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.

2010.45 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.

2010.31 When to declare bankruptcy or call a turnaround expert; thoughts after the Turnaround Management Association’s 8th Annual Night of Excellence

Last Thursday I attended the Turnaround Management Association’s 8th Annual Night of Excellence – a charity event benefitting the City of Hope. It was held at The Petersen Automotive Museum and included dinner and a wine tasting. One wine was named “Ponzi” which in this crowd means you just drink it while hearing about their recent Ponzi scheme related assignments.

I was talking to George Blanco from Avant Advisory Group, who headed the event and he said something interesting: that many restructurings or bankruptcies were transactions that didn’t happen. My mind automatically recalled a few CEOs I’d worked with that had turned down capital because they thought the deal valuations was too low and then proceeded to go bankrupt.

When I mentioned this topic idea to David he said, “Why not. We advise business owners cradle to grave, right?” So in that spirit, when to call a turnaround or bankruptcy expert:
1. Management has exhausted all other forms of capital and the company is not cash flow positive.
2. Your top line business continues to decline with little hope for an upswing.
3. Burdensome contracts or leases can’t be re-negotiated any other way (and are too expensive to afford as is).
4. Management lacks the specific expertise or skill set to turn the company around or has already tried and failed.
5. Creditors are threatening aggressive actions.
6. Industry wide challenges are creating disruptive results for all market participants and a speedy, well crafted response is required.
7. And, at the extreme, there is little value left in the business and you need experts skilled at liquidating or winding down.

And the transaction that didn’t happen? History does repeat in that funding is not always available or at least not available on reasonable terms. Raise money before you’re running out (if you are going to or just might need it); sell the company before business deteriorates to the point at which little value is left. Turnaround and bankruptcy experts have very specialized skills, relationships and knowledge that are valuable when a company or industry hits a rough patch.

Bottom line: business is a series of tough judgment calls. When to run a struggling or over leveraged business in the ordinary course, versus when to pursue a restructuring, is one of the toughest judgment calls there is. You will be disappointing equity holders and dashing expectations to push the restructuring button – but it may be the necessary step to maximize the value of the business for creditors, business partners, employees and maybe even existing shareholders. And get specialized help if you need it.

2010.23 Wall Street Two trailer

In the spirit of my review of Michael Lewis’s newest book I decided to add a preview of Wall Street Two, Oliver Stone’s return of Gordon Gekko.

These two content creators seem to have a nose for Wall Street downturns (and the resulting, and even sometimes deserved, criticisms).

2010. 22 Reflections on quality from Digital Hollywood and The Cable Show

Recent wanderings got me pondering quality – across many fronts, from content to technology to the overall experience.  The definition, of course, can hinge on what side (economically) you represent.  Is quality an intangible that we recognize, like obscenity, when we see it but can’t articulate in concrete terms?

At Digital Hollywood a few weeks ago I listened to two different panels that addressed quality but from very different perspectives.

The first panel consisted of representatives from studios, media distributors, agents and creatives.  One of the studio panelists addressed quality by saying, “For us quality means we need to have a celebrity or other name attached otherwise it just isn’t quality content.  We are an old media company after all.”

In contrast, a 3D panel, with representatives from AEG Live, IMAX, Sony, 3ality, Cinedigm, Reliance MediaWorks, a movie director and the 3D VFX Supervisor from Avatar, addressed quality very differently.  The participants discussed aesthetic challenges along with making and presenting 3D content.  Their entire focus was on the overall consumer experience and how it had to justify the added ticket cost.  Quality meant that the consumer experience had to be exceptional.  I asked myself if perhaps James Cameron had been the “name” that attached itself to the whole 3D ecosystem enabling it to break out as a hot “new” industry focus.

Still pondering this issue of quality I headed up to San Francisco (sure to get some “techie” inputs).  Running into Rich Maggiotto of Zinio, we flipped through his company’s assortment of magazine and related pages on an iPad (many of the top magazines are available for subscription viewing through Zinio on a PC, iPad or iPhone and the experience is stunning).  He showed me a few newer online ad options and I would watch them (I usually don’t).  I asked Rich about quality from his perch.  He spoke of the user experience and the tough balance of providing branded or name content while weighing the extensive list of popular alternative content that the consumer can get so easily.

Flying home I wondered about the studio audience bleed.  The vast majority of media-related dollars (content not technology) come from what is termed old media sources.  Yet at the consumer level little distinction exists between old and new media as they continue melding together.  Has the definition of quality changed?  Or does it rest, ultimately, in the individual?  Chris Anderson, years ago, in his Wired piece on “Free” used the example of his kids – if given a limited two hour window to watch content – choosing not Star Wars the movie but YouTube videos of Lego Star Wars characters made by other nine year olds.

My last step pondering quality occurred when I attended The Cable Show at the Los Angeles Convention Center.  The exhibits were lavish and celebrity-strewn.  The show was visually stunning with large, high def screens lining the aisles.  Every step of the media distribution (cable) process was represented; from the studios, to the cable companies, to technology providers and enablers.  Cablevision had one of the best and most lavish booths refreshment-wise with nice champagne, assorted ice creams and a coffee bar.  The first two were known brands while the later was brand-less.

And that offering, by a cable company, sums up my current state of mind with respect to quality.   The flavor or form often varies per person or their mood (I had a coffee, later in the day maybe it would have been champagne; 24/7 my kids would have chosen ice cream).  But you aim to provide the best overall experience, ensuring that each offering tastes good, and let the consumer decide for themselves.

Challenges faced in the continuing battle to provide and monetize a consumer experience will always rest on consumers’ ultimate determinations of quality.  As the various providers along the value chain try to provide an experience based on an amorphous but sometimes recognizable definition the consumer continues to benefit.  From 100 plus channels, to the iPad, 3D, Glee, Avatar, YouTube (my kids’ favorite) quality itself is being monetized, sometimes more directly than indirectly.

I’d greatly appreciate hearing what others think of quality.

Ideas came from, other than the people above:  John Rubey, AEG Live; Greg Foster, IMAX; Buzz Hays, Sony; Angela Wilson, 3ality Digital; Chuck Comisky, Avatar; Keith Melton, director; Jonathan Dern, Cinedigm; Jim Hannafin, Reliance; Marty Shindler, The Shindler Perspective; Keith Quinn, Paramount; Pam Schechter, NBC/Universal; Jonathan Foqualityrd, ContentFilm International; Chris Jacquemin, WME Entertainment; Michael Kernan, NuMedia Studios.



2010.16 To add insult to injury

Have a look at the March 2010 cover letter from Richard Parsons, the chairman of Citigroup, to Citi stockholders.  It’s not easy to offend a reader who hasn’t made it past the cover page, but Parsons managed to do it (small picture below or legible link here):

As a (small) Citi stockholder, it is bad enough that I have lost over 80% of the value of my investment since I made it.

As a US citizen and taxpayer, it is worse that Citi investors would have been wiped out completely if the US government had not invested $45 billion in taxpayer cash and guaranteed over $300 billion in toxic assets to enable Citi to remain viable during the financial crisis.

But to add insult to injury, Mr. Parsons (on behalf of the board) chose to recognize three retiring directors (Michael Armstrong, John Deutch and Anne Mulcahy) “for their many contributions to Citi…” and noted that “the collective wisdom and insight of these directors have been an invaluable source of strength for Citi.”

Mr. Armstrong has been on the board of Citi since 1989, Ms. Mulcahy has been on the board since 2004.  Mr. Deutsch rejoined the board of Citi in 2009 after having served on the board in the 1990’s, and I want to emphasize that I direct my comments here toward Mr. Parsons as chairman and toward Armstrong and Mulcahy as long-serving directors.  Mr. Deutch’s agreement to rejoin the board in 2009 during the crisis was the generous action of a patriot.

The management and board of Citi were manifestly asleep at the switch leading up to the financial crisis.  Armstrong and Mulcahy either (i) went with the flow and thereby contributed to the collapse of a once-great firm, or (ii) fought valiantly to change the course of Citi and failed in their efforts.  If (ii) is true, they should have resigned long before the crisis – and there is no evidence I am aware of that (ii) is true.

We are all fortunate to live in a productive society where the financial rewards for business achievement can be enormous.  Going further, Armstrong and Mulcahy are fortunate to live in a competitive economy where the demand for talented executive management is strong and well-regarded executives can receive significant director compensation (as they have) for part-time work even as shareholders suffer mightily.  Contracts are contracts and I would not advocate retrading old deals (as satisfying as it might be).

But does Parsons have to take the final step and publicly praise Armstrong and Mulcahy for disastrous performance?  No.  The retiring directors should have left quietly when their terms were up, and Parson should not have insulted our intelligence with his recognition.

Excuse the bile of this post.  We live in what I believe is the greatest economic system ever devised, but it is not a free lunch.  Directors are the governors of the corporate actors in our economy, and if they are going to accept the remuneration and the reputational benefits of their positions they must be held accountable, at least culturally if not financially.

BTW, I thought it was an SEC requirement that proxy statements include a five-year chart showing the performance of the company’s stock against a comparable basket of stocks (in Citi’s case, big banks) and against a broader index like the S&P500.  Somehow, I couldn’t find that chart in this proxy statement.  Might have something to do with the 90% loss of value in the last five years?  If any securities lawyer knows the basis on which they might have avoided including such chart, please a comment.

2010.14 Who shot my business model?

Creative destruction plus debt rarely miss a solid shot at any business model.

EMI and MGM share many things in common: they’re both studios (one music, one movies) with storied reputations, a history of hits, large and still-selling catalogues and owners (the hedge fund Terra Firma for EMI; Sony, Comast, TPG, and Providence among others for MGM) who loaded them with debt. Both are reeling as they battle to preserve value in light of creditor demands (which are justified under the debt terms) and negative industry trends.

The old studio business models are very obviously no longer working, and are still in flux. In the case of EMI and its music peers, nobody has found an adequate replacement for the sale of richly priced CD’s. In the case of MGM, which has a substantial library relative to a modest production slate (at least recently), the decline of DVD sales and the lack of equally lucrative replacement revenue streams sound like a similar tale of woe. And both businesses are beset by piracy and ever-increasing consumer entertainment alternatives. So who’s to blame? And why? The importance of the question hinges on the reality that if quality content can’t be monetized then no one can afford to make it.

The list of villains includes: the Internet, Netflix (rent, don’t buy), pirates, private equity firms, banks, consumers (read pirates), YouTube, video games and the studios themselves.

Ultimately, why these companies are tottering in 2010 is simple: private equity firms loaded up these media companies with too much debt, not expecting a precipitous decline in their revenues and much tighter credit. Let’s dig deeper. EMI has seen ten or so years of digital downloads siphoning sales. At MGM, DVD sales slid from $395 million in fiscal year 2008 to $70 million in 2010 (with a fiscal year end of March 31). The reality is that in both cases, the cash cow has been slaughtered. Neither EMI nor MGM has that steady stream of royalties to cover both their costs and their debt loads. New content remains unpredictable – will it be a hit – and is hurt by the destructive cracks to the historical monetization models of media’s recent past.

I blame what the economist Joseph Schumpeter most famously called “creative destruction.”

I’ve been reading Inventing the Movies by Scott Kirsner. It reinforces the story that’s been told before: media business models have repeatedly been disrupted by new technologies. “This time” is never different. Silent movies gave way to talkies, which gave way to radio, which gave way to network television, which gave way to cable, now the Internet (now 3D and our smartphones) – for a highly simplified overview. Media businesses have always been entwined with the then-prevailing technology. Progressive technological advances, from Technicolor to mobile video, have always disrupted media business models. As a result, whole sectors have been transformed or ended (silent film stars with bad voices…). Does anyone remember the song “Video Killed the Radio Star”? Yet we still have radio; we also have satellite radio, iPods, podcasts, MP3 players…

Further, no one should put a lot of debt on companies subject to full-blown technological disruptions in their industry. A company in the early stages of a new technology paradigm introduces something new so people start consuming it; when people get bored or a newer and better option arises then the business declines UNLESS you’ve anticipated the change and responded with a solution. Examples of responding to challenges by innovating: Apple, YouTube and Fred.

Assets – or in these cases libraries – are only worth what people are willing to pay at any given moment. And what people can or will pay changes (remember the tulip craze). EMI and MGM are learning that the hard way as they try to sell an asset which is in a downturn – the valuations are low (even if the content itself has long term value) because there is UNCERTAINTY in the long term monetization realities so buyers are avoiding risk.

Whether content is the core product, or rather it’s the larger entertainment, matters little. Monetization models have been disrupted with the introduction of new technologies. The response, since the disruption is so large (being creative destruction and not just a business cycle issue), will have to match the change and not just struggle with little tweaks in all that’s been done before. Some ideas that are working (already!) I’ll post about in future blogs.

And for now, I’m sticking with cowboys…

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2010.10 Something I read and liked

Tom Barrack, founder of Colony Capital, writes a smart blog in which he addresses deep financial issues. But he also discusses ethics, character, values and most recently, heroes. A reminder for all of us. Click here:
Cowboy heroes

And for some insight into financial cycles (others might say crisis) click here: Cycles

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