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Project Big Fish: Acquisition Opportunity June 2006

Project Big Fish: Acquisition Opportunity June 2006. Agenda. Executive Summary Detailed Analysis: Digital Distribution Landscape Appendix. Executive Summary. Executive Summary. Digital distribution is critical to SPE

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Project Big Fish: Acquisition Opportunity June 2006

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  1. Project Big Fish: Acquisition Opportunity June 2006 CONFIDENTIAL

  2. Agenda • Executive Summary • Detailed Analysis: Digital Distribution Landscape • Appendix

  3. Executive Summary CONFIDENTIAL

  4. Executive Summary • Digital distribution is critical to SPE • Digital video distribution is reaching critical mass, changing the distribution landscape and creating new opportunities for Sony Pictures • Other studios are investing heavily to capitalize on these opportunities • Sony Pictures is developing solutions for digital distribution and has three alternatives for market entry • Build an entirely home-grown solution • Partner with technology vendors and online destinations • Acquire for technology, management, and/or user base • An acquisition would best address technology challenges and accelerate speed-to-market by providing a platform • Grouper, a leading destination for user-generated content, is a target which could be a cornerstone for SPE • Acquisition criteria include access to technology, management expertise, content and revenue potential • Potential risks relate to retaining and growing customer base and incorporating commercial content

  5. Digital Video Distribution is Reaching Critical Mass • Infrastructure is nearly in place • Roughly 50% broadband penetration of U.S. households • Compression technologies continue to improve • Content owners digitizing libraries • Consumers are engaging with more content, in ways that are unique to a two-way, interactive medium • Over half of Internet users have visited a social networking site • U.S. video downloads exceeded 18 BN in 2005 • Traction is being demonstrated by multiple players, large and small, new and old • Leading online destinations extending brands to video • Traditional networks establishing online presence • Start-up video and social networking sites building large audiences

  6. Digital Video Creates Opportunities for Sony Pictures • IP-delivery is decreasing control exerted by traditional distribution partners and increasing the importance of two-way communications • Consumer time spent watching cable and network TV forecast to remain roughly flat while time spent with interactive media (online, games, mobile) will grow by over 10% • Unlimited shelf space is increasing the importance of content breadth • Major studio content composes 95% of volume for brick-and-mortar retailers but only 80% for online retailers • Advertising is becoming increasingly important in the online space • Online advertising grew 30% in 2005 (compared with 6% for traditional media) • Online advertising expected to reach 25% of the $115 BN domestic advertising market • SPE is creating digital video services to capitalize on these trends and strengthen our position in the market • Increase control of distribution and build direct, two-way relationships with consumers • Broaden base of content to include user generated and short-form • Increase ownership of ad-supported content

  7. Customer-facing Service SPE SPE-owned Service Broadband ISP PC or TV Evolving Infrastructure Represents an Opportunity to Build Direct Relationship with End-users and Increase Control of Distribution Broadcast Model Production Aggregation Distribution Customer SPE Broadcast Network Local Affiliate Broadcast TV Cable Model SPE Cable Network Cable MSO Cable TV Digital Distribution – Licensing/Syndication SPE Portal Broadband ISP PC or TV

  8. Sony Continues to Invest in Digital Video Services Sony Actions to Dates Learning and Implications for Current • Nanofilms • Chat Cinema • Broadband Channels • Sony Connect • Success requires a significant financial commitments • Sony faces challenges in developing differentiated technologies in-house • Requires coordination across SPE and other Sony divisions Previous • Screen Blast • SoapCity

  9. Competitors See the Potential for Digital Video Distribution and are Investing Heavily in the Space Parent Studio Network Online Destinations • ABC.com: ad-supported full episode streaming • ESPN.com: ad-supported streaming and subscriptions • Disneychannelcom: Launching new broadband player today with a dozen free episodes • CBS.com: ad-supported and limited download-to-own • Innertube: ad-supported broadband channel • MTV Overdrive: ad-supported video channel • Acquired iFilm for $49 MM QUANG COMBINE WITH NEXT • Invested over $1BN to acquire online properties (IGN, Scout, and Intermix / MySpace) • Will sell episodes of “24” on MySpace • Fox.com: primarily clips and previews • Launching “NBC 360 Digital” with classic comedy and new previews available online • Acquired iVillage for $592MM • Promoting content on YouTube • Launched AOL In2TV, ad-supported classic TV episodes • Acquired Lightningcast to improve video advertising technology • Licensed content through BitTorrent (P2P site) and Guba (social network)

  10. Social Networks Generate Value for Traditional Content Owners • Studios and traditional networks are validating the benefits of social networks • News Corporation invested $580MM to acquire MySpace • Warner Bros. is licensing content to BitTorrent and Guba • NBC is advertising and promoting network shows on YouTube • Social Networks’ large audiences provide a legitimate alternative distribution channel, increasingly supported by advertising revenue • Social Networks offer a high degree of interactivity, providing opportunities to create popular derivatives of existing properties • Add interactive elements to existing shows (e.g., story navigation) • Introduce shorter-form content • Explore additional story lines between airing of episodes • Social Networks harness users’ creativity to identify and develop new concepts QUANG COMBINE WITH PRIOR

  11. Social Networks are Attracting the Largest Audiences ADD BULLETS WITH DESCRIPTIONS ON WHY WE CATEGORIZE THIS WAY Social Network Store Channel Promotional Source: Nielsen NetRatings. Figures as of 6/21/06. * Grouper unique user numbers as provided by company. Number of unique users represents US base of direct and embedded. Worldwide unique users total approximately 8 million.

  12. Acquisition Targets Must Meet the Following Criteria • Strong management • Proven track record • Domain expertise • Differentiated technology • Address gaps in SPE asset base • Service operation and design • Tool / software development • Consumer data usage • Breadth of complimentary content • Large and growing base of user-generated content Focus on these criteria and reasonable valuation to: • Accelerate time-to-market • Decrease cost of entry • Gain access to new content • Create potential for growth in advertising revenue

  13. SPE Target and Competitive Landscape (Monthly Unique Users in millions) Yahoo (105.5) Google (97.2) AOL (72.0) MySpace (51.4) EXPAND TO FILL PAGE, ADD ROO AND GUBA iTunes (20.5) High (> 3mm) YouTube (20.1) MLB.com (9.3) FOX.com (8.5) ABC.com (8.0) Facebook (7.7) CBS.com (5.4) MTV Overdrive (4.4) iFilm (3.2) Existing Service Penetration Grouper* (2.8) AddictingClips (1.7) Metacafe (1.6) Low (< 3mm) Connect (1.2) Friendster (0.8) vidiLife (0.7) MovieLink (0.6) vSocial (0.5) Dailymotion (0.4) vimeo (0.4) CinemaNow (0.3) Brightcove (0.2) Revver (0.1) Veoh (0.1) VideoEgg (NA) Blinkx (0.01) Low High Technology Capabilities • Source: Nielsen NetRatings. Figures as of 6/21/06. • Grouper unique user numbers as provided by company. Number of unique users represents US base of direct and embedded. Worldwide unique users total approximately 8 million.

  14. Grouper Service Overview

  15. Grouper Management Team

  16. Grouper Performance Against Competitors Technology Content Accelerate Market Entry Revenue Potential P2P Client Low CostStreaming Ease of Use Features Quality of Content Community Connections Size Ad Sales ADD ROO AND GUBA, ADD COMMENTS ON MANAGEMENT, USE NUMBERS FOR “SIZE”

  17. Cross-Sony Opportunities for Grouper Technology as a Platform for Growth • Grouper technology built to support ad-based and transactional business models • Grouper can expand to become the lead brand for Sony’s broadband channels or support additional channels with new brands • Connect service primarily acts as a digital store, aggregating commercial content for Sony devices • Grouper expands service capabilities, adding user-generated content and distributing across all device types SPE Ad Sales Opportunities • Grouper has positioned itself to meet the high demand for online video advertising (supports ad insertion in both streamed and downloaded content) • SPE ad sales team could sell ad space Complementary to Connect

  18. Risks and Mitigation Risks Mitigation • Customer retention / increased competition • Differentiated technology provides a better user experience than competitors • Leverage strategic partners for growth (less dependent on “fads” in user taste) • Lack of interest by advertisers • Grouper struck first deal with MTV • AOL and Google report sold-out ad inventory • Inability to offer commercial content • Ensure SPE appropriately programs content for the channel • Create new, more interactive content for the Grouper Network • Integration challenges • Structure incentives for acquired management • Allow new management to retain decision-making authority

  19. Valuation • Based on Grouper’s current 2.8MM US unique users and based on multiples in comparable transactions, initial valuation guidance includes a discount for the company’s pre-revenue status ADD OTHER DATA THAT SUPPORTS VALUE Employees Number of streams (multiple of streams?) $ invested to date (perhaps invested capital is our lowest value) Get some other Venturesource values (any friends with passwords?)

  20. Deal Process June 30: Week of July 3: Week of July 10: Week of July 17: June 30: Due diligence at Grouper HQ Week of July 3: Present to Ben Feingold Present to Michael Lynton Present to SCA Verbal indication of value range to Grouper Week of July 10: Preliminary term sheet to Grouper Grouper response Week of July 17: Review with Tokyo Begin negotiation of formal terms

  21. Detailed Analysis Digital Distribution Landscape CONFIDENTIAL

  22. Broadband Access and Content Availability Are Driving Growth in Digital Video Broadband-enabled U.S. Households (MM) Video Downloads (BN) 18.0 69.6 65.1 58.9 51.0 42.6 33.2 0.28 Source: SG Cowen Research dated June 7, 2005, Morgan Stanley Broadband Update, April 2005

  23. Box Video Office /DVD 52% 41% Box Video Office /DVD 27% 7% TV TV 32% 41% Downloadable Video Should Drive Growth in Filmed Entertainment • Models with unique consumer benefits have been consistently adopted by Hollywood • Adoption has often been led by outside entrants and new industry players • Double digit annual growth has doubled the market approximately every 7 years $47Bn $37Bn Evolution of Content Distribution & Revenue Growth of Filmed Entertainment Industry in the US* 100%=$18Bn $9Bn 1995 100%=$4Bn $2Bn 1980 2004 2008e IP Delivery Pay TV/ Subscription VHS/ Rental DVD/ Sell thru New consumer benefits Movies without advertising Consumer controlled viewing Ownership, high quality, additional features Complete library, convenience & control Introduction drivers New cable network entrants Consumer electronics manufacturers Warner Home Video & CE industry Technology Companies * Includes revenue generated by films from major studios across content distribution windows – box office, video (rental, sell thru), television (ppv, pay, network, made for TV), and foreign revenues for each Source: Entertainment Industry Economics Vogel 4th ed., PricewaterhouseCoopers Global Entertainment & Media Outlook 2004-2008.

  24. Digital Video Delivery Represents an Opportunity to Reach a Younger Demographic Percent of Each Age Group Downloading Video (18-28) (29-40) (41-50) (51-59) (60-69) Source: Pew Internet & American Life Project, December 2005

  25. SPE Can Best Reach Younger Demographics with Models that Include Two-way Interactivity and Social Networking Percent of Each Age Group Participating in Online Activity Instant Message Read a Blog (18-28) (29-40) (41-50) (51-59) (60-69) Source: Pew Internet & American Life Project, December 2005

  26. Consumers are Shifting Time Away from Traditional Media Toward Online and Interactive Media • Cable and satellite TV hours rise slightly due to increase in channels, VOD and PPV services • Consumer time spent on broadcast TV may flatten with emerging technologies (a la TiVo) • But the real growth is in Interactive/wireless, home video, internet and games Note: Consumer Internet includes both dial-up and broadband Source: Veronis Suhler Stevenson, Val Morgan, Harris Interactive, L.E.K. Analysis, Jupiter analyst interview, Corporate Development Analysis

  27. New Distribution Models are Shifting Consumer Consumption toward “Long-Tail” Titles

  28. Studio Content May not Be as Dominant in Emerging Channels Methodology Product Mix of Units Books • Surveyed 6 B&N and Borders stores • Calculated number of SKU’s for a sample of fiction titles • Reviewed 8 to 12 stacks • Counted the number of separate SKU’s • Determined which titles were major (including sub-labels) • Amazon figures are units sold in 2005 (source Wired 2.0 and Bain consumer study) • Publishing analysts from First Research conclude that there is a strong correlation between SKU’s and units sold Niche (All Others) Major (RH, TW, Simon, HC, Pearson) Music • Surveyed 5 Borders and Best Buy stores • Calculated number of SKU’s for a sample of new release and catalog titles • Reviewed 6 to10 stacks • Counted the number of separate SKU’s • Determined which titles were major (including sub-labels) • Digital figures are units sold in 2005 (source Wired 2.0 and Bain consumer study) • Units sold figures for music via traditional stores is being researched through Nielsen Musicscan data Niche (All Others) Major (Uni, War, Sony/BMG, EMI) Home Video • Surveyed 7 WalMart, Best Buy and Target stores • Calculated number of SKU’s for a sample of new release/catalog titles • Reviewed 12 to15 racks • Counted the number of separate SKU’s • Backed-up SKU findings with units sold data from Nielsen VideoScan • Digital figures are units sold in 2005 via Amazon & other online retailers Niche (All Others) Major (7 Majors) Sources: Nielsen Videoscan data, Wired 2.0, Industry Interviews, select store visits across Los Angeles area

  29. Ad Market is Changing Significantly as Ad Dollars Following Consumers and Two-way Infrastructure Becomes Available Media spending does not yet reflect consumption Advertising dollars are shifting online to address the current gap 1999 2005

  30. SPE Currently Has Limited Ability to Capitalize on the General Growth in Ad Revenues, Particularly in the Online Space Overall ’05 – ’09 Projected CAGR: 10.1% Broadcast ’05 – ’09 Projected CAGR: 4.9% Cable/Sat ’05 – ’09 Projected CAGR: 11.4% Online ’05 – ’09 Projected CAGR: 22.3% 114.9 106.0 95.1 87.6 78.3 71.7 63.2 US $ (Billions) 60.7 57.9 TV & Online Advertising Spend Online %: 12% 10% 12% 13% 16% 18% 21% 23% 25% Source: Veronis Suhler, 2005 Note: Cable/satellite growth expected to be driven by increasing audience share of prime time ratings, ability to target within specific demographic groups, improved sales system; broadcast growth expected to be driven by sustained ratings and ad rates, continued appeal as optimal means to reach large audiences

  31. Appendix CONFIDENTIAL

  32. Digital Video Offerings Can be Divided into Four Main Categories • Predominantly short video clips that promote the site owner’s content, merchandise, and brand • May include some advertising, and minimal commerce capabilities, but is promotional in nature Promotional Channel Store Social Network • Includes on-demand videos available in programmed micro-channels, on a show-by-show basis, or in a traditional channel lineup • Business model primarily includes advertising, with some upsell to subscription • Aggregates video across content providers for purchase • Uses a range of models including sell-thru, rental, and subscription • Generally consists of short video clips from users of the service • May also provide tools for creating video clips or interacting with video content • Primarily ad-based business models

  33. Examples of Online Video Destinations by Category • CBS.com • Fox.com • NBC.com • Sonypictures.com Promotional Channel Store Social Network • ABC.com • Atomfilms • CBS.com / innertube • ESPN.com • iFilm • In2TV • MLB.com • MTV Overdrive • Yahoo • Google • iTunes • Facebook • Friendster • Google • Grouper • Metacafe • MySpace • YouTube • Yahoo Larger Audience • Blinkx • Innertube • Multi-media Networks • Singingfish • CinemaNow • Connect • MovieLink • Dave.TV • Fleapit • Gather • Tag World • Varsity World Smaller Audience

  34. Categories for Online Video Technology Providers • Content preparation • Ingestion • Metadata / tagging • Ad insertion • Content delivery • From content owners to aggregators • Onto P2P networks • Content classification and discovery Content Management Interactivity and Social Networking Consumer Tools • Tools and infrastructure for: • Chat • Instant Messaging • Blogs • Ratings • Recommendations • Clickable Video • Video creation • Video editing • Media mixing software (integrate video, photo, audio) • Video publishing (cross-platform) • Personal channel creation • DVD burning

  35. Examples of Technology Providers by Category Content Management Interactivity and Social Networking Consumer Tools • Grouper • BrightCove • Maven / The Platform • Veoh Networks • MLB Adanced Media • Roo Media • Grouper • Sonic • Sony Media Software • Veoh Networks More Established • Extend Media • Intent Mediaworks • Kontiki • Redswoosh • Solid State Networks • SyncCast • Tandberg TV • Zetools • Avant Interactive • Intent Mediaworks • Imeem • Kozuru • vMix • Dave.TV (Social Broadcast Network / MyChannels) • Fleapit • Intercasting / Rabble.com • Oddcast • Participatory Culture • Video Publishing on Demand (vpod.tv) • vMix Newer Entrant

  36. Key Attributes of Digital Video Services Low Medium High Content Accessibility Anytime, Anywhere Connected Portable 1 Content Value Produced Promotional User-Generated 2 Range of Content Providers Aggregated Company Owned 3 Content Breadth Single Genre Multi Genre 4 Degree of Interactivity Real-Time(e.g., chat, story navigation) On-Demand Ancillary(e.g., blogs and ratings) 5 Business Model(Cost to Consumer) Pay Free Ad-Based 6

  37. Promotional Video Websites Overview Attributes • Predominantly consist of short video clips to promote site owner’s content, merchandise, and brand • May include some advertising, and minimal commerce capabilities, but is promotional in nature Low Medium High Content Accessibility Anytime, Anywhere Connected Portable 1 Content Value Produced Promotional User-Generated 2 Range of Content Providers Company Owned Aggregated 3 Content Breadth Single Genre Multi Genre 4 Real-Time(e.g., chat, story navigation) Degree of Interactivity Ancillary(e.g., blogs and ratings) On-Demand 5 Business Model(Cost to Consumer) Free Ad-Based Pay 6

  38. Broadband Video Channels Overview Attributes • Includes on-demand videos available in programmed micro-channels, on a show-by-show basis, or in a traditional channel lineup • Business model primarily includes advertising, with upsell to subscription Low Medium High Content Accessibility Anytime, Anywhere Connected Portable 1 Content Value Produced Promotional User-Generated 2 Range of Content Providers Company Owned Aggregated 3 Content Breadth Single Genre Multi Genre 4 Real-Time(e.g., chat, story navigation) Degree of Interactivity Ancillary(e.g., blogs and ratings) On-Demand 5 Business Model(Cost to Consumer) Free Ad-Based Pay 6

  39. Video Store (Content Aggregation) Overview Attributes • Aggregates video across content providers for purchase • Uses a range of models including sell-thru, rental, and subscription Low Medium High Content Accessibility Anytime, Anywhere Connected Portable 1 Content Value Produced Promotional User-Generated 2 Range of Content Providers Company Owned Aggregated 3 Content Breadth Single Genre Multi Genre 4 Real-Time(e.g., chat, story navigation) Degree of Interactivity Ancillary(e.g., blogs and ratings) On-Demand 5 Business Model(Cost to Consumer) Free Ad-Based Pay 6

  40. Social Network (User-generated Video Sites) Overview Attributes Low Medium High • Consists of short video clips from users of the service • May also provide tools for creating video clips or interacting with video content • Primarily ad-based business models Content Accessibility Anytime, Anywhere Connected Portable 1 Content Value Produced Promotional User-Generated 2 Range of Content Providers Company Owned Aggregated 3 Content Breadth Single Genre Multi Genre 4 Real-Time(e.g., chat, story navigation) Degree of Interactivity Ancillary(e.g., blogs and ratings) On-Demand 5 Business Model(Cost to Consumer) Free Ad-Based Pay 6

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