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.

2010.41 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).

2010.44 The Web is dead? Is Wired right or just good at headlines?

I’ll go with the headline option as the other point is nuanced.

The article in question starts with “Who’s to blame?” Chris Anderson takes the ” us” argument with Michael Wolff blaming “them”. The title on the cover, asking whether the Web is dead, is clearly an attention getter, but the related articles are very thoughtful.

What points stuck with me – for those who haven’t read the article (and those who did and may want to discuss related thoughts). I’ll break my argument up by discussing Anderson’s points first.

Anderson is making a distinction between closed systems on the Internet and the Web itself. We have moved over the past few years from search engines and the broader web to semi-closed systems such as Pandora and Facebook. The screen comes to the user, not the other way around; so these systems often provide a better experience. He also resurrected the “push” concept which I remember so clearly when first discussed in the mid to late 1990’s. Now push comes in the form of APIs, apps and the Smartphone.

Content delivered via browser currently only accounts for a quarter of Web traffic and the number is still dropping. Increasingly traffic consists of peer-to-peer file transfers, email, company VPNs, the machine-to-machine communications of APIs, Skype, World of Warcraft and other online games, Xbox live, iTunes, VOIP phones, iChat and Netflix movie streaming. Shifts are accelerating and Anderson quotes Morgan Stanley as saying that within five years the number of people accessing the Net from mobile devices will exceed those using a PC. Phones have a smaller screen; traffic is often accessed not through a browser but specialty software (a closed or semi-closed system).

Results? A pressure for profits from these “walled gardens” and monopolies. Ah, monopolies. Networks are more monopoly prone, Anderson claims; using Metcalfe’s law, that the value of a network increases in proportion to the square of connections, a winner takes all market is created. As Facebook’s user base grows more people are drawn to it because that is where they can find the largest number of their friends (and they miss out if they aren’t thus connected).

The victory of convenience over openness? People are often choosing quality over free, yet also appreciate choice. Some watch content and others create it.

According to Anderson, “The Internet is the real revolution, as important as electricity; what we do with it is still evolving.”

To sum up some of Wolff’s key points, online power blocks are real due to concentrated user numbers. He references some statistics from Compete, a Web analytics company, which says that the top 10 Web sites accounted for 31% of US page views in 2001, 40% in 2006 and about 75% in 2010. Big dominates; and those related companies control enormous numbers of people.

An example he sites is Google, who he analogizes to being like the only movie distributor, who also owns all of the movie theatres. Google may stand for open systems and level architecture but it also heavily dominates its space. Disruptive business models and the breakdown of incumbent power structures are only one part of the Web. Struggles for control are another.

Content companies had to face their own disruption online. Wolff points out that the Web was built by engineers and not editors. HTML-constructed Web sites aren’t the best as an advertising medium. While growth initially masked the resulting revenue generation crisis it has become clear to all now. Ads can be tracked online but we also know how many consumers ignore them.

Wolff states that the online audience is a fraud. He says that nearly 60% of people find websites from search engines, driven by search engine optimization (skewed results based on the related algorithm). And, as Web audiences have gotten larger, the quality of those audiences has dropped. Hence companies such as DemandMedia produce ever cheaper content for audiences that don’t want to pay for it (a spiraling that leads to less and less valued content).

Those coming from the media side don’t typically know technology and vice versa (as an aside, I recently met the CEO of a local tech based content distribution company who made movies before going to grad school – I was thrilled). But then Wolff brought in Steve Jobs…who aligned himself with media interests and found one solution.

Further points are to be found in the pages of Wired Magazine’s September issue

George Gilder, in his newsletter dated Friday, August 27 titled “Wired Weirds Out”, criticized the Anderson/Wolff articles. (Free sign-up at http://earth.lyris.net/cgi-bin/lyris.pl?join=gilder-technology-report). I’m never one to easily argue with George Gilder! I think the essential disagreement with the respect to the two positions is that Wired gave the walled gardens too much credit for displacing the broader web. Gilder points out his nuance: the massive growth of usage/traffic and credits the online world with killing TV and the Internet. Essentially, the network needs to meet the continued increases in demand (and type of traffic) and no solution has thus far come forward (who pays…who controls the network…neutrality or not?). He also criticizes Wired for its extensive name dropping of media darling companies – and he’s right on that point.

All three pieces are worth reading. Gilder’s focuses more on the actual technology; the Anderson and Wolff pieces are more thought pieces – hence the attention getting title. Viewed in sum, we get insights onto the evolution of an industry – digital media – which continues to evolve. We may all be surprised with the results of that evolution.

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.

2010.39 Francisco Partners makes firm offer for Grass Valley Broadcast business

In January 2009 Technicolor announced that it would spin off its Grass Valley business in its entirety. 18 months later, in July 2010 Francisco Partners has made a binding offer for the broadcast business only, and Technicolor intends to divest the transmission and head-end units separately.

Grass Valley’s broadcast business is a leading provider of video creation and video management equipment for broadcasters and teleproduction companies. As of June 30, 2010, the business unit had 1,457 employees in 23 countries. Revenues were about 272 million Euros for 2009 with an operating loss of approximately 52 million Euros. During 2009 the broadcast division made up 72% of total Grass Valley revenues and 59% of its operating loss; so the other Grass Valley businesses aren’t doing well either.

Per the deal announcements the broadcast business is valued at US$100 million. However, in reality the valuation is nowhere near that, and Technicolor is not receiving any cash; in fact, they are bringing cash to the closing. A promissory note of $80 million with a six year maturity and capitalized interest of 5% will be issued to Technicolor. Technicolor will also provide 20 million Euros of cash to support the business. Additional consideration may accrue to Technicolor based on future results, (i.e., an earn-out). It has not been publicly announced how much capital Francisco Partners is investing in the company.

All assets and employees of the Broadcast business are included, as are patents and license agreements in the professional broadcast equipment space. Active employee retirement liabilities are transferred to the acquiring Newco.

The transaction is expected to close by year end (subject to final agreement and regulatory approval).

Francisco Partners, with nearly $5 billion in capital, is among the world’s largest technology focused private equity funds. Partner David Golob is quoted in online reports of the deal.

Technicolor is attempting to refocus its business around its content creator and network service provider customer base. Having been in business for over 95 years the company is clearly trying to proactively react to cataclysmic changes in its business model. Historically, they have been providing production, postproduction and distribution services to content creators and distributors for entertainment, software and gaming customers. Technicolor is an industry leader in film processing and DVD manufacturing and distribution (a business decimated by industry evolution). They also provide set top boxes and gateways, and operate an intellectual property and licensing business.

No cash upfront after eighteen months on the market? Clearly not the easiest offer to muster. But Francisco Partners is also taking on some industry challenges. Not only does the broadcast industry remain challenged and capex budgets likely more frugal going forward, but the growing significance of IP-based video in professional as well as consumer applications means that Grass Valley’s business will increasingly be coming into contact with technology leaders such as Cisco and EMC.

2010.34 Update on Sonic Solutions / DivX

As our alert readers already know, on June 1 Sonic Solutions and DivX announced a definitive agreement for Sonic to acquire DivX (see our previous post on this topic).  The point of this post is to give interested readers an update.

Valuation reminder.  Sonic agreed to pay $3.75 in cash and to issue 0.514 Sonic shares for each DivX share.  That represented $9.83 per share to DivX holders on June 1, and the implied enterprise valuation for DivX was $189 million.

Timing is everything.  On the day of the announcement, Sonic’s stock price closed at $11.83, which was up almost 20x from its March 2009 low of $0.60.  However, since the announcement Sonic’s stock price has dropped over 35% to its July 9 closing price of $7.64.  This reduces the per-share value of the offer for DivX to $7.68.  Still a premium to DivX’s June 1 closing price of $6.95, but now only a 10.5% premium.

The S&P 500 closed slightly up today (July 9) vs. its June 1 close, so this is not a market issue more generally.  Nor is there any dramatic news from either Sonic or DivX since the announcement.  To the extent that one can explain short-term trading fluctuations, I think the fallback represents (a) arbitrageurs selling Sonic short and going long DivX to lock in a trading gain on a transaction, and (b) some concern on the part of the market that Sonic is opportunistically using the dramatic run-up in its stock price to execute a stock acquisition.

Updated valuation metrics.  At the July 9 valuation, DivX has an implied transactional enterprise valuation of about $118 million.  This represents a valuation of 1.6x DivX’s LTM revenue and slightly under 13x its LTM EBITDA.

Sonic’s portrayal of the transaction.  Check out this link for a Sonic management presentation at the William Blair Growth Stock Conference in June.

What do the relative stock prices say? As noted above, the current transactional valuation for DivX is $7.68.  DivX’s July 9 closing price was $7.26.  That represents a 5.8% discount to the transaction price.  Sonic and DivX have publicly expressed the expectation that the transaction will close before September 30, so on an annualized basis excluding transaction costs that is a return of over 23%.  Not a bad return, but also a price that suggests the market believes the transaction will close on schedule or close to it.

When do you think the transaction will close?

2010.25 Sonic Solutions to acquire DivX

On June 1, Sonic Solutions and DivX announced a definitive agreement for Sonic to acquire DivX.  Your intrepid bloggers at Hadley Partners wanted to bring you some scoop and prompt commentary on the proposed transaction.

Deal terms / premium

DivX shareholders are to receive $3.75 in cash and 0.514 shares of Sonic stock per DivX share.  Sonic stock closed on June 1 at $11.83, so total per-share consideration at announcement was $9.83.  With DivX’s pre-announcement share price at $6.95, the premium was 41%.  However, Sonic’s stock price dropped 12% in the two days after the announcement, reducing the deal premium to 31%.

Post-transaction, DivX stockholders will hold approximately 35% of the equity of the combined company.

At announcement, the price being paid for DivX’s equity was $325 million.  However, as of March DivX had no debt and over $135 million in cash on its books.  In fact, Sonic is paying less in cash to acquire DivX than the cash it will inherit at closing, so in economic terms this is really an all-stock acquisition.

The transaction is expected to close in September, and is subject to a vote of both companies’ stockholders.  If DivX terminates the transaction under certain circumstances prior to year-end, it is required to pay a termination fee of $8.35 million.

Sonic Solutions

Sonic supports the creation and management of digital media with products, software and services.  It generates the majority of its revenues in its “Roxio Consumer” segment, where its offerings enable consumers to create, manage and share digital media content (data backup, media transfers, DVD burning, etc.).  Sonic bought the Roxio brand name and some of this consumer business in 2004 from what is now remembered as Napster.  The Roxio Consumer segment generated 87% of company revenue and all of its operating profit for the nine months ended March 2010.  These sales come through digital storefronts such as Digital River, distributors such as Ingram Micro and Navarre, and the company’s own website.

Sonic’s second business unit is what it calls its “Premium Content” segment.  Most prominently, Sonic offers digital media solutions that enable major studios and other content producers to render their media in different digital forms.  Historically, this has been primarily DVD authoring tools.  However, this business is evolving rapidly, first toward Blu-ray and ultimately toward digital distribution (streaming, downloading, etc.).  The Premium Content business has recently been shrinking and losing money, but the company is optimistic about its positioning for the digital distribution growth opportunity.

DivX

DivX is a leading provider of digital media encoding and decoding formats and solutions, and also supplies digital rights management (DRM) tools.  Encoding/decoding tools (“codecs”) are proprietary offerings that make the delivery of media, in particular video, more bandwidth-efficient without sacrificing image quality.

Since its inception, DivX has been vying against the likes of Microsoft, Apple, On2 Technologies (recently acquired by Google) and Real Networks to become the industry standard for video compression.  DivX technologies have shipped in over 300 million hardware devices worldwide including digital televisions, DVD and Blu-ray players, game consoles and mobile handsets.  The end game is to make high-quality digital content accessible anywhere, anytime on any device.

The company generates over 90% of its revenue by licensing its technologies to consumer electronics OEMs (70%) or to software vendors that include DivX technologies in their offerings (22%).  The company is also very strong internationally, with less than 20% of its 1999 revenues derived in the U.S.

Business logic / strategic rationale

Both Sonic and DivX operate within a complex value chain where their solutions work best if broadly available.  The value chain involves content creators (both professional and personal), content distributors, consumer electronics/hardware companies, PC/software companies and online and offline retailers.  Both companies license their technologies to key consumer electronics OEM’s as well as content creators and distributors.

As the industry evolves from one dominated by hardware distribution (DVD and Blu-ray discs) to one dominated by digital distribution, Sonic is betting that DivX’s technology strengths, licensing relationships and installed device base can all accelerate Sonic’s momentum.  Direct synergies from a combination are not obvious – the companies have been working together for years, and will continue to work with other partners – but the ability to bring more value to key business partners and licensees should create some benefits.

It is possible that the transaction has an opportunistic element for Sonic as well.  The dramatic rebound in Sonic’s stock in the last year – almost 20x from its low of $0.60 in March 2009 – is arguably ahead of its business, where revenue for fiscal 2010 was down 12% vs. the prior year and the business lost money for the full year (albeit profitable in the March quarter).  DivX’s top line has also been down due to lower consumer electronic sales and related licensing revenues, but its absolute profitability currently exceeds Sonic’s.

The acquisition is intended to enhance Sonic’s recently released RoxioNow content platform, the technology behind the virtual video storefront services that Sonic currently runs for Best Buy, Blockbuster and Lionsgate aimed to provide consumer with access to digital media content from virtually anywhere.  Sonic also bought CinemaNow last year and is offering studio content via that website.

Valuation / Metrics

DivX equity valuation – $325 million

DivX enterprise valuation – $189 million

DivX LTM revenue (March 2010) – $75.2 million

DivX – LTM EBITDA – $9.2 million

TEV / LTM DivX revenue – 2.5x

TEV / LTM DivX EBITDA – 20.6x

Legal developments for peer-to-peer file sharing

The May 11 court decision in the case of Arista Records LLC vs. Lime Group LLC was widely reported on in the press (WSJ article here, NY Times article here).

To briefly summarize, Lime Group is the parent company of LimeWire, LLC.  LimeWire is a technological descendant of BitTorrent and Gnutella, its software permitting users to share files over digital networks.  13 major record companies sued Lime for secondary copyright infringement.  U.S. judge Kimba Wood granted partial summary judgment in favor of the record companies, and also found that Lime Group chairman Mark Gorton is personally liable in the case.

So I could go on and on about this, right?  After all, peer-to-peer technology is an important factor in numerous digital media markets, so this is big stuff!  But I am not an attorney, and the devil is in the details on such matters, and I am as lazy as the next investment banker.  So I figured it would be great if somebody else did the hard work and shared it with me, so that I could share it with you!

Good news: that is exactly what has happened.  Prominent law firm Skadden Arps did the work for us.  Please refer to this link for a three-page summary of the case, the decision and the implications.  And a tip of the hat to Stuart Levi, David Sussman and Mary Rasenberger at Skadden.  Please note that they indicate their memo is “advertising,” which I assume means they were involved in the case.  They do not say who they represented, but since they are advertising, I also assume they represent the plaintiffs.

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.