One in a series of Deadline stories that look back on 2013 and ahead to 2014.
People in and around the media businessstock marketmay look at 2013 as the calm before the storm. The Dow Jones Media Index, up nearly 39% this year (as of mid-December), is the highest it’s been in at least a decade while stock prices are at or near all-time highs for industry leaders including CBS, Comcast, Discovery Communications, Disney, Netflix, and Viacom. YearEnd2013_badgeMany execs say that the good times will keep rolling in 2014. Additional ad revenues will pour into the market for theOlympics and mid-term elections, and media companies are making headway in their efforts to adjust to social media and new technologies. But next year moguls may have to work harder than they have in years for their unconscionably high pay. They face a possible return of merger mania, new efforts by tech giants to divert advertising and subscription dollars, and skittish shareholders poised to sell at the first sign that company earnings can’t fulfill their outsized expectations.
Here are a few of the specific questions on the minds of industry insiders as they look ahead to 2014:
Will Netflix tap the brakes on its content spending spree?
Netflix signHollywood’s becoming addicted to Netflix’s money. After a few years of license deals it owed creators of its streaming content $6.5B at the end of September, with 43% due in less than a year – and it has vowed to commit nearly $3B in 2014 for TV shows and movies. Those are huge numbers for a company that’s expected to generate $4.4B in revenue this year. Netflix can justify the outlays because it’s growing like Topsy. The number of domestic households that subscribed to the $7.99-a-month service grew 25.8% to nearly 30M in the 12 months ending in September. That fueled a 300+% increase in the stock price in 2013 making Netflix more valuable than Sony in investors’ eyes. “At some point [Netflix] could emerge as a monopolistic player in its [subscription video on demand] niche that would allow it to increase pricing, subs, and leverage in content negotiations,” Janney Capital Markets’ Tony Wible says, summarizing the bull case. But bears warn that Netflix will find itself overextended if sub growth slows, Amazon or Hulu gain momentum, and especially if cable companies aggressively move to a usage-based pricing system for broadband. Producers shouldn’t “assume Netflix and Amazon will bail them out and buy everything they make, forever,” Bernstein Research’s Todd Junger notes. “Eventually somebody has to lose.” With several shareholders urging CEO Reed Hastings to show Hollywood a little less love, studios in 2014 will have their antenna up for any signal that indicates a shift in Netflix’s spending plans.
Will merger mania reshape pay TV?
merger acquisition handshakeMedia mergers lost their cache about a decade ago after AOL Time Warner cratered. With a few exceptions (notably Comcast) Big Media companies have shed assets, and returned cash to shareholders — a sign that they’ve run out of big ideas. But that could change in 2014: It’s relatively easy for buyers to raise cash. Interest rates are low, the stock market is near a record high, and the economy is at least stable. Meanwhile, pay TV distributors and content creators appear to be finished with deconsolidation (think Fox and newspapers, Time Warner and magazines, CBS and billboards). They crave economies of scale as the business matures, and increasingly looks like zero-sum game. Liberty Media’s John Malone, who savors elegant capital structures as much as wine lovers relish a Château Margaux 2009, is helping Charter take a run at Time Warner Cable. That might lead others — including Comcast, Cox, and Cablevision — to look for deals that would help them to keep pace. Even a merger of DirecTV and Dish Network, which the FCC rejected in 2002, is seen as a possibility. Programmers may join in. Starz, Scripps Networks, and AMC Networks are potential targets. And anything can happen if a big tech company such as Google or Microsoft decides it needs content to fuel its ambitions. Dealmakers have to consider whether their plans can pass muster with antitrust regulators and the FCC where the new chairman, Tom Wheeler, is untested — but whose early comments and appointments have impressed public interest advocates.
Will someone launch a virtual cable system? 
TV on TabletViacom CEO Philippe Dauman sounded like he was spilling a secret this month when he said that there’s a “very strong chance” someone in 2014 will sell subscriptions for a collection of pay TV channels transmitted via the Internet. It’s a tantalizing thought if — and it’s a big “if” — it indicates that one of the seven companies that control more than 80% of primetime TV viewing is ready to think outside the pay TV bundle. Thus far programmers have been united in defense of the system that requires cable and satellite subscribers to pay for channels that they don’t watch. For example, Disney says that it will only support what’s known as a  “virtual MVPD” (for Multichannel Video Programming Distributor) if it offers essentially the same bundles that cable and satellite provide. That virtually guarantees that a virtual MVPD would cost more, making it little more than a luxury item for technophiles.
But dominoes begin to tumble if a major programmer (Viacom, perhaps?) agrees to license its channels outside of the bundle. That could open the opportunity for someone to offer a service with fewer channels than cable/satellite companies package, but that also costs less than $80 a month. And that, in turn, might encourage cord cutting: For example, parents of young kids who don’t also happen to be sports fans might like a less expensive service that offers Nickelodeon but not ESPN. What happens next is anybody’s guess. Would cable operators win the same rights to break up the bundle? Would channels that depend on subsidies from non-viewers have to fold? Would operators accelerate their move to usage based broadband pricing? And here’s the mind-blower: Would an industry giant such as Comcast launch its own national virtual MVPD service — making it a competitor to other cable operators?
Will local TV become 2014’s hot medium?
Local TV stationTribune, Gannett, and Sinclair bet that it will when they committed billions this year to buy stations. The dealmaking could continue in 2014, especially if the FCC raises its ownership caps. Buyers say that they can profit from a post-Citizens United growth in political advertising, and use their larger size to demand higher retransmission consent payments from cable and satellite distributors. But several also believe local TV can help them transform themselves and the media business. Tribune hopes to become a TV production power following its $2.73B acquisition of Local TV’s 19 stations in 16 markets. CEO Peter Liguori says he plans to create primetime shows for his cable superstation WGN America and The CW (Tribune is its largest affiliate owner) as well as non-primetime shows for his stations that he can also syndicate to others. Gannett’s $1.5B acquisition of Belo will  give it TV stations in  21 of the 25 largest markets, and help the nation’s No. 1 newspaper owner to become a local digital colossus. Each of its newspapers and stations has a website with local news and features, and ad sales relationships — and Gannett’s digital assets include locally oriented classified-like services Apartments.com, Cars.com, Homefinder.com, and DealChicken.com. And Sinclair, which paid at least $2.5B in multiple station deals, wants to use its retransmission consent clout to launch cable channels offering local news and high school sports. These are intriguing possibilities, but a revival of local TV could create trouble for the FCC’s effort to entice station owners to give up spectrum so it could be auctioned in 2015 to wireless broadband providers. Sinclair, for one, is “not going to participate,” CEO David Smith says. “Do the auction tomorrow. We don’t care. We have no dog in that hunt. We’re a buyer, not a seller.”
What will Apple do?
Apple questionCEO Tim Cook said this year that the consumer electronics company will have “some really great stuff coming in the fall and across all of 2014.” He’d better. Competitors have made deep inroads into the smartphone and tablet markets that Apple created by selling slick products that run Google’s Android operating system. Apple investors are impatient to see a new blockbuster product. Its stock appreciated just 5.6% in 2013 (as of mid-December), well behind the benchmark Standard & Poors 500′s gain of 25.4%. Activist investorCarl Icahn is pressuring Cook to give some of the company’s stockpile of cash back to shareholders in the form of a stock buyback. Apple has teased the possibility that it will introduce a TV set that could vastly simplify the process of finding TV shows. (In 2012 Cook called this “an area of intense interest for us.”) Other possibilities include a wearable computer such as an iWatch, or different sized iPhones and iPads.
Will exhibition chains have to play catch-up as AMC Entertainment increases its spending on comfort and concessions? 
AMC Entertainment theaterThe No. 2 exhibition chain just went public telling investors that it’s on a campaign to become the “Customer Experience Leader.” It has a ambitious plans to introduce plush reclining chairs, reserved seating, and restaurant-like concessions — in some cases including alcohol — among other things. Backed by its owner, China’s Wanda Group, AMC vows to spend an average of $245M for each of the next three years, up from $136.2M in 2012. “Through most of its history, moviegoing has been defined by product — the movies themselves,” AMC says. “Yet, long term significant, sustainable changes in the economics of the business and attendance patterns have been driven by improvements to the movie-going experience, not the temporary ebb and flow of product.” To be sure, AMC needs to spend just to make up for years of underinvestment. Still, if the initiatives pay off, then they could shake up an industry that continues to conservatively focus on consolidation and cost controls. Exhibition execs will need a good story to tell if forecasts for a blah year at the box office pan out. With an expected dip in contributions from sequels to proven blockbusters, domestic sales could fall about 3% (as much as a 5% drop in attendance offset by a 2% gain in ticket prices), B. Riley & Co analyst Eric Wold predicts.