Week in review: Endemol and Telefonica's fear factor

(Originally published in Total Content + Media earlier today.)

Among the noteworthy M&A deals this week in the media industry—they included online advertising companies snapped up by Microsoft, WPP and AOL and Thomson finalising its deal to buy Reuters—Telefonica finally offloaded its 75% stake in Endemol to the tune of €2.6 billion.

It sounds like a nice sum, except for the fact that the Spanish telco had actually bought the stake in the TV production company in 2000 for €5.5 billion.

The consortium of successful buyers was led by Endemol’s founder, John de Mol and his investment vehicle Cyrte Fund, and included the Italian media giant Mediaset as well as Goldman Sachs.

"John de Mol did a great deal," one executive from a major broadcaster, told me this week. "He’s basically bought back his company for almost half of what he sold it for a few years ago! We should all try to do that.”

Putting aside the obvious waste of money in buying Endemol at a high and selling it for a low, one has to ask whether Telefonica would have ever been able to capitalise on its asset.

Endemol has been hugely successful in its traditional market of TV, producing franchises in largely in non-scripted formats: shows like Big Brother, Deal or No Deal and Fear Factor now grace millions of TV sets in dozens of countries.

But it’s also been setting the pace in new markets, too, developing mobile-only programming, games and products for other new formats like IPTV. Endemol has made some interesting progress here, signing distribution deals not just with Telefonica properties like mobile operator O2 but with a number of other distributors (mobile and otherwise). And it partners with a number of content companies to develop the products themselves.

Now it may not be your particular cup of tea, but a recent product, a mobile-only TV programme called Get Close To…Sugababes, was done in partnership with Universal Music, appeared exclusively on the O2 network, and really works to push the idea of how to use a small, short mobile format in a compelling way not just for the viewer, but also as part of the programme itself.

In the mobile space alone, Endemol claims that mobile users have downloaded 10 million minutes of Endemol-produced content, and that one million people have streamed endemol shows on their phones.

But all this still didn’t seem to be enough to make Endemol a compelling asset for Telefonica to keep, or to raise its price above what the telco had paid in 2000.

To be fair, Telefonica did try to work some convergence magic on Endemol over the last seven years. This apparently was why the telco didn’t sell it sooner. According to a source, Telefonica had actually wanted to sell off Endemol as far back as 2005 but held off after it bought mobile phone operator O2.

“They didn’t want to upset the relationship between the two,” he said, referring to the deal Endemol had struck with the mobile operator to run text voting for programmes like Big Brother, a lucrative mobile data deal for O2.

“Telefonica seemed to do the right thing buying Endemol,” said the executive. “They just did it at the wrong time.”

Looking to the future, early days under its new owners might be rocky for Endemol. From the moment the deal was announced, there were reports that the company would lose some key executives. Stephane Courbit, the chairman and founder of Endemol France, who was one of the unsuccessful bidders, said he would leave if John de Mol returned to the helm. And the chief creative officer and chairman of Endemol UK, Peter Bazalgette is also rumoured to be eyeing up the exit.

Mediaset, the Berlusconi-owned Italian media conglomerate, may have less time for new projects like mobile TV and IPTV as previous owner Telefonica did. Mediaset has been quick to release a statement saying that Endemol will retain its editorial independence, but this wouldn’t rule out trying to shape the production company’s product line up to better fit with its own media assets.

And Goldman Sachs could stay on the sidelines as a pure financial punter, but it too wouldn’t be in this deal if it didn’t think it could make some money out of it at some point. Perhaps those bankers know something that Telefonica did not.

The week in review: Fast moves

This was last Friday's week in review from the web site...

The week kicked off with an interesting series of M&A news items coming out of Italy. Swiss incumbent operator Swisscom has made a €3.7bn bid for Milan-based Fastweb, the triple play pioneer. It’s an interesting move from the usually staid Helvetic republic. Swisscom has itself been trying to make a business out of IPTV, not terribly successfully: after many technical hiccups, it launched its own Microsoft-powered service a year behind schedule. The company now says it has picked up some 30,000 users since launching the service in November. But a tie-up with Fastweb could inject Swisscom with some expertise from a veteran of the IPTV/triple play model. And it could mark the establishment of one of the first international IPTV players in Europe.

That is if Mediaset decides to sit back after all. The Silvio Berlusconi-owned concern, which is Italy’s largest media company encompassing television, film and publishing, is also reportedly interested in Fastweb. Although the company denied such interest, late Thursday another report emerged that seemed to say Mediaset wouldn’t rule anything out as far as Fastweb was concerned. Mediaset is also figuring very strongly in speculation about possible buyers for TV production company Endemol, which seems to finally, finally be getting ready for a sale by majority-owners Telefonica.

The executives that ruled out a Fastweb buy said that Mediaset wanted to focus its attentions on an Endemol bid, but I can see that if private equity houses and others start to look like more credible Endemol buyers, perhaps Mediaset might just pick itself up and look for a more local buy like Fastweb. In any case, both Endemol and Fastweb would add bows to Mediaset’s strings, albeit of entirely different tones.

On the subject of dominant media companies, ITV, the UK’s largest commercial broadcaster, had to take another big step down in interactive TV this week, as it formally lost its broadcast slot for its currently suspended ITV Play channel. ITV Play had been under major scrutiny by regulators for irregular accounting in its various interactive, money-based games. The issue of how consumers are charged for premium rate interactive TV phone lines, used not only for games like the ones on ITV Play but for all those popular voting-based shows like Big Brother and Pop Idol, is still not resolved and could have very far ranging repercussions in the industry, considering how popular the participation format has become.

In the UK, it’s not just the commercial broadcasters getting heat from regulators, though. The BBC said that it would suspend its BBC Jam educational web site from 20 March after complaints from educational companies that the site was putting commercial education publishers at an unfair disadvantage because of the BBC’s market dominance. It’s crazy that a non-profit company like the BBC can get in trouble for creating a good educational site—I’d always thought that the less profit-motivated educational tools are, the better.

The suspension of BBC Jam was also interesting because it’s one of the first instances in which the BBC has been taken to task for potentially stifling competition amongst commercial organisations. This is the same issue that is at the heart of other new initiatives that the BBC would like to pursue, such as its iPlayer, which some have said could put other content companies at an unfair disadvantage in the market. We should watch this space to see how this plays out.

Viacom this week took their dispute with YouTube one step further by filing a $1bn lawsuit for copyright infringement. Viacom’s argument is that Google’s YouTube has profited enormously from the traffic they’ve had over the site from people who come to view clips from programmes owned by Viacom—these include shows from Comedy Central, Nickelodeon and MTV among others. And, the argument continues, despite Viacom’s request earlier this month for YouTube to remove some 100,000 clips from the site, other clips continue to be posted and YouTube is not doing enough to stop the problem at the gate.

Various pundits think that the suit is more posturing than anything else, and that there might be a settlement out of court in the end. The outspoken Internet entrepreneur Mark Cuban, who himself is subpoenaing YouTube for the names of people who upload unauthorised clips from movies made by his production company, pointed out in his blog that whether or not Viacom settles or goes through with the suit, it will be a win-win situation, since at most the legal fees could be around $10 million but a settlement would be much more substantial, and certainly a $1bn award would be even more substantial than that. And in any case the company will most likely come out with an agreement not unlike the ones struck between YouTube and music companies. The upshot will be more proactive filtering from YouTube and/or legitimate content posts from Viacom itself.

I think that other companies may well follow in Viacom’s shoes, but just as many will continue to strike deals with this video giant, until the next virally popular service comes along.

The week in review: new ideas for avatars

This was published last Friday on the Total Content + Media web site. For past weeks in review not posted here, go to http://www.totalcontentandmedia.com.

Today, Spanish telco Telefonica finally announced that it would start the process to sell off the remainder of its 75% stake in TV production company Endemol. The company is being valued at a whopping €3 billion. Since Telefonica floated 25% of its Endemol stock in November 2005, the share price of the company has gradually worked its way up from €9 per share to current prices of around €22 as speculation about interested buyers has ratcheted up over the last 15 months. According to this article, private equity firms including Apax, KKR, Providence and CVD are all circling around the company. Mediaset and Telecinco, bidding jointly, are among the media companies that have also expressed interest in the producer of formats like Big Brother and Deal or No Deal.

On Wednesday I shared a cowhide-upholstered sofa in Soho with Silvio Scaglia, founder of IPTV pioneer Fastweb in Italy, to talk about his newest venture, an online P2P video company called Babelgum. The company is coming in on a wave of online video aggregators, some of which are also based on peer-to-peer networking technology—BitTorrent (which relaunched the other week as a legit, commercial enterprise) and Joost among them. (Joost, incidentally, has signed a deal with Endemol.)

This is what Scaglia told me would be Babelgum's unique selling points: it will have a transparent pricing structure for content providers ($5 for every 1,000 CPMs when providers upload the content themselves); a strong mix of "professional" rather than user-generated content; and an intuitive "smart channel" service that morphs to your tastes based on what you choose to watch, and what you choose to skip. The channel will be advertising-supported and free to watch, as Scaglia says he doesn't believe people will ever pay much for these services.

Folks will be able to see for themselves when the site launches its beta later this spring, but I think Babelgum will have a challenge ahead of it amidst this glut of other online video contenders.

A case in point: online video market got another player this week in the form of Amazon linking up with TiVo for its Unbox service. Users of the service can now use their TiVo boxes to transfer their films directly to their televisions for viewing—something that seems simple and obvious but actually is not that common in the majority of video downloading services, which still largely expect people to watch programmes on their computer screens. I expect that with deals like the one signed between Yahoo and Akimbo at the beginning of this year, the area of transferring Internet content to televisions will be a focus for other companies too in the months ahead.

In another piece of news that underscores the bridge between the television set and the Internet, Sony this week announced a new dimension to its PlayStation 3 that will offer users the chance to play games with other users in "3D." The service, to be called Home, will use interactive elements, virtual worlds and avatars, a la Second Life, but all be accessible via your television rather than your computer monitor. Analysts have greeted the news positively—Sony's been lagging behind Microsoft's Xbox and Nintendo's Wii in the games console stakes and needs a boost of something fresh to drive sales.

I've thought of a good application for business people in this emerging 3D world: This week has been a big one for media conferences: the IPTV World Forum and the FT Media Conference and the Digital TV Group's Annual Summit in London; and the Bear Stearns annual media confab in Florida were among them. As we were finishing with the second issue of Total Content + Media magazine, I didn't manage to attend any of them. But it strikes me as a very good idea for these conferences to eventually move into the 3D world so that at least my avatar could have come in my place.

The week in review

originally posted last friday on www.totalcontentandmedia.com....

It’s a testament to the current market dominance of Google that every day seems to bring a new story about the company. This week the news flow included items on Google ads in video games, on billboards and music videos; Google partnering with the BBC; Google accidentally releasing user data; and Google on top in searches, again (it will report its figures on the 31st so next week is bound to contain more stories).

But more interesting, I thought, was the news coming out about its competitor-in-chief, Yahoo.

After a burst of dealmaking at CES earlier this month, things have taken a dimmer turn. The week didn’t start off too well, when on Monday a story emerged that Didier Lombard, the CEO of France Telecom, said that the operator was considering ending its Yahoo contract and potentially trying to develop services themselves. France Tel is one of Yahoo’s biggest customers in Europe and uses Yahoo advertising products on its Web portals. Even if we don't know the actual terms of their agreement, it's high profile enough to be a problem for Yahoo, which is trying to win lots of new customers in the telco space.

Things didn’t get any better when Yahoo reported that net profit was down 61% on 2005—largely because of one-off investment gains last year—and revenue rose a mere 13%, to $1.7bn from $1.07bn in the fourth quarter last year. To compare, online business competitor Ebay reported net income growth of 24% on the back of similar revenues of $1.72bn. To further Yahoo’s regional woe in Europe, the MD for the area said growth in the UK market, one of its biggest worldwide, is likely to stagnate. Suddenly that exclamation mark they use starts to look especially out of place, doesn’t it? Yahoo!

Yahoo tried to make up for any further grumblings, about its new ad system or anything else, by announcing that it would actually be coming on line earlier than originally promised.

The silver lining to all this seems to be that Yahoo’s joint venture in Japan with Softbank is still coming up strong, reporting a 20% rise in profits over the same period last year. There, a big appetite for online shopping seems to be offsetting stagnating growth in search advertising.

Japan made some other notable appearances this week. The European Commission released its latest report on the digital economy. Online revenues in the region will grow to E8.3 billion by 2010, it forecast, but Europe will still lag behind the US and Japan, where people have proven to be tech crazy. Plus, the connectivity that people are getting both for at-home Internet and on-the-go wireless massively outpaces developments in Europe.

As a juggernaut, however, nothing can compare to China. This week, the country’s ministry of information industry said that Internet users grew 23% to 137 million. In a country with a population of more than 1.3 billion, the potential is still largely untapped.

Back in Japan again to note that Nintendo, the games company, has reported that it’s reached its full-year profit targets in nine months, underscoring how aiming modestly can sometimes pull off magnificent results, particularly compared to its rivals in the games area, Sony and Microsoft. While the Wii was largely written about as a simpler, cheaper new games console compared to its competitors, Nintendo clearly wants to bring its own stamp onto the idea of convergence, launching a news service that can be accessed through an graphic map, a Wii player, a broadband connection and an Opera browser.

On the subject of Nintendo's game's competitors, Microsoft had some bad news this week: a drop of operating profit (tho still profitable!). In the area of new products, AT&T pointed its finger at the software behemoth for ongoing glitches in its IPTV services.

Endemol sell-off buzz continued to be pushed out this week, with rumours that Disney is interested in bidding for the company in the same consortium that includes the company’s founder John de Mol. Such a buy would secure Disney a major producer of reality TV and game shows, which have so captivated audiences around the world (and cost relatively little to put together, and definitely less per episode than an instalment of Lost).

No one has brought up whether Disney would come up against any shareholder problems stemming from how some of the Endemol shows’ content might conflict with its corporate image of offering family entertainment.

News Corp. is another big media player rumoured to be interested in taking a stake of Endemol, but the company has denied interest. One other M&A play the company hasn’t ruled out, though, is throwing its hat into the ring for the Tribune Group in the United States. According to reports, News Corp. would buy almost only for the purpose of consolidating operations between Newsday and the New York Post, two Big Apple dailies that are not keeping analysts happy with their numbers. I wonder if they might also be a little interested in some of their television stations and maybe a sports team or two?

Indeed, the connection between how sport can be used to drive media domination is one that Murdoch has played to perfection in other markets, namely the UK and Asia. Now in the latter market, sport is being used again to try to grow a business—this time around it’s HDTV. It looks like it will be a challenging game, though: so many people get their content through free pirated signals that some think it will be hard to get companies to ramp up investment in costly HD services that have little chance of being sold.

Big Brother is watching...and being watched

While the current season of Celebrity Big Brother continues to get a new lease of life on its ratings, courtesy of some racial slurs from B/C/D-list celebs staying in the house and the international furore this is causing, the creator of the BB format, Endemol, is also getting the once-over in the press.

We have a good article on the site today, actually posted yesterday, from our lowlands correspondent Erik, on Endemol and its will-they won't-they selloff by majority owners Telefonica. It's timely, given all the attention industry people are paying to the future ownership of this reality-TV megaproducer. Dow Jones today published a similar sort of story, and I suspect there will be more in the weeks to come. My soon-to-be-former editorial director, David, suggested an alternate lede for the article, which I thought would have been a perfect start to a pulpy novel on the reality TV business:

One day in October 2006, Jon de Mol looked out the window of the tenth floor office in Madrid.
The skies were clear, he noticed, all but for one bank of dark clouds away to the west.
Oncoming gloom was what he felt, too.

The offices were not his, but those of Telefonica, Spain's national telco and parent company of his previously wildly successful TV production outfit Endemol. And he had just been told by the board to prepare for some bad news.

"Your ratings are down Jon. Your stocks down- the company's worth half what it used to be. We need to do something. Get Jade Goody on your show...."