Are Old Equity Models Breaking Down?

November 10th, 2006 by Barry Caplan | Tags: , , , ,

A Barry Caplan/Digimediafinance.com exclusive: 

I was prepping for a meeting with a serial Silicon Valley CEO about his new digital media venture this week when my thoughts headed towards some industry structure matters that result in the sorts of market inefficiencies we see in the story just below here: Scripts being “stolen” by studios.

I don’t want to argue the point about whether a particular script was stolen or not. Let’s just take the imbalance of power in transactions as a starting point for this discussion.

To me, the  emergence of digital media rest is a stool being built on top of three uncertain legs, comprising Hollywood, Silicon Valley, and increasingly Madison Avenue, all varnished in Wall Street.

Let’s face it – money is involved, and lot’s of it. what stuck me as curious this week was to notice that the first three in that list use the same term to describe different aspects of their very different business models: equity.

All three business models evolved to finance high risk, high return ventures. Hollywood, about 100 years ago, Madison Avenue about 70 years ago, and Silicon Valley about 40 years ago.

But aside from the  actual terms, the separations geographically and across industries meant the term had a different meaning to each group.

In Hollywood,  equity in a venture means where you stand in line to reach into the till of revenue dollars. In Silicon Valley it is more nebulous: equity refers to the value the marketplace places not on the products, but indirectly the company’s future. Madison Avenue is even more indirect and nebulous then that: the talk is of “brand equity”, meaning the value of the feelings the market has that might compel them to favor one product over another.

This was all well and good when there was minimal interaction among the three groups – each could go their own independent way without stepping on each other. If needed, related projects could cooperate at arms length to magnify the value of 2 or 3 sets of equity.

But now in the emerging digital entertainment era, arms length is not so easy to do. Production, distribution, and exhibition are increasingly digital end to end. That means old models of equity in projects are showing the strain. As the delivery of high risk high return ventures in these three geos is changing and blending to combine the features of the others – the overall meaning of equity in a project is going to have to combine meanings somehow and emerge as something new too.

Of course is not just the “stolen” movie scripts that are symptoms – ask the music industry, and ask Tower Records investors how the changes have affected them.

But what if we cut off the 3 legs on the stool of equity and created a new kind of bench or benchmark that was a better fit, in a metaphorical ergonomic sense, for the emerging industry structure?

Could we come up with a new beneficial model that benefits investors and other players of the entire channel of finance, production, distribution, exhibition of end-to-end digital entertainment? I am not asking about making old content libraries fit, but referring to new content and its production, delivery and use? What is its economic value to each of the players in the chain?

Naturally, the answer is going to lie in the laws of supply and demand and value added at each stage. How much goes to who, hard to say right now. But I have drawn up  some business models that take a more synergistic and cooperative approach as to the all or nothing, hit the lottery and take it from someone else approach described it the stolen movie scripts stories.

It seems so much more natural and effective when everyone’s interests are aligned towards creating value, and towards creating a bigger pie instead of a bigger slice of a limited pie. Sharing the pie is a lot easier then, and so creativity will thrive, which creates a cycle that feeds on itself – that is the growth that true value and equity are based on and that are emerging in the Digital Entertainment Era.

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