“Media companies haven’t taken enough risks in the past 15 years, and they're paying the price for it today”
In February 2011, Harry Sloan and Jeff Sagansky founded Global Eagle, a new $190 million fund to acquire media and entertainment ventures. In their first in-depth interview since creating the company, they sat down with TheWrap’s Editor-in-Chief Sharon Waxman to discuss the state of the industry on the eve of the second annual Grill media leadership conference.
Sloan gave the keynote at the conference opening, along with Terry Semel, CEO of Windsor Media.
Sloan was most recently the CEO and chairman of MGM, and previously built SBS Broadcasting into the second largest broadcaster in Europe. Sagansky’s broad experience in television and film includes a stint as president of CBS Entertainment and as a senior executive at Sony over many years.
Sloan and Semel will speak on "Hollywood's Future: Between Wall Street and Silicon Valley" at the SLS Hotel on Monday evening.
The two of you are people everybody in the industry knows. When I was looking back at the announcement of Global Eagle, it said you were looking for high growth media companies. So I put it to you, what the hell is that today?
SLOAN: It’s either a traditional media company outside the United States in a big high growth market, or a new media business in the U.S.
SAGANSKY: There are a number of countries that are anywhere from five to eight years behind the U.S. in terms of broadband penetration, but the underlying economies — in Asia and Latin America — are growing double digits. So you’ve got a lot of traditional publishers and broadcasters growing in double digits.
So you’re going to invest outside of the country in traditional media companies, even if 10 years out those are all likely to move to new media?
SLOAN: We’ve seen the future … it’s happening right here. And it’s predictable. When I was doing broadcasting in Europe, I remember one of the legendary German broadcasters saying, “Germany’s future is America’s present,” and it really was that with the penetration of television. That’s what that SBS story really was for me … knowing where broadcasting was headed because I’ve seen that in the ‘80s and ‘90s in the U.S. and the early part of this decade in Europe.
It doesn’t concern you — to be investing in newspapers, if we know where the newspaper story ends … and it’s probably not great?
SAGANSKY: Newspapers aren’t on our list. But there’s other print that might be.
Why aren’t newspapers on your list? That’s a stupid question, but I will ask it.
SLOAN: Well, neither of us have any experience in that business, just to start with. That’s a bit of a cop-out because I know that’s not what you’re asking us, but it would be good to be involved in something that we know something about. With Rupert Murdoch, if you ask him, what he is and does, he’ll say, “I’m a newspaper man.” If you ask Jeff and me, I think we’re international broadcast investors and maybe content producers
Yeah — don’t leave the country.
SLOAN: There is so much talk going on now in every studio about producing outside the U.S. I mean, I just saw something about “The Hobbit,” a project green-lit while I was still in MGM, which is being shot and produced in New Zealand. The New Zealand dollar was 50-55 cents per every U.S. dollar, when we were thinking about buying the currency; today, they’re getting into pre-production and it’s 85 cents to a U.S. dollar. And imagine adding 60 percent to a $400-$500 million budget.
But Warner Bros. already bought foreign currency …
SAGANSKY: No, no. I don’t think so. They may have at some point … but when it was 50 or 55 cents, we were looking at it, because Warner’s was going to fund it and MGM didn’t have the wherewithal to fund it, which was apparent all along. A deal wasn’t done for them to fund it until MGM was going through the prepackaged bankruptcy, maybe a year or two later. I followed this, but the currency as far as I know, was never purchased. So now, they are spending the money in real time.
SLOAN: It may be one thing to look at how much more expensive movies are by the dollar being shot out of the U.S. On the other hand, revenue of international in strong currencies gives us more dollar revenue, right? The big story right now is international box offices becoming even bigger … and I don’t know why anyone is surprised.
The baseline on domestic is stable. But the growth is coming from the international world.
SAGANSKY: When I started Tri-Star Pictures, maybe 35-40 percent total box office was outside of the U.S., and now routinely I think it’s 75 percent. The industry average is around 63 percent — and this is all in 20 years. The reason is not only the growth of these economies. If you look at everything from Russia, China, Brazil, Turkey, they’re also getting new screens. In China, three years ago there were 1,500 screens, and many of them were old. Today there are 6,500 screens. And they’re beautiful screens. Next year — and they’re all by the way 3D — they’re estimating that its going to be 10,000 screens going to 25,000-30,000 screens in the next three or four years. That’s just one place.
SLOAN: The interesting stat is that there are 200 million people in Brazil, and 80 million of them are entering the middle class. Right now, the average Brazilian sees one movie every two years, and that’s why they’re building screens. Imagine when you go from one admission every two years to two admissions a year for 200 million people. I think that’s 400 million more admissions and what $5? $2? $3?
Are your investors mainly from abroad?
SLOAN: I’d say two-thirds U.S.
SAGANSKY: We talked to all 50 media investors — including the usual which we call “the media mafia” — and we asked them, “Where are your interests? Do you have a fund specifically for Latin America? Do you have a fund specifically for China media?” So I think the road show was two-way. Showing what we want to do as we raise the money but also trying to read the mood of Wall Street so that we come back with an acquisition that becomes a publicly traded stock that’s going to be supported.
And what were you hearing back?
SAGANSKY: Don’t buy a movie company!
You’re being serious, right?
SAGANSKY: Absolutely. First of all there are very few stand-alone movie companies.
What are you talking about? Everyone believes Summit is for sale, DreamWorks is for sale. Let’s just clarify, you’re not going to buy those?
SLOAN: No. It’s not on our radar screen. But the second most-asked question out of those meetings with institutional investors was, “What do you think of the value of content? You have been around content, TV, movies, networks, studios and all that — building libraries — where is the value in that that, where are we in that cycle? That leads you to the conclusion Jeff just made about whether you should buy a TV studio. There’s no right or wrong answer, it depends on where you are in the cycle.
What was the first most-asked question?
SLOAN: Is Netflix short? (laughs)
SAGANSKY: Content has been shredded in the last number of years because the full transition to digital hasn’t happened, and yet home video has been impacted around the world.
So where is the value of content going?
SLOAN: We think that it's come off the bottom. Subscription VOD, Netflix and the potential competitors are paying more … this Hulu auction is going to be interesting
Who do you think will be the likely buyer? The rumors are Yahoo, Google, Amazon, Microsoft … the usual new media suspects … Facebook …
SAGANSKY: I don’t really know. But I think the valuation number is going to depend on what kind of rights these three (owner) companies put into it. How long and what rights — whether it’s exclusive or inexclusive rights. At some point, the business will sail on its own bottom, and whether that’s three, five, seven years, that’ll be part of the negotiation. But the whole question is: Who needs it most, who is this most transformative for?
SLOAN: The ones who need it most are the sellers. It’s the studios … the content owners who need it most to exist. The world is not going to change at Microsoft or at Google or at any of these $500 billion companies, it’s the studios, the much smaller companies …
So you think they should keep it?
SLOAN: No, I they should make sure that something happens so there’s a viable ownership. Now you’ve got honest agreements among the owners because no one knows what the heck is gonna happen in the new media world. They have differences in opinion, so the ownership is dysfunctional, and it’s not going to be able to continue. If they can figure out a way to work together with the right ownership group, then it might be the answer to the question of, “Who’s going to be the next subscription VOD service to compete with Netflix?”
SAGANSKY: Right now, there’s only one real buyer for the S-VOD business. It’s like the word Jell-O — when you describe an S-VOD service, you just say “Netflix.”
There are a few transactional services. Steve Jobs’ model for this is: I’m a middle-man, I’m going to take 30 percent, which is what they take on iTunes, and I’m going to tie up as much product as I can, but I’m not going to buy content, and I’m not going to own content, and I’m not going to get in a situation where if I pay you this, somebody else wants more, we’re just going to be neutral.”
Now, if the big tech and social media companies want to follow that model, they have to make a big investment in content, which is unlikely. So the idea that Apple, for sure, or Google, or Facebook or Amazon, or Netflix, or any of these guys, are going to turn around one day and buy a studio seems unlikely, because they’re following the Steve Jobs model right now, which is you don’t have to pay for content.
If that changes, if those guys start buying content, controlling content, controlling exclusive content, that’s going to change the value of content. As long as content lives in the environment that it lives right now, with Netflix essentially non-exclusive, DVD declining, broadcast in the U.S. is kind of a little bit tired outside the U.S. — in that environment, content value is a little bit off the floor, it’s off of its lows, but not to where it was in the height of the DVD.
In the height of the DVD boom, the consortium that bought MGM paid $5 million for that library. That is, an average library – it’s bigger than any of the others, except for Warner’s, but it was older. So it would kinda be in the middle in value. It’s probably fallen to about $3 million, maybe 3 and a half. So the answer to the question when you buy and sell content is, where are we in that cycle?
SLOAN: The other thing is that, if you look at the actual studio output, you would now put more value on the television library and production capability than you would on the movie capability, and that wasn’t always the case.
That was the thing that is driving these subscription services — television, not the movies. In television, there’s usually that primary window, and this is the secondary window, whereas with movies, there are so many windows. But what’s interesting is that even when I started at Sony in the mid-‘90s, you had to produce the movies to drag along the TV content and the music library and the old TV library.
Now, it’s reversed — it’s the TV product that the international TV broadcasters want, to do an output deal, but not always on the movie product.
Someone with great vision would say, “The value of content is gonna go up, this is a good time to buy.” The guys who bought Miramax were completely convinced that the value of content was going up even though they paid what most people thought was a retail number.
Do you think they were wrong?
SLOAN: No. I don’t know. The Wall Street investors who are operating on quarterly and yearly earnings probably aren’t really ready to get behind a big content play. Otherwise, I think you’d see some interesting mergers. I think you’d see MGM, Summit and Lionsgate get together, because that just makes so much sense.
SAGANSKY: But if you felt that within a certain period of time you’re going to have Netflix and Hulu and Amazon and Blockbuster, and they’re all going to be bidding for streaming rights, and it was that kind of vigorous market and it was gonna happen worldwide, I think you’re gonna probably say this is going to be a good time owning content. But how long is it gonna take?
SLOAN: And the U.S. isn’t the entire story, not even half the story. If you look at a world that you’ve got 50 or 60 percent broadband penetration, and streaming rights becoming valuable in Brazil, in Turkey, in Indonesia, in Russia, in India, and piracy doesn’t derail it as it is already doing in Spain, China, in a lot of those places, that’s probably the right time to buy libraries. So, our view is: We just want to be in the right place.
If we’re lucky enough to get into one of those high growth territories, a big one with hundreds and millions of people, with broadcasting, whether it’s cable or satellite, traditional, however it is … it’d be foolish not to try to control as much content as possible. Again, we know what the future looks like. The future looks like the U.S. — where the fastest growing business is subscription video … Netflix.
But in a lot of those countries, there are limits, there are ownership issues…
SLOAN: There are a number of opportunities to distribute content over cable, over satellite, over nontraditional broadcasting all over the world that are not regulated. Italy. for example. Today all the terrestrial broadcasters are regulated … you have to have 75 or 8 percent Italian ownership but they’re transitioning to digital terrestrial. I don’t know if you know what that is, you probably do – it’s a juggernaut in Europe. You're taking an over-the-air broadcasting signal and splitting digitally three, four, five, six channels. As Italy transitions so that you can broadcast over digital terrestrial, you don't need a license.
SAGANSKY: and the reason is because there's going to be a profusion of channels, so they feel, hey it’s not just gonna be three players.
SLOAN: Getting a foothold in one of these territories, there are always regulatory issues, particularly if you're a traditional broadcasting. The premise here is if we can get into a high-growth market, and we can get away to deliver the content, invest in the content and be there when broad brand penetrations reach critical mass …
What's your window for that?
SLOAN: Five years. In Turkey, I am convinced that that market is going to double in the next four to five years, and they’re going to get the 40 or 50 percent broadband penetration. So that's going to put in some subscription VOD potential, right? And cable is exploding and there are more and more subscribers. There are two viable platforms. Turkey may be too small for Jeff and I, we're talking more countries with a population of 100 or 200 million.
But you also run a risk because what if Turkey or Brazil has a coup.
SLOAN: That’s one of the reasons Jeff and I aren't facing enormous competition from the major players. We feel more comfortable. I've done this for 15 years in one form of unstable environment after another. I was in Eastern Europe when the Berlin Wall first came down, with the first TV license in Hungary and Poland and a lot of places, and it all worked out well. It worked out better than in Western Europe, where you had completely stable politics.
So where are you bidding now overseas?
SAGANSKY: We're not going to tell you exactly what countries we're looking at.
But where's the likelihood to make your first acquisition?
SAGANSKY: I think that outside the U.S. has a slight edge over inside the U.S. We do see ourselves as internationalists. There's a certain amount of political and economical risks that we're prepared to take — media companies haven’t taken enough risks at all in the past 15 years, and they're paying the price for it today.
I think that content producers, they're going to continue to do very well because they produce at a level of quality and quantity above anyone else in the world. And if anything, because of the digital technology, CGI, in the effects business, that gulf is growing. You can see it.
On the other side, their ability to compete in distribution — other than the physical distribution — it’s lagging. These aren't entrepreneurial cultures.
So it sounds like you're pessimistic about –
SAGANSKY: Their ability to create value. When you look at the startups and really all over the world, these are low overhead operations. They have to shift their busienss strategies on a dime sometimes. You can't do that within the bureaucracy of these media companies.
Which is to say that this makes you pessimistic about their ability –
SAGANSKY: — to be growth engines. Their stocks are the same as they were 15 years ago.
SLOAN: The major media companies are playing a defensive game, and I’m not sure I blame them. If you look at the digital revolution, you look at who the winners and the losers are, there are some very very big losers — music, the newspaper industry. And there are some really big winners, social media, Facebook.
The issue for the major companies is how, is how when and where to make their content online. And the major studios, like I said, are playing a very defensive game right now. They're putting a little bit of their current TV series on right now, some of their deep library through Netflix, but they're being very very careful about exposing the content that represents about 75 percent of their market value — and that's their cable networks. So you look at these major cable companies, whether it’s Disney or Time Warner, News Corp., ESPN, USA, they're being very very careful, about making their content available over the internet, and they're trying to figure it out.
SLOAN: And that's why we don't want to invest in traditional media in the U.S. — because they've got to a point where Jeff said some of these stocks they're trading the same stocks they were 15 years ago … there's no growth. We're a public company, we want to show growth.