01 July 2000

Out with the scotch and water, download the movies and media! That seems to be the battle cry from Paris, with a supporting trill from Canada, but will the new mix be an appealing cocktail? Vivendi's $34bn (£22.4bn) three-way merger with Seagram, the Canadian drinks company - encompassing Universal movie studios and music businesses - and Canal Plus, the French pay TV business, completes the transformation of the old French water and waste company (the Compagnie General des Eaux) into a global media and communications business. And it launches Vivendi's Jean-Marie Messier into the media mogul big league to rival Rupert Murdoch.

Or Messier could opt to cosy up to him even more. Murdoch is gearing up his Sky Global Networks, a new holding company for his global TV businesses, from BSkyB in the UK to Star TV in Asia and including News Corp's 80% stake in NDS, the technology company that makes the guts of pay-TV set-top boxes. Murdoch wants Messier to be part of the group by parlaying Vivendi's minority stake in BSkyB into a holding in Sky Global. With Seagram under his belt, Messier should be able to strike a better and perhaps bigger role in Sky Networks.

But first Messier and his new vice chairman Edgar Bronfman Jr must make the Seagram-Vivendi-Canal Plus deal work. This involves a complicated set of disposals, a spin-out of the Canal Plus-regulated programme business into a separate entity and the partial float of Vivendi's traditional water and waste unit - and the market certainly has doubts. On June 20, the day the deal was formally announced, Vivendi's stock had fallen 24% from its pre-bid price. Messier says that this reaction is simply arbitrage dealings to be expected in any big transaction among public companies.

He may be right, but the market needs convincing that the deal makes sense.

As they perched on stools in front of a closely packed room of reporters and executives in Paris, both Messier and Bronfman were keen to play-up the potential of the deal they have penned. Bronfman, like Messier, is enamoured with the media business, although as a part-time songwriter, Bronfman may like the glamour as much as Messier, the former investment banker, enjoys the growth potential. It was Edgar Jr who, against some family resistance, used the profits from the traditional drinks side of Seagram to fund media purchases, like the 1995 $5.7bn (£3.7bn) acquisition of MCA, owner of Universal Studios, and the 1998 purchase of Polygram for $10.4bn (£6.8bn).

Now to help fund the sale to Vivendi, the famous drinks brands, from Chivas Regal to Martell Cognac, will be sold. Messier will also raise funds by floating 35 to 40% of Vivendi Environment, which pools the water and waste businesses. But some analysts are concerned. Both the scotch and water businesses are profitable, while Universal Pictures loses money.

And Messier's plan to load virtually all of Vivendi's debt into the Environment business will make that IPO less attractive. Nor does Canal Plus' earlier forays into Hollywood (notably its investment in Carolco) give much cause for confidence.

There is also concern about how to value Univeral Music. True, Universal is the world's biggest music company with artists from Shania Twain to Bon Jovi and Yves Montand. And with the internet promising to widen the listening audience, the $40bn (£26.3bn) worldwide music business could get a growth spurt. The problem is the nagging question of piracy. In this regard the internet is both an opportunity and a threat. No wonder record labels are suing internet companies like MP3.com and Napster, which have used the power of the internet to ignore copyright.

But for Messier the internet is the future. "The internet tomorrow will not just be faster," said Messier, "it will also contain two types of services: information and entertainment, from music to plays, games and films."

With Seagram's assets, Messier plans to fill up the distribution pipes he controls today (like Canal Plus's 14m pay-TV subscribers in Europe) and increasingly to establish beach heads on the internet. A crucial part of this vision is its joint venture with Vodafone Airtouch in mobile portal Vizzavi. At an over-the-top party in Paris - the night before the Seagram-Vivendi deal was announced - Vizzavi rolled out aerial gymnasts, camels, a few boa constrictors and an elephant to herald the new service. Customers using WAP phones can access all kinds of information services, from sports scores and travel information to weather and stock trading. Over the next few months Vizzavi will be the default portal to all 60m Vodafone mobile phone customers. And the services will develop from simple information to include entertainment services, fuelled by Vivendi's new assets in music and film.

Music is a killer application in all this. Today an estimated 5% of the population buys 75% of the music sold. So with the internet's potential to match listeners with music they might like and the ease of interactive ordering, music streaming and purchasing should grow. But first the financial problems with illegal downloading have to be solved and no one knows how to do that yet.

Messier is taking a bold step, particularly as he is doing it from the top of a French company that not so very long ago was in the steady, but perhaps boring, business of supplying water and dealing with waste. By adding Universal's movies and music, Messier is attempting to control and integrate all internet-related activities from telecom, to TV, to music, to games to music. But he may have underestimated what one commentator calls "the anarchic creativity" of the internet. How all this is going to work out is unknown.

I was talking to a senior MTV executive about the Vivendi-Seagram link-up and he reminded me that controlling content is going to become increasingly difficult, particularly in relation to music. With the internet, the artist can be free of his or her record label and go direct. So how do you value owning the labels that 'own' the artists? Good question.