As a student of media conglomerates from within the College of Mass Communications at Southern Illinois University Carbondale, I'm as concerned as anyone regarding the state of consolidation within the scope of traditional media. When only seven corporations control almost every newspaper, book publisher, radio station, television channel, movie production, magazine publication, and music label, one can easily interpret this as an assault on free speech. These mega-corporations have diversified their holdings across all media just enough to circumvent any anti-trust regulation, and yet they determine to a large extent what you watch, read, or hear. But they are facing an unprecedented attack by the Internet and, more than most industries, are experiencing upheaval among their ranks because of this electronic marketplace of ideas.
Newspaper circulation has been on the decline for twenty years, first because of changes in the population, and later because of the vast amount of news available on the Internet. Seven major newspapers have now filed for bankruptcy protection and more are on the way. Accelerating the demise are the cutbacks being executed within newsrooms; as revenues fall, so does reporting quality and coverage. Certainly, newspapers have turned to the Internet as a salvation, but instead of competing with a few other dailies on the news stand, they are now facing literally millions of sources for news and information. Given their anachronistic status within the modern world, I take great pleasure in reading about Rupert Murdoch's grand plans to open the world's largest printing plant outside of London. I'm sure that history will look kindly upon this move, as it did with Napoleon at Waterloo.
No one reads books in bound form any more. This is only the mildest of exaggerations - two years ago, there were 1.2 million different titles published in the United States, and less than 400 of them sold more than 100,000 copies. Every traditional book publisher is now operating under the Hollywood "blockbuster" model - secure a name-brand author, and publish only work that can be read by a sixth-grader. You see, reading skills have plummeted such that America is a dumbed-down country capable of taking the English language, now with over 1,000,000 words, and reducing it to a puerile compendium of colloquialisms, a minimalist street-wise lexicon for communicating base needs at the bottom of Maslow's hierarchy. For those who are still interested in reading more than a Twitter post, Google is scanning books into their database as fast as the light bars can move across the page, and even textbook companies are being forced into producing eBooks, which sell for a fraction of a bound or paperback version. Amazon's Kindle is also reshaping the landscape for digesting novellas, novels, and tomes. All of this spells trouble for the traditional book publishing industry model, and opportunity for new writers to become seen through the many avenues of self-publication that are available. Book publishers are approaching marginalization as marketing services only; the last line to cross are the brick-and-mortar stores such as Borders and Barnes & Noble. See, book publishers don't have very good record at recognizing valuable content - Gone With the Wind was rejected 38 times, Ray Bradbury was rejected 736 times, Harry Potter was rejected 16 times; all told, publishers have rejected now-famous works by authors such as Stephen King, John Le Carre, Joseph Heller, Oscar Wilde, George Orwell, Vladimir Nabokov, and even Anne Frank. Little Anne Frank was rejected with the words, "The girl doesn’t, it seems to me, have a special perception or feeling which would lift that book above the 'curiosity' level." They deserve whatever demise the Internet has in store for them.
Radio is now available on the Internet, and in the case of Pandora, each song is customized for your listening pleasure by isolating a "music genome" from the style or artist of your choice. If you haven't tried this, you must do it now - and be prepared to be amazed. Talk radio still has its adherents, but if the media empires are reducing to catering to "dittoheads," and brain-damaged shock-jock enthusiasts, then they will have hit rock bottom. You're only as respected as the customers you serve.
With 500 channels, modern television services are largely, but still only partially controlled by media giants, with each conglomerate owning a number of channels of either broadcast or cable-delivered. A&E Television Networks (AETN) is a joint venture of the Hearst Corporation, ABC/Disney and NBC whereas the Discovery Channel (including TLC, Animal Planet, Discovery Health, Science Channel, Planet Green, Discovery Kids, and the Military Channel) is an independent venture. And, as Comcast is discovering, subscribers are dropping cable service in favor of free TV shows on the Internet. In response, the largest cable company in America is launching fee-based Internet delivery of television programming. This will have an interesting effect - as more customers switch and become accustomed to using the Internet for their viewing pleasure, the door will open for more independent productions to reach eyes and ears. We will get more choice with less intrusive advertising and at the same time, the bony grip of the media conglomerates on our skulls will be weakened.
With the advent of digital editing on a Mac using Final Cut Pro and distribution of the finished product on the Internet using services such as Netflix Instant View, there are more movies available for viewing than any time in history. Independent filmmakers still have to work the ropes at Cannes and Sundance, but we are rapidly approaching a time when even this will be unnecessary. Using YouTube, Facebook, and Twitter, new films will be able to generate a cult following overnight, which can lead to mass market exposure through the word-of-mouth-at-the-speed-of-light presented by the Internet. The big studios are still needed for big-budget extravaganzas, but outstanding human drama doesn't require their oversight or money. Some of the best films of our time were independent productions whereas the major studios have been known to occasionally make a kind of movie affectionately known as a "flop or bomb." And some of those movies actually killed the studios that made them. All in all, the indie film community is thriving and we are better because of it.
The health of magazines can be measured by monitoring the number of advertising pages sold. And the latest data doesn't bode well for the glossy-cover crowd. Considering that there are 7,200 different magazines available to the general consumer, and 389 new titles appeared just this year, it seems that the publishers are doubling down on a dwindling market. Of the top 25 magazines by circulation, only AARP increased subscribership - yet another clear indication of the aging of America along with a barometer of magazine desirability. Once again, the Internet gives each person the information they want, when they want it and for the price they are willing to pay, and with minimal advertising intrusion. Why wait for a magazine when I can read reviews about a product, service, technique, or newsbite, check YouTube for someone using it, download the manual from the manufacturer, and post my own reviews when it doesn't work for me.
The music industry still has a stranglehold on musicians and listeners, but cracks are starting to appear in their bastion. First, MP3 downloads have collapsed revenues, and while I don't condone theft of any form, it allowed a company like Apple to negotiate a pay-by-the-song model for the iTunes Music Store, something the industry had rejected for decades as infringing on their right to sell CDs with 2 good songs and 11 pieces of trash. Second, with the iTunes Music Store in place, individual artists can now self-produce and distribute, and provided that they handle or outsource marketing and PR chores, they don't have to share with a major label who forces them to record two or three albums a year for five years or they get their asses sued off. In effect, because Distribution is Digital, the big record labels are nothing more than marketing agencies for artists, and if those artists find other sources for marketing services, the labels will become defunct. Given the sleazy way the music industry has acted toward their artists and their customers, this would be a fitting end.
I think we should set aside our fears of media consolidation and instead become active participants in using the Internet to bring them down.
Thursday, September 3, 2009
Tuesday, September 1, 2009
Skype: Going, Going, 65% Gone
One of the more confounding business acquisitions of the last 10 years has been eBay's purchase of Swedish VoIP services provider Skype. eBay is in the business of online auctions and payment transactions, and Skype delivers low-cost IP telecommunications services - other than the Internet as a basic delivery mechanism, they are not related business models, except perhaps in the alternate universe known as "bizarro world." Adding insult to injury, eBay paid a total of $3.1 billion for Skype in 2005, when they were generating approximately $70 million in annual revenues. This equates to a premium of over 44x revenues, and while Skype's revenues have increased to $600 million, market valuations have dropped as well.
This means that even though Skype revenues have increased 8.6x, their market value has dropped by 11% since the eBay acquisition, at least according to the terms of the announced deal. Controlling 65% of Skype, the new majority shareholders, led in part by U of I alum Marc Andreesen, will not be burdened with an auction business as a distraction. Further, eBay can use the $1.9 billion to make intelligent acquisitions in the transaction processing and exchange segments.
But why did eBay purchase Skype in the first place? There are some who would argue that it was predicated on the agency problems associated with increased diversification - namely, the justification for additional compensation and heightened job security. But this argument is deflated in the face of CEO Meg Whitman's "retirement" in 2007, only two years after the acquisition. If the agency problems were evident, it is axiomatic that a longer term at the helm would occur. She did not resign in disgrace, and in fact is now running for governor of California.
Fortunately for you, dear reader, I possess inside information that may shed some light on the reason behind "the mistake that shall forever be known as Skype." In 2002, eBay was in the market for a new billing system. Their original system was a kluge of software that grew over time into a monolithic mess. In-house programmers kept adding features and functionality in response to immediate needs, and eventually a point was reached were it could not expand any more and would not accommodate eBay's plans for future rate schedules. Our company, a telecommunications billing vendor and systems integrator, made it past down-selection and was one of the two finalists. We didn't win the contract, but our competition was also a telecom billing vendor. Installation and testing took over a year, and eventually eBay went online with their new billing system in 2003-2004 timeframe, with a sequenced rollout to different segments of their customer base.
eBay had purchased a billing system that could not only handle their auction and PayPal traffic, but it could also support VoIP services as well. And sometimes companies get involved in new strategic ventures because they can, not because they should. Just imagine a meeting in the boardroom in San Jose, when the discussion turns to what possible new directions they can set forth. The head of IT says, "I don't know, but we have all the infrastructure in place to support a VoIP telephone company." The rest is history...
This means that even though Skype revenues have increased 8.6x, their market value has dropped by 11% since the eBay acquisition, at least according to the terms of the announced deal. Controlling 65% of Skype, the new majority shareholders, led in part by U of I alum Marc Andreesen, will not be burdened with an auction business as a distraction. Further, eBay can use the $1.9 billion to make intelligent acquisitions in the transaction processing and exchange segments.
But why did eBay purchase Skype in the first place? There are some who would argue that it was predicated on the agency problems associated with increased diversification - namely, the justification for additional compensation and heightened job security. But this argument is deflated in the face of CEO Meg Whitman's "retirement" in 2007, only two years after the acquisition. If the agency problems were evident, it is axiomatic that a longer term at the helm would occur. She did not resign in disgrace, and in fact is now running for governor of California.
Fortunately for you, dear reader, I possess inside information that may shed some light on the reason behind "the mistake that shall forever be known as Skype." In 2002, eBay was in the market for a new billing system. Their original system was a kluge of software that grew over time into a monolithic mess. In-house programmers kept adding features and functionality in response to immediate needs, and eventually a point was reached were it could not expand any more and would not accommodate eBay's plans for future rate schedules. Our company, a telecommunications billing vendor and systems integrator, made it past down-selection and was one of the two finalists. We didn't win the contract, but our competition was also a telecom billing vendor. Installation and testing took over a year, and eventually eBay went online with their new billing system in 2003-2004 timeframe, with a sequenced rollout to different segments of their customer base.
eBay had purchased a billing system that could not only handle their auction and PayPal traffic, but it could also support VoIP services as well. And sometimes companies get involved in new strategic ventures because they can, not because they should. Just imagine a meeting in the boardroom in San Jose, when the discussion turns to what possible new directions they can set forth. The head of IT says, "I don't know, but we have all the infrastructure in place to support a VoIP telephone company." The rest is history...
Monday, August 31, 2009
Team Rodent Eats Spidey!
Walt Disney Co. (aka Team Rodent) has announced its acquisition of Marvel Entertainment Inc. this morning in a deal that values the comic book powerhouse at $50 share, a 30% premium over Friday's close. After changing its Depends, CNBC has been streaming non-stop segments covering the purchase like Burma Shave billboards along the highway, and every talking head is providing perspective as if from the top of the Magic Castle in Anaheim. That is, the Disney View is the only view that offered to the public. A quick analysis of Disney's holdings and history would tell an eighth-grader why they wanted to buy. The more intelligent question is, "why did Marvel want to sell?" With the economy in rebound and consumer spending on the rise, a 30% premium seems downright cheap for MVL, so why bail out now?
I can think of four possible reasons:
Isaac ("Ike") Perlmutter, the CEO of Marvel, is ready to cash out and retire. He's 66 years old and been in business as a restructuring expert for decades. He acquired a bankrupt Marvel in 1998 and over 10 years, has increased share value from $7.69 to $33.87 - an increase of 440% ex-Disney (676% including the Mouse). Buying collapsed companies and bringing them back to life requires tremendous stamina, and he doesn't get much love from the board of directors. His base salary is a paltry $700,000 and he only get three weeks of vacation per annum. His wealth is solely wrapped up in MVL stock, and the best way to extract value from an equity is through acquisition. Insider selling only depresses the market value, either through a dropping bid price due to volume or through a decline in investor confidence. Perlmutter has 29 million shares of MVL, which is currently valued at $1.45 billion and enough to qualify for the Forbes 400 Richest Americans as well as their 500 Richest People. He'll have no problem making the transition from first-class confinement on United Airlines to a personal Gulfstream G-550 painted with "web juice." Yes, with that payday, he'll be running in the tall grass with the big dogs on Jupiter Island.
Another reason to sell may be the very thing that has propelled Marvel into a new (and very profitable) strategic line of business - movie production. Initially, MVL licensed its Spiderman intellectual property to Sony for the production of live-action films. But with the release of the shark-jumping Spiderman 3, Marvel decided to take the reins and produce movies in-house. They secured a $525 million credit facility, used the intellectual property of 12 characters pledged as content collateral, and became Hollywood producers. Except, unlike many Hollywood types, they actually made a great movie with the release of "Iron Man." Starring Robert Downey, Jr., this film generated $582 million in worldwide box office receipts, representing the second-best selling film of 2008. And that doesn't include revenues from lunch boxes, t-shirts, video games, etc. Sure, it cost more than $200 million to produce and promote, but it generated a 100% profit on the initial release ticket sales alone. But it does take a truckload of greenbacks to finance a movie and MVL's production credit line is fraught with conditions - namely, it requires them to use their own cash for 33% of the movies' budgets. Iron Man 2 is scheduled for release in May, 2010, but there are no Marvel movies being released in 2009. It could be that Marvel doesn't have the financial traction to become a movie factory (1-3 releases per year), but Disney certainly does. Provided that Disney does a Pixar with Marvel (i.e. no interference with day-to-day management), the home of the Hulk could ramp up faster than the Silver Surfer and pounce on its competitors like Wolverine. Or, if done improperly, like Hannah Montana and the Jonas Brothers...
On the dark side, there is a lawsuit winding its way through Federal Court in the Southern District of New York alleging that the characters created by Stan Lee actually belong to another company, Stan Lee Media. The plaintiff's lawyer is Martin Garbus, a larger-than-life trial lawyer - in other words, this is serious business. If true, Marvel would owe SLM 50% of all gross profits generated by any work involving a Stan Lee character (Spiderman, Fantastic Four, The Incredible Hulk, Iron Man, and many, many others) from 2004 and for 50 years into the future. Interestingly enough, Stan Lee is suing Stan Lee Media as an injured investor himself, but that's another story. Back when Marvel went bankrupt in 1997, apparently they canceled Stan Lee's contract. During the interregnum, a contract-less Lee was befriended by an alleged con man, Peter Paul, who formed Stan Lee Media (Paul was later charged by the SEC for securities fraud and accepted a 43-month time-served sentence; SLM went bankrupt in 1998 due to his looting, reemerging in 2006). Lee is reported to have transferred his intellectual property to SLM, and then later, when rehired by Marvel, also transferred his intellectual property to MVL. Therein lies the 50/50 split being asked for by SLM. What makes this more intriguing is that on January 27, 2009, Judge Stephen Wilson ruled in a California court that Lee and POW! Entertainment (Lee's new company) illegally transferred assets from SLM while it was in bankruptcy protection. If the assets that were illegally transferred include the X-Men, et. al. then Marvel is in deep trouble. Basically, this lawsuit is a dictionary-definition of FUBAR, and Disney has just the legal team to tie it up in court for 25 years or more. While this wouldn't be a sole reason to sell, it could be a mitigating factor.
Finally, perhaps the board and executive management of MVL truly believe that the Disney offer is the best and only way to generate shareholder value, and in a fit of altruism, are reluctantly parting with the company. Of course, Perlmutter is the largest single shareholder by far, so please return to Reason #1 and start over.
Maybe the reason to sell wasn't any one factor - it could be the conjunction of everything delineated above and then some.
I can think of four possible reasons:
Isaac ("Ike") Perlmutter, the CEO of Marvel, is ready to cash out and retire. He's 66 years old and been in business as a restructuring expert for decades. He acquired a bankrupt Marvel in 1998 and over 10 years, has increased share value from $7.69 to $33.87 - an increase of 440% ex-Disney (676% including the Mouse). Buying collapsed companies and bringing them back to life requires tremendous stamina, and he doesn't get much love from the board of directors. His base salary is a paltry $700,000 and he only get three weeks of vacation per annum. His wealth is solely wrapped up in MVL stock, and the best way to extract value from an equity is through acquisition. Insider selling only depresses the market value, either through a dropping bid price due to volume or through a decline in investor confidence. Perlmutter has 29 million shares of MVL, which is currently valued at $1.45 billion and enough to qualify for the Forbes 400 Richest Americans as well as their 500 Richest People. He'll have no problem making the transition from first-class confinement on United Airlines to a personal Gulfstream G-550 painted with "web juice." Yes, with that payday, he'll be running in the tall grass with the big dogs on Jupiter Island.
Another reason to sell may be the very thing that has propelled Marvel into a new (and very profitable) strategic line of business - movie production. Initially, MVL licensed its Spiderman intellectual property to Sony for the production of live-action films. But with the release of the shark-jumping Spiderman 3, Marvel decided to take the reins and produce movies in-house. They secured a $525 million credit facility, used the intellectual property of 12 characters pledged as content collateral, and became Hollywood producers. Except, unlike many Hollywood types, they actually made a great movie with the release of "Iron Man." Starring Robert Downey, Jr., this film generated $582 million in worldwide box office receipts, representing the second-best selling film of 2008. And that doesn't include revenues from lunch boxes, t-shirts, video games, etc. Sure, it cost more than $200 million to produce and promote, but it generated a 100% profit on the initial release ticket sales alone. But it does take a truckload of greenbacks to finance a movie and MVL's production credit line is fraught with conditions - namely, it requires them to use their own cash for 33% of the movies' budgets. Iron Man 2 is scheduled for release in May, 2010, but there are no Marvel movies being released in 2009. It could be that Marvel doesn't have the financial traction to become a movie factory (1-3 releases per year), but Disney certainly does. Provided that Disney does a Pixar with Marvel (i.e. no interference with day-to-day management), the home of the Hulk could ramp up faster than the Silver Surfer and pounce on its competitors like Wolverine. Or, if done improperly, like Hannah Montana and the Jonas Brothers...
On the dark side, there is a lawsuit winding its way through Federal Court in the Southern District of New York alleging that the characters created by Stan Lee actually belong to another company, Stan Lee Media. The plaintiff's lawyer is Martin Garbus, a larger-than-life trial lawyer - in other words, this is serious business. If true, Marvel would owe SLM 50% of all gross profits generated by any work involving a Stan Lee character (Spiderman, Fantastic Four, The Incredible Hulk, Iron Man, and many, many others) from 2004 and for 50 years into the future. Interestingly enough, Stan Lee is suing Stan Lee Media as an injured investor himself, but that's another story. Back when Marvel went bankrupt in 1997, apparently they canceled Stan Lee's contract. During the interregnum, a contract-less Lee was befriended by an alleged con man, Peter Paul, who formed Stan Lee Media (Paul was later charged by the SEC for securities fraud and accepted a 43-month time-served sentence; SLM went bankrupt in 1998 due to his looting, reemerging in 2006). Lee is reported to have transferred his intellectual property to SLM, and then later, when rehired by Marvel, also transferred his intellectual property to MVL. Therein lies the 50/50 split being asked for by SLM. What makes this more intriguing is that on January 27, 2009, Judge Stephen Wilson ruled in a California court that Lee and POW! Entertainment (Lee's new company) illegally transferred assets from SLM while it was in bankruptcy protection. If the assets that were illegally transferred include the X-Men, et. al. then Marvel is in deep trouble. Basically, this lawsuit is a dictionary-definition of FUBAR, and Disney has just the legal team to tie it up in court for 25 years or more. While this wouldn't be a sole reason to sell, it could be a mitigating factor.
Finally, perhaps the board and executive management of MVL truly believe that the Disney offer is the best and only way to generate shareholder value, and in a fit of altruism, are reluctantly parting with the company. Of course, Perlmutter is the largest single shareholder by far, so please return to Reason #1 and start over.
Maybe the reason to sell wasn't any one factor - it could be the conjunction of everything delineated above and then some.
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