In a world of cloud media, when all content is globally available on demand, the laws of thermodynamics start to apply – nothing can be created or destroyed and entropy leads inevitably to equilibrium.
In the media world it means there are no new ideas and even bad television shows are repeated endlessly, but there is a frantic search for the latest combinations of ideas with more than 20 corporate venturing-backed funds or programmes started in the past 18 months with an aggregate of over $6bn under management, according to Global Corporate Venturing research.
The biggest programmes included new funds focused on the Asian games and communications industry from International Data Group’s stable of funds in India, China, Korea and Vietnam that nearly doubled its corporate venturing assets under management to $6.8bn, and the world’s largest inaugural programme at RMB10bn ($1.5bn) by China-based Tencent.
The corporate venturing funds are focused on all or parts of the media industry, from content through distribution and monetisation, as the effects of digitalisation, the internet and mobile devices continue to disrupt established models and technologies, throw more people together on social platforms and test the limits of intellectual property rights and regulatory barriers.
In the near-20 years since the flotationof online news and services provider America Online (now called AOL) in 1992, the internet has disrupted established business models for media companies.
Brian Fields, director of corporate development at US-based media conglomerate Tribune, which backed AOL, when it was still known as Quantum Computer Services, to reap $1bn from its initial public offering, said: "There is a seismic shift taking place in the established business models and in how media content is consumed.
"As a large publisher and broadcaster reaching 80% of the US audience, [Tribune is] at the centre of this disruption and so looking for opportunities to work with emerging companies with new business models, technologies and capabilities that can augment our existing business.
"We [in the corporate development team are] focused on investing in new business models to monetise trafficas we create world-class content. The past decade has seen drastic changes to the established business models of large media companies in print, film and music, and as an industry we are in the early stages of understanding how content will be produced, consumed and paid for in the future."
Content
Media covers content created or requested by "amateur" users through surveys, home videos and chat boards and blogs, provided by "professionals" as news, analysis and entertainment, plus education and games.
Mark Read, head of strategy at WPP, the world’s largest advertising and marketing services provider, said: "A generation of creative people are producing work having not grown up in traditional media – 70% of video on YouTube is from amateurs, with 500 hours on crocheting, for example."
This explosion of amateur content is effectively competing with material from media companies just as the number of channels for dissemination increases.
Daniel Heaf, director of digital at BBC Worldwide, the commercial operation of the UK media conglomerate that has just incubated its first US start-up at its corporate venturing unit, said: "BBC Worldwide is seen by others as an innovative organisation with thousands of hours of content and unique, multi-platform news proposition and more than 50 TV channels. Around our global brands we have multiple formats including live events, magazines, books, consumer products and games.
"So a responsible strategy, and to move fast and be international, is to have a portfolio of shareholdings in good third parties with a strategic fit where the BBC can build a relationship. The shareholding gives an opportunity to learn before we perhaps go deeper.
"What is strategically important is interesting, as in the round, the BBC is a massive media conglomerate, but for deciding investments it is about looking at what BBC Worldwide is good at, how big the market opportunity is to move the BBC revenue needle and seeing what strategic value the BBC would bring to the portfolio company."
The BBC’s venturing unit is looking to encourage internal innovation as well as fund external entrepreneurs, with a deal expected to close this month. This incubation model is already being used at US-based financial media group Bloomberg, which set up its ventures division in 2009.
Bloomberg Ventures has incubated three businesses around the provision of content, covering events, a data exchange and education, before now starting to turn its attention to third parties.
Matt Turck, managing director of the five-strong Bloomberg Ventures team run by Lex Fenwick from New York, said: "Our mandate is to do different things but it is a fine line between synergy and innovation, so we look for three to five years out rather than 10 years or something currently being looked at.
"For example, conferences, when we started in 2009 was the worst time to run them, so we figured it was the best time to build something up in readiness for the upturn and now we will put on 40 events this year."
This contrarian investment strategy has been seen at other highly-regarded corporate venturing units. Sarbvir Singh, head of the $50m Capital18 corporate venturing unit sponsored by India-based media group Network18, said it had been set up in 2007, during the height of the previous venture capital bub-ble in the country.
He said: "We looked early-stage because when we started in 2007 any company with revenues and profits were being chased by at least five funds at what seemed like very high valuations. It made more sense to back seasoned professionals to build organically and this approach has paid off for us."
Of the first 10 portfolio companies at Capital18, therefore, four have been incubated. However, while Singh said India was "finally seeing the arrival of digital media for real in India", its portfolio also covers the range of traditional media investments, such as a television channel to help people study for exams, or cinema multiplexes in semi-rural India, as well as digital media content and service providers, such as 24×7 Learning, for education (see related content).
And media liberalisation, relative freedom to invest and economic growth are attracting foreign multinationals, which are willing to pay more than double the three-times multiples of local companies to acquire businesses, according to research by technology publisher International Data Group’s (IDG) Indian corporate venturing unit.
But India remains hindered by a relative lack of broadband internet, with wireless services being rolled out over the next 12 months and a smaller emerging market for digital media than China, which has a far bigger online games market, according to Singh.
Whereas India has yet to create digital media companies on a similar scale to peers in the US, China’s online user-base has surpassed those of the US and Europe and tight regulations and a differentiated language and culture has encouraged entrepreneurs.
Led by Tencent (see profile) and Baidu, both originally backed by IDG’s $6.8bn corporate venturing unit, China’s venture-backed companies in a little more than a decade have created some of the most valuable media groups in the world.
Along with internet-focused peers, such as Alibaba, Duowan (see case study) and Sina, Chinese companies have spread into adjacent areas, from instant messag-ing, games, search, e-commerce and blogging, around the themes of entertainment, services and information provision.
The willingness of Chinese users to pay for virtual accessories for their online games characters and profiles,and the importance of social media in a country where few young people have siblings due to the one-child edict, means the country has the most active internet and mobile device users, and the largest number of them, in the world.
To provide or maintain dominance, and partly influenced by their own histories with venture backing, local companies have also been active in setting up corporate venturing units to invest in and attract developers and entrepre-neurs to work with their platforms (see table).
Many of these Asia-based corporate venturing funds, such as from Gree, DeNA, The9 and Baidu, focus on games, which, like films or music, remains a hits-driven business where having a diversified portfolio from different developers increases the chances of success.
IDG’s second Korean fund, which is being raised with a $100m target, is looking at the $15.5bn digital and mobile games industry in the country, as well as more traditional clean and information technology sectors, according to IDG Ventures Korea (IDGVK) managing partner Matthew Lee.
Lee added: "Our investment focusing area is getting narrower but, recently, we can see the huge power shift from hardware to software. Google’s acquisition of Motorola [Mobility] was a big shock to [Korean] Android phone makers Samsung and LG.
"This [IDGVK] fund will be focusing on the online and mobile game industry as online game projects are getting bigger and [we will be] especially targeting the Chinese market [where four out of the top 10 already come from Korea]. Moreover, Korean online games are getting more popular in Germany, south Asia and South America.
"We have two online game portfolio companies – Toppig and NSE Entertainment – [which] will be published by Tencent, which is the number-one game publisher in China and a former portfolio company of IDG Ventures China.
"IDG as a sponsor investor [means] we can get a lot of benefits- we can use IDG’s research paper for understanding market trends and we can also participate in events and conferences organised by IDG. Thanks to IDG, IDGVK can provide portfolio companies with differentiated value-adding services."
Korea’s games and mobile developers are also backed by other multinationals, including China’s biggest internet company, Tencent, which is a limited partner in the Capstone Partners fund and has licensed games, including Cross Fire, from Korean producers.
The new breed of corporate venturing funds – led by Tencent’s RMB10bn ($1.5bn) fund started in January and already about a fifth invested – maintain links with former or current shareholders, in Tencent’s case primarily South Africa-based Naspers.
In the past year, both Tencent and Naspers have also invested in Russia-based internet investment company Digital Sky Technologies (DST) to create a global internet network to share trends and insights.
Wayne Shiong, partner of Bertelsmann Asia Investments, a China-based corporate venturing team investing on behalf of Germany-based publisher Bertelsmann, said Tencent’s DST partnership was a pioneering move among Chinese corporate investors.
However, Naspers’ success in managing the Tencent relationship over the past decade as well as its continued dealmaking in other emerging markets means it stands out as the most influentialcorporate venturing unit in the media sector, according to Global Corporate Venturing.
But with the internet meaning anyone, anywhere can develop a potential global product, investing in multiple countries remains difficult.
John Ball, founder and managing partner of Steamboat Ventures, the venture capital firmaligned with US-based media group Disney as its founding limited partner, said: "The venture capital industry is changing and a global per-spective is essential. Cross-border investing is as challenging as globalisation itself, but we see more opportunities and advantages from being active in the US and China simultaneously.
"China and the US remain the largest markets for mobile and the internet. If you are not deeply engaged in both these markets you are missing out on significant growth opportunities.
"We expect to see more cross-border partnerships and M&A. Where there is market demand, deals will follow, albeit subject to political, regulatory and cultural hurdles that have to be cleared.
"It takes time to build relationships and to understand the cultural and business practices and local regulations. This is the specific plan Steam-boat has been working to in China for six years and we are definitely seeing the fruits of this hard work.
"Given the lower cost structure in China compared with the US, companies are generally able to achieve profitability earlier at a given level of revenue.
"However, in many of the sectors we look at, including IT, media and con-sumer, the vast majority of disruptive business models generally originate in the US.
"We can use that experience to great advantage by identifying how China can leverage, adapt or modify this experience for their own unique but very large markets. It is a great investment theme. For exam-ple, online advertising is an approxi-mately $30bn industry in the US that has already undergone many years of disruption and innovation, but China is just at the beginning of that massive opportunity, partly because ad agen-cies have tightly controlled advertising spend historically.
"In some sectors, such as social commerce or mobile innovation, China is developing as fast as, if not faster than, western markets, and Asia is, in general, ahead of the US or Europe.
"When investing in the digital media and consumer sectors it is important to isolate what risks are you taking relative to content versus technology. Content, such as movies and TV shows, are hit-driven businesses, so diversificationis essential to manage the inherent risks.
"At Steamboat we leave content risk to Disney and other content heavyweights – it is one of our core religious principles – in favour of focusing on technology or business risk.
"However, the lines between what is pure content or technology are blurring as entrepreneurs look for new ways to bring content to consumers through changing consumption patterns, delivery and production methods.
"Social gaming companies such as Playdom, a Steamboat portfolio company that Disney acquired, is involved in content development in its games and is also a deep technology platform with the tools to make games more engaging and enjoyable to play. It is part content, part technology.
"The past 10 years have seen huge shifts in media con-sumption patterns and consumer behaviour, as demonstrated by the success of companies like Facebook, Playdom and Twitter. The next 10 years will also see highly innovative and novel platforms and online activity with secondary and tertiary waves of innovation around these platforms and with a speed of propagation also increasing.
"So while it is an exciting and fruitful time to be making venture capital investments, venture capital firms are being challenged to identify and understand new technologies and business models more rapidly and are having to make investment decisions faster within the context of different global markets."
Kai-Fu Lee, former head of Google China and chief executive of Innovation Works, an early-stage and incubation vehicle backed by Tencent, Bertelsmann and some of China’s wealthiest technology and media entrepreneurs, agreed the speed of innovation had increased.
He said: "With the digital media age and internet software, the whole project development process is not ‘lock your door, develop for two years, come out with the amazing product and protect it with app [which is the product]’.
"Instead, it is more about ‘roll it out and iterate and improve’. It is actually quite difficult to avoid others copying your idea, and in fact it is probably not prudent for an entrepreneur to try to dream up ideas all by his or herself because, after all, getting that first prototype right is important and if someone else has done the work for you at least you should learn from it and then add your alterations on [top] of that.
"That is why in the US there are now probably hundreds of Groupon copycats, including [from] daily newspapers. This is not a China phenomenon alone, but the whole innovation process has gone from a two-year product cycle to more like doing a prototype in three months and then iterating every week.
"That causes the copying or the inspiration or the competition to become a very fast loop so that the innovator really needs to be ahead of the curve to build up loyalty, virality or brand or beta markets and beta improvements so that when others copy the last version you have already moved ahead with a new version."
Distribution
Few established media companies appear able to cope with this pace of innovation, however, especially when it comes with a fundamental shift in industry from silos of different content and distribution channels to one, overarching platform with multiple links and channels to consumers.
As the BBC’s Heaf said: "The big trend is for cloud media, the availability of all content, globally and on demand."
The creation of new technology platforms is affecting the type of content media companies are producing for so-called lean-back, lean-forward or on-the-go devices.
WPP’s Read said: "As with book publishing, there is a wave of disintermediation of traditional publishers coming in the next few years but traditional distribution channels still have a lot of power.
"Physical production drives form of content but also the type of use consumers have for the content, as it represents a state of mind, time available and interest or concentration level."
The proliferation of media channels using the internet and social networks encourages venture investing. Greg Foster, former investor at US-based broadcaster Turner, said: "I think the media space tends to get more interested in venture investing when big changes are occurring in the market.
"I benefited from Turner’s questions around the way [internet protocol]-delivered video was going to change digital audience aggregation and monetisation.
"We now seem to be in a period where the market is digesting all that, but back in 2005 and 2006, YouTube and others were just coming on to the market and the landscape was shifting quickly."
In response to the success of Google-owned YouTube, established media companies Disney, News Corp and NBCUniversal (now owned by cable company Comcast) took minority stakes in the establishment of Hulu as an online video channel as a way to control their content’s use and as a potential platform for advertising and subscriptions. Hulu is now up for sale.
As with books and their indices, online distribution relies on effective classificationand the ability of people to findthe material.
Text, or logic, searching online has been dominated by a handful of providers, including Google and two corporate venturing-backed peers, Yandex in Russia and China’s Baidu, using algorithms to structure popularity based on web clicks.
However, digital media is broader than text, encompassing pictures and sound, can be reached anywhere through the internet in effective real time and on a variety of devices, from immobile personal computers to mobile phones and smart pads.And with the popularity of video, music and images online, visual searching becomes important.
As the head of a Japan-based media and financial services conglomerate’s corporate venturing unit described it: "Digital media also contains music and movies, not just restricted text information.
"It is not easy to search music and videos, although it has been tried experimentally, for example, adding meta-data. It may be said that it is impossible to search perfectly.
"Music and videos [and breaking rather than archived news] cannot be dealt with by logic. They contain ‘feeling’, which cannot be quantified.
"Digital media appeals to the human feeling. This means that it is beyond Google’s field. Facebook [or peers, such as China’s RenRen, Brazil’s Orkut and Japan’s Mixi] is a platform, whose core is a ‘social graph’, or the user’s actual relationship in real life, and it has 750 million users in the world.
"The target of this SNS [social network service] is the connection between people, and its character-istic point is the ‘like’ button. You can say ‘I like it’ to contents uploaded by your friend with this ‘like’ button. This is not logic, but feeling.
"Since digital media appeals to your feeling, it is driven more by social media, which is represented by feeling."
In reaction, Google has set up its own social network, Google+ and been investing in early and later-stage businesses through its corporate venturing unit, Google Ventures.
Google Ventures might be expanded with the company’s planned acquisition of phone maker Motorola Mobility, and its ventures unit headed by Wallace Pai (see box on recruitment).
Monetisation
Media technology provider Google’s success in creating a business with a market capitalisation of $170bn in a decade has come from monetising searches by way of display advertising and paid-for search engine optimisation through the use of keywords.
Others are capitalising on the social network’s influenceby aggregating feelings to launch flash marketing services, such as discount coupon schemes like Groupon’s – backed by Germany-based media group Holtzbrinck and DST.
With smartphones and pads increasingly used world-wide, encouraging interaction between on and offlineworlds, different media business models are being set up and a greater focus placed on personal optimisation and execution.
As Mike Brown, head of AOL Ventures, put it: "Media companies are revisiting the non-core technology they use to distribute and structure content and are deciding more quickly whether to spend on second-generation tools if they help their key performance indicators or cut overall costs."
Media companies are encouraging users through a mixed model of charging fees, from advertising to subscrip-tions or one-off micropayments, often with a free trial element.
WPP’s Read said: "The internet is a challenge with non-mixed models but we are still waiting for micro-payments to take off."
However, the plurality of channels and lower barriers to entry and distribution for content providers is affecting charges while increasing capital expenditure on the dissemination methods.
David Elms, a partner at accountant KPMG, in a presentation in May, said revenues for music online were on average $1.57 compared with $7.81 for a physical good, while news providers had been able to charge between a quarter and 60% of the headline prices paid for newspapers.
While media sector-focused private equity firm Veronis Suhler Stevenson has yet to bring out its latest forecast for the industry’s revenue expectations, it has previously predicted more than 6% compound annual growth rates until 2014, spread around the various media sub-sectors.
But which areas will gain and which firms will deliver a successful business model is still unclear, causing some investors to stand off.
Jan-Gisbert Schultz, founding partner of internet-focused growth equity firm Acton Capital Partners since its spin-out from Germany-based media group Hubert Burda in 2008, said: "We shy away from media in the short term as online there is so much flux to so many players in the value chain. This flux is not so much in content or distribution but revenue for content."
Given the media industry will be worth about $1.5 trillion by 2014, the market is one investors and the media establishment are prepared to fight for.