RIAA Changing Its Tactics -- An Economic Decision

It was reported by the Wall Street Journal, AP and other news sources today that the RIAA plans to stops its mass lawsuits against consumers.  Instead, the music-industry group is forging agreements with ISP's that will send notices to heavy uploaders asking them to stop.  If they don't stop, then the ISP's will presumably take action, such as slowing down the abuser's connection or possibly discontinuing service all together.

The presumed rationale for this change in strategy is that mass litigation wasn't getting the right results, and that it was alienating consumers.  First, we should get one thing straight.  The RIAA has never been particularly concerned about alienating consumers, and I'm sure that attitude hasn't changed.  They didn't suddenly "see the light" and get the urge to be perceived as a kinder, gentler enforcement agency.

This is about the money.  Litigation is very expensive, and the RIAA has not won every time it's been pushed to the wall by a defendant.  A couple of high profile losses (such as the Foster case in 2006) probably emboldened some defendants.  That means that the RIAA actually has to go to court and prove their case sometimes, and that gets very expensive.  In a pure cost-benefit analysis, the RIAA (and its member labels) probably realized that the aggressive tactics simply aren't economically efficient.

Also, the ISP's are apparently more willing now than in the past to cooperate with the RIAA.   The ISP's traditionally had no interest in alienating their customers in order to help the music industry.  The DMCA protects ISP's from liability for infringement by their users.  So, why would they do more than what is legally required?

One possible answer is that ISP's are expanding beyond being simple data pipelines and instead more actively participating in content distribution.  I imagine their plan is to somehow convert the illegal music traffic into legal music traffic from which they can extract a profit.  It's even possible that some new models for content distribution could emerge as a result.  

Ultimately, perhaps there is a way to monetize P2P activity.  That's been talked about for years; maybe this is the first step in getting serious about doing it.  With social networking being so prevalent and increasingly important in the digital landscape, it makes sense to integrate legal content distribution models into online communities.  ISP's might be in a good position to do that.

Bottom line -- the RIAA is changing tactics because the member labels don't want to keep paying for lawsuits.  Under these economic conditions, absolutely everyone is looking to cut every cost possible.  But this belt-tightening might ultimately lead to better distribution models and perhaps even more revenues and profits.  

Sometimes people don't do what's good for them until they're forced to.  Tough economic times may create a new wave of innovation and efficency  -- especially in the digitial media industry where the cost of distribution is potentially so inexpensive.  If every consumer is also a distributor, and the content owners are getting paid, I would call that a very efficient distribution model.

A Seemingly Successful Experiment in Paid Social Media

This is a really interesting article about a recent social media campaign undertaken by Kmart. In short, Kmart gave a $500 gift card to each of 6 influential bloggers and told them to go shopping at Kmart and then write about their experience. There was no censorship or editing, and the bloggers each disclosed the arrangement in their blog entries.

According to independent metrics, the campaign significantly raised Kmart's online profile. That's about the best 3 grand that company ever spent.

I don't think this strategy will work for everyone, and it could certainly become quickly overused. Plus, the bloggers run the risk of losing popularity if their blogs are viewed as corporate vehicles. With that said, it sure shows the power of social media and citizen journalism. I believe there are plenty of ways to capture that power without such a direct commercial inducement.

Digital public relations which seamlessly injects a product, service or brand into the collective digital dialogue is the model that makes sense. Companies that can provide an effective service in this regard should be very successful.

Satriani v. Coldplay - A Battle Worth Winning

Interesting news on Joe Satriani filing an action against Coldplay for copyright infringement.  He claims that the Coldplay hit single, Viva la Vida, infringes on his 2004 release, If I Could Fly.  I'm no musicologist (although I did graduate from Musicians Institute's guitar program), but I listened to both tracks and I can definitely see his point.  I anticipate there will be a settlement on terms that none of us will ever hear about.

From a business standpoint, the lesson is something I tell my clients all the time.  Litigation is expensive so make sure you're launching a battle that's worth winning.  In this case, the Coldplay song and album have been massively successful, and just got nominated for a total of 7 Grammys, including Record of the Year, Album of the Year and Song of the Year.  This is definitely a pie worth having a piece of.  If the record had sold a few thousand copies and then died, I imagine Joe's lawyers wouldn't have done much more than write a nasty letter, but when the stakes are high, the big guns come out.

It's a good lesson to learn and understand.  Lawsuits are not cheap or fun.  Before going down that path, make sure you can afford it (both financially and emotionally), and make sure you're chasing a prize that really warrants the risk.

Prop 8 - The Musical Shows The Power of New Media

It's been only a day, and Marc Shaiman's creative musical take on Prop 8 (the California anti-gay marriage initiative which was voted into law last month) is today's "next big thing" on the Net.  In less than 24 hours, the 3 minute video featured on funnyordie.com has already been seen almost 1.3 million times.  Those are pretty  impressive numbers when you consider the marketing budget is essentially $0.00.

This shows the power of viral marketing combined with a ubiquitous, instantaneous distribution system.  This media power is available to everyone, and we have barely begun scratching the surface of what can be accomplished with it.

Of course, Shaiman's musical features Jack Black, John C. Reilly, Neil Patrick Harris and a whole lot of other popular stars.  That certainly drives the huge appeal.  But all of that star power (not to mention Shaiman's own brilliant material) was spread through the power of the medium.  Without a digital media infrastructure, Shaiman would have had to make DVD copies and put them in a rack at Whole Foods Market (or some other establishment where his intended audience was likely to see it).  In other words, he probably wouldn't have bothered to create it at all.  But the ability to instantly make it available to the world is really what made it worth doing.  The digital media infrastructure facilitated and perhaps even inspired the creativity.

Of course, it is the power of this medium, and the fact that it is literally in its infancy, that caused  the WGA strike and may well lead to a SAG strike in the not too distant future.  Everyone sees where the entertainment business is going and they don't want to be left out in the cold.  Both sides probably have some valid points, but they might well kill the goose before it ever lays its first golden egg.  After all, over a million people may have already viewed Prop 8 - The Musical, but it certainly hasn't generated enough revenue to begin to pay for the production (if everyone hadn't been working for a cause instead of for their normal paychecks).

Mobile DTV Takes Another Step

A more technical (and very insightful) take from Greg Tarr on the importance of this week's technical developments in the Mobile DTV area:

Mobile DTV Takes Another Step: "

A seemingly minor yet important item came out of the Advanced Television Systems Committee (ATSC) this week in regard to the forthcoming Mobile DTV...

"

Mobile DTV

This article from Broadcasting and Cable discusses how the technical hurdles have been cleared to allow digital television to be broadcast to mobile devices.  This allows manufacturers to start building the hardware that will put television in everyone's pocket.  This is a significant development for the media industry.

It marks another major milestone in giving consumers the content they want when and where they want it.  Obviously, when used in conjunction with other mobile technologies, the commercial possibilities are huge.  From a business standpoint, the end game here is to make consumers' buying behavior into a virtually seamless experience with their media usage.  See it, want it, get it -- anytime, anywhere.

I'm not saying that we want to encourage people to buy things they don't need or can't afford (I think there is too much of that going on already).  However, access to information about products and services should be linked (both in time and proximity) to the ability to actually obtain those products and services.  I think that is becoming a quality of life issue for this century.  Clearly, technology is the key to achieving that goal.

The More Things Change, The More They Remain The Same

It's been almost 9 months since my last post. I moved my practice to a larger firm and took a blogging break to sit back and watch. So what's changed in 9 months? In some respects, a lot. But in many respects, not so much.

We have a new president from the other party taking office in less than 2 months. The economy continued to get worse and then went into a bit of a free fall. People were nervous about the economy in March; they're more nervous now.

But in the entertainment business, certain universal truths have held. We need to give consumers the content they want, when they want it, where they want it and at a price that represents value. This is not news, but it should be at the center of every company's strategy. Technology should be used to facilitate that simple goal -- get the right content to the consumers the way they want it. They will pay for that.

Blu-Ray? As I mentioned a while ago, any business based on physical delivery has a limited shelf life. I think a certain segment of consumers will pay for the highest quality hardware and software, but the software will ultimately be delivered to the hardware through a high speed connection. That's what they want.

Ad-based models will survive, but the scramble for ad dollars has become much more competitive in this challenging economic environment. I think the winners will be those companies that can deliver a superior user experience -- letting consumers interact with the advertising in a comfortable, engaging manner. That will result in purchases, and that's always the bottom line in the ad business.

The film business continues the run towards digital and 3D at the studios, but overall I think it is still healthy. The expansion of online outlets that connect to high quality output devices is creating a market for super low-budget films. I think this will expand and actually feed and expand the market for creative independent projects. This will help certain filmmakers gain audiences and migrate to the big screen. It's all about audiences and technology is facilitating the process of finding the people who like a particular genre or artist.

I'm going to start picking out the sign posts again on a regular basis. In the meantime, I welcome comments, ideas, questions, criticism...whatever. I think a healthy discourse is a key element of keeping our industry healthy. Let's keep talking.

Opportunity In The Current Economic Environment

Well, it's Monday morning and I'm doing my normal review of news and announcements. It's definitely a slower environment. There is a lot of talk about the economic slow down. Obviously, this is a self-perpetuating situation. As people hear more about a slowing economy, they become more cautious (if not downright nervous) and they develop a wait-and-see attitude towards their next strategic moves. (This seems to be happening in the Microsoft-Yahoo situation, but who really knows what Microsoft is doing or thinking.)

I wholeheartedly believe that times like these can present the greatest opportunities. Everyone broadens their vision and companies might be willing to listen to ideas that they would ignore in boom times. After all, when companies are making a ton of money with their current strategy, they aren't looking for new ideas. They are generally just focused on executing the strategy as well as possible to capitalize on the environment of success.

However, when things start to slow down, companies start reconsidering what other avenues might be open to them. They will re-examine their strategies and take the extra time to listen to some new ideas. This presents a great opportunity to creative companies to propose new relationships or deals that might not have been considered in a busier environment.

I encourage everyone to think outside the box, look for new ideas, look at new potential deal partners, and don't be afraid to communicate and consider. It is in times like these that the deck gets reshuffled and you don't want to be left out of that mix by sitting on the sidelines. The decisions you make now will determine where you are situated when things heat up again.

Slow News Days -- Or Perhaps Not...

I look through the news daily, mostly just to keep myself informed. I'm also looking for interesting items to blog on. As you can see, I haven't written a blog entry for almost a couple of weeks. I've been looking, but honestly, I just didn't see anything that caught my eye or sparked any big thoughts. Maybe it was me, or maybe things really slowed down.

Clearly, the economy is struggling a bit. I think that has made dealmakers more cautious. (No one likes to buy anything that's on the way down.) Personally, I think values will go down a bit more and some bargains will appear, and the deals will start again. That's the nature of economic cycles. In fact, the Fed should be careful not to prop up the economy too much with interest rate decreases (if indeed that strategy is still working). That will only stall price corrections in company values, and those price corrections will actually spur more deals than cheap money. (And cheap money doesn't help if lenders are too nervous to lend, and that seems to be somewhat the case right now.)

I think the other point that slowed me down on my blogging is a lack of any real big technology breakthroughs or announcements. After all, for the past several years it has been technology that has driven much of the revolutionary changes in the entertainment industry. However, when I thought about looking for major technology breakthroughs on a daily basis, it made me laugh. Have we really come to expect major developments and announcements every day? I know I have. I expect to open my email in the morning and see something amazing -- every morning. That's funny. It tells me just how fast things are really moving.

When our expectation is that something great will happen every day, that would indicate that a whole lot of great stuff has been happening for a long time. And that's true. Let's not forget that we live in the golden age of innovation. Economic cycles are no match for rampant creativity and entrepreneurial spirit. We are still surrounded by more innovation and creative energy than ever and I am confident that the string of amazing advances in both technology and business will continue for the foreseeable future.

Personally, I'm not that worried about a week or two where things slow down a bit. In fact, perhaps it's good to catch our breath once in a while, sit back and reflect. The calm moments between creative bursts are as important to the process as the big announcements.

The DVD Is Not Dead...Yet

An article in yesterday's NY Times does an excellent job of covering the point I was making last week. That is, the entire DVD business has a limited lifetime and Sony's Blu-Ray victory is somewhat hollow. The disc business is not a long-term business and it is already showing signs of fading.

The article discusses what the various studios are doing in an attempt to bolster the DVD and Blu-Ray business and keep it from going the way of the CD. They are trying everything from better packaging to actually providing a downloadable file on an accompanying disc so consumers can put the content right on their computers, iPods and wireless devices.

However, that last strategy relies on the fact that loading from a disc is still a lot faster than loading from the Internet. At least one executive claims that this advantage will remain for the foreseeable future. If that's true, then how come everyone is already foreseeing the day when all content will be piped directly to the consumer with no need for a disc or packaging or a brick-and-mortar retailer. Maybe no one can pinpoint the day that the speed and capacity of most consumers' Internet access will cause that technology shift to occur, but everyone can foresee the occurrence. And I maintain it is sooner rather than later.

I think we again are seeing entertainment companies struggling against inevitable technology shifts rather than embracing them and developing new and better business models. These guys have to give Who Moved My Cheese? another read. Change is inevitable and needs to be not only accepted, but pursued. Smart business people get out in front and give consumers what they want before they start switching to other vendors. The problem with the major entertainment companies is that they are still used to controlling the business and dictating to consumers. They need to get smart and embrace the commercial democracy that is created by technological revolutions.

And Blu-Ray sales will certainly pick up. As prices come down on 1080p displays and Blu-Ray players, consumers will seek and enjoy the higher quality. But that doesn't buy that much more time. Eventually, superior HD content will also be delivered over the pipeline. It is right around the corner -- maybe it's a 3 year corner, maybe a 5 year corner or maybe even a 10 year corner, but it's coming. Let's not put so much effort into denying consumers what they really want by delaying technological shifts as long as possible. Let's get out in front of consumers and figure out how to make more money by using technology to provide more quality and convenience at a price that consumers are willing to pay.

Update: Here is an article from Macworld, published last night, that makes the point even more directly, and backs it up with some emerging research.

And The Winner Is....Blu-Ray

No surprise here. Warner Bros. put the first nail in HD-DVD's coffin with the announcement at CES that WB hi-def content would thereafter only be published on Blu-Ray. Walmart, Best Buy and Netflix hammered in the final nails over the past week or so. When retail won't sell your product, it makes it very hard to stay in business.

To Toshiba's credit, it didn't waste time in seeing that the game was over and accepting defeat. Toshiba is a great company with excellent technological and business skills and history. Being a great company (especially in the technology industry) means having the flexibility to change when it's time to change.

I think Toshiba also recognizes that the entire disc business has a limited lifespan. Eventually (in the not too distant future) all content will come down the digitial pipeline at the push of a button. Everyone knows this. So, there was really no reason for Toshiba to keep fighting. Aside from the fact that they had no realistic chance to retain any significant market share, it's a business that they would have abandoned sooner or later anyway.

Mobile Media Marches On

Another good article this morning (this time from the BBC) which is indicative of the speed with which mobile media is advancing. The gist of the article is that the sales of smartphones will surpass the sale of laptops within the next 12 to 18 months.

Think about that -- 12 to 18 months. That is right around the corner. This means that everyone is quickly heading towards having robust media capability in their pocket, with a 24-7 connection. This supports what we've been saying about mobile media being the place where content providers need to be focussing -- not for sometime in the future, but right now.

This also means that the vision for mobile peer-to-peer distribution which gets charged to consumers through their carriers is a paradigm that should be set up now. If everyone has a media player in his or her pocket, and they can easily beam their favorite media to their friends, and the content providers can get paid on that transaction, that equals a win for everyone. That's where we need to be headed, and today's BBC coverage shows that the necessary shift in technology usage is fully underway.

The Real Hurdle to Mobile Media

At the Mobile World Congress in Barcelona on Thursday, one of the panels was apparently very revealing on the topic of advancing mobile media business models. The Hollywood Reporter has excellent coverage on that story.

If you ask most people, they would probably characterize the content providers as reluctant to make their content widely available on mobile devices. Personally, if I had to guess, I would have identified that as the primary factor impeding progress in that area.

However, the real problem appears to be the carriers. They are apparently stuck in a business model where consumers must pay extra for everything they get through their phone. The content guys favor making content more readily (and cheaply) available to mobile customers, but the carriers insist on pricing it as a premium feature. This, of course, discourages most consumers from signing on.

The content guys recognize that if you want people to change their media habits, you can't make price an issue. You have to make it cheap and easy at first so consumers get used to doing things the new way. Once they grow attached to the availability of robust media on their phones, then they will be much more likely to pay for additional and expanded services.

That makes sense to me. I think the content guys are right and the carriers are being short-sighted.

By the way, the article makes one other interesting point. MTV is apparently discovering that consumers like watching full-length media on their phones. I think the presumption was (and continues to be for most people in the business) that mobile media would work best in smaller units -- something in the 5 minute range as is the norm for online media. However, MTV says this does not appear to necessarily be true.

Update on Viewer Migration Caused by the Strike

Another article today relevant to what I was talking about on Monday. Video Business confirmed that in December, as new television programming was waning because of the strike, viewers turned to the Web. The article notes a 34% increase in online video consumption -- apparently a lot of it at Youtube. (Check out the table showing market shares of online video traffic -- very interesting.)

It's probably not a popular opinion, but I think this is ultimately a really good thing. The only thing holding back more aggressive development and commercialization of online media is the lack of enough viewership to constitute a critical mass. Everyone knows that video on demand through the Internet (and mobile networks) is the future of the entertainment business. We need to get out of the no-man's land between television and online media, and get to an integrated model. Anything that speeds up that process is a good thing in my mind.

Mobile Is The Next Frontier, and It's Right Now

The most interesting news on the digital entertainment front comes out of Barcelona, Spain today. That's the site of the Mobile World Congress where there have been two very interesting and related developments.

First, Microsoft announced its acquisition of Danger, a mobile phone operating system. The Danger software is especially adept at facilitating social networking through mobile devices. This is clearly a part of the MS strategy to dominate the entire digital media environment. I view the acquisition of Danger as being equally important to that strategy as the proposed acquisition of Yahoo. Certainly not as high profile, but an equally important piece of the puzzle.

At the same conference, the new Google-enabled cellular device was unveiled. The phone runs on Google's Android operating system.

So the fight between MS and Google has officially extended onto the mobile front, and it will be a battle royale. The mobile advertising business should be worth double-digit billions of dollars by the end of the decade, or not long thereafter. Mobile media is the portion of the business that truly frees consumers from their desks and facilitates the "whatever I want, whenever and wherever I want it" paradigm that is the current goal of media technology development.

And the big winner at this point appears to be Andy Rubin. Andy is the co-founder of Danger who is now running Android for Google. That's right, the entire mobile operating system battle can be traced back to one guy (who I'm sure had a lot of help from dozens of other talented people). I guess when they make the list of most important people in the world of mobile technology, Andy's name will be near the top.

What the Writers Strike Really Accomplished

It looks like the WGA labor action will be coming to an end in the next couple of days. The show runners are heading back to work today, so that's a pretty good indication that the union anticipates a positive vote from the membership on Tuesday evening. (http://www.variety.com/VR1117980626.html)

There is already a lot of talk about what the writers accomplished with their job action. The most important provisions of the new deal would appear to be those which focus on the writers compensation in connection with new media (including mobile), both original and derivatives of broadcast shows. Is it a good deal? At first glance, it would appear to be pretty good as it ties into a lot of the current television provisions. However, I still don't think we know enough about the ultimate digital media landscape to determine what constitutes a good deal. Everyone is still doing a lot of speculating and projecting of possible scenarios.

What's more interesting is that the 14-week strike used up the inventory of new television shows. This appears to have driven viewers towards the Internet looking for different content. Although the strike is over, many of those viewers will continue to visit the digital media outlets they discovered during the strike.

So perhaps the most important impact of the strike is that it not only helped set a framework for the compensation of creative personnel in the new media environment, but it also contributed to the speed of evolution towards that new model. That seems ironic, but if the WGA has indeed cut a good deal in connection with new media, then I would call it a double win.

Personally, I like anything that helps speed the transition to a new, stable digital media environment with enough users to create a critical mass of revenue. So, while I never like any job action or other event which slows down production, this one might have had an unanticipated positive impact. I'm glad it's over, but perhaps it wasn't all bad.

Why Microsoft Wants (Needs?) Yahoo

Clearly the big media business news of this week is Mircrosoft's unsolicited (and unwanted) offer to buy Yahoo for a combination of Microsoft stock and cash. Depending on the price of the MS stock at any particular time, the deal is worth around $42 billion. That represents a steep premium over the pre-offer price of Yahoo.

Obviously, the deal is driven somewhat by the current low price of Yahoo stock. However, the premium offered by MS shows that this is about more than bargain-hunting. Everyone covering the story accurately notes that MS sees Yahoo as a necessary piece of its strategy to take the Internet away from Google. It's about gaining control over as much online advertising as possible. No big mystery there.

What I find interesting is that this is a huge endorsement of the idea that advertising is the key to online riches. Again, this philosophy is nothing new. In fact, there are really only three basic models for selling online content -- subscription, per-unit and advertising-based. So, anyone who wants to deliver any content over the Internet without charging the end-user is looking to make their money from advertising.

My question is how much growth is in that model? Online advertising dollars are predicted to grow by multiples over the next few years, and they probably will. However, what if advertisers start deciding that the bulk of their online dollars are not generating sales? What happens when online advertising stops working as well as everyone thinks and hopes? The prices for online ads could go down, the dollars could migrate to other media, or advertisers could simply cut back.

Honestly, I don't think there's a significant risk of negative growth in online advertising anytime soon. I personally believe that it can be a very effective way to hit target markets and initiate transactions. But it is more fun to think about business growth in the digital world once advertising growth tapers off. What's over the next hill? I think the answer is delivering content that is so compelling that consumers will gladly pay for it. That may not be realistic, but it is a much more interesting challenge than figuring out how many ads on a web page are too many.

Sony Takes Another Big Step in Digital Distribution

I am excited by a report in yesterday's Variety on Sony's deal with SK Telecom of Korea. The new arrangement further expands Sony' s digital distribution of film content in Korea by adding a mobile element. Under the deal, SK Telecom will reportedly have the right to distribute a limited number of full-length films (including the Spiderman series) and television programs directly to mobile phones. (Sony already has a deal for day and date Internet releases of films in that market.)

As all of us in the digital media business recognize, mobile distribution is the next wave of expansion in direct distribution of content, and the mechanism which shows the most potential to give consumers the content they want, when and where they want it. This is the key to making money in the new digital entertainment environment.

Personally, I'm not sure that I'd want to watch an entire Spiderman film on my cell phone, but that is just a hardware issue. Lately, I've been watching some content on my son's Sony PSP, and it's really not bad for a mobile experience. The screen quality is great, although the speakers still leave a lot to be desired. You really need a headset to get any kind of decent sonic experience. But, the point is that hardware continues to improve, and as always, the availability of first-rate mobile content will provide the economic motivation to continue those technological developments.

Technology drives content, which drives better technology. Sony is really the only company in the world that plays a major role on both sides of that equation, so it makes sense that it would take the lead in that process. Kudos to Sir Stringer for continuing to take advantage of his company's unique market position by encouraging bold moves such as the SK Telecom deal. As the record companies have learned, this is not the time for timidity in the face of advancing technology. Among the major entertainment companies, I think Sony is perhaps the most courageous player on the field right now.

Live Nation's Sale of Theater Biz Further Sharpens Its Music Focus

This week, Live Nation sold its theater business to Key Brand, a private investment group. (Check out the Variety coverage here.) The deal divests Live Nation of virtually all of its legit theater assets, and launches Key Brand as a solid niche player in that industry. This is a great example of a strong company further focusing its business on the assets that are making money.

Live Nation has firmly established itself as not only the leader, but really the only major player in the live music business. As anyone in the music industry will tell you, concerts are now the economic center of the music business. It used to be that concerts were used to promote music sales. Now, the roles are reversed -- recorded music is created as much for marketing tours as for profit. Live Nation is the company that has capitalized perfectly on this paradigm shift.

Live Nation separated itself from Clear Channel's broadcast assets in 2005 and has never looked back. The current move away from theater is a further refinement which allows it to fully exploit its dominant position in live music. LN can now focus virtually all of its attention and assets on the business where it makes (and will probably continue to make) the most money. This is smart and a great example of a solid business divestment strategy.

Most often, we think of companies divesting assets in order to pay down debt. In this case, divestiture is a key component to Live Nation's growth strategy. Think about this in your own business. What business activity could you stop doing that would open the door to further growth in the remaining areas?

Independent Film is a Great Business

I just returned from this year's Sundance Film Festival and I am more enthusiastic than ever about the economic potential of the independent film industry. While the number of film sales at Sundance seemed to be down a bit from some prior years, I am more excited by the people I met and the energy in the air.

In the hotel hallways and theater lobbies, there was almost constant chatter of new projects, better business models and great new ideas for marketing and distribution. In fact, the slightly slower sales activity seems to reflect a more businesslike and reasoned approach to the industry. Rather than getting caught up in the emotion of the moment and atmosphere, buyers are really thinking about how to make money with a film, and that bodes well for the long term health of the business.

What I like about the independent film business right now is that it gives investors and producers a chance to control their risk while still making excellent films with huge upside potential. There is hardly another business with a more favorable risk-reward equation. Of course, this only works if each film is approached with solid business fundamentals in mind. That doesn't mean that creativity needs to be sacrificed; it only means that the project needs to make sense on a business level, as well as creatively.

Advances in technology are allowing filmmakers to produce stunning movies for much less than in prior years. At the same time, the public is hungry for creative and edgy films coming from filmmakers who are not locked into the studio system. (This is very evident from this year's Oscar contenders and their performance at the box office.) Also, with exhibitioners now starting to take advantage of digital technology, distribution will become even more cost-effective; and online distribution and home theater systems are creating even more demand and economic potential for quality content.

This combination of factors could not be better. It is a great time to be in the independent film industry. I am personally experiencing the benefits in my own business and I think it only gets better for the foreseeable future.

Capturing Value in Creative Companies

Buying a creative company is very tricky. Successful creative enterprises can be very attractive targets. The profit margins can be outrageously high. The work can be exciting and high profile. The culture and work environments are often exhilarating.

On the other hand, it is really easy to overpay for a creative enterprise -- and I don't mean by just a little bit. Sometimes a buyer can pay multiples of the company's real value if he or she doesn't understand what's being purchased.

As I mentioned before, a really valuable creative company can't be judged just by its revenues and profits. You need to look behind the curtain and figure out why customers find it so attractive. You also need to evaluate the company's ability to continue to satisfy its customers and attract new ones. This can't be based just on the work of one or two people, but must rely on the company's proven systems, culture and management.

One good way to evaluate this is through general industry research. Talk to people in the business about your target company. Ask them what they think of it. If they do business there, ask them what they like and dislike about it.

After the external analysis, do an internal evaluation. Ask yourself (and the sellers), what would happen if...? Understand how the company actually creates its products and serves its customers, and how that would change if certain people left or if the industry landscape changed. This process will not only help you understand how much value you can actually capture in the sale, but it will be a first step in developing better strategies and systems going forward.

The lesson here is that you can't buy a creative enterprise based on typical financial due diligence. The real story is not in the numbers. The financial performance gives an indication of the company's proven potential and current status, but that can change quickly. The good part is that the changes can be positive, as well as negative. A creative company with good momentum and performance has the ability to quickly rise to even greater heights. So, while the volatility creates some risk of overpayment, it can also result in some incredible home runs.

Digg - Buyer or Seller?

I'll get back to the discussion of deal points soon, but I saw an article in Business Week today that I really wanted to comment on. The article addresses the rumour about Digg.com being up for sale this year, as well as the other rumour that Digg might be buying a couple of competitors. Digg CEO, Jay Adelson gave BW a fairly open interview. He essentially denies that Digg is buying or selling, and focuses more on the company's relationship with Microsoft and plans for international expansion.

In reality, I imagine that Digg is both a buyer and seller if the right deal comes along. I think that's true for almost every company that's growing.

Digg is supposedly valued at around $300 million right now. If a strategic buyer offered substantially more than that, I'm sure Digg's management would think hard about taking it. The founders certainly don't need the money, but the landscape for digital media, social networking and other related Internet businesses is constantly changing. There is always risk of a disruptive change dramatically shifting the values of Internet companies in unpredictable ways.

And although Adelson says that Digg doesn't have enough of a war chest to go on a buying spree (as attractive as that might be), there are always creative ways to approach a transaction. In my experience, if there are two motivated and realistic parties, there is a deal to be made.

I'm not into making predictions, but I wouldn't be surprised to see some M&A activity involving Digg this year. It is a great company and this seems like the right time for management to make some moves. Digg is a top candidate to be the next major player in the digital media space, and that means some bold action might be appropriate.