by Joey Tamer
As a strategic consultant in dealmaking
in L.A., San Francisco and New York in the technology and entertainment industries,
I dress differently, speak differently and respect all the players differently,
not only in each town, but in each industry in each town.
Convergence and Conflict in Content Deals
As the multiple medias (online, film, television, software, multimedia etc.)
converge to create new technologies and new deals, each converging industry
must be understood: its history, value system, and ways of doing business. To
make the deals succeed, we must understand each industryºs culture, deal models,
the impact of vertical integration, the sources of money, and who makes money
in what year.
Content deals on the Internet are in flux. The Internet is approximate to the
silent era of the movies. We just don't know much yet. The Internet Service
Providers (ISPs) control both the distribution pipeline by building it and the
content by funding it.
Microsoft
When Microsoft first began searching for entertainment content, it sent its
development people to Hollywood to create episodic series, like TV deals. A
pilot would be developed, and 13 episodes would follow. The deals would range
from $100,000 to $1,000,000. Mostly they didn't get to 13 episodes. The "D girl"
who was searching out those deals in Hollywood now sells advertising for MSN,
I am told.
Why? Did the project fail? Was it ahead of its time? Perhaps. Mostly, it was
simply not the correct economic moment. Too few eyeballs generated too little
advertising revenue, and the subscription model did not work at all. Microsoft
s use of the broadcast TV model (funded programming, advertising supported)
came too early, used the wrong technology, and incorrectly anticipated audience
behavior. The computer screen in the den is not the TV in the living room, and
until it is, in technology and in audience behavior and in advertising support,
it will be too soon to put Melrose Place on the computer.
AOL
AOL began by creating a greenhouse: it funded up to $200,000 for content development,
taking a 20% equity stake in the developer, and assuming an AOL exclusive for
the content for the first year of its availability. Agents were commissioned
on the back-end. The greenhouse is gone now too. Did it just go in-house? I
heard a rumor that the agents would be returning. I think it is the same issue:
too soon, too many opportunities, not enough successes, not enough economic
stability.
Fin/Syn
Long ago, broadcast TV was subject to fin/syn--the financial syndication rules.
Broadcast TV, supported by advertising, could not own content; it had to "license"
it from independent production houses. The fin/syn rules were based on an anti-trust
concept: these rules were meant to foster competition and force the networks
to avoid the favoritism of using their own production houses. It was a conflict
of interest issue.
A couple of years ago, Congress reversed the fin/syn rules, as the networks
faced so much competition from cable and the Internet, and other major trends
in telecommunications.
Now all players can control both the content and its pipeline. The deal? It
makes it more difficult for independent production houses, except the really
big ones (like Carsey Werner) to control their content, and to win a position.
It means the small indy prods take more risk in the deal, can lose control earlier,
and can lose the project all together, including their original creative idea,
if they run over time and budget.
This pressure on the independent production houses may be simply cyclical. In
the wake of the Titanic, we also saw great regard for Good Will Hunting and
The Full Monty. I always think when the big production studios get oversaturated,
both the audience and the industry seek the creative qualities of the smaller,
independent production houses. Maybe the pendulum is swinging back now.
Vertical Integration
It is important in creating wealth and constructing media deals to understand
the full impact of the vertical integration of the leading studios. Viacom,
Fox, Disney, MCA/Universal, and Time Warner are all vertically integrated: they
own business entities in film, television, cable, independent production, book
publishing, news publishing, interactive content development, music producers,
Internet tools, and the occasional media retailer or sports team.
For example, Viacom owns Paramount, MTV, Showtime, Spelling (including Republic
Pictures), Simon & Schuster and Blockbuster. Fox, through NewsCorp, owns 20th
Century, Fox FX, Fox Searchlight, HarperCollins, Fox Interactive and Delphi.
Disney owns ABC, Cap Cities, Hollywood Pictures, Touchstone, Hollywood Records
and InfoSeek. Time Warner owns the Turner Empire, as well as HBO, Fine Line,
Castle Rock, and so on. MCA, now coupled with Universal, may soon own Polygram,
with its film and music empires.
Get the picture? Several deal issues arise from comprehending the control of
all media by vertically integrated corporations: generally, all media deals
will be signed at once, and it will be difficult for the content creator to
reserve rights for exploitation in any media if he signs with a major studio.
The already-successful developers of programming, armed with their Hollywood
attorneys, managers and agents will fare better. But new content, created by
new talent, will be signed at its weakest moment, to all media at once, when
the talent is unproven, and the project not yet launched.
The question arises--who makes a new brand? Everyone wants a new brand, and
the major studios can certainly exploit it across all media, around the world.
The negotiation revolves around the credit to the talent for creating the new
branded material, versus the marketer (the studio) that can gain its highest
visibility.
A further issue involves immediate global exposure: if the new material succeeds,
it is likely to go global very quickly, and its impact will be felt worldwide.
Deals are now exclusive, worldwide, in all media, "now known or yet to be invented."
And that's just the beginning of the negotiation. Such an offer creates great
opportunity and great risk of loss of control of the original creative concept.
Money Sources
There are many sources of money for the creation of Internet tools and infrastructure,
and for some content. Money can come from the pipeline--the ISP or the studio.
There is VC money (usually $2 million
- 8 million for first round), and angel money ($300K - $800K for seed capital).
There is asset-based financing,
in which money is loaned against a companyºs accounts receivable and assets,
which is now being extended to include revenue generated by patents and royalties
on content licensing.
There are new Internet investment
banking houses offering the public early round investments in young companies.
There are strategic alliances in
which no equity is exchanged, and joint ventures in which equity is shared.
These alliances are often based on some synergy between companies from different
industries: retailers and product companies, software and hardware, merchandisers
and media producers.
Who is Making Money Now?
Tools and Infrastructure Companies: Well, the tool companies and developers
of the Internet infrastructure are doing well. Disney pays $70 million for InfoSeek.
AOL turns down AT&T at a rumored offer of $32 billion, based on an assumed value
of $20 billion. Even if these rumors are not accurate, their deals are big enough
to pay attention to.
Service Companies: Certain services companies, many of whom sell products,
are making money on the Internet, or so we think. Amazon is a clear success.
CD-Now and CNET (sold SNAP! its new service, to NBC) have excellent track records.
Profitability? Maybe, maybe now, maybe soon. But success just the same, given
how early we are in the moment of Internet and electronic commerce. Why these?
Because it is easy: the customer doesn't have to try the product to buy it.
The companies have created excellent service and ease of use. The companies
have created customer loyalty by their excellent service, and have created community
by their attention to their audience. As a formula, it is the one that will
work for the next few years.
Content: Making money with content is much more difficult at this time.
Just as the product companies are actually service businesses, the content companies
are more community than they are pure content. Is CBS Sportsline a sports content
company? Or is it an information service company focusing on the subject of
sports and the sports community. It is using a subscription base, with payment
for special services.
Yahoo, a service provider, has enough creative content, and reaches such a community,
and manages enough commerce that I have heard it compared to Viacom, and considered
one of the first vertically-integrated Internet companies.
But for content as entertainment, we are early yet. Before content will be king
again, we need the eyeballs to combine with the technology and the audience
behavior and the appropriate pricing in an alignment that creates success.
Joey
Tamer refines the vision, strategy and success of companies --
Fortune 1000, capitalized start-ups and investment fund.
www.joeytamer.com
(310) 245 5310 joey @ joeytamer.com