In Reel Time

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

2010.42 Digital Hollywood Day One: Comments about Michael Eisner’s Keynote Interview

Michael Eisner was the first keynote speaker at Digital Hollywood in Los Angeles today. He was engaging and funny. I liked him; and I didn’t have preconceived notions.

Key points:

1. The first thing he wanted to talk about was his new game coming out via Facebook on November 1. Lesson: we are all working at a conference. Don’t lose sight of why you’re really there.

2. He is very positive on the movie industry; the worse shape it’s in, the more he likes it because that focuses creativity.

3. “Making movies for less can often lead to a better movie because you’re forced to be creative”.

4. With a spectacular hit the genre overtakes the industry, whether or not that makes sense.

5. You “should not bring an audience to the cost of a movie”. For them, it’s about the experience. Tiered pricing brings the audience into factors that shouldn’t be allowed to impact their experience.

6. “Nothing will replace 2,000 years of story telling”.

7. “I like going places where you can’t fall off the floor”. Meaning – things are so bad you can only take them up.

8. “The king of bankruptcy and risk is here in Hollywood,” where so many creative projects fail. Keep that investment in a box so that it doesn’t take down the whole organization. Silicon Valley comes next in the risk spectrum.

9. A historic brand is a museum. Ultimately, what matters is the product (stop making product and you’re dead).

10. The changes in the entertainment industry are less than those within the general economy.

11. Social media is just a different business. Like the TV business is different from the toy business.

12. Entertainment, by definition, is about change.

As I write these words of wisdom out I realize that I heard a visionary speak today. He seemed so down to earth at the moment.

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.

2010.49 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.

2010.40 Stress in Hollywood and recent media services developments

As you know, Megan and I are focused on the media services sector: the software, system, application, service and equipment rental companies that support the content ecosystem.  We often refer to this universe of companies as “first derivative plays” on the media/content business.

Megan’s post Thursday on Technicolor’s divestiture of its Grass Valley Broadcast business to Francisco Partners covered an important transaction in the broadcast equipment business.  I want to go further and connect a few recent data points:

• Data point number one, April.  Eastman Kodak sells its post-production service business Laser-Pacific to an affiliate of H.I.G. Capital portfolio company Telecorps.  Telecorps had previously acquired Wexler Video, Coffey Sound, PostWorks New York, Orbit Digital and Hulu Post since 2007.  Terms were not disclosed, but word on the street is that Kodak received modest consideration for Laser after having acquired the business for over $30 million in 2004 (FULL DISCLOSURE: Hadley Partners owns an immaterial interest in Telecorps).
• Data point number two, July.  Technicolor sells its Grass Valley Broadcast business to Francisco Partners.  As recounted in Megan’s post, GV lost 52 million Euros in the broadcast business last year, and Technicolor is selling GV to Francisco for no cash consideration – just a note and an earn-out.  In fact, Technicolor is contributing 20 million Euros to the company at closing.
• Data point number three, July.  As covered in the Wall Street Journal Thursday (subscription required), Eastman Kodak’s movie film business is shrinking faster than previously expected due both to less film production generally and the transition of theatrical exhibitors from film to digital distribution.  Kodak’s “entertainment imaging” revenue fell 18% in the June quarter vs. the prior-year period.
• Data point number four, ongoing.  We have heard from several sources that Ascent Media is soliciting bids for all or part of the Company.

I could go on, but you get the point.  Technicolor, Grass Valley, Eastman Kodak, Ascent Media – these companies are all leading vendors into the film/TV entertainment industry.  There is dramatic stress throughout this food chain.  The stress is due partly to financial factors (movie making is one of the last great capital-intensive businesses, and you might have noticed that the cost of capital has risen in the last three years).  It is also indicative of the fundamental shift from analog to digital throughout the video workflow cycle (from capture to display).  The gale-force winds of Moore’s Law will dramatically improve price/performance for customers in this sector as it goes digital, but it is not at all clear that volume will rise enough to support the business models of many vendors.

I’ll end with an advertisement for HPi.  If you an owner, investor, executive, entrepreneur or director in the media services industry, you need to understand the very powerful forces that are squeezing many of the leaders.  And you need a financial advisor who understands these currents and has significant transactional experience navigating in all business environments.  Call us if it is time to talk.

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.



2010.21 Venture capital 2010 – Digital Hollywood update

The days of high valuations and large capital expenditures are over….

I listened to a few panels on (or related to) venture capital during my days at Digital Hollywood May 2010.  Below is a state of the industry 2010 based on those panels and some common sense “interpretation” on my part.  Rarely will I identify the speaker because doing so will clutter up the commentary.  I’ll list the names of the venture capitalists (and in one case a lawyer) who were on the panels.  Anyone wanting credit for points below feel free to comment or email me and I’ll post credit.

The past ten years have flipped venture returns into negative territory and their own investors are being much slower to fund new venture investments.   Some newer funds are likely to disappear and it’s only the large granddaddies (the Sequoias, NEAs… with their $500 to $700 million funds) that can chase large valuation companies.  

Over the past few years there have been few venture exits – almost no IPOs and M&A activity is down dramatically (with valuations also having dropped).  The exits have predominantly been in the $30 to $70 million range.  While venture targets a ten times return (almost impossible to get in today’s environment) they need a four to five times (investment) return.

Out of ten investments, a VC hopes for one to two that do very, very well; three to four will at least double their money; with the rest likely being written off or sold for scrap. 

In today’s environment, a “capital efficient” company can still generate a venture return.  That term essentially means that hiring can be reasonably priced, not a lot of equipment is required and minimal investment is needed.  Those parameters may sound constraining but more and more can now be outsourced or is cheaper (Google AdSense, Amazon hosting, cheaper bandwidth and equipment).  Capital intensive businesses – such as chip or hardware companies – are finding financing a tough go.

Since some of the basic start up costs have plummeted VCs are more focused on other factors including defensible IP, quality of the team, evidence of traction and a network effect.  Indeed, over the past year the VCs have been able to invest in what would have been, in the past, a B Round at what used to be an A Round valuation – while getting the benefit of seeing the company at that later and more developed stage.

In 2009 almost all companies did down rounds – if they could do a financing.  All panelists agreed that today it’s wise to keep valuations reasonable in round A because a down round on B or C or not having existing investors participate in the next round is the kiss of death – you’ll look distressed and get a distressed valuation if you can get money at all (hotly contested by many audience members).  Surprising on the upside is better in the long run for the company than getting a high initial valuation (10% of a $300 million company is the same as 50% of a $60 million company).

Areas of opportunity:

For larger companies in tech and media – practically – development no longer exists and they need to buy growth.  Therefore, in designing a business plan just don’t just target an amorphous exit – think about which large companies could buy you and start working with them on business partnerships/development opportunities (think Ankeena and Juniper).  True growth comes from small companies since they don’t have a legacy overhang and the large companies won’t eat their babies (existing cash cow businesses) no matter how dire their industry changes are.

Find an “unfair sustainable competitive advantage”.  Build multiple revenue streams.  Closed versus open is debatable (Twitter was so open they may have killed their true opportunity and aren’t monetizing their business; Facebook was so closed they’re now opening up).  An app alone is not a company.  Customize.

The value of the studios will keep going down over time.  Quality content is where value rests; the supply of distribution channels will continue to grow.

Sports, games (especially social network related games), companies that can shift ad dollars their way, creative ecommerce with proven monetization models, core data center components, location based.

Mobile is in its very nascent stages of development being where the internet was in the late 1990’s

In closing, the overall message was that now is a great time to start a company!  Lots of disruption is swirling through numerous markets, it’s cheaper to ramp up and capital exists for the right idea.

List of VCs who’s comments helped shape the above:  Jon Chait – Dace Ventures;  Tim Chang – Norwest Venture Partners; Neal Hansch – Rustic Canyon Partners; Alex Hart – Revolution Partners; Paul Lee – Peacock Equity Fund; Ross  Levinsohn – Fuse Capital; Erez Levy – TriplePoint Capital; Schuyler Moore – Strook & Strook & Lavan LLP; Robert Raciti – Raciti Capital Advisors; Len Rand – Granite Ventures; Kevin Spain – Emergence Capital; and Richard Yen – Saban Ventures.

2010.20 Digital Hollywood halftime highlights

Longer blog post to come … but after two (out of four) days at Digital Hollywood at Loews Santa Monica, a few comments, inputs, ideas and debates stand out so far.

1. The best comment of the show so far came from Paul Colichman, co-founder and CEO of Here Media, who articulated a core belief of his company, “If you make it too expensive or too difficult for consumers to get, they will steal it from you. So make it so that they don’t want to steal it for you. If they are going to steal it, make it from you and not someone else (so you can at least make some advertising revenue off it).”

2. My personal second favorite insight came from Kevin Yen – YouTube’s Director of Strategic Marketing (and at Google for years before that). After not answering many questions (to be fair, he was asked to provide some very specific, thus far undisclosed numbers – not something the representative of a public company can just do) he came out with a worthy insight. Asked about what he was surprised to hear so little covered in the press, he answered the inevitable interface changes that would occur when television and other content was delivered mainly (or increasingly) over the Internet. Deflected momentarily from the point, he then added a comment about social networks such as Facebook and other types of customization (so no Google search for a TV listing) perhaps forming a base for such interface.

3. A panel called “Beyond Avatar” discussing 3D was surprisingly unattended (after the 3D buzz at both ShoWest and NAB). The panel included John Ruby, AEG Live; Greg Foster: IMAX; Buzz Hays, Sony 3D; Angela Gyetvan, 3ality Digital; Chuck Comisky, 3D Stereo VFX Supervisor on Avatar; Keith Melton, director; Jonathan Dern, Cinedigm Entertainment Group; Jim Hannafin, Reliance MediaWorks; and Marty Shindler, The Shindler Perspective. It was an amazing panel and full of highlights. My favorite (and it’s so hard to pick) is that current screen capacity for upcoming movie releases is less than half the 10,000 needed. A second was that many of the technical production givens had to be thrown out with 3D because the visuals are so different (such as that you can’t break the plane since 3D has no screen plane).

4. Ross Levinsohn of Fuse Capital said that he loves advertising and ad based businesses. Media has been ad based in the past to the tune of $85 billion a year ($40 billion untargeted). That’s a lot of dollars to shift. The ad networks – centered around remnants – have destroyed the Internet.

I don’t traditionally like ad only supported business models (Google being, as always, the exception) but Levinsohn made a great point. No one can ignore the shift of so many billions of dollars spent (or discount it too much even if it doesn’t result in a dollar for dollar end game shift).

5. Sharon Waxman, Editor in Chief of TheWrap (which just raised $2 million in funding) said she realized network news was dead when she was interviewed in an over the top deluxe Beverly Hills hotel suite with cameras, lights etc. and asked the same type of questions she asks using her Flip video camera. End conclusion being true or not, she raised a good point.

6. With about thirty pages of notes in my pad I started asking people I met at the show what I should write about on the blog. Two recurrent answers: customization of the consumer experience (a crime it isn’t being done more yet) and that no one yet has figured out a working business model to monetize content (we bundle up a disparate bunch of revenue streams and hope it is a business model; at least now people have had some time to test what works and what doesn’t and some things seem to be working – even if only on a limited scale)

7. I prefer conferences in Santa Monica to those in Vegas (I live in Santa Monica).

More to come later in the conference and upon further reflection. These are the few immediate thoughts that stuck.

I’ll be at Digital Hollywood in Santa Monica next week

Digital Hollywood starts this coming Monday at the Loews in Santa Monica. I’ll be there for most of the conference and at least one dinner (the Finance dinner on Monday night).

Before I go to such events I read through the program to figure out what I want to get out my time investment. Listening to panelists who only market their own company or stick with standard, clichéd viewpoints always frustrate me. If I think back over the past few years and like events the best panels have always included individuals with widely divergent viewpoints. It’s always easy to agree with someone who espouses what we read and think we know. But how much better to listen to someone trying an innovative or even crazy idea. Even if that person fails this time they may learn from their mistakes and succeed the next.

Earlier today I heard Father Cunnane of St. Thomas Church say something along the lines of a leader needing to be one step ahead of his followers; if he is two steps ahead then no one will follow. But, he continued, once and a while, the situation requires a prophet, someone who is both many steps ahead and not grounded in reality.

Will anyone at Digital Hollywood stand out as a prophet? If so, who? Is expecting someone to do so reasonable?
What expectations does anyone else have for the conference?

Feel free to comment here, email me at jones@hadleypartners.com or – best – tell me at the conference.

Past Digital Hollywood Session videos are a click away.