In Reel Time

2010.48 Thoughts on the media industry

Last weekend I was asked twice about what will happen with the media industry long term. I get asked this question often (or the variant…what are your thoughts on the media industry).

The question is so big and broad I always inhale and think for a minute before saying a word (it’s like being asked if there is a God or how we’ll fix social security).

So the short answer is that I don’t know.

But the long answer revolves around the best way to figure out any evolving industry. Start with what you know. Evolution is an iterative process and the end result isn’t pre-determined; rather it takes shape as each individual step or change is implemented (and chosen by a related party). Good ideas often repeat.

So, what I do know (including some clichés that we all know):

1. Story telling goes back before written history; it won’t disappear. It isn’t disappearing.

2. Quality content can’t be free; otherwise artists can’t afford to create much of it (and, to date, newer content has more value than does older content, in general).

3. People are social creatures; blockbusters and the mass market will continue to exist as people want to have common discussion topics.

4. Technology will continue to disrupt media. It always has (the printing press…).

5. A friend’s point: technology is actually adding less value over the past ten years than it did in the years leading up to 2000 (think the PC or Internet over arguably the biggest tech breakthrough of the past ten years – the iPad).

6. Artists need to be more multidimensional. As radio killed the video star and talkies cratered the career of the silent greats the distribution platforms have gotten more demanding and diverse. Lady Gaga is a performer; not a singer.

7. But, I don’t believe that all content should reach its audience over all platforms all of the time. If your audience isn’t watching television don’t spend (money and employee time) to get on television. Note the original argument only works well if you take mainstream media onto the newer avenues of portable devices or the Web and not vice versa (no Farmville movie planned in my knowledge).

8. Digital content is much harder to monetize; no one has perfected the model but I’ve met with some companies that are successfully monetizing (and not just pennies). Look at online gaming!

9. Anecdotal evidence only but the tech world seems to be hiring more out of the studios or other mainstream media companies than vice versa (except in tech systems and support areas).

10. People really do like fragmented distribution. It’s fun and convenient.

11. My kids love games. Kids love games. Women, who make up a lot of the monetizable online traffic right now increasingly, love games.

12. The MacBook Air is great. I like the iPad less (no flash). My Blackberry and Kindle are dear to my heart. Books and Kindles can co-exist.

13. The studio model will continue to be under attack from many Silicon Valley types. The core question is whether it will adapt quickly enough to survive by migrating to a – highly different – form (“protected and feudal microcosm that was only able to stay artificially alive as long as it did because the artists were a part of this small community and helped protect it longer than was wise” was what I heard today from a friend).

14. Iteration broken by big break throughs is the pattern.

15. The old definitions no longer apply: “technology” and “media” are imprecise.

16. Cisco has a tough job. After hours on the line with tech support making my home network “work” I can attest that seamless home networks are not a plug and play concept yet.

17. Some people are open to new ideas and others will resist disruptive change and related solutions (one of my promised clichés). Our brains aren’t wired to accept or process ideas that are vastly different than what we’ve accepted to be true in the past. Having been windows based for so long I’ve had a harder time working my daughter’s Mac than she has (at 9). I keep looking for an X in the right hand upper corner.

18. I haven’t been as excited by so many companies in ten years or more.

Are we in the early stages of this change? No; most industries continue to evolve but the media industry gets more press (it’s more fun!). And the related innovations have accelerated (with the music industry leading the charge).

Coming from the tech world I’ve lived the fast pace of such cycles; and the Internet has clearly injected that speed into media, which had been protected from certain competitive forces by its strong dominant niche position. Consumers have more choice now and the ramifications have been felt throughout all forms of media and created new ones. Some won’t survive. This resolution is far from pre-determined and I’m enjoying meeting with and advising companies that are at the cutting edge of such changes or creatively meeting them head on.

So, in conclusion, what are my thoughts on the media industry? The business model is shifting from protected windows to a more tech style model of proactively focusing on the customer/audience. But, actually, there is no true conclusion for this blog posting. Rather, the debate will continue.

2010.47 Inside Job screening and my review

What should have been an important movie is marred by a slanted and biased attack.

First, thank you to The Wrap for inviting me to a screening of Inside Job (click Inside Job for webpage) last night in Sherman Oaks. And thank you also to director Charles Ferguson for speaking about the film and answering questions after the screening.

I wasn’t able to articulate the question I would have liked answered last night but now can: Why lose such an important message in mean spirited and malicious attacks?

The movie starts with some quotes from finance professionals and commentators that set up the audience for the tone of the movie. I’m okay with that; the documentary needs a mission statement and this one’s is clear from the beginning.

And the first half or so of the movie is great. A lot of these questions should be asked and the answers exposed. Many Wall Street and other firms did a lot of questionable things during the time frame covered and the public deserves answers. Ferguson spares no administration from Clinton, to Bush, to Obama…which I admire. He treads softly around certain governmental participation in the factors leading to the bubble then skewers them in others. For example, when regulating derivatives was proposed, the poor lawyer who suggested it was attacked from industry and government both. Ferguson’s clips of executives from various firms evading questions, even very direct ones, while in front of various government panels is painful to watch. Sure, answering some questions honestly exposes your firm to potential liability but a certain level of ethics and acceptance of responsibility when presented with facts would have been reassuring. The lead up to the financial crisis is informative, concise and understandable.

The film’s photography and imagery are beautiful. Technically the film is lovely. It follows a coherent narrative flow and explains complex issues in a way understandable to many. I especially loved the sweeping aerial shots of Manhattan. Ferguson is a very skilled film maker.

Ferguson does get a few facts wrong – for example, while Wall Street CEOs earned high numbers, much of this compensation was in the form of stock, deferred comp and other illiquid (in the short term) payments…and in some cases was only paper money that melted away during the financial crisis. And he also makes a few puzzling arguments (the increasing distribution of wealth to the top 1% of the population may be relevant when analyzing the financial meltdown but he doesn’t explain the tie…which makes it puzzling). I can forgive him these points; he is clearly using facts selectively to support his mission statement. Ferguson doesn’t owe us a fair minded portrayal…he’s been clear from the start in defining his agenda.

But Inside Job veered off course completely when the personal attacks began; both in not substantiating them and in the mean spited way many interviewees were attacked after agreeing to speak (leading questions with no answer being shown on film, accusations, assumptions…). I was puzzled when he criticized professors who had advised and been in government for getting paid for their work and public speeches (and, in like spirit, is Ferguson getting paid for the documentary or any related paid speeches he is asked to do?). Economic theory is just that – theory. Only in actual application can we see if it will work. I don’t understand why academic economists shouldn’t do advisory work inside or outside government.

And having Elliot Spitzer as a moral high ground making indirect accusations/innuendos about prostitution and sex in the industry seems bizarre. First, I have my own issues with Spitzer as I believe his actions directly contributed to the financial meltdown. Next, his innuendos are tied in with direct (but unsubstantiated) accusations of rampant drug use and prostitutes as a part of Wall Street culture by a madam and psychologist with “Wall Street clients”. With no direct information just sweeping statements the tactic appears to be a trick meant to deflect from the real issues and just smear the industry.

Interestingly, Ferguson uses interview clips with Raghuram Rajan, who wrote Fault Lines and was at the IMF during the time in question and warned of the risks, to support his argument. Yet Rajan’s excellent book is more moderate and realistic and much more powerful than this biased movie.

The question and answer period after the film revolved around a wall street bashing free for all so Ferguson clearly found his audience last night. Too bad he didn’t aim for a serious discussion of the issues instead of sensationalism. I thought the first half of the movie was excellent and was disappointed with the ending. Perhaps that’s what it takes to get big studio support in this day and age. But, I wonder if, had his viewpoint not been pre-determined and antagonistic, he would have gotten access to a broader range of key potential interviewees and been able to provide a more rounded picture.

That movie is still waiting to be made.

2010.46: LAVA’s annual private equity breakfast

Within the private equity universe the world is back on track and the eighteen-month nuclear winter is over. PE buyers are seeing many more deals and multiples have jumped (up to 12x plus in healthcare deals). One caveat is that getting debt financing to buy a company with less than $5 million in EDITDA remains tough.

Diligence has gotten more rigorous (including from the limited partners who are doing much more themselves – immeasurably so).

Return expectations are down to 20%, with many funds willing to go lower if a provable safety level can be established (lower return but less risk). Deal structures with respect to percentage bought are more flexible; but structures such as PIPES or other creative securities don’t meet the bar with many of today’s more conservative LP’s.

With the public markets having largely recovered institutions are no longer over-allocated in PE funds so funds are raising money again. LP candidates are increasingly foreign, with China and Australia being mentioned during the panel discussion. And the contracts themselves are going to a more “European” model not the straight 20/80 split of yester year…meaning that the investors get their money back and a floor return before the profit is shared. Any terms that used to allocate the GP 20 percent early are being denied by the LP’s.

What are PE investors looking for? Same as always: management team, culture, a good grasp of financials, clear use of proceeds and a competitive advantage (strong business). Twelve to fifteen slides and an executive summary is better than a fifty plus page book.

Exits? Sure. After eighteen months – during which the market often wouldn’t fairly price a good company – a backlog of potential companies to be exited does exist. But all the panelists agreed that while valuations have risen we aren’t at a frothy market top so they are only feeling a slight nudge to sell some portfolio companies. This LAVA panel consensus differs from the opinions of many PE firms focused on larger deals, where enormous dry powder and a strong high yield market are driving multiples.

Good companies, as always, are hard to find. But if you have one and want a private equity partner I can introduce you to four just from this panel who are actively looking.

Panelists:
Steve Moore – Brentwood Associates
Mark Rosenbaum – Aurora Capital Group
Michael LaSalle – Shamrock Capital Advisors
Alain Rothstein – Vicente Capital Partners

2010.41 My last week: ITExpo; Digital Music Forum West: Caltech/MIT Enterprise Forum

Last week I dabbled in a few conferences and then committed to a panel. What did I learn?

At ITExpo in downtown my big takeaway was speed. Evolution. Regulation. The cloud. Opportunities continue to develop at an increasing pace. And the battle of net neutrality continues. Indeed, Hank Hultquist gave a riveting speech on the major issues and regulation that comprise net neutrality issues…from AT&T’s viewpoint.

Panels at the Digital Music Forum West (Roosevelt Hotel) sometimes got confrontational, with the forces for change arguing against those with a vested interest in staying the same. A few later panels were too politically correct and mutually supportive (for my taste). But Rick Alden, SkullCandy’s CEO provided insight and emphasis on branding, which distinguishes how his company operates. Visionary and charismatic (with freebees to hand out) he garnered a lot of questions and a crowd outside the main hall. Best quote? “The best ideas won’t come from sitting behind a desk”.

Later panels on Brands & Music and Touring explored further specific instances of how acts and brands can customize and define themselves. The real message? Define clearly who you are and your audience. Then set yourself apart creatively in that context. And don’t tie your brand to an artist; develop your own broader, richer personality.

The conference highlighted innovation (and spots that lack innovation) within the music industry. As we all know, the music industry was ahead in getting hit with digital change, making mistakes in their response and now in coming up with new ideas to survive and prosper.

The Caltech/MIT Enterprise Forum – From Past Time to Prime Time (on Social Networking) – was where I committed. Kevin DeBre of Stubbs Alderton & Markiles introduced. Mark Suster of GRP and Jay Samit of SVnetwork spoke. You want to hear the message straight? They both deliver that. Mark told us to look outside of walled gardens (if you rely only on Facebook they own your audience – keep your website) as both closed and open systems work. Jay advised entrepreneurs to get between big trends and pick up the crumbs (great imagery).

The panel: Jay, Sean Moriarty (Mayfield Fund currently), Jonathan Strauss (awe.sm) and Andy Wilson (Momentum Ventures), with Mark Suster moderating. The panel offered so many insights; I only have room to list a few. The social capital that you bring to business is critical today. Traditional analytics don’t work in social media…the space is so fragmented; do you want pages views or transactions? Brands need to get where the customers are and realize that their “important” doesn’t matter as much as does their customers’. Individuals now communicate across channels. Local is (still) the great unsolved problem. Women are over-served in the major success stories of the past few years: daily deals, flash sites and social games (take the women away and…). Tigertext effectively erases the record of your digital communications.

My conclusion on the week? I’d prefer not to go to conferences/panels everyday (fun though they can be).

Next up, Digital Hollywood starting October 18. I myself am on a panel on Wednesday, October 20.

2010:40 Exit strategies: practical realities for 2010

As I often say, I grew up in and out of Silicon Valley with a dad in high-tech. So, early on I knew what venture capital is (along with “chips”, “boxes”, “burn rate” and other valley lingo). The valley has changed; most of the orchards are gone and Tully Road is lined with company headquarters not the stables I visited in my teens.

Some things haven’t changed: Steve Jobs, Stanford University and the dead (cell) zone between Sand Hill and Page Mill Roads on 280.

But I’ve been surprised recently by the number of VCs saying – publicly and on panels – that any company looking for funding needs to have an exit strategy based around likely corporate buyers. Basically, a company sale instead of an IPO. The basis? The practical reality is that VC backed IPOs (no, wait, all IPOs) have gotten fewer and harder to complete.

According to PWC in a recent report, during Q2 2010 the number of IPOs filed tripled to 39 (raising $16.6 billion) from 12 (raising $5.1 billion) in 2009. But that number was down from the comparable period in 2007 during which 79 deals raised $21.1 billion. And the numbers being filed have been tapering each month. 15 IPOs were pulled or postponed in the latter two months of the quarter.

While the stats on VC-based M&A exits I’ve heard have ranged – the reality is that company sales are now the prevalent exit strategy for most VC funds. (And, to be fair, I think that any stats with respect to recent exits has to consider the impact of the bad economy over the past two years; the IPO market may not have been open but many companies were going belly up and not deprived of capital due to market issues – though those definitely existed as well – but rather operating ones).

So, anyone can quote numbers. What is the deeper analysis?
Key trends have changed:

1. Being a public company is much more expensive than it was ten years ago (I heard a quote from a lawyer yesterday saying that SOX compliance alone can cost $1 million per year these days).
2. Law suits, director liability, increased governmental encroachment into business affairs, complicated tax structures, uncertainty of future regulations and taxes…
3. I know my part of the world: smaller middle market or growth companies. Scale and deep pockets help in an economic downturn with more limited access to capital.
4. The larger companies are sitting on pools of cash (if lucky) and willing to buy growth.
5. The IPO market is still tough. VCs and their investors don’t always want to, or can’t, wait.
6. Even after a company completes an IPO, it often takes a year or two for the investors to get liquid on their stock – assuming it is still a decent valuation. A sale gets investors all/most of their liquidity at closing.
7. The role of the research analyst has changed (contact me offline on this point, if interested).
8. VC funds have had a bad ten year period overall (with the industry, though not all funds, being down for the period). They need to show some positive returns and M&A has been more closable than IPOs.

I’ll stop there because otherwise I’ll venture too far into opinion and politics.

But the practical lesson is that M&A is now – correctly or incorrectly – viewed as the probable exit strategy. You better know who might be a good potential buyer for your company when meeting with investors.

Saying that an M&A exit was the expected outcome used to be heresy. Now it’s the “new normal” (with a bow to PIMCO for the phrase).

Photo credit to Ana Berman

2010.49 Media Innovations Summit 2010: 22 points from day one

1. Mark Cuban – in person – is engaging, friendly, brilliant, insightful, knowledgeable and says things that others lack either the insight or courage to say.
2. Be careful what you write about people in blogs because you may once meet them in person. (Scroll down to see my blog on Mark Cuban and Lions Gate).
3. Mark Cuban, “You don’t live in the world that you were born in.”
4. Smaller conferences have some strong advantages – at Media Innovations Summit the panelists mingled freely among the attendees, introduced themselves and watched many of the other panels.
5. A focused theme centered around well reasoned and articulated panels draws your panelists into other sessions and creates an engaging environment.
6. Content providers have to contend with numerous devices; being too dedicated to one (iPad/iPhone apps) cuts you off from that group of consumers without that device (credit to fellow Blackberry devotee Joanne Burns, EVP at 20th Television, Fox, a Keynote speaker, for this and numerous other insights).
7. Okay, one more from Joanne – don’t mirror your content across platforms. Make it engaging and show personality. Adapt to the platform and its potential. Interact. Tell a story.
8. TV everywhere? Define TV.
9. “TV is the best alternative to boredom,” Aaron Spelling via Mark Cuban.
10. Define TV? Define Channel. “What is a channel will change,” Phil Wiser of Sezmi.
11. Sezmi and Boxee are hot.
12. TV everywhere is “a wide open game”. It is rolling out as we speak; but how do you make money from it (hint: trial, error and prayer).
13. In the past, curated content was delivered to consumers; now consumers choose when and on what platform (or they go elsewhere).
14. My favorite quote (if you said it or know who did – email me) is that the service providers need to get past the consumer thinking that there is nothing to watch on TV.
15. Aggregators find ways of getting paid; they help the consumer find things. Now comes further personalization.
16. Consumers care about ease.
17. Fragmentation is only getting worse; the top tier of content (measured by consumption not quality) continues garnering a higher percentage of money and audience. The long tail continues getting longer.
18. Everyone admires Netflix; not everyone likes Netflix.
19. Why did Showtime and HBO develop their own content? Because they paid a lot for studio content, everyone paid a lot for the same studio content and nothing was left to distinguish anyone. So, they created premium content to distinguish themselves. Today (history repeats) and everyone is paying a lot for the same content. Conclusion: paying a lot for the same content doesn’t distinguish you.
20. 3D fills the consumers’ desire to immerse and escape reality.
21. With so much content available (for example 100,000 video clips or more downloaded onto the Internet daily) how do you distinguish yourself? Hint: no one has the full answer yet. If you know, please email me privately.
22. Interactivity? Soon, soon…

My thanks to Bob Gold, of Bob Gold and Associates (PR maven).

2010.48 2010 ACG Los Angeles Business Conference – my top nine points from day one

1. Business isn’t ignoring politics. Is politics increasingly intruding into business? Austin Beutner, an Evercore investment banker turned First Deputy Mayor of Los Angeles, opened up the conference. For those not reading (my) local media, Los Angeles is in dire straights and Austin, with his business sense and drive, is a great hope to turn some things around. He was followed by Senator Tom Daschle and Senator Bill Frist debating/discussing the new health care law. Of course, to be fair, past conferences have included political speakers also.
2. While politics in Washington may be polarized, Daschle and Frist were (surprisingly) civil and disagreed only on the margins.
3. Recent business results ranged from better than expected to very busy. No one was overly enthusiastic either about their own firm’s prospects or the economy. The best I heard was guarded optimism.
4. Quite a crowd paid the fees and turned out. Sponsorship was everywhere.
5. Los Angeles is a small town.
6. Best toys: Vintage Filings rubber band ball and KRG Capital’s slinky. It’s a tie (any unwanted leftovers can be sent here).
7. Three great friends had booths and no toys. One, or more, is a legendary investor. Is there a message in that?
8. The Beverly Hills Hilton handled parking beautifully.
9. The deal world has had a rocky few years but participants are hanging in there, overall.

2010.47 Reprint of blog on VentureBeat

VentureBeat

Click above to see a re-print (slightly edited) of posting on how emerging companies become consolidating ones.

2010.46 Confidentiality

I was in San Francisco earlier this week meeting with some very exciting companies. These trips are always fascinating as I learn about the related company, its industry and often much more. After the last trip I sat down and tried to encapsulate some of what I learned in a blog posting. And threw what I wrote away.

The posting read like gibberish: in order to honor the requisite confidentiality requirements (inherent in such a meeting) I had to leave the best details out.

I’m like that at dinner parties too. In such a social context I can be the most boring person in the room.

“What are you working on?”
“This and that,” I’ll reply.
“Oh, not busy; too bad,” may be the response.
“No it isn’t that; I just can’t discuss any of my transactions,” I’ll say and get an eye roll and then maybe a joke.

Investment bankers walk a fine line. On the one hand, our core value proposition is what and who we know. We make introductions and can update management on what we’re seeing in the industry and on the financing or M&A front. But we can’t disclose any information that has been shared in confidence. The balance is delicate.

I always say that if I mention a company to someone I’m not currently working with that company (unless I’m mentioning it in the context of bringing you into a deal). But, I have gotten calls from management out of the blue when they received an unexpected offer. Facts change. But the need for discretion does not.

Having been to law school I have an innate sense of caution when it comes to information sharing. Early in my career I then worked with numerous public companies (where the wrong slip can be catastrophic). I also (many moons ago) had a senior managing director threaten me if I didn’t stop sharing confidential information over a cell phone (land line only – not easy in that he traveled 80% of the time – I learned).

On this trip I took a few pictures in San Francisco; one of which headlines this blog posting. None were of buildings in which I had a meeting. Confidentiality agreement or not, we carefully protect the information with which we’re entrusted.

2010.45 Consolidation: or one industry evolution which often repeats

All the lessons of history in four sentences: Whom the gods would destroy, they first make mad with power. The mills of God grind slowly, but they grind exceedingly small. The bee fertilizes the flower it robs. When it is dark enough, you can see the stars.
Charles A. Beard

This morning I was speaking with David Cremin of DFJ Frontier (VC) and drinking some excellent coffee. The topic turned at one point to industry consolidation.

My initial point had been that select media related spaces will likely consolidate at some point (and indeed are starting to do so). This theme has been a big one for me lately and its roots arise from the industry consolidations I saw early in my career as a tech banker in Menlo Park. A number of companies that I’ve spoken to recently have had a potential acquirer lurking nearby – whether or not they are interested in selling.

Why do emerging industries sometimes evolve quickly into consolidating ones?

1. Emerging industries that get press and attention tend to grow quickly, have large markets, attract talented people, have multiple and iterative stages of evolution and scale. All of those factors also enable easier funding – either from business partners or venture capitalists.

2. Sometimes, as a result, they get over funded with multiple VC firms each owning a like company (and all of these heavily funded companies must slug it out in a fast moving, ever changing business sector to win market share).

3. New industries or business segments are hard to build. Business models are often based on precedent: like industries that targeted similar customers and monetized in related ways. In other words, you guess a lot, hopefully making reasoned guesses. A lot of mistakes are made (and some companies blow up) as a workable business model develops through trial and error. Google wasn’t the first search engine.

4. To build market share faster some companies wisely merge. This action can enable economies of scale, a better customer experience (more offerings; better geographical reach; better or deeper management team) and add audience/customers. Should the public markets be open the merger could create an entity large enough to go public; thereby becoming better funded than competitors.

5. The market can only support so many like companies (and it’s better to sell what’s left of a beaten company and realize some value from what you’ve built than none).

6. Buying something (capacity; products; customers; geographies) takes less time and money than developing it does. This factor can also lead to larger public companies buying into a new and emerging sector.

7. Selling later in the consolidation stage is often not as lucrative as selling earlier. The first companies snapped up typically get more resources to build their presence in the industry, giving them an advantage (and harming those that remain independent). The holdouts need to execute very well to maintain an early leadership position.

8. VCs may push for a sale to ensure that their portfolio company partners with other stronger sector players and they get a good return.

Other reasons do exist, including factors unique to different industries and companies.

For any industry in which scale, often ideally built quickly, is important (most) – such as media or (often) consumer technology – consolidation concerns are very relevant. What would you do if your biggest competitor was bought by a Fortune 100 company? Winning over a customer already dominated by a better funded and more established company can be a losing proposition. Best to seize your advantage early on once the consolidation winds start blowing.