In '06, Google plays villain for media industry

Five years ago, Microsoft was considered the big bad wolf of the media business.

Armed with a stockpile of cash and the Windows operating system that dominates office computing, Bill Gates' company also was expected to huff and puff its way into U.S. living rooms, with video-game consoles, home-networking systems and TV set-top boxes.

But today, there's a different wolf at the door. Although Microsoft is flush with $40 billion in cash, it is Google the media industry fears most. So intense is Google-fueled paranoia that industry watchers think the Internet search giant could drive profound changes in the media, entertainment and technology landscape in 2006.

Old media are investing heavily in new-media ventures. Newspapers are defending their bread-and-butter income — classified advertising — by stepping up Web offerings. Media conglomerates such as News Corp. are buying Web properties such as MySpace.com that connect them to young audiences, which are choosing television and radio in favor of the Internet.

This year, new media could return the favor by investing in old media, the folks who know the most about producing entertainment content. Here are some predictions for the media industry for 2006, based on interviews with industry analysts, executives and investors, along with a little intuition.

Cheap PCs, anyone?

Google will unveil its own low-price personal computer or other device that connects to the Internet.

Sources say Google has been in negotiations with Wal-Mart, among other retailers, to sell a Google PC. The machine would run an operating system created by Google, not Microsoft's Windows, which is one reason it would be so cheap, perhaps as little as a couple of hundred dollars.

Bear Stearns analysts speculated in a research report last month that consumers soon would see the "Google Cube," a small hardware box that could allow users to move songs, videos and other digital files between their computers and TV sets. Larry Page, Google's co-founder and president of products, will give a keynote address Friday at the Consumer Electronics Show in Las Vegas. Analysts suspect Page will either show off a Google computing device or announce a partnership with a big retailer to sell such a machine.

That's not the only Google theory circulating. Content producers wonder whether Google's push into video search will unravel the economics that make Hollywood hum. If viewers can find and legally download an episode of "Seinfeld" through Google, will that cut into cable and network television's profits?

And what if Google, after equipping cities, starting with San Francisco, with Wi-Fi wireless technology, starts to offer pay-TV service for free?

To date, the company's $123 billion stock-market value is based almost entirely on its dominance of one business: global text searches on the Web. Some investors worry that Page and co-founder Sergey Brin could be done in by their penchant for seeing themselves as do-gooders rather than profiteers. But those naysayers are in the minority. Most industry executives and Wall Street analysts think Google's search-engine business is robust enough to give the young billionaires two or three years of wiggle room to build nifty services first and worry about making money on them later.

Microsoft strikes back

When Microsoft lost its yearlong battle to replace Google as the provider of advertisements on AOL Search last month, one analyst described the defeat as "the death knell" for MSN, Microsoft's Internet service.

Within days, speculation was rampant that Microsoft, determined to stay in the game, had offered to buy Yahoo! for $80 billion. If rumors were to be believed, the Microsoft bid — a premium of more than 30 percent over the Web giant's current market value — was rejected by Yahoo! as too low.

Will Microsoft spend $90 billion or more to buy Yahoo! or, alternatively, AOL parent Time Warner? Maybe not, especially when the software giant could buy Barry Diller's IAC/InterActiveCorp at a fraction of the price. If owned by Microsoft, Diller's collection of Web sites such as Ask Jeeves, Expedia, HSN.com and Ticketmaster could help drive traffic to MSN.

Icahn retreats

Wall Street sources said that upon learning of the Google-AOL alliance, bankers at Lazard who represented financier Carl Icahn asked Gates to join their team. The hope was that Microsoft would aid Icahn in his proxy battle to unseat the Time Warner board, split up the company and win control of AOL.

Most media experts, however, are betting the opposite will occur: Icahn, lacking support from the entertainment giant's institutional investors, will fold his cards in defeat even before Time Warner's annual meeting this spring.

It seems a long shot that Microsoft would throw its lot in with a likely loser. Still, by year's end, with its Windows operating system buffeted by a low-cost or free Google alternative, Microsoft may think twice about not having pursued a jewel like Time Warner.

Jobs (as in Steve)

Everyone believes that among Walt Disney Co. Chief Executive Bob Iger's New Year's resolutions, securing an extended distribution agreement with Pixar Animation Studios is near the top of the list. Indeed, the new Disney CEO will consider — albeit briefly — an even bolder move: acquisition of the animation superpower behind "Toy Story" and "Finding Nemo."

Such a purchase would revive the luster of the entertainment giant's own animation division. It also would be a coup for Iger, given that friction between his predecessor, Michael Eisner, and Pixar Chairman Steve Jobs nearly drove Pixar from the Disney fold.

Ultimately, though, Iger's instinct for self-preservation will kill the deal as he weighs how Pixar's purchase price of nearly $10 billion might rattle Wall Street.

What might be harder to swallow for Iger is this: Jobs, also chief of Apple Computer, will demand a seat on the Disney board, becoming the leading candidate to replace George Mitchell, who plans to retire as Disney chairman at the end of the year.

Before 2006 ends, Iger will name a No. 2: Anne Sweeney, the cable executive he credits with reviving the ABC television network.