In 2004: NBC Meets HBO? A New Pixar? Free DVRs?

Call it the Rupert Effect.

Not long ago it seemed the fast-and-furious wave of media consolidation was over, with Time Warner Inc.’s marriage to AOL having proved a bust and troubled Vivendi Universal agreeing to shed its U.S. entertainment assets. The era of big deals looked dead.

Then last week, the situation changed -- and so did the predictions of many Hollywood insiders about what may lie ahead in 2004.

The reason was that News Corp. completed its three-year pursuit of DirecTV, adding the leading satellite TV provider in the United States to a portfolio that already includes the Fox broadcast network, the nation’s No. 1 TV station group, a movie studio, powerful regional sports channels and the Fox News cable channel.

The acquisition gives News Corp. Chairman Rupert Murdoch enormous clout and threatens his principal rivals, including Time Warner, Walt Disney Co. and Viacom Inc. Some predict that Murdoch’s competitors will have little choice but to seek new combinations in a bid to check News Corp.’s burgeoning power.

Here, then, are some bold predictions for next year, based on interviews with analysts, investors and top industry executives -- along with a little intuition and imagination:

Time Warner Gets Busy

Time Warner Chief Executive Richard D. Parsons will agree to pay $100 million to $200 million to the Securities and Exchange Commission to settle charges of accounting fraud at the company’s America Online division, cleaning up a liability that has paralyzed the media giant for two years.

That will allow Time Warner to shift into high gear and make up for the time lost to management strife, legal scandal and the heavy debt incurred from its merger with the Internet services provider.

To strengthen one of its biggest growth engines -- cable systems -- Time Warner will acquire Adelphia Communications Corp. once the Denver-based pay-TV provider, which collapsed after its own accounting scandal, emerges from bankruptcy protection in the summer.

To finance the acquisition, Time Warner will spin off its cable group to the public, though it will still retain a big stake. The move will give Time Warner control of about 16 million subscribers, putting it in position to compete with the industry’s leader, Comcast Corp., and its 21 million subscribers.

A second acquisition, of Cablevision Systems Corp. and its 3 million cable subscribers, would give Time Warner a lock on the lucrative New York-Long Island market -- though there are no guarantees that Cablevision founder Chuck Dolan will agree to let go.

NBC Meets HBO

By the end of the year, Parsons will seriously contemplate his boldest move of all: a merger with General Electric Co.’s NBC Universal.

Such a deal would give Time Warner a major broadcast outlet, providing it with an important bargaining chip with pay-TV operators and putting it on equal footing with News Corp., CBS owner Viacom and ABC parent Disney.

Time Warner and General Electric have discussed such a combination since the mid- 1990s, but talks have always broken down over issues of control.

But the timing could be right by late 2004 or early 2005.

After all, even after buying Vivendi Universal’s U.S. entertainment assets, NBC still lacks sufficient clout with pay-TV distributors -- a deficiency that Time Warner could shore up.

Putting NBC, MSNBC, CNBC, Bravo, USA and Sci Fi under the same roof as HBO, CNN, WB, TBS, TNT and the Cartoon Network would give the partners unmatched firepower on the small screen, not to mention more news-gathering efficiencies than any other company in the world.

Life After Eisner

The coming year will be the year that Disney finally gets serious about finding a successor to Chairman Michael Eisner.

Eisner survived several threats to his leadership in 2003 -- the most serious a November boardroom brawl that saw Roy Disney and another director step down in a huff and call for Eisner’s resignation.

Now, with the board swept clean of Eisner’s critics, many pundits suggest that the beleaguered chief will be in a position to throw his weight around all the more.

Don’t bet on it.

Eisner could be in for more turmoil if ABC tanks in the ratings in 2004. And with Roy Disney continuing to mount a very public campaign against Eisner on Wall Street and in the press, the board will have little choice but to demand a bona fide succession plan.

One candidate to replace Eisner is Disney’s president, Robert Iger. But Iger received something of a vote of no confidence when a Disney board member held secret negotiations with News Corp.’s chief operating officer, Peter Chernin. Sources say the talks disintegrated because Eisner would not set a date for his retirement.

Chernin, however, is still waiting in the wings.

He has been in negotiations with Murdoch for the last four months to renew his employment contract, which expires in May. Sources say the new accord, like the old one, will allow Chernin to break the deal if it means running another entertainment giant. (He’ll never have that chance at News Corp., where the 72-year-old Murdoch is grooming his two sons to succeed him.)

Look, then, for Disney to reach out to Chernin and come to some kind of understanding for the post-Eisner era.

Rivals Tackle ESPN

Cable operators have long been bent on driving down the cost of sports programming, which is contributing heavily to consumer rate increases. They’ll finally gain some traction early next year.

That’s when Cox Communications Corp. will score some concessions from ESPN. The cable channel, which has been a huge profit machine for parent Disney, will get an increase in licensing fees from Cox of about 12%, down from the 20% it has extracted annually for the last five years.

This could well mark the start of a long-term slide for ESPN.

As the nation’s new cable leader, Comcast will declare open warfare on the channel. Like Cox, Comcast will pay less for ESPN. Even more important, Comcast will soon form a regional sports programming partnership with News Corp. to undercut the power of ESPN.

The two behemoths also will form a direct national competitor to ESPN. As a cornerstone of the service -- an unusual pairing of cable and satellite rivals -- Comcast and News Corp. will bid for National Football League rights owned by ESPN when they come up in 2005. ESPN’s NFL rights were the basis for the 20%-a-year rate increases that Disney has imposed.

Give Me Liberty ...

Wall Street investors have predicted over the last year that Comcast eventually would buy Disney, eager to own more content to push through its cable pipes. But 2004 will prove that there’s a more comfortable acquisition for Comcast and its conservative chief, Brian Roberts, to make: Liberty Media Corp.

Liberty’s biggest assets -- the Discovery, Starz and QVC cable properties -- would give Comcast the programming bulk it needs, while allowing it to avoid the headaches that would come from taking on Disney’s troubled broadcasting and theme park operations.

And unlike a Hollywood buyer, Comcast could make sense of the vast overseas cable operations that have been cobbled together by John Malone, who controls Liberty. Those would give Roberts an important international platform. Indeed, Comcast could mine emerging cable markets overseas at a time when growth in the United States has peaked and Murdoch’s DirecTV will be coming up with novel ways to lure away U.S. subscribers.

Seeing Green

With the release of “Shrek 2,” DreamWorks SKG will start transforming its animation division into a Pixar Animation Studios clone, setting the stage to take the unit public and tap into Wall Street’s love of the genre.

A DVR in Every Spot

Despite their convenience in enabling consumers to record and store TV shows without the hassle of videotapes, TiVo-style devices have yet to take off because of their relatively high cost.

News Corp. will start to change all that in ’04.

In a development that threatens to undercut the advertising model that has funded television production since the advent of broadcasting, Murdoch’s company will roll out free digital video recorders to entice consumers to sign up for DirecTV. Cable operators, fearful of a mass exodus of their subscribers, already are beginning to incorporate the technology into their own set-top boxes.

As DVRs become ubiquitous -- and consumers get hooked on fast-forwarding through commercials -- advertisers will pull money out of television, at least in the short term. That will lead to the biggest decline in advertising sales ever experienced by broadcasters.

At the same time, advertisers’ experiments with product placement will become more pronounced next year. Marketers also will customize advertising for this new TV environment. Watch for more moves like the one by German automaker BMW, which has developed short films on the Internet to reach consumers.

In Theaters Everywhere

In their most dramatic response to movie piracy, the studios will begin to release feature films simultaneously around the world. The idea is to reduce demand on the black market overseas for pirated films that have opened in the United States but have not yet premiered in Asia.

Also next year, the Motion Picture Assn. of America’s lengthy courtship of Rep. W.J. “Billy” Tauzin (R-La.) will end when he formally agrees to take the reins from longtime lobbyist Jack Valenti. The timetable, however, may be pushed back as Tauzin tries to secure the kind of sweeping energy bill that narrowly failed in Congress this year. He sees the measure as an important part of his legacy as a lawmaker.

‘My Friend Sumner ... ‘

Viacom, the media darling of Wall Street this decade, will begin slipping in stature as investors grow skittish about its reliance on ads to generate revenue.

A spinoff of Blockbuster Inc., which it controls, would only increase that dependence and is one reason top management has dragged its feet on deciding the fate of the video chain.

Viacom’s top two executives, Chief Executive Sumner Redstone and President Mel Karmazin, are hunting for acquisitions that could offset the advertising addiction. Redstone lusts after Time Warner, although most analysts say such a deal would never pass antitrust scrutiny.

Meanwhile, insiders say the two former adversaries seem to be heading into the new year having made a resolution: to smooth over their relationship. In recent meetings, Redstone and Karmazin were even finishing each other’s sentences.