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NEWS ANALYSIS : The Rise of a Hollywood Heavy Hitter : Entertainment: A merger of Paramount and Viacom would produce a new media elite. And it would freeze out some newcomers to the game.


Forget fiber-optic superhighways and the much ballyhooed 500-channel universe. The Brave New World of interactive communications won't amount to much without Hollywood.

That is the message behind the impending mega-merger of entertainment giants Paramount Communications and Viacom International. The $16.5-billion deal, expected to be approved today by company directors, underscores the clout that film and television studios now wield in an intensely competitive struggle for dominance in a potentially vast new industry.

Entertainment, telecommunication and computer companies all are scrambling feverishly to establish high-tech beachheads, hoping eventually to cash in on everything from first-run movies to algebra lessons available at the flick of a TV remote control.

A Paramount-Viacom merger would create a new elite among media companies that brings under one roof technology, programming and distribution, rivaled only by Time Warner and Rupert Murdoch's global News Corp.

The merger also would freeze out--at least temporarily--cable and telephone companies, which have been trying to get a grip on valuable movie and program suppliers.

Cable giants, like John Malone's Tele-Communications Inc., and aggressive telephone companies, such as Bell Atlantic, believe that owning the content--movies, TV shows and information--is as valuable as controlling the high-tech pipeline into the home.

But the creation of an entertainment powerhouse, which would own such well-known assets as MTV, Nickelodeon and hit shows like "Cheers" and "Star Trek: The Next Generation," leaves Malone, among other major players, still knocking on Hollywood's door.

The Paramount-Viacom marriage likely would increase pressure on the brutally competitive Malone to align his company with a major Hollywood studio or telecommunication company. Malone reportedly has held a wide range of talks with many producers and telecommunication companies, from Paramount to MCA Inc. to AT&T and MCI, to merge or form joint ventures.

There also is speculation that Malone might go after beleaguered Metro-Goldwyn-Mayer, now owned by the French bank Credit Lyonnaise.

Hollywood fears Malone because TCI controls one out of every five cable TV subscribers in the country and is therefore the "gatekeeper" for the plethora of channels and services expected to flood the home.

Malone also is at the head of the group of cable TV operators who control Turner Broadcasting System Inc., which has agreed to buy Castle Rock Entertainment and New Line Cinema, two of Hollywood's leading independent producers. And TCI, through its affiliate Liberty Media Corp., also is behind the merger of rivals Home Shopping Network and QVC.

Although Malone already is an investor in 25 different cable TV networks through Liberty Media, he still does not have the kind of major Hollywood studio operation that produces the hit TV or film that can generate hundreds of millions in profits as it passes through the various stages of theatrical release, home video, TV, and cable around the world.

Cable operators and phone companies also are interested in studios because they hope the Hollywood creative community can lend its production skills to the development of electronic publishing and interactive media, uncharted but hopefully promising markets.

Paramount and Viacom are only the latest to join forces. Other alliances and mergers--138 by one count--are now occurring among a wide range of entertainment, media and telecommunication companies.

Over the past year, US West has agreed to invest $2.5 billion in Time Warner's entertainment division, and Southwestern Bell purchased cable TV operator Hauser Communications for $750 million. Time Warner, the second-biggest cable TV operator in the country, and Hauser hope to benefit by the technology the phone companies can bring to cable.

"Computer companies and TV companies and entertainment companies are trying to figure out how to create new forms of information and entertainment that people will pay for," said Charles Finnie of the San Francisco investment firm Volpe, Welty & Co. "And there's a strong realization that you're more likely to succeed by linking arms with others than by going it alone."

Still, the drive to combine the creation and delivery of entertainment is not new.

Hollywood has always recognized the value in owning theater chains (though the Justice Department once took a dim view of the practice). And the takeover of two of Hollywood's biggest studios--Columbia and Universal--by Sony and Matsushita in recent years was largely driven by the Japanese firms' desire to sell the latest in consumer electronics.

Another reason for the recent merger mania is cost: Building the fabled information superhighway is an incredibly high-risk venture.

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