Manatt Digital Media - February 2016

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In This Issue:

  • How to Spot Investment Opportunities in Digital Media
  • IBM Acquires Live Streaming Capabilities via Ustream
  • Athletes of the Future

In this newsletter, we highlight how strategic acquisition and investment can best be leveraged for organizational growth. We also discuss a recent example in the case of IBM's purchase of live streaming service Ustream, and how this fits into the company's future plans. Lastly, we delve into the up-and-coming world of eSports and the layout of its live events.

How to Spot Investment Opportunities in Digital Media

By Jacob Carlson, Manager, Manatt Digital Media

This article first appeared on VideoInk's site and is reprinted here with permission. You can find the original article here.

In 2014, Mark Zuckerberg tried on a prototype headset from a VR startup called Oculus VR. The experience was transformative and Zuckerberg saw the massive potential for VR/AR, including the impact on social media and gaming. When he realized that Facebook needed to be a part of VR/AR, he had two options: organically build a Facebook product that could take years to develop—ceding precious time and brand awareness to market leaders and future competitors like Oculus—or strategically invest in an existing company to accelerate their go-to-market timeline and signal Facebook's commitment to the future of the VR/AR industry.

Facebook made a big bet—a $2 billion bet—that VR/AR was going to be an important part of the social industry in the coming years and that Oculus was going to be the partner to help them dominate the market. Since the acquisition, Facebook's stock has grown by more than 50%.

The pace of today's digital transformation of the media and entertainment industry is far faster than anticipated by most. This transformation has been fueled by Millennials and their mobile-first, social preference for content consumption. New digital-first media companies can finance, produce, market, and distribute their content successfully without the once required studio system, so traditional media companies recognize that they must rapidly evolve and actively "play" in this disruptive new reality. Many now realize that M&A, investment, and strategic partnerships are the most efficient and effective ways to stay relevant and effectively positioned for the future.

While traditional media companies have the capital to change their course, they must shrewdly choose among these strategic options to accelerate and optimize their path. Deep strategic thinking to understand how best to structure a deal and savvy due diligence to optimize it post-transaction are needed.

This past year was a major year for M&A, investment, and strategic partnerships, and 2016 looks to be even bigger. Transactions such as NBCU's double investment into Vox Media and BuzzFeed show that future relevance is worth $400 million to these traditional players. But with so many new digital media companies operating, how can the traditional companies identify the right targets? Relevant factors include:

1) Faster go-to-market opportunities: When Facebook acquired Oculus for $2 billion, many people were shocked at the sticker price. But what they did not immediately understand was that Facebook was positioning itself to be one of the first to market in virtual reality (VR). While Facebook has great tech capabilities, starting a competing VR company from scratch would have cost more and taken years to accomplish. With the Oculus acquisition, they were immediately best in class and able to leverage our second trait . . .

2) Synergistic capabilities: Making bets on companies that can enhance or build your enterprise value is essential. Facebook's acquisitions of Instagram, Oculus, and Whatsapp have positioned it well to be a fully integrated ecosystem, capable of leveraging its reach across platforms and helping to increase its acquisition of active users. A future seamless offering from Facebook does not seem far off—something consumers and shareholders will appreciate.

3) Unique offerings for growth: Traditional media companies need new major growth opportunities, so piggybacking on the explosion of new digital businesses is an easy and smart way to achieve success. The growth opportunity for the seller needs to align with the buyer's goals, but identifying companies that fit can provide tremendous value in the long run.

4) Diversifying portfolios: We've already seen companies such as SoftBank and Tencent taking advantage of this opportunity with great success. Traditional media companies need to mitigate the risk new digital companies pose by getting involved in areas that aren't core to their current lines of business. Virtual and augmented reality, eSports, and live streaming are all areas that may not be current lines of business but can offer great value to traditional media companies.

5) Signifying a position to Wall Street or the broader marketplace: Strategic digital transactions are not only an operational and business benefit, but it may show investors and competitors that the traditional media company is serious about the future of its business. The last label any media company wants to be tagged with is stagnant, and the right transactions can provide a clear communication that they have a plan for the future.

In addition to target identification, comprehensive due diligence is required. However, this process can't be solely the financial and legal activities that typically take place. A focused and smart process to understand the value, potential and match of the target company is necessary. A true ROI projection and identification and mitigation of risks prior to any deal completion will help satisfy essential stakeholders throughout the transaction.

While everyone typically focuses on the deal itself, many times companies drop the ball post-acquisition. A clear post-transaction integration plan will save traditional media companies time, money, and employee morale (not to mention bad press). Enabling the target company to do what they do best, managing relationships and differing cultures, and keeping up the external communication are required to complete a truly successful deal.

We see tremendous opportunity here, especially from a global standpoint. Major transactions from major international companies such as ProSiebenSat.1, Alibaba, and SoftBank have shown that the industry is going to continue down this path at an accelerated rate. Those companies that continue to lead in this strategy will be well positioned to not only survive, but to thrive in the new digital world.

IBM Acquires Live Streaming Capabilities via Ustream

By Jordan Pritchett, Analyst, Manatt Digital Media

IBM made headlines last month after confirming the acquisition of video streaming service Ustream. The price tag was rumored to be in the vicinity of $130 million and has largely been met with praise. The strategic buy looks as if it will bode well for the organization in terms of its broader initiatives. The end goal is an all-encompassing "enterprise video offering" that will serve as a foothold for future growth and expansion in the cloud-video realm. The move should also help to counteract IBM's growing trend of revenue decline on the company's balance sheet.

Ustream, it appears, was the last piece of the puzzle when taken in conjunction with IBM's previous purchases. The company has been on a bit of a shopping spree as of late. Since 2013, it acquired ClearLeap, Cleversafe, and Aspera, which respectively represent platform management, storage and data transfer capabilities.

It is unclear when this piecemeal offering will become available. However, it goes without saying that IBM's competitors have already taken notice.

Live streaming as a medium has evolved considerably in recent years and grown to become a staple of content consumption across numerous verticals. This year's Super Bowl marks the first instance in which all ads airing on the telecast were also live-streamed in the digicasts as well. This underscores the significant shift that has been evolving within the digital media ecosystem. Given this migration that is occurring relative to ad spend, it is reasonable to assume that IBM will also seek to integrate its existing analytic capabilities (via Watson) into this upcoming offering and leverage its data capture as a means of gaining market share.

Athletes of the Future

By Jordan Pritchett, Analyst, Manatt Digital Media

This article first appeared on Manatt Digital Media's blog and can be viewed here.

With the new year now in full swing, expectations have never been higher within the digital media ecosystem. Great things are upon us all. From the commercialization of VR/AR technology to the rapid and perpetual evolution of the digital-first economy, 2016 is set to be an extraordinary year in terms of its accelerating pace, disruptive potential, and overall degree of innovation.

One area in particular that has amassed significant attention to date is the evolution of eSports. Once considered a subculture of sorts and more a tertiary market in terms of its widespread appeal, this industry has surged in recent years and established an emergent viability that is now on par with many of the mainstay organizations one might associate with professional sports. The industry's robust global following alone is enough to turn heads. Moreover, its role in pioneering the use of live streaming as a mechanism to disseminate content while circumventing the traditional media gatekeepers compounds the notion that this phenomenon will only continue to gain momentum as its accessibility broadens.

While most people can agree on the massive potential that eSports bring to the table, its characterization as a "sport" is the subject of a much more contentious dispute, and one that seems to separate the fans from the skeptics within the burgeoning industry. Do eSports truly fall under the banner of what can be considered a "sport"? And as such, can the gamers themselves really be considered athletes? It is a valid question to be sure and one that I was not entirely certain of until fairly recently, but the short answer is "yes."

During my time at CES, I was fortunate enough to spectate ELeague's "Road to Vegas Counter-Strike: Global Offensive Championship." It was my first in-person experience with an eSports competition, and believe me when I tell you that it bore all the components of a traditional sport. Teamwork, creativity, highlight-reel plays, triumph, and defeat were all inherent components of this event. Above all, it was entertaining. Wildly.

However, I couldn't help but notice that there was a noticeable discrepancy between myself and the more seasoned members of the audience in terms of how we processed and followed the action. There were times when I felt completely out of the loop, despite the announcer's best efforts to keep me apprised on pertinent updates throughout. Still, the colorful narration wasn't sufficient in preventing key moments from going completely over my head. This is not surprising given my limited experience with gaming. I might have stood half a chance of keeping up with the pace if the ELeague had been hosting a Tony Hawk Pro Skater or NFL Blitz tournament for N-64, but those days are long dead and gone.

Regardless of my shortcomings, this experience highlighted an important segment that the industry will need to cater to as these leagues continue their push toward the mainstream—the nongamers. While it is estimated that there are 134 million eSports viewers worldwide, future growth will eventually become reliant on the industry's ability to attract new fans from beyond its core target market and indoctrinate these unfamiliar consumers into this culture. It is my belief that simple changes—such as tweaking aspects of the presentation of the event to provide the audience with a more encompassing and holistic perspective of the action—will likely take place over time and go a long way in streamlining the audience's ease of consumption. Furthermore, the expected rise of eSports-focused programing that features news, commentary, and analysis (the "SportsCenter" equivalent) will play an instrumental role in solidifying the general public's awareness and comprehension. Whether this takes place in 2016 or in the years that follow remains unclear. However, the coming of age for the industry is already under way, and I am excited to watch it evolve and grow as a form of mainstream entertainment. In fact, it might be appropriate to say that the mainstream era of eSports is already here. All of us—especially marketers—should take note. Immediately.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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