Investing in the Media and Entertainment Business

I did not know that private equity firms and venture capitalists take creative businesses seriously. Only recently was it made known that private equity investors took interest in fashion houses. Which other creative business could become a target for investment and growth? It turns out most of the media and entertainment businesses may appear appealing to savvy investors. This is what I learned last Friday at the MBA—Media and Entertainment Conference (MEC) organized by the best business schools in the US: Columbia Business School, The Wharton School, MIT Sloan Management School, Duke The Fuqua School of Business, and NYU The Leonard N. Stern School of Business.

The conference took place on Friday February 25, 2011 at Columbia’s Low Library. McKinsey & Company, Goldman Sachs, and AOL were the underwriters of the event while a great number of MBA students from the aforementioned schools took charge of the logistics. Throughout the day, great discussions unfolded and hundreds of other MBAs and many professionals were able to participate.

The main point of the keynote address by Leslie Moonves, President and CEO CBS Corporation was that content is key, especially now that digital technology is enabling the industry to transform structurally. This struck me as an interesting point of differentiation between this conference and the one on the Retail Industry I attended a few weeks ago also at Columbia University. There I learned that retail/fashion/design brands are using digital technology as a means of distribution and a new way to interact with their customers. At the MEC I heard from those who own distribution channels and who invest in new digital technology to transform these channels while they also strive to develop proprietary content. What type of content? Anything that is based on good writing, such as films, TV series, books—after all CBS owns the esteemed publishing house of Simon & Schuster. What a remarkable moment this is: media companies capitalize on inexpensive productions (such as reality shows) that bring spectatorship numbers up while creative companies (fashion, design, advertising) experiment with new content to take advantage of the new digital technology. One wonders for how long these two industries will be approaching what seems to be the same target, whether the two will merge under a new order or whether yet a third type of business will spring up to dominate both directions.

Content is the driving force either for those who produce it and wish to increase its reach or for those who have been facilitating its distribution. Content was the catalyst behind the acquisition of The Huffington Post by AOL, a business transaction that took place just days before the conference and as a result stirred an exciting discussion between Arthur Minson, CFO of AOL, and John Martin, CFO of Time Warner.

Content is what impels Contour Venture Partners, Canaan Partners, Warburg Pincus and Zelnick Media to invest in new ventures in the media business and not technology alone. Content is what inspires film financing, an area that most private equity investors avoid, unless they have a solid (low to zero correlation) strategy as Chip Seelig Jr. Partner and Managing Director, Dune Capital Management facetiously admitted. Apparently, the film industry remains the most elusive to investors. Even with a well thought out approach to content, a production does not always respond to the audience’s psychographic wants and often results to “flops” (creatively and financially speaking) mused Brent Stone, Partner ABRY Partners. Finally, the one industry where content itself remains elusive is the art market. “The Art Market in the 21^st Century,” was the last panel but rather than crowning my day with new insights on the visual arts industry it sadly highlighted the discordance between the uninitiated (to art) public and the uninitiated (to business) art professionals. Except for the “black swan” of course: right now this would be Manish Vora, Co-Founder, ARTLOG.com former investment banker and driving force behind a major transformation that even the arts industry is about to face.

Next year, the conference will take place at NYU’s Stern School of Business. In one year’s time, a whole new generation of ventures will have come and gone with plenty of valuable lessons for those who find the creative fields to be an appealing investment. 

Retail Reborn

The Department Store shaped America. As a new type of building in which to trade clothing, home appliances, and a variety of other goods it penetrated American life and changed its course. There are a few notable examples in Europe; think of La Samaritaine and Le Bon Marché in Paris, two very prominent examples that changed the retail business in France, or the Schocken Department Store in Germany. But it is only in the US where this model of retailing changed life for good. It changed entire cities, their history and architecture. It changed people’s needs and wants. It became the cornerstone of new urban settlements and the center of social life. And while it spurred American consumerism, it also ignited manufacturing, entrepreneurship, and financial savvy all of which have defined American identity for at least the last one hundred and fifty years.

The decision to invite Michael Gould, Chairman and CEO, Bloomingdale’s to deliver one of the two keynote addresses at Columbia’s Business School Fifth Annual Retail & Luxury Goods Conference was truly enlightened.  The conference took place on February 4, 2011 at the Low Memorial Library, Columbia University in New York.  Aniza Shah (’11) and Derrick Chan (’11) hit the right note with that decision and also put a most interesting program in place for their audience.  They also echoed a similar decision the NYU Stern Luxury Retail Conference Committee made a little over three months ago (http://thomaiserdari.blogspot.com/2010/10/c-suite-retail-spotlight.html) when they invited Lord & Taylor CEO Brendan Hoffman to be the keynote speaker.

This means that student committees know how to read the pulse of the market and put together programs that many a professional organization would envy. It also means that New York City is blessed with two wonderful institutions, each one with its own character and approach to student life but both with a very rigorous business curriculum. These two schools have traditionally staffed executive positions both in the Garment District but also in the great department stores that dot the city’s grid. It seems that these two schools are also producing the executives for several retail and luxury brands that have already expanded their businesses oversees—and wisely so, as Rick Darling, President, Li & Fung, USA pointed out in his keynote address, later that afternoon. (http://www0.gsb.columbia.edu/students/organizations/retail/conference.html)

It is not easy to summarize the speakers’ main arguments in one entry only. But the same points kept returning in both key speeches: staff training and development and brand development strategy. The former raises questions of leadership (should it be top-down? Or should one lead and manage from behind? How does one reach out to recruit?). The latter is the outcome of two important events: a. manufacturing has very little future domestically (within the US) and is rapidly developing in new hubs in Asia (Central China, Thailand, Bangladesh for example); b. the size of the American market is not enough in itself for brands to maintain their competitive advantage. It may have rendered a variety of brands complacent because the opportunity to record substantial revenues within a consumerist society of the size of this country has always been present. However, today, when new economies are emerging and grow to consume, a brand’s viability and its competitiveness are proven on an international level. For this to be successful, brands need to study and understand their new markets rather than rely on outdated models supplied by the saturated by now American reality.

These are tough points to digest but Profs. Ketty Maisonrouge and Mark A. Cohen who moderated the panel discussions had planned a series of thought-provoking questions that allowed the panelists to express a variety of perspectives across brand levels (from mass-market to upmost luxury). It did not hurt that the audience (mostly Columbia students but young professionals as well) was particularly sophisticated and added to the discussion with pertinent, and rather challenging questions. I will make sure to return to a few of the most novel ideas that were presented last Friday in subsequent entries. Certainly, I am looking forward to the Sixth Annual Retail Conference of 2012.

Bottom-Up Reassessment

I feel I have come full circle.  Last year, I began this blog inspired by my former professor’s, Edward Altman’s, work at the Leonard N. Stern School of Business. A year later, in December of 2010, he gave me his latest paper to read, “Sovereign Default Risk Assessment From The Bottom-Up,” where he and Herbert Rijken elaborate on their new model, based on Altman’s classic Z-score, and how it measures sovereign default risk based primarily on the health of privately held companies within each country. (You can find a copy of his paper here: http://pages.stern.nyu.edu/~ealtman/Oped.pdf)

Yet, this last year was more than just reading papers. The year took shape for me by going to conferences, attending meetings, and joining online discussions. All these activities had one thing in common: they evolved around those who manage private companies (small, medium, and large) and the problems that they face each day.

Ironically, I have been pedaling backwards for the entire year. I attended several private equity conferences where the Who’s Who of the financial world stirred as much thrill from the public as Bono does every time he appears in concert. I backpedaled my way to meetings on Venture Capital and realized that the major players had already had a whole other life in seed investing, often as entrepreneurs themselves—on the “other” side, that is. Naturally, I began following what’s happening in the start-up world but from the entrepreneur’s side. Funding ceased being a concern (although it very much is for every single one of the entrepreneurs I met last year).  Building the business, gaining traction, creating a product the customer wants, these have been the primary questions on my mind since last summer.  In the process, I met wonderful people who are inspiring, imaginative, and generous with their advice like Peter Shankman of HARO, Graham Lawlor of Ultra Light Start Ups, Carrissa Reiniger of Silver Lining and so many others.

While I continue feeling the attraction for companies that remain detached from the public markets, what happens in each sphere (private vs. public) is very much intertwined. Vistage, a West-Coast membership organization for CEOs of small and mid-sized companies, has been reading the market’s pulse on a quarterly basis and has been predicting consumers’ behavior and its effect on the businesses with which it works. No matter which side one takes, every decision has consequences and this is what I learned as I studied a few companies that had made a difference in the way the business world is functioning and re-structuring.

My hiatus from this blog for almost three months was due to my own desire to try the market out and build something for myself, a company that caters to those who have not had the chance or the time to learn how to appreciate and incorporate luxury into their lives ( http://www.encoreluxe.com). And while the dice has not been cast yet on my venture’s longevity, I am thrilled to return to this blog and keep you posted on what the conference/meet-up and real life circuit has in store for all of us inquisitive minds this year.

The Elevator Pitch

Last Thursday, November 4, I attended an event organized by Ultra Light Start Ups (Twitter @ULS). This was actually one of the monthly meet ups that take place in various locations around New York City. On Thursday, Microsoft hosted the event and welcomed approximately 150 entrepreneurs who were in the company (via Skype) of another sizable group in Boston. The moderator, Graham Lawlor of Ultra Light Start Ups, assembled “The Email Mafia” (Jason Baptiste, OnStartups.com; Greg Cangialosi, Blue Sky Factory; Chris McCann, StartUp Digest; Peter Shankman, HARO) to discuss what makes an email-based media startup profitable.  

To get to the point where one uses a distribution platform effectively, grows the email list consistently, and is able to sell the startup within two years for $20 million without external capital, one needs to perfect the elevator pitch. This became obvious on Thursday because the evening began with pitches from about ten startups. But what’s important about the elevator pitch, which lasts exactly for one minute, is that it serves many more purposes than what most people imagine.

First, the pitch describes the company and the people behind it: Who are you? What are you working on? Why is it important? How are you doing it? What is the value you bring compared to your competitors? What is your revenue model? Or else how do you make money? Finally, and once again, why is it that you are doing something important? As simple as these questions are the answers need to be finely crafted. The goal is to outline the aforementioned questions within 60 seconds and to do it effectively one needs to write, re-write, and re-write the pitch to perfection. Is that it?

No. An elevator pitch should be a live document. It should change in time to reflect how the company is growing and in which direction. This became obvious on Thursday when a couple of the presenters had been in business for a few years but still had difficulty expressing and clearly explaining to the audience what is it they do. Not only is the pitch addressed to the non-expert (and therefore you should forget and eliminate any jargon and acronyms from it) but it is also a means for the entrepreneur to check whether he/she has deviated from the original plan and to determine why. In other words, the pitch is a road map to remind you what you set out to accomplish. It is an outline of the original strategy. If the strategy has changed so should the pitch. Leaving it aside among the many items on the to-do list and checking it off once completed for the first time does not help anyone. It certainly does not help the entrepreneur in defining what works and what does not and in charting new directions for the future.

What became evident last Thursday during the pitch segment of the Ultra Light Start Ups evening was that the elevator pitch has been incorrectly associated with start ups exclusively. Imagine running a large fund and trying to convince new investors to join you. If their decision is based solely on the fund manager’s reputation, they are most probably making a mistake. But if it is based on a clearly articulated investment strategy (elevator pitch) chances are the fund manager is constantly refining the fund’s strategy and pursuing projects that fall within its purview.

Fidelity vs. Convenience: The Trade-Off

It is time to revisit my post of October 29. Tonight, I learned of a new model that explains exactly what I outlined in my earlier entry.

I attended a lecture by Kevin Maney, best selling author and journalist, who writes for Fortune, The Atlantic, and Fast Company. He was recruited by Condé Nast Portfolio magazine and remained contributing editor there until the magazine’s demise. Prior to that he had been a senior technology reporter at USA Today. Maney is the author of The Maverick and His Machine: Thomas Watson Sr. and the Making of IBM (John Wiley & Sons, 2003) but his lecture tonight at Alliance Bernstein was on his most recent book, Trade-off: Why Some Things Catch On and Others Don’t.

            In his book, Maney elaborates a theory according to which successful products accomplish one of two things: either fidelity or convenience. Fidelity is a term that refers to the customer’s willingness to pay a premium for an experience even if that experience involves unpleasant events along the way. For example, a Bono fan will pay a high price for a ticket to a Bono concert, even if it is very hard to find parking, the space is really crowded, and getting back home after the concert takes for ever. The other end of the spectrum would be listening to Bono singing on one’s MP3 player. That would be highly convenient. Unfortunately, the sound does not compare to that of a concert and Bono does not come run errands with the listener. Both products, the extremely expensive and highly inconvenient as well as the inexpensive and highly convenient have a steady and specific following and generate substantial revenues in their category. In addition, both can grow. To illustrate how, one may place fidelity on the y (vertical) axis and convenience on the x (horizontal) axis and picture the two growing either up (higher fidelity can bring larger margins) or to the right (higher convenience can bring greater market share and greater returns).

Problems arise when companies want to achieve both at the same time. They want to have a large following of loyal customers who recognize the coolness of the brand and are willing to pay the price for it, while they also target a large market share for whom the product is appealing because it is accessible. The perfect example would be Starbucks during its period of aggressive growth. In fact, what Starbucks proves is that the combination of both high fidelity and high convenience is disastrous for the brand. The contradictory powers fight each other and usually demote the brand to a zone close to the bottom left of the previous illustration. That zone is called the fidelity belly. Brands that fall into the fidelity belly usually have a very hard time coming out of it. This is because companies within that space cannot make up their minds as to whether they would like to pursue the fidelity axis or the convenience axis. The author presented several examples of companies who have succeeded in that endeavor by clearly choosing a path for growth and only in one direction.

This is exactly why Maney’s presentation reminded me of the discussion of Gilt’s acquisition of Bergine. In my mind, Gilt is moving along the convenience axis, expanding geographically and making discounts available to a broader geographic region. This does not mean that Gilt itself is a luxury retailer. It has now become a discount retailer and it so happens that the discounts it sells are of products within the high-end sector of the lifestyle industry. The products themselves originally belong to the fidelity zone but when they are marketed through Gilt or Groupon they temporarily shift to the convenience zone. But e-commerce does not necessarily have to be a shift toward convenience. Within the luxury sector, I distinguish Portero.com, a company that sells premium, pre-owned, prized luxury goods while maintaining a very clear definition of its own brand within the domain of exclusivity (fidelity, experience, coolness) that both it and the brands it markets occupy.

While I had thought about these issues before, I gained a new perspective on things tonight. I think Maney’s model is a very handy tool both for established firms that are re-examining their own strategy for growth or start-ups that are in the process of defining which segment of the market they serve.

The missing link: Women in the Boardroom

A panel showcasing Susan Engel, CEO, Portero.com, Barrie Berg, CEO Americas, ?What if!, and Meesha Rosa, Head of Communications with Catalyst’s Corporate Board Services, and moderated by Marie C. Wilson, Founder of The White House Project is no small feat. For Sheila Ronning, CEO and President, Sharp UpSwing who organized the event this was another opportunity to add value to the audience of Women in the Boardroom (http://www.womenintheboardroom.com/), an executive leadership event designed to assist in preparation for board service.

The event took place today (November 1, 2010) at The Park Hyatt in New York and hosted approximately 750 women, all leaders in their industry and all eager to serve. We all enjoyed Marie C. Wilson’s opening remarks on Norway’s legislative mandate to public corporations to recruit more women for their boards (http://www.guardian.co.uk/money/2006/jan/09/business.workandcareers). Running a publicly listed company in Norway five years ago must have been a real drag but today Norway is leading the way in prosperity (http://www.eubusiness.com/europe/norway/econ). Is there a direct correlation between economic success and female executive leadership? The experts today confirmed there is. They discussed the data, elaborated on its consequences, and recounted personal experiences, which prove that corporate governance in the US today remains opaque and antiquated—in spite of the SEC’s efforts to update the corporate governance process and the meaning of fiduciary responsibility.

Admittedly, women offer a different way of thinking (not better, not worse, just different), a different approach to problems and their solutions, and a superbly qualified profile that has been thriving in executive positions for years. In addition, women’s inclusion on corporate boards offers reassurance that diversity is appreciated and valued. Why aren’t there more women in corporate boards? And when there are, why aren’t they necessarily part of the Compensation, Audit, and Nominating Committees?

Perhaps these are the wrong questions to ask. What would be more interesting than trying to comprehend the internal politics of public companies is to offer the missing link to that part of the industry that usually offers innovation: the private sector. Indeed, the panelists established today that the most active and creative industry in recruiting women for available corporate seats may be private equity and specifically small to mid-cap private equity investors who are constantly looking to equip the boards of their newly acquired companies. This is not to say that women’s presence is palpable or already actively pursued within private equity. On the contrary, what this note offers is a suggestion that perhaps the missing link between private equity investments and their concerted effort to lead private companies to growth is the recruitment of qualified women for Advisory Board or Corporate Board roles.

Luxury re-defined

Gilt’s first acquisition of Bergine, a San Francisco based company, stirred quite a discussion within the e-commerce sector, particularly as it pertains to the luxury goods and services industry. The best place to get the specifics of the deal (which, after all, was between two private companies so don’t expect to find any numbers) is in Geoffrey Fowler’s WSJ Blog of October 26, 2010 (http://blogs.wsj.com/digits/2010/10/26/gilt-makes-its-first-acquisition-bergine/). Mr. Fowler thoroughly covers what has grown to be a very competitive landscape of online discount retailers on luxury deals, for example discounts on five-star restaurants, wedding planning consultations, or high-end flower design. The deals have an expiration date, are good for one use only (this could however include a package of services), and allow the masses or financially mindful to partake in the luxury lifestyle industry.

All this is very nice. It seems however that the idea of luxury for such type of operation is a fleeting one. While Gilt City (which launched in New York last May and quickly expanded to Boston, Chicago, Miami, and Los Angeles) is gaining market share against competitor Groupon, (which controls a considerable percentage of the market and has been growing thanks to a strategy of determined acquisitions of small, local businesses that keep cropping up), the question of how is luxury doing online remains unanswered.

Technology has changed the way people think and has contributed to educating them on various topics and industries. The masses are suddenly aware of the unique and highly exclusive restaurant where a dinner for two may easily cost their weekly wages, if not more. They are able to taste that extravagant dinner once thanks to the online discounts (purchased on Gilt City or Groupon). Do they become permanent clients at this establishment? Probably not, but according to the analytics of traffic, sales, and return customers, one who has bought a discount dinner may be on the look out for another discount at the same restaurant. The restaurant, on the other hand, remains open thanks to the people who pay full-price for their meal. Most importantly, the restaurant maintains its status within the luxury world because it is not accessible to everyone.

I find the current developments within the particular segment of the online luxury market very interesting. The phenomenon will certainly continue for a few years and until all regional markets are covered. But once this has been achieved, it will also spur a leap in prices within the luxury lifestyle sector. This is because our culture prizes excess. The people who can own excess demand exclusivity and those who admire excess desire both the product and the privilege of exclusivity.  This is how human psychology operates.

Consequently, I cannot agree with the generalizations online retailers of discounted luxury goods project. Who do we group under the “online luxury” label? More importantly, which product and service do we specifically distinguish and denote as luxury? While the online market will be consolidated in a greater degree, so will the luxury lifestyle sector. When cards are reshuffled, they are reshuffled in all directions, albeit not at the same time. The more prolific the online discount deals on the so-called luxury goods, the greater the spike in the prices of exclusive products. This is how the economy works, either on paper or online.