Manatt Digital and Technology

Welcome to MDM Newsletter #5—and to an entirely new year of Digital Media machinations. What better way to start the year than first recapping the last one—then predicting major themes for 2015—and then ending things up with advice and news you can use. With that, here we go.

The 3 Digital Media Megadeals That Defined 2014

By Peter Csathy, CEO, Manatt Digital Media

Note: This article originally appeared in Variety on December 28, 2014.

2014 proved to be a transformational year for content-driven digital media and tech investment. What started as a year in which SoCal investors longed for credibility and redemption for their long-held faith in the age-old adage “content is king” (in an increasingly tech-driven world), ended as a year of affirmation via a parade of multibillion-dollar exits.

Disney unlocked this door first on the video side of the house with its $500 million to $950 million purchase of leading multichannel network (MCN) Maker Studios. But then others rushed the stage. Facebook bought virtual reality (V/R) company Oculus Rift – and its initial gaming applications — for $2 billion; and Apple Beat(s) the drum of music for $3 billion. These three deals alone totaled nearly $6 billion and defined a Millennial-driven year in digital media.

Let’s start with Disney buying Maker Studios for up to nearly $1 billion. “Why?” you ask.

Stop scratching your head. First, let’s be clear, there is no one “right” price for anything. Subjectivity permeates all deals, especially Silicon Valley-based tech deals that never raise eyebrows, even when mass dollars chase nonexistent revenues. Second, scarcity plays a massive role in most strategic deals. Disney clearly concluded that Maker Studios—amongst the very top MCNs in terms of reach, content and talent depth—best “fit” its strategic needs. So, Disney paid up so that others couldn’t double down. Only time will tell, of course, if its gamble ultimately pays off.

But, think about Disney’s underlying motivation to do the deal – and applaud it. Disney recognized what many (most?) in the traditional media business still do not – i.e., that we now live in a fundamentally different multiplatform media world. And, Millennials—the most highly valued demographic by marketers—aren’t where they used to be. They are now glued to the new television sets—to an entirely new platform—i.e., their smartphones. THAT is where they consume and share content. Voraciously. And, new platforms that showcase new storytelling demand new forms of digital-first content development and distribution that Disney felt it was not best equipped to do.

Enter Maker Studios—a leading digital-first new media company with short-form mobile-friendly video in its DNA and an immediate critical mass of content. Sprinkle in a bit of Disney magic—its priceless cast of characters to star (wars, anyone?) in those new stories—and you may really have something. That’s the dream, and Disney immediately became an “A” player in this MCN game with one massive “ka-ching” heard around the media world.

Expect other major studios to follow Disney’s lead throughout 2015 with a continuing wave of MCN M&A activity.

Next up, Facebook’s acquisition of SoCal-based virtual reality (V/R) company Oculus Rift for $2 billion. Here we seemingly follow a Silicon Valley-esque “tale as old as time” — a tech company with no revenues, but heaps of hype (this time, justified) and scarcity (hence, the huge exit). But, make no mistake, this is no average Silicon Valley tech company. This one is dressed up in all kinds of SoCal style and swagger, because Oculus is content-driven through and through — ready to shake up the increasingly rich media worlds of storytelling (video, gaming) by taking those experiences to entirely different immersive levels.

And there’s the rub for Facebook. Like Disney facing an unknown new multiplatform media world to reach Millennials, Facebook increasingly faces a new rich media reality in which it must play—but doesn’t fully understand—in order to stay relevant. That means the dual mass markets of digital video (where it is spending voraciously right now to become a real challenger to YouTube as the go-to video platform – expect MCN M&A soon) and gaming. V/R is that big bet on an entirely new platform for storytelling that offers the potential to transform both worlds. Facebook needed to pay up for this one-of-a-kind Oculus opportunity to shut up other contenders.

Expect an Oculus under the tree of every heavy-duty gamer next Xmas, and expect storytelling, compelling central characters, and new enabling platforms to be front and center for strategic moves in the gaming world in 2015.

Finally, don’t forget the power of music. Apple certainly didn’t. It ventured where it had never gone before, paying up big ($3 billion, nearly 8 times its largest previous acquisition) to buy and feature a brand not its own (for the first time). Why? Certainly not just for the revenues (although don’t forget that Beats generated between $1 billion and $1.5 billion in revenues on its own).

Here, once again, we have our old friends of strategic “fit” and scarcity. Beats had what Apple needed—i.e., a Millennial-driven multiplatform music service and brand, as well as critical artist relations. Beats also made sense to Apple as a core business. Unlike any other company offering a leading digital music service, Beats also fundamentally is a hardware company that features its “Beats Music” service as the Trojan Horse to drive headphone sales. Sound familiar? It should. That’s precisely Apple’s playbook. Beats stole it. Apple wanted it back! Apple paid Dr. Dre and Jimmy Iovine big to take them off their IPO path and divert Beats’ Millennials (and inevitable billions) to Cupertino.

Look for other similar content-driven Trojan Horse-type strategic acquisitions next year.

Three deals—averaging $2 billion each—across video, gaming and music. Each represents both a new appreciation of the value of content and new exciting possibilities for creators of that content enabled by new technology. Each also portends more Millennial-fueled content-driven megadeals to come in 2015 in this new “golden age.”

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The Future of Digital Media in 2015

By Peter Csathy, CEO, Manatt Digital Media

Note: This article originally appeared in TechCrunch on January 4, 2015.

2014’s megadeals discussed above, together with Microsoft uploading Minecraft maker Mojang for $2.5 billion and Amazon snatching up live gamer site Twitch for $1 billion, totaled nearly $10 billion. What does this portend for 2015? Certainly, accelerating digital media activity and a continued investor focus—meaning billions of dollars of new bets placed by VCs, strategic investors and acquirers on content-driven opportunities.

Beyond that, here are a few specific thoughts on what’s in store for the content landscape over the next year:

(1) The mobile-driven, premium, short-form video economy “grows up,” and traditional media companies take notice on a mass scale.

Shell-shocked studio executives internalize that digital-first platforms are where they must be to reach smartphone-obsessed Millennials. MCN acquisitions will quicken as more studios jump into the M&A game rather than try to figure out this new content platform themselves.

Some leading MCNs ripe for acquisition include foodie-focused Tastemade, dance-focused DanceOn, Latino-focused Mitu, sports-focused Whistle Sports and Collective Digital Studio. [Note: Manatt is an investor in DanceOn, and both Whistle Sports and Mitu are clients.]

International also becomes a major new battleground for these borderless video opportunities (European media company RTL Group’s $150 million to $200 million acquisition of U.S.-based fashion-focused MCN StyleHaul is a recent indicator of more to come).

(2) Major consumer brands follow suit and act in earnest.

Massive marketing dollars shift from traditional media to more measurable digital platforms in the form of branded content (not just ads), cannibalizing the former for the first time. Major investments are placed on ad-tech companies to maximize and measure those spends.

We see a number of significant ad-tech exits like Yahoo’s recent acquisition of BrightRoll for $640 million. Several brands go further and invest big to become digital-first lifestyle media companies themselves a la Red Bull, developing and aggregating content. GoPro, Pepsi and Marriott have proudly announced such ambitions.

(3) YouTube comes under siege from competing video platforms like Facebook and Vessel.

These “off YouTube” platforms lure content creators away with promises of more compelling care, feeding and economics (including the tantalizing prospect of real subscription revenues).

(4) Traditional pay TV packages likewise come under fire in the “Great Unbundling” that began in 2014.

What was unthinkable just one year ago (even 6 months ago!) became reality as HBO, CBS, Starz and others announced stand-alone over-the-top services. A parade of others follow suit in 2015 (which is not all bad for cable companies that benefit from the thirst for larger pipes). [In fact, both DISH and Verizon formally announced their stripped-down mobile-first paid subscription packages in the first two weeks of this year (and since I first posted this article).]

(5) Media and tech companies will literally converge.

Facing these tectonic shifts in long-established business models, traditional media companies and major tech companies, which find content increasingly critical to fuel their own businesses, take M&A seriously. One may pull the trigger on a mega-acquisition deal in 2015. After all, such a move wouldn’t be unprecedented. Let’s not forget that Sony acquired Columbia Pictures studios over two decades ago and Matsushita bought MCA/Universal Studios soon thereafter.

(6) On the music side, businesses move away from stand-alone services.

Massive moves are made away from business model-challenged stand-alone music subscription services. Like Apple buying Beats (which was never about the economics of Beats Music), numerous potential behemoth buyers exist.

(7) Gamers see real action too.

App developers increasingly focus on storytelling and compelling characters to build multiplatform media companies a la Rovio with Angry Birds. Rather than take traditional media properties and “gamify” them, these companies flip the model with an Apps-first approach.

Finland-based Silvermile and Seriously are two companies with Rovio roots to take … well … seriously. V/R also enters the ring with gamers en masse in 2015.

(8) Gamers take to wearables.

We see an Oculus under every hard-core gamer’s tree next year, alongside their parents’ new digital health and fitness watches.

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Outside Voices: Top 3 Legal Issues Facing Marketers in 2015

Author: Linda Goldstein

Note: This article originally appeared in The Wall Street Journal on December 31, 2014.

The marketing landscape is evolving faster than the speed of light, fueled by changes in technology and marketing strategies that are creating enormous legal challenges for brands. The laws have not kept pace with technology, yet many of the marketing practices that are integral to today’s hottest digital media trends are very much a focus of current regulatory scrutiny and raising novel legal issues. Heading into 2015, the following issues stand out as creating the most significant legal challenges for marketers.

1. Heightened Regulatory Scrutiny

Perhaps the greatest legal challenge that marketers currently face is heightened regulatory scrutiny of marketing practices at the very core of many of today’s most popular digital media campaigns. This includes the Federal Trade Commission’s (FTC) expanded enforcement of its testimonial and endorsement guides, focus on native advertising and demand for increasingly prominent disclosures in advertising.

The FTC’s Testimonial and Endorsement Guides require that any “material connection” between an advertiser and endorser must be disclosed. Recently, the FTC’s view of what constitutes an endorsement and what constitutes a material connection has become so restrictive that even the most benign social media campaigns could be implicated.

In a case involving a Cole Haan sweepstakes in which winners were asked to pin five images of Cole Haan shoes onto a Pinterest board to enter, the FTC determined that the mere act of pinning an image constitutes an endorsement and that a sweepstakes entry was a material connection that had to be disclosed. The FTC also recently reached a settlement with Deutsch L.A. after the agency asked employees to tweet about a client and employees did not disclose that they were employees of client’s agency.

As brands increasingly look to consumers to blog, tweet and post photos of their products, they should be mindful that even these simple interactions with the brand or the brand’s product, if incentivized in any manner, could trigger these endorsement guides.

The FTC has also set its sights on native advertising, particularly the blurring of advertising and editorial content. The FTC is demanding greater transparency and disclosure of the sponsored nature of content. With recent data showing that consumers are five times more likely to click on a native ad compared to a traditional ad, marketers will be increasingly challenged to preserve the organic nature of the content, while at the same time satisfying regulators’ demands for greater transparency.

2. Privacy and Data Security

With retargeting, personalization and big data emerging among the top media trends, we can expect concerns over privacy and data security to take center stage this year. Even if Congress is not successful in implementing new privacy legislation, marketers can expect the FTC and the class action bar to remain vigilant in scrutinizing companies’ marketing and data practices.

As the channels through which data is being collected and shared become more complex, brands will be increasingly challenged to understand exactly what information is being collected and how, and with whom and how it is being shared. This will require closer alignment between data specialists within companies and their privacy counsel to ensure that privacy policies accurately reflect existing privacy practices. The vast majority of privacy cases brought in 2014 resulted from the failure to honor stated privacy policies and promises. And as the sheer volume of data being collected, including highly sensitive data, continues to increase, concerns over data security and potential breaches will likewise intensify. The high-profile data security breaches that occurred at Target and other top retailers should be a stark reminder to marketers of the reputational damage that can result from the failure to properly secure sensitive data.

3. Respecting and Protecting IP Rights

The social media world is built on a culture of sharing—sharing photos, videos, tweets and posts. That culture, however, is creating enormous challenges for brands who are struggling to determine where the boundaries of intellectual property lie. What is the legal status of a hashtag, can consumer tweets and posts be shared, can they reach out and “touch” or communicate with consumers who have commented on their brands? While social media platforms may permit sharing, the rules of engagement for brands are different as copyright, trademark and laws of privacy and publicity may apply.

This year, Duane Reade’s retweeting of a photo of Katherine Heigl holding a Duane Reade bag resulted in a $6 million lawsuit that ultimately settled. These and similar questions are likely to continue to plague brands. Furthering this challenge, real-time marketing has become the new norm requiring that these decisions be made quickly. Witness the speed with which the now famous Oscar night selfie was retweeted across the globe. Brands will have to assess their own risk tolerance levels and adopt policies and procedures that afford marketers the flexibility to react in real time, while not creating undue legal risk for the company.

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What Social Currency Can Do for— and to— the Marketer’s Brand

Author: Linda Goldstein

Note: This article originally appeared in Mobile Marketer on January 5, 2015.

The newest currency behind marketing is not money. It is consumers’ social reach.

Marketers are experimenting with ways to use social currency to build brands, enticing consumers to open their social networks instead of their wallets.

Ante Social

Designer Marc Jacobs made headlines last year at New York Fashion Week with a pop-up shop where customers could only pay for a product by hashtag—no cash allowed. Shoppers bought fragrances and accessories by posting on Twitter, Instagram or Facebook with the hashtag, #MJDaisyChain.

Reebok gave away pairs of new ZJet shoes to New Yorkers who tweeted their shoe size and address. A runner—in ZJets, of course—delivered a free pair of shoes on the spot.

Birdseye hosted The Picture House, a London restaurant serving frozen foods. Diners could only pay for their meal by posting a photo of it on Instagram with the hashtag, #BirdsEyeInspirations.

The Kellogg Tweet Shop in London gave away bags of new Special K chips in exchange for a tweet, which is a savvy twist on sampling.

Frito-Lay amped up its “Do Us a Flavor” campaign in the United Kingdom with vending machines at bus shelters: Tweet the brand, get a free package of Walkers chips, one of six Do Us a Flavor finalists.

Mercedes launched its CLA sedan with a contest that put five top Instagram photographers behind the wheel for a three-day road trip, sharing six photos a day with the hashtag #CLATaketheWheel. The Instagrammer with the most likes won the car.

Fashion and style site Refinery 29 has been hosting “InstaMeets,” exclusive parties for influential Instagrammers whose posts, tagged “#r29instameet,” help boost the brand’s following.

Each consumer who touches, tweets, shares, and endorses your brand lends his or her credibility to it. Brand equity comes from consumer equity. Consumers are the brand activation.

A small group cannot do it, of course.

A handful of tweets and Instagram photos will not carry a brand. The trick is to amplify thousands and millions of personal interactions, to tie all the threads together and drive personal interaction at mass scale.

How can we harness the magnificent chaos of human interaction?

Look at the dynamics of big data: Just as data sources that are connected together now learn from each other to fuel continuous mutual progress, “big marketing” will connect many small pieces of consumer interaction that feed off one another to fuel organic, sustained marketing.

As brands rely more on consumers—setting their voices in motion and letting the conversation unfold organically—marketing will take on a life of its own.

Three Top

As we look at the year ahead, this new consumer dynamic has three implications for marketers.

Multichannel Campaign Management Becomes Crucial Over the Next Few Years. It is already a big concern, especially for agencies: more than one-third see multichannel campaign management as their top digital priority, according to Adobe and e-Consultancy’s “2014 Digital Trends” report.

More than one-quarter of brand-side respondents ranked it as a top priority, too.

Experimentation Gets Easier. Brands can test social-based brand activations with a small, targeted group of consumers easily and cheaply, and get results quickly.

A marketing strategy based on real-time interactions can be evaluated constantly and tweaked on the fly.

Building Scale Gets Harder. Consumer-generated marketing is complicated to scale up, with so many individuals, so many directions, so many personalities and moods and voices adding to the marketing mix.

Organic marketing is hard to control, and mistakes can snowball—publicly, and in real time.

THIS NEW CONSUMER dynamic will complicate the legal landscape.

The process of engaging millions of consumers directly is fraught with risk. Marketers need help to foresee potential problems, plan for contingencies and respond to issues in real time, directly with individual consumers.

After all, consumers hold the currency.

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