Friday, May 20, 2005

Image Industry Consolidation and The DNA Factor

After nearly a three year pause in activity, consolidation in the image licensing business has begun anew. The past 12 months have seen all three of the industries top players investing significant sums in acquisitions. Corbis' acquisition of ZEFA and the Roger Richman Agency, Jupiter Media's (Nasdaq: JUPM) acquisition of Comstock and Dynamic Graphics, and Getty Images (NYSE: GYI) recent announcement of Digital Vision and Photonica all send a clear signal that leading companies in the content licensing business have resumed their bullish outlook on the future of the industry.

And no wonder: Getty's rise to dominance can be almost singularly attributed to their effective execution of an industry roll-up strategy (initiated in 1995 with the acquisition of Tony Stone Images). Moreover, Getty has also demonstrated that by their nearly flawless integration of these companies, that partners and shareholders can realize greater value through effective execution of a roll-up strategy.

For competitors, partners and investors alike, acquisitions provide insight to the buyer's business and the buyer's DNA, aka strategy and approach, to the market:

Corbis: This Bill Gates-owned company (and the distant #2 player in the industry at $170MM as compared to Getty's $700MM) has been active in acquisitions and their inherent DNA - slow to innovate and avoid risk -- seems to be playing out again. The ZEFA acquisition, while certainly a move that bolsters revenue was done primarily to preserve market share and remain competitive in Europe with Getty. ZEFA adds little to Corbis' ability to innovate and as such is low risk/low return. Similarly, The Roger Richman Agency acquisition, while strengthening Corbis' rights clearance business (and appealing to their trained-as-a-lawyer CEO), the bottom-line effect will be minimal due to the nature of the rights clearances business. While Corbis will no doubtedly enjoy the spotlight of managing rights of famous artists and celebrities, rights clearance by definition is a labor intensive business fraught with complexities and therefore will be near impossible to automate or scale.

Jupiter Media: By contrast, Jupiter's DNA is an internet media company and their acquistions reflect this fact: While also pursuing acquisitions for content and market share, Jupiter is primarily using acquisition to accelerate adoption of a "subscription licensing" model very different from Getty and Corbis. Subscription revenue is something media companies live and die by (and highly desireable as a preferred model for business operators "to see revenue" in the future). And, unlike, Getty or Corbis, Jupiter sees itself as a pure internet play and is using it's acquisitions to enhance its position as such. Evidence of this strategy taking effect can be found in the superior Alexa rankings for the collective Jupiter properties when compared to Getty and Corbis (not to mention traffic generated to and from Jupiter's numerous affiliates). In short order, measured by acquisition, traffic and total revenue, Jupiter's DNA has guided the company in becoming the 3rd largest player in the industry.

For its part, Getty knows a good thing when it sees it. Its recent acquisitions reinforce Getty's DNA: acquire, integrate for efficiency, improve margin and generate free cash flow. Some have argued that Getty paid too much for Digital Vision (Getty paid $165MM; it has been rumored that only a year ago DV was to be had for less than half this amount). Don't bet on it: Jonathan and Co. are investment bankers by training. They ran the numbers, amortized the acquisition cost and will deliver to The Street exactly what it wants: Greater margins. By no longer paying DV a royalty for images sold, Getty gets to realize 100% of every sale and gross margins upward of 70%. The recent Photonica acquisition reflects a similar rationale: The Photonica acquisition not only buys Getty better margin, (Photonica, like DV, is also an existing Getty image partner) but will also give Getty a stronger footprint in the Japanese and the larger Asian markets which it greatly covets.

When looking at the acquisitions through the lens of a company's DNA, a very clear and consistent picture emerges. Competitors, partners, customers and investors should take note.

Friday, May 13, 2005

Lessons in Hardball

Earlier this year, I read the book "Hardball, Are You Playing to Play or Playing to Win?” by George Stalk and Rob Lachenauer published by HBS Press. The authors cite numerous case studies and reveal explicit boardroom strategies of companies (Frito Lay, Dell, Citibank among others) who use their dominant market position to block or, in some cases, crush would-be competitors. Having worked for two companies that held dominant positions in their respective markets, I can speak from first hand experience how maintaining a hardball focus provides winning results. Conversely, I've also been part of two companies who held, and then lost, their dominant position, because they lost the hardball edge.

Watching this week's events unfold with the announcement of Yahoo!'s new Unlimited Music subscription service, let's take a look at some effective hardball strategies at work:

1) Leveraging dominant market position as world's # 1 digital media portal: Yahoo! is unequaled in its market position. Some will argue that whether or not Yahoo! makes money from music subscription fees (and I'm sure they will), the recently announced music service will retain and draw even more qualified and targeted traffic for Yahoo! to sell to its advertisers and partners and THAT's ultimately what drives Yahoo!'s business. This strategy is analogous to what many successful retailers do in aggressively discounting certain products (described as "impulse purchases" -- low price music CDs are often deployed in this fashion) that in turn attract customers, then make them linger in the store longer to the consider the purchase of the more expensive-high margin products where the retailers really make their money.

2) Market leaders use price to their advantage: While lower price is an obvious tactic, market leaders who have profitable businesses can completely undermine and obliterate nascent competitors by using low price to buy market share. This is a page right out of Wal-Mart and Costco's playbook and a strategy that virtually pre-clude competitors from entering their space. Moreover, it will force the hand of current competitors to respond if they are to survive.

3) Hardball players move markets: Just take a look at how Napster's stock price got hammered after the Yahoo! announcement. Lower stock price means less capital and resources to respond to the hardball tactic. And to think, just 4 months ago on SuperBowl Sunday Napster-to-Go literally swept both Apple and Real off the headlines and had analysts and columnists everywhere lauding their brilliant strategy.

Hardball? You bet. Yahoo!'s move this week qualifies them for the Cy Young.

Wednesday, May 11, 2005

Hey Kid - 5 CDs or 800,000 Tracks-- Which One Do you Want?

As an avid listener (and collector) of digital music, I've always believed in owning the tracks I listen to and haven't seriously considered buying into any of the music subscription services-- until today. Yahoo! Announced their Yahoo! Music Unlimited service at the remarkable price of $4.99 month giving access to over 800,000 tracks from the major labels.

When I pause to think about how I can best leverage my investment of gear (computer, home WiFi network, broadband connection and integration with my existing home stereo), I start to salivate at the possibility of pumping 800,000 tracks through my system. Moreover, when I consider my additional (and ongoing) investment of time (purchasing CDs, downloading, ripping tracks), $5 a months sounds like a no brainer.

Has the promise of music subscription finally been realized? This one will he interesting to watch.

Friday, May 06, 2005

"Daddy, Does the Music Come From Your Cell Phone?"

Driving my 6 year old daughter to an after school event, we were listening to music from my iPod through my car stereo. (Apple teamed with BMW to make a neat adapter cable that allows you to tuck away the iPod in the glove box and operate the player's functionality though the existing car stereo controls-- I love it). My daughter only cares about the music ( huge Beatles fan) and not the technology that makes it work. But as I pulled into the drive, turned off the ignition and grabbed my Treo cell phone, even she made the natural connection between the portability of the cell phone and the infinite enjoyment of being able to take your music with you EVERYWHERE.

She's not alone in her observation: A recent Consumer Mobility Study by In-Stat/MDR finds that 11.4% of US mobile subscribers are very or extremely interested in moving beyond basic ringtones and purchasing more full-featured music/audio services for their wireless phones including music and news/talk content available as downloadable content or on demand. The most popular service concept is the ability to download MP3s or other digital music files directly to wireless handsets, followed closely by the ability to listen to streaming music on demand.

Here are just a few of the activities underway that are helping to bring her vision to the market today:

Robust storage capacity is here: SanDisk says, in 2005, phone manufacturers will introduce 200 new phone models with memory card slots. Samsung Electronics has developed a cell phone that runs on Microsoft's Windows Mobile operating system and includes a 3GB hard drive. The drives in the Samsung phones are similar to those used in some portable digital music players, such as Apple Computer's iPod Mini, and the phone maker is employing them so that it can offer similar music player functions on the handsets.

Best of both worlds - Dual Track Download: Loudeye (NASDAQ: LOUD) in partnership with Nokia and O2 recently announced functionality for users that download a full track to their mobile device will simultaneously receive a “dual download” of the same track sent to their desktop optimized for playback on a PC or other portable device. This service will allow users to “synchronize their mobile music collection with their PC. Tracks optimized for transmission over mobile networks are typically in the 500 to 750K range which are considerably smaller than the average MP3 file which for a 4 minute track typically weighs in at 4-5MB.” (Excerpt from Loudeye company press release, 3/9/05)

P2P Goes Mobile: Using Melodeo’s peer-to-peer feature, ( users select a song from the play list of tracks on their mobile phone. They can then send the full track to another user with a Melodeo-enabled mobile phone located within Bluetooth range. The song file, which is DRM protected, pops up on the recipient’s mobile phone and he or she can listen to a 30 second preview of the song. If the person likes it, he or she can easily choose to purchase it and the Melodeo server then sends a decryption key via the carrier’s network to unlock the song, and bill the purchase to the recipient’s account. Melodeo has launched the service with tracks licensed exclusively from Warner Music. (Adapted from Melodeo press release, 2/10/05)

Wednesday, May 04, 2005

70,000,000,000 Images: Coming To A Hard Drive Near You

At the recent CTIA Wireless conference in New Orleans, Dan Carp, CEO of Kodak, gave the keynote addressed and shared this staggering statistic: During the next 12 months, over 70BB (that's Billion with a "B") digital images will be captured worldwide. Kodak estimates about 1/2 of those images will be taken with camera phones; the other 1/2 with digital cameras.

Since hearing this statistic (and observing recent activity in the M&A arena) the implications of such rapid global adoption of the digital image platform creates significant opportunities for companies--both large and small-- to introduce products and services that help users edit, manage, share, print and distribute their digital image content. One area in particular that deserves exploration is archival storage.

During the last 3 years since adopting digital capture, I personally have amassed a collection of over 5,000 digital images. While I am delighted with the flexibility and speed (not to mention creative freedom) digital has provided me, I am also nervous as hell: Will my images stand the test of time so that my kids and their kids will be able to enjoy all of the special memories long after the current media I use for storage is obsolete? (Currently, I use several storage mechanisms including serial external hard drives for real time back-up and a combination of DVD/CD for archival storage.)

Archival storage of images is not a new problem: During the past 15 years, I've been part of several leading edge companies that have developed both the expertise and invested in very sophisticated (and very expensive) state-of-the-art digital archive systems to manage and preserve millions of images. But what about Soccer Mom? Who will she turn to? Can we really expect consumers to have the patience and/or foresight to recognize that the digital images they are creating today must be proactively archived and managed in order to preserve their digital memory for future generations?

Life used to be simple: My father's brother captured images of my parent's 1959 wedding on his Brownie camera using Kodakchrome 25 film. Last week, or 46 years later, I loaded those same images into a slide carousel (which I was informed Kodak has stopped manufacturing) and projected them on a screen for my children and family to enjoy. The colors were brilliant, the images sharp and the memories, most important, were/are intact.

With digital capture, some companies (esp. those who make a their living from selling ink, chemistry and paper) would like you to believe that the only way to preserve memories is to make a print. And I agree-- printing is the only guarantee I can think of that provides this security. But in many ways, printing makes me feel like I'm taking a step backwards.

Companies that can provide solutions for real-time, state of the art storage-and most importantly, those that can create or leverage a brand identity that resonates with "longevity" and "permanance" stand a good chance of filling the void between the smart card, the hard drive and the photo album. Moreover, let's not be satisfied with static storage-- the winner should also allow customers to better leverage the unique attributes of digital content to share, search, edit, and distribute their images within a real-time dynamic architecture.

After all, 70,000,000,000 images deserve to live somewhere-- let's find them a home.

Tuesday, May 03, 2005

What is ShabuStation?

Welcome to ShabuStation. Like many of us, I've been lurking in and around blogs for several years now. Truth be told I have exploited the power of blogs for commercial purposes beginning in 2002 when I published a weekly blog for a software company I used to run. But to date, I have avoided creating a personal blog. That is until today.

Given my 20+ year background in and around the distribution of digital content, my small (but growing) group of industry colleagues in technology, media and content seem to be in ever-more animated dialogue about the exciting possibilities taking place in our industry. I couldn't agree more and have initiated this blog in the hopes to capture some of the more salient points which emerge from these discussions at ShabuStation.

What is ShabuStation: On my first visit to Japan in 1998, I had the privilege of enjoying dinner at the home of a colleague where I was introduced to "Shabu-Shabu." To enjoy this method of dining, you take thinly sliced pieces of raw meat, fish or vegetables grasped between chop sticks and quickly dip the selected item into a hot broth. This action has the effect of cooking the meat or fish before you eat. In Japanese, this type of cooking is called "Shabu-Shabu" or "swish-swish" and hence while I won't pretend to do deep-dive analysis of the digital media industry (there are others who do a much finer job than I), I will hopefully attempt to provide quick dips or tastings as I come across them. These tastings will be provided for you to enjoy, dismiss or deride. Of course, the intended purpose of blogs is to encourage two-way dialogue so that all participants may expand our horizions on any given subject. Thank you in advance for your help in achieveing this objective.

Eat in peace.

Best, Mark

Life After iPod: The Future of Digital Music

Digital distribution of music is here to stay and not a day goes by that someone, somewhere isn't creating new ways to deliver music to the people. I've been priviliged to be part of a team working on behalf of the MIT Enterprise Forum, Seattle Chapter to bring together a group of music industry, technology and artist thought-leaders who will discuss their respective views beginning 5:30PM, Wed, May 18th at the Bellevue Hyatt in Bellevue, WA. Our panel includes:

Presenting Musical Artist:
Dave Dederer, guitarist, singer and songwriter, The Presidents of the United States of America

Expert Panelists:
David Ring, Universal Music , Senior V.P. Business Affairs & Business Development
Bill Valenti, Melodeo, CEO
Robert Acker, RealNetworks, Vice President, Music Services

Michael Malone, Founder of AEI Music Network, board member DMX Music

Our program will explore opportunities and challenges in the emerging world of digital music. This program will explore the impact of digital distribution on the artists and how they are likely to respond to the changing environment. Specific questions that will be addressed in the program include:

1. How do musicians/artists take advantage of new technology and new platforms to get music to their fansand while maximizing revenue and protecting their creative property?

2. When will digital music sales comprise a significant percentage of total music sales?

3. Where will the growth in digital music sales come from? Is mobile the answer?

4. Between artists and listeners, what opportunities exist for digital music entrepreneurs?

For those friends and colleagues working in the digital content industry this is an event not to be missed. If you will be in Seattle on May 18th, I urge you to attend and be part of this stimulating conversation. Register online at See you there.

Sunset at Ecola State Park, Canon Beach, Oregon, USA

Ecola sunset
Originally uploaded by ShabuStation.

From time to time I'll post personal work. This image was taken at sunset during a family trip to the Oregon Coast. Click on the image to see more at