Musings on Media Investing

I’ve found that you get more by giving, so I’m writing this hoping it will help others, provide stimulating feedback for me, and maybe help land an opportunity to invest in the next great media company.

Since launching my new venture fund, Plus Capital, I’ve been thinking a lot about media and my investment strategy or “thesis” for the category.  I’ve had the privilege of being a board member, investor or advisor to amazing digital media companies including ZEFR (f/k/a Movieclips), BigFrame, MoviePass and IconicTV. I also spend significant time with friends in traditional media trying to better understand their plans since several of them are (hopefully) going to be the acquirers of the digital media companies I invest in.   

I break media investment opportunities into three layers: Platforms, Networks, and Creators.

Platforms

In Venture Capital, this is the ‘whale hunting’ investment.  Huge risk, huge (potential) reward.  For example: Artis Capital and Sequoia Capital backed YouTube. When YouTube started taking off and bandwidth costs passed $500,000 per month these investors were thrilled to keep funding. Others thought they were nuts. The model was one of building scale before monetization. Boom! YouTube hit 72 million monthly users, but still had limited or no revenue. Nonetheless, it resulted in a $1.65 Billion exit to Google less than two years from launch.  Go big or go home.

NetFlix, Amazon and Hulu are the competition. They are the platforms who are winning.  With scale of videos and viewers, all of them have an advantage over newcomers, Ubiquity.  They come pre-loaded on TVs, gaming devices, mobile phones. They come “on-deck,” which is important because there will be limited portals featured in this brave new world.

For the last few years, investors have been looking for another YouTube to back (Vimeo, Daily Motion, etc.). I personally believe that success will come from an indirect route; specifically, large entrenched players like Facebook or Twitter, to name a couple.  Honestly, I’m not smart enough to see a mobile-first path for a start-up or another route that doesn’t already start with scale today so for now I’m just watching. Also, with a small fund like mine, I would have to tag along with a firm that has deep pockets and a big appetite to fund any idea of this type. 

Since starting this post, rumors have surfaced about Maker Studios creating a competing service to YouTube.  I haven’t fully wrapped my arms around that one yet and I’ll defer commentary to their very capable investors. Whether or not it’s true, the question for whoever decides to compete with YouTube is, “Does it (or will it soon) have the necessary components to compete with YouTube?”  Does it have:

A minimum threshold of scale in terms of users, creators and possibly advertisers

A compelling value proposition to attract new users

Content that is hard to substitute

The third point is the most interesting to me because time and time again companies underestimate the difficulty in getting people to switch service providers.  Consumers will find replacement content. They always do. A major TV networks content is important for a platform except when it’s the only one not in yet.  If YouTube had no TV content and got Fox to give it their shows, it’s a big deal.  If every other network gives YouTube content and Fox doesn’t, then not many people are going to leave just because they don’t have Fox content on YouTube. It takes event driven programming to drive adoption. The NFL package on DirecTV, House of Cards on NetFlix or Sopranos on HBO are all examples. It’s rare for a Venture Capital firm to bet on hit driven programming to drive platform adoption.

In the platform space, what I do see worth funding today are technology companies that are enabling media companies on and/or across platforms. Companies like ZEFR.  ZEFR is the ‘picks and shovels’ business for premium video.  YouTube’s users are gold and every content creator and brand wants it.  ZEFR provides tools and services like ContentID and BrandID to help them harvest their gold. (Disclaimer: I was on the board of directors of ZEFR for 2 years from the days they were 5 people and called Movieclips. Love them.)

Networks

MCN, MCN, MCN.  All we keep hearing about are MCN’s (Multi-Channel Networks). MCN’s typically have three functions:

1. Create – producing their own content for their own channel(s)

2. Curate – working with third parties content owners to distribute this content through their owned and operated channels

3. Represent – Similar to an ad network or ad rep firm, MCN’s represent dozens, hundreds, and sometimes thousands of other channels in order to bring scale of a demographic or psychographic to advertisers.    

MCN’s were the first YouTube driven companies to get venture funding. Machinima, Maker Studios, and Full Screen have all scaled to billions of monthly views and valuations in excess of $100M. But now we’ve hit a fork in the road. Creators are bitching to me (many rightly so) that they’ve been locked up in long contracts for advertising representation that is getting minimal monetization.  It reminds me of the days of Tribal Fusion and Gorilla Nation where they locked up websites for three years on a promise of better monetization and easier scaling only to find that they sold less than 20% of their inventory and took a huge piece of the remnant revenue.  They also sued people if they tried to get out their contract.  Ah, the good old days.

Smart MCNs, like Machinima, are already two steps ahead of this trend (since they started it). I believe that smart MCNs have moved toward becoming what I call a “Multi-Platform Network”. This is where I’m focusing my time and money.

The Multi-Platform Network

I believe that the next big media investment opportunity will come from today’s Multi-Platform Network.  My definition of a multi-platform network is a new media company that is:

Creating and curating programming targeted by demographic or psychographic.  The reason for this is that we’ve finally hit a tipping point where we can get scale without finding one size fits all content.

Directly engaging a community of creators and consumers. It’s not just about comments.  YouTube called it “Generation C”, the Connected Generation, at its Newfront presentation this year.  It was very powerful.  The next generation is engaging with the content, both the creators and the viewers.  It’s game changing for media and being masked by all the hype on those second screen app companies that have limited user bases. 

Distributing this content across multiple platforms YouTube, cable networks, broadcast, NetFlix, Yahoo, AOL...This is the bet.  It’s not about a YouTube-only strategy.  YouTube’s channel funding programming provides an opportunity to develop formats (new shows).  They don’t own any of the Intellectual Property the channel creates.  They just want to recoup on advertising. “You can’t recoup so why take it?” “It’s fools money!” Hold on.  YouTube money can help a channel grow an audience of viewers, in fact a community. It’s even great for funding a specific show.  Assume for a minute that YouTube funds a specific show for a channel.  It gets wildly popular.  “So what? I just have to give YouTube the money back before I see a dime.” Maybe.  But beyond the subscribes you just bought with YouTube’s money, you can do a deal with Fox, Bravo, ANYONE for that same, now popular, show and you don’t have to share a dollar with YouTube.  Yep.  In fact, YouTube should love that you’re doing this because it TOTALLY validates YouTube as a video platform.  It’s the Arctic Monkeys moment on MySpace or the Arab Spring for Twitter.  It completely legitimizes YouTube as a Platform that’s not just about cat videos. People are complaining about the revenue split with YouTube but they’re not computing the value of the farm system that YouTube brings to the Media ecosystem.  Give away the small dollars and keep the big dollars.  It’s a fair trade if done correctly.

4.     Mobilizing the community to new programming wherever it’s available. “But I don’t own my subscribers!” Hogwash (I had another word in mind).  History Channel doesn’t own it’s subscribers on Comcast.  At least on YouTube you can directly communicate with your subscribers when they’re not actively watching your channel.  You can upload a video and tell them about your new show on Fox.  It’s just the beginning.  This is how creators will start to see bigger and bigger upfront payments and revenue share agreements. It’s already happening in the movie and TV business.  Actors that can mobilize large numbers of fans and followers from social media to the opening weekend of their movie or the premier of an episode of a new show are more valuable to studios. They are getting higher fees and back end participation.   As actors and creators become their own media companies they too will participate (see ‘Creators’ below).

Brian Robbins did these four things with Awesomeness and I’m sure if he’d have continued independently they would have had an even bigger exit. Create programming on YouTube, grow a very active viewer base, license shows to major cable networks, and start a movement where over 100,000 young creators join in.  They are a MPN.  And by the way, they’re changing the face of media.  Those shows they created and licensed to cable networks weren’t deficit financed, an industry term used for shows that cost more than they make upfront but have long-term value in syndication, etc. They were making money from day one.  

Creators

Typically people are either creative or business minded. Very few ‘artists’ are also great business people. That’s why they give 30-40% of their income away to managers, agents, business managers, and lawyers. But now Artists are becoming their own brands and they will soon build up their own media companies. These are not typical venture capital investments because they don’t have ‘programmatic scale’. But they can be great businesses.  They just build off cash flow.  They’re tweeners.  They need angel money or friends and family and if they’re really successful, they’ll throw off enough free-cash flow to interest private equity investors.  Creators are going to have a field day becoming their own media companies.  They’ll build teams or get representatives to mobilize and monetize their fans and followers.  New celebrities will emerge.  Careers will be made and people will make a lot of money.  This is already happening.   It’s just good business.  But to take the leap from good business to needing or wanting venture capital money, it has to be more in my opinion.

I’m excited about the future of Media.  I have no doubt that the next Nickelodeon, MTV or ESPN will (and should) start digitally.  I hope I’m lucky enough to play a role in backing them.