In Reel Time

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.

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.

2010.14 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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2010.07 Price that tune

On February 9 I drove to Sherman Oaks for a dinner and panel hosted by the California Copyright Conference (http://www.theccc.org/index.php). The group is an eclectic mix of artists/musicians, people who work with artists (producers, marketers, agents, library owners and more), lawyers, bankers and more.

The topic was monetizing music libraries, and panelists ranged from bankers to music studio executives. I’d heard the topic touched on a few months earlier and the same themes arose (though in more detail). Licensing a track to the producer of a show, who wants legal protection and exactly the right piece of music, is still very profitable. Everyone else continues to fight the same rising tide.

For an outsider (as an investment banker I’ve worked with companies that own libraries but I’ve never owned one myself) the most interesting debate is a technical one. Can we or can’t we (accurately and consistently) identify and trace the use of specific excerpts from copyrighted songs? Can we match the artist with the clip? Can we monitor the ISPs?

Speaking as an investment banker I’ll back up the panelists; there is solid demand for both licensing specific music tracks and buying music libraries. And, sometimes you can borrow against them.
I’ll continue watching these debates.

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