows were made and distributed on direct-to-consumer digital platforms owned by Netflix, Amazon, Apple, Comcast, AT&T-Time Warner or Disney-Fox. Because each of those companies would have such massive resources and diverse operations, they wouldn't need partners to prosper. Everyone left over in Hollywood would either get swallowed or wither.

The storied William Morris Agency is one example of how Hollywood giants are pivoting to avoid this fate. For more than a century, the agency had a simple role in Hollywood: It represented the creative talent, cutting deals for writers, directors or actors in exchange for a percentage of their income. But in today's entertainment business, companies that do only one thing are unlikely to have the scale to survive.

So William Morris, which merged with rival agency Endeavor in 2009, has been on an expansion tear. The company, now known as William Morris Endeavor Entertainment, has snapped up companies in adjacent businesses including sports, fashion, live events and mixed-martial-arts fighting.

Late last year it quietly launched Endeavor Content, a new sibling company that invests directly in films and TV shows. It helped fund the TV series "Killing Eve," a hit that aired on BBC America, and the recent film "Book Club," starring starring Diane Keaton and Jane Fonda, a modest success released by Paramount Pictures.

Endeavor Content is attempting to help the talent the agency represents and others produce content outside of those massive tech-media silos. "Everything we're doing is geared toward helping to empower creators in a disrupted landscape," said Graham Taylor, co-president of the business.

When creators can sell near-finished products, financed with independent money, to technology and media giants, they're more likely to get better deals, Mr. Taylor said. It also makes it more difficult for tech-media behemoths to get the content they want without partnering with Endeavor.

The decision expected June 12 on the AT&T-Time Warner merger will be a key test for the entertainment industry.

The Justice Department is trying to derail the merger, arguing that the combination of the telecommunications and pay-TV distribution giant with one of the biggest producers of entertainment content would be anti-competitive and harmful to consumers.

A combined AT&T-Time Warner, the Justice Department has argued, would have the leverage to force other pay-TV providers to pay higher prices for Time Warner-owned channels such as TNT and CNN. Those costs would then be passed on to consumers.

AT&T and Time Warner have countered that it has no incentive to withhold content from rival providers and that such scale is necessary to compete against Silicon Valley tech giants.

If the court puts a hold on the AT&T-Time Warner deal, the manic race to expand and to consolidate might slow down.

But many expect that the deal will go through in some form, and the frenzy will continue.

Says Mr. Berman, the studio executive: "The AT&T case is not just looming over Time Warner, but looming over the whole future of the media landscape."

--Joe Flint contributed to this article.

Write to Ben Fritz at ben.fritz@wsj.com

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(END) Dow Jones Newswires

June 08, 2018 12:40 ET (16:40 GMT)

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