Postproduction facilities are facing technological and economic challenges as they turn the corner into the next millennium. The buildup to HDTV is a new and major expenditure for post houses, and traditional entertainment as well as commercial advertising face growing competition from the Internet and interactive television. The new media alternatives also require an investment in new resources and technology in order for companies to be able to compete effectively. Moreover, competition is not limit-
ed to local, regional or national markets, but has become global in scale.
As an indication of the new business realities, the Todd-AO Corporation, Soundelux Entertainment Group and Four Media Company (4MC), three leading players in the video and postproduction industry, have turned to "big money" to help propel them into the next millennium’s media arena. This infusion of capital has come from Englewood, Colo.-based cable and communications conglomerate Liberty Media Corp. With a $5 billion cash infusion the company received earlier this year from the merger between Telecommunications, Inc. (TCI) and AT&T, Liberty Media has set its eye on production and postproduction services to support its growing entertainment programming needs.
"As consumer demand increases for entertainment and information in all forms, the infrastructure to produce, traffic, distribute and store program and commercial content must grow and mature," says Robert R. Bennett, president/CEO of Liberty in a press statement announcing the Todd-AO and Soundelux acquisitions. "We believe that these businesses can provide valuable services to our existing businesses and will play an important role in providing a new generation of services focused on the evolving interactive video market."
Money Talks
Liberty Media Corp. announced in July that it had entered into letters of intent to acquire controlling interests in both Todd-AO and Hollywood-based Soundelux. As a result of the transaction, Liberty will own approximately 57 percent of the equity and 82 percent of the votes of Todd-AO. A provider of motion picture and television postproduction since ’52, Todd-AO has facilities located in Los Angeles, New York, London and Atlanta. Other Todd-AO holdings include Hollywood Digital, HD West, Santa Monica, and Todd-AO/Editworks, Atlanta.
"Our announced plan to globalize postproduction services giving precedence to market presence over market share in all facets of delivery, postproduction and formatting, shall now become a much earlier reality than expected," says Todd-AO president/CEO Salah M. Hassanein, in a prepared statement. "This association with Liberty Media will permit Todd-AO to achieve its goals, given the Liberty Media resources."
In a separate transaction, Liberty acquired approximately 55 percent of the equity and approximately 92 percent of the votes of Soundelux, a provider of audio postproduction as well as location-based entertainment, production services, content and technology. Soundelux has operations in San Francisco, New York, London, Las Vegas, Minneapolis, Glendale, Calif., Orlando, Fla., Des Moines, Iowa, and Melbourne, Australia. "This solidifies our vision of partnering with a corporation that has a wide spectrum of technologies and resources," Jeffrey Edell, president/CEO of Soundelux, states in the press release announcing the deal. "This enables us to address future challenges and opportunities related to the convergence of entertainment and commerce."
For both letters of intent, definitive agreements have been signed. Both transactions are expected to close at the end of the year. David P. Beddow, VP of Liberty Media Corp., is coordinating the conglomerate’s activities with Todd-AO and Soundelux.
On Nov. 1, 4MC announced that it had entered into a letter of intent to sell 100 percent of its issued and outstanding common stock to Liberty Media. The 4MC family of companies includes Riot, Santa Monica; Encore Hollywood; Pacific Ocean Post, Santa Monica; Digital Magic Company, Santa Monica; and Company 3, Santa Monica. Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and 4MC chairman Robert T. Walston, are, collectively, holders of approximately 70 percent of the issued and outstanding shares of 4MC. They are expected to enter into agreements with Liberty Media to vote in favor of the transaction. The parties anticipated that after a definitive agreement is signed, the deal should close in the first quarter of 2000.
"We are impressed with the breadth and scale of Four Media’s operations and the quality of their investments in digital infrastructure," said Beddow in a statement about Liberty Media’s intention to purchase 4MC. "Four Media is an important asset in our services and infrastructure development strategy."
Larry Chernoff, president of 4MC Television and the Encore Group, which is comprised of Riot, Encore Hollywood, POP, Digital Magic Company, and Video Symphony, expresses support for the acquisition. "Liberty Media is a company that is involved in what is termed ‘convergence’ television," he explains. "It is a very progressive company, with a view toward the future and how television will integrate into e-commerce, and how entertainment television and advertising will ultimately converge on the television set. In that respect, we stand a good chance to learn and benefit from these efforts.
"What will be done—and how—is still very much up in the air," he continues. "But 4MC and its attendant companies will play a pivotal part in the production process. The digital infrastructure that 4MC has developed in terms of facilities as well as distribution are attractive to Liberty Media’s ultimate plans."
Industry Response
Despite all such forward thinking, there is no doubt that the three Liberty Media acquisitions have sent shockwaves through all quarters of the postproduction industry. There are varied opinions on what such a development says about the post market—which has already seen a few waves of consolidation over the last few years—as well as on how it will affect the industry. To get a sense of the impact, SHOOT spoke with several postproduction companies—some that remain independent entities, and others that have expanded and diversified in the post arena—to get a sense of how the community is responding to Liberty’s sudden interest in commercial postproduction.
Recognizing that it is really too early to gauge the long-term ramifications of the Liberty Media acquisitions, one of the main concerns expressed by many was that the mergers represent the "corporatization" of the postproduction industry. Some feel these acquisitions are purely financial deals for a company that doesn’t have a great deal of knowledge about or little interest in this sector of the industry. Several view this as a complete antithesis to the culture of postproduction, which is based on creativity, service and one-to-one relationships. "On a long-term basis, Liberty Media is a hugely capitalized company with a global strategic plan, so it will be interesting to see [what happens]," says Jack Schaeffer, president of The Finish Line, Santa Monica. "I have been involved with companies before—[for instance,] The Editel Group, which is no longer around—where there was an acquisition by a company with a strategic plan. The problem [the acquiring company] had was that in each of the different markets, whether it be New York, Chicago or Los Angeles, the activities, needs and service issues were so diverse that it was very difficult to pull it all together the same way you do so in a manufacturing environment. This is a very personal service creative industry, which is quirky and harder to get a corporate take on.
"A long-distance, hands-off, swap-of-stock kind of thing is not going to change much on a short-term basis," he continues. "4MC already is a very large company, and things are pretty much removed from the frontlines where the action is. If anything, on a short-term basis, it challenges us all to be as good as we can be, to reinforce our own infrastructures and have the very best talent with everybody secure and happy. It still comes down to individual talent operating our equipment. I give credence to service, but it is still very much a talent-driven business."
"What we do is create ideas and that is a totally creative process," says Dick Voss, president of Post Logic, Los Angeles and Santa Monica. "If the ideas aren’t there—if we don’t put out a good creative product—then everything goes to hell in a handbasket. It is service and relationships, but what I’m seeing is that larger corporations will have to be careful because they look at it as a business. Because these are public entities, the driving force is going to be the stockholder and earnings per share. That traditionally has not been the driving force for the entrepreneurs who started all of these postproduction companies.
"It is going to be more difficult to stay independent," Voss says of the long-term impact of the acquisitions. "For a corporation such as Liberty Media, there are obviously economics of scale from the standpoint of equipment. The biggest cost factors for a facility are technology and personnel. That is where eighty-five percent of your costs are located. Larger corporations can get better deals on equipment because they are going to buy ten, while an independent will buy only one."
Godfrey Pye, president of Sunset Digital Studios, Los Angeles, expresses agreement with Voss’ observation that a corporate parent with deep pockets leads to discounts on equipment. "The 4MC and Todd-AO people just took that business route of attack," he says. "They have been smart. … There is the need for deeper pockets. HDTV equipment does get very expensive. Here at Sunset, however, we have gotten into HDTV paying our own way."
Dean Winkler, president of Post Perfect, New York and CEO of New York Media Group—which is comprised of New York-based companies such as Crush Digital Video, Cyclotron, East Side Audio, Lower East Side, Mixed Nuts Recording Studio, Oculus and Superdupe Recording—concurs with the argument that the economics of the post business put a lot of pressure on independent players. But, he adds, growth doesn’t necessarily require selling out to big corporate entities who don’t understand the needs of the market. "In terms of expansion, we have tried to build a creative satellite that adds creative value to our clients and leverages our core technology," Winkler says. "It is obvious that we are working in a very capital-intensive business, and that the added pressure of going to HDTV only intensifies the pressure. However, we are a very service-oriented business, and I think it is going to be challenge for them to maintain the level of personalized service, being part of a company so big."
Harri Paakkonen, co-founder/ co-owner/CG animation director at Mixin Pixls, Santa Monica, offers the point of view of smaller companies outside the traditional postproduction arena. "My first reaction to [the acquisitions] was probably similar to that of a small mom-and pop-store that sees WalMart coming to town," he explains. "I heard a lot of talk from friends and colleagues that this might be the beginning of a monopoly, one that would affect pricing and even creativity. But after thinking about it, I’m not all that concerned. I don’t think it is going to affect us all that adversely. Even though people call this an industry, it’s not like we are making sausages—throw in some meat, and violà, there’s a wiener. We are selling creativity and problem-solving. The clients come to us, a small company, because they like attention. They are not just one project among many.
"Also, if you look at what’s happened recently with these mergers," Paakkonen adds, "many companies’ top talent have left and started boutiques. The top talent doesn’t like to work with all that bureaucracy. At least twenty or thirty new boutiques have sprung up near us."
New Paradigm
Not everyone is so skeptical of the benefits of the merger. "Joining with Liberty Media provides 4MC and Todd-AO access to the resources they need to compete on a global basis," says Mark Polyocan, president of New York-based The Tape House, which includes a number of companies under its corporate umbrella: Tape House Editorial, Tape House Advanced Imaging Center, Tape House Toons, Tape House Digital Film and Black Logic. Tape House also shares ownership of The ANX, New York, with Photomag, also New York-based, which is a sister company under the Editing Concepts umbrella.
Chernoff indicates that the acquisition represents a paradigm in the concept of the television industry, more than being representative of the economics of the postproduction market. "The marvelous thing about this acquisition is that it overturns traditional business concepts about postproduction in general," he says. "You cannot base the decision that Liberty Media made on traditional thinking. It kind of turns the industry on its head—not because of any preconceived consolidation of companies, but with redefining what television, entertainment and e-commerce are. It has to do with a much grander vision than any one venue, even HDTV."i
