The pace of change in the media industry is accelerating with actors, artists, and content creators able to take far greater control of their franchises than ever before. Technology is knocking down barriers to entry with distribution platforms proliferating. New web-based platforms offer content creators the ability to build their brands outside the traditional content gatekeepers with greater creative freedom and the potential for generating more wealth in the long-term (albeit, likely means sacrificing near-term rewards).

Recent examples have been limited, but they provide a sneak peak of a trend we expect to become far more common in the near-intermediate future:
 

• In December 2005, Howard Stern left his nationally syndicated terrestrial radio show and launched a dedicated channel on Sirius (now Sirius XM) satellite radio (currently reaches Sirius’ 20 mm subscribers).

• In November 2009, Oprah Winfrey told her fans that she would end her nationally syndicated talk show on broadcast television in September 2011 to devote all her energies to her cable TV channel, OWN (80 million subscribers) which launched in early 2011 and Oprah.com.  Oprah is using Twitter to highlight new programming to over 5 million followers and engage her audience.

• In January 2011, Keith Olbermann quit MSNBC and shortly thereafter announced he was moving his talk show to Current TV, a fledging cable network (in 60 mm homes), fully-integrated with its website. 

• In March 2011, Charlie Sheen was fired by Warner Bros. Television from his CBS television show Two and a Half Men.  Sheen has since reached out to his fan base via live broadcasts on Ustream, via 3 million Twitter followers and has launched a live-entertainment tour. 

• Yesterday, Glenn Beck announced he was leaving Fox News later this year.  While Beck has not yet revealed his future plans, he has built a multi-platform media business that goes well beyond his Fox News show spanning radio (10 million weekly listeners), publishing (1.1 million books sold in 2010), the Internet (3 million monthly unique visitors to Glennbeck.com, 3 million uniques to the TheBlaze.com, including 80K-plus paid subscribers at $9.95/month), and live events (14 stage shows in 2010).  Beck is likely to either launch his own web-video program and/or rebrand an existing network (similar to Oprah’s OWN).  

Money Has Been the Key Barrier to Entry. 

Historically, broadcast networks were the only ones capable of investing the significant dollars necessary to finance television shows and to market content in an increasingly fragmented media world (usually at a steep loss upfront, in hopes of significant syndication profits on the back-end).  The continued growth of multichannel television has enabled Pay TV networks to finance an increasing array of original programming (HBO, Showtime and now Starz), with basic cable networks leveraging their sub fee base to enter the original programming arena (from TNT to Discovery to MTV to Food Network to even the History Channel).
 

• Not only do networks spend weeks promoting a show/series ahead of its actual airing (across a wide array of other networks at a considerable financial expense, but we have seen networks go as far as giving away dry cleaner bags with the slogan “Everyone Has a Little Dirty Laundry” to launch  ABC’s Desperate Housewives).

Web-Based Content and Programming Has Failed-to-date. 

Marshall Herskovitz tried to enter original programming online in 2007, distributing Quarterlife on both Myspace and YouTube.  60Frames.com (now defunct) launched several web-only series such as WhoWhatWearDaily distributed across a host of online video sites in 2008.  Even American Idol’s Simon Fuller has taken a shot at online video with ICanDream distributed via Hulu last year.  There are probably two core reasons why online video original programming has failed to-date: 
 

• Consumers were forced to watch on their computers where they tend to “snack” vs. consume whole portions of content.
• Financial backing.  Nobody has been willing to invest $1-2 million/episode, let alone $3-$4 mm/episode to create high quality content in a web-only world, not to mention the serious resources needed to make consumers aware of the content.  Splitting ad revenue is simply not enough to create and market content on a scale that can effectively compete with traditional platforms – there is simply too much risk in the model.  

Technology’s Perfect Storm Enables the Rise of Internet Content. 

New distribution platforms are proliferating (YouTube, Netflix, Hulu and XBox Live); the rapid rise of social networks (led by Facebook and Twitter, which are platforms as well) have rapidly decreased the cost to market to consumers and increased the speed at which you can reach them (content essentially finds you, versus needing to search for it); broadband pipes are becoming far more robust (both wired and wireless) improving the consumer experience of online video; and the IP-enabled home is allowing us to view content in our living room on a big screen HDTV (via IP-enabled TV’s, Blu ray players, video gaming systems, AppleTV/Airplay, Roku, Boxee Box, etc.).  These same trends are playing out globally with platforms such as Youtube and Facebook global themselves, enabling content creators to reach a global audience without the vast array of “middlemen” that currently control content distribution around the world.    

Against this backdrop, new platforms are increasingly interested in investing serious dollars in original online content/programming – going well beyond an ad revenue share model:
 

• Netflix, armed with over 20 million subscribers and available on virtually every IP-enabled device imaginable, is reportedly spending $1-$2 mm/episode for David Fincher’s House of Cards in late 2012, content you would normally expect to see on pay or basic cable. 

• YouTube is looking to invest heavily in original programming (up to $100 mm according to the WSJ)  to move well-beyond its user-generated content roots (recently acquired NextNewNetworks and is expected to reorganize its site around channels later this year, including premium channels with professionally created content).  YouTube has a massive global reach and a user-interface that is compatible across an array of platforms. 

• Hulu is launching a web-only series starring Keifer Sutherland later this month, as it seeks to step-up its original programming efforts and to increase consumer interest in Hulu Plus (subscription service, which enables Hulu on Tablets and IP-enabled TVs).  

What Happens Now?  

Consumer recognizable content that begins its life on the web and where ownership does not ultimately reside within a content gatekeeper company controlled by Bewkes, Iger, Malone, Murdoch, Redstone, Roberts, or Stringer is coming… 

• Does Jon Stewart really need the Daily Show?  Does Does Conan really need TBS?

• Can Netflix make an original movie or TV show successful because it knows its audience has an affinity for this type of show and/or specific actors/directors – meaning it can use its recommendation engine to drive exposure?

• Could the Huffington Post start its own web-based cable network to compete with CNN, in addition to the newspapers with whom it already competes?

• While Charlie Sheen’s initial foray into web video has been crude at best, the potential is there.  Imagine if he received funding to do an original web-based series, distributed over Youtube or Hulu?  Twitter and Facebook would quickly get the message out and he would have distribution to a vast global network of devices and platforms.  

It may still be a bit too early for any of the above to concepts to occur and/or be successful.  However, we sense they are all becoming increasingly realistic by the day and that none of these concepts are years away.  The result will be more competition for talent/content – driving up costs for the established media industry players with traditional media viewership negatively impacted (lower ratings) over time.

From a consumer standpoint, the disruption of the historic media ecosystem should be a positive.  Consumers have already benefited from a wider array of content choices (such as when cable networks launched original programming to compete with broadcast).  Now the prospect of competition from web-based platforms should only help to further increase content choice for consumers.  




Appendix: Analyst Certification and Other Important Disclosures

Analyst Certification

I, Richard Greenfield, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.

I, Brandon Ross, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.

Regulatory Disclosures

Analyst Stock Ratings Definitions

BTIG LLC’s (“BTIG”) ratings, effective May 10, 2010, are defined as follows:

BUY – A stock that is expected at initiation to produce a positive total return of 15% or greater over the 12 months following the initial recommendation. The BUY rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return.

SELL – A stock that is expected at initiation to produce a negative total return of 15% or greater over the next 12 months following the initial recommendation. The SELL rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return.

NEUTRAL – A stock that is not expected to appreciate or depreciate meaningfully over the next 12 months.

NOT RATED – A stock that is not rated but that is covered by BTIG.

Distribution of Ratings and Investment Banking Clients

BTIG must disclose in each research report the percentage of all securities rated by the member to which the member would assign a “buy”, “neutral” or “sell” rating. The said ratings are updated on a quarterly basis. BTIG must also disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months. Below is the distribution of BTIG’s research recommendations.

BUY: 64% NEUTRAL: 22% SELL: 14%

Stocks in coverage as of the end of the most recent calendar quarter (March 31, 2011): 36

The percentage of Investment banking services is calculated as of March 31, 2011.

Distribution of investment Banking Relationships: BUY: 0% NEUTRAL: 0% SELL: 0%” after the ratings distribution.

For purposes of FINRA ratings distribution rules, BTIG’s stock ratings of Buy, Neutral and Sell fall into Buy, Hold and Sell categories, respectively.

Other Disclosures

Additional Information Available Upon Request

General Disclosures

Research reports produced by BTIG LLC (“BTIG”) are published for and intended to be distributed solely to BTIG institutional and corporate clients. Recipients of BTIG reports will not be considered clients of BTIG solely because they may have received such BTIG report.

BTIG reports are based on public information and BTIG considers the same to be reliable, comprehensive information, but makes no representation or warranty that the reports are accurate or complete. BTIG opinions and information provided in this report are as of the date of the report and may change without notice.

This research report is not an offer to buy or sell or solicitation of an offer to buy or sell any security in any jurisdiction where such an offer or solicitation would be illegal. This research report was not drafted specifically for any particular individual or entity and is not a personal recommendation to participate in any particular trading strategy or transaction. Any recipient of this research report should obtain independent advice specific to their personal circumstances before undertaking any investment activity and must make their own independent evaluation of any securities or financial instruments.

Facts, views or opinions presented in this report have not been reviewed by, and may not reflect information known to, employees or other professionals in the “BTIG Group” (BTIG Group includes, but is not limited to, BTIG and its parents, subsidiaries and/or affiliates). BTIG Group employees, including Sales Representatives and Traders, may provide oral or written commentary or advice that may be inconsistent with the opinions and/or views expressed in this research report. BTIG Group employees and/or its affiliates not involved in the preparation of this research report may have investments in securities or derivatives of securities of companies mentioned in this report that are inconsistent with the views discussed in this report.

Investors in securities products bear certain risks in conjunction with those investments. The value of, and income from, any investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors within or beyond the companies control. Recipient of the research reports should be aware that investments in equity securities may pose significant risks due to the inherent uncertainty associated with relying on forecasts of various factors that can affect the earnings, cash flow and overall valuation of a company. Any investment in equity securities should be undertaken only upon consideration of issues relating to the recipient’s overall investment portfolio and objectives (such as diversification by asset class, industry or company) as well as time horizon and liquidity needs. Further, past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. There may be time limitations on the exercise of options or other rights in any securities transactions.

The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability of any damages of any kind relating to such data. The report or any portion hereof may not be reprinted, sold or redistributed without the written consent of BTIG. This report is intended only for use by the recipient. The recipient acknowledges that all research and analysis in this report are the property of BTIG and agrees to limit the use of all publications received from BTIG within his, or her or its, own company or organization. No rights are given for passing on, transmitting, re transmitting or reselling the information provided.

Jurisdiction and Dissemination

BTIG is a U.S. broker-dealer and member of FINRA and SIPC.

BTIG Australia Limited ACN 128 554 601, member of ASIC and ASX; BTIG Hong Kong Limited, an Exchange Participant of SEHK and licensed and regulated by the SFC; BTIG Ltd, member of the LSE, authorized and regulated by the FSA; and BTIG Singapore Pte Ltd, registered and licensed with MAS; are all separate but affiliated entities of BTIG. Unless governing law permits otherwise, you must contact a BTIG entity in your home jurisdiction for further information, or if you want to use our services in effecting a transaction.

Issues and approved for distribution in the UK and EEA by BTIG Ltd. to eligible counterparties and professional clients only. Issued and distributed in Australia to “wholesale clients” only by BTIG Australia Limited. In Singapore and Hong Kong, further information may be obtained from BTIG Singapore Pte Ltd and BTIG Hong Kong Limited, respectively.