Panel on Investing Opportunities in Digital Media

This morning, I have attended an AlwaysOn/KPMG event featuring a panel of venture capitalists investing in the digital media space, co-moderated by Tony Perkins and KPMG's Packy Kelly. VCs participating to this panel were:

• Tim Draper from Draper Fisher Jurvetson. Tim and his firm have invested in Skype, Akimbo, Divx, Technorati and Revver.
• John Jarve from Menlo Venture. His firm invested in CinemaNow and MobiTV.
• Brad Feld from Mobius VC - and author of Feld Thoughts (one of the best VC blogs). Brad and his firm have invested in Technorati, NewsGator, FeedBurner and SlingMedia.

Tony kicked off the session by stating that he saw Hollywood and Silicon Valley “getting in bed”, which was quite different from “Web 1.0”, and asked his panelists to comment on trends underpinning the investment strategy of their respective firms.

Tim saw a major revolution happening in the media space enabled by new technology: production, distribution and consumption - on TVs, computers and cell phones. John related to three trends Menlo Ventures has been tracking over the past 5 years: raw bandwidth availability going up, storage costs dropping and the new efficient H.264 compression enabling a wide range distribution of video. Brad explained that current trends resulted from constructs which are 10 years old and have now reached maturity - and user adoption.

Packy asked about the size of the market opportunity, and the percentage of consumers' disposable income available to acquire these devices or subscribe to new services. John replied that Menlo was looking at the introduction of new devices as drivers of new acquisition opportunities (such as TV channels on cell phones). Tim is looking at entrepreneurs to lead with new concepts: for example, because of the shorter attention span of people, short 2mn videos are enjoying a lot of success, and their cost of production and delivery is almost absurdly low compared to major TV programs and movies. Brad related to MMORPGs and the fact that people spend a lot of time online and create alternate lives for themselves in these universes. This has created a whole slew of economic opportunities related to avatars, “items” that can be acquired: land, clothes, weapons,... for hard cash. Second Life is one of the most advanced “parallel economies” as highlighted in this recent Business 2.0 piece. Brad mentioned OnLive and Electric Communities,  investments Mobius made in '95 and '96, that tried to implement the same concepts and bombed - having spotted an opportunity but being way too early.

The next question was about how to get incumbents (rights owners, majors, etc.) to see the opportunity created by these new distribution channels, and accept to make their content available according to new “economic rules” - e.g. distributing 20+ TV channels on cell phones through carriers that required proving to both content owners and operators that a new, viable, medium had been created without comprising traditional TV,

Tony jumped into consumer generated media and the snowball effect created by communities like MySpace. One of the secrets for these companies to succeed is to know their target consumer base, and focus on serving them with the content (text, audio, video, avatars) and services they care about - even if these do not make sense in the context of a broader market. These communities also allowed unknown bands or artists to get direct distribution without requiring the help of a record company. An ever increasing issue though is the discovery aspect, especially with audio and video: as the amount of rich media grows, and traditional search engines do not provide meaningful results, social recommendation and/or collaborative filtering will be required (which is exactly what client Loomia is offering).

Packy asked about the need for VCs to align themselves on GEMAYANI (or AGILE AMY as Brad put it - for Amazon Google Interactive LibertyMedia Amazon Microsoft Yahoo) in order to generate realizations though M&A exits since the IPO market is sort of closed, and SOX is really acting as a barrier preventing early IPOs. Tim explained that he did not want to sell Skype in a first place (even for $4.1B) and that eBay is going to do wonderful things with it. Brad commented on recent early stage takeouts (flickr, del.icio.us,...) that were highly publicized and are nothing but exceptions (hundreds of startups created, a dozen early takeouts ?). Tim added that the average time it takes to create a billion dollar company in this new global market is shrinking (40 years for HP, 9 years Microsoft, 2 years Skype).

The discussion then went into the opportunities created by the realtime distribution of events (concerts, sports game,...) vs. the comfort of time-shifting through Tivo or similar services - as well as place-shifting, such as recording on Tivo and downloading it on a PC. One of the issue in the US is the poor (as in sorry) state of the wireless infrastructure that makes it challenging to roll-out a broadband experience on cell phones. Tim mentioned that the Skype phone, relying on the ubiquity of Wifi, will partially solve this issue.

On Apple and their impact on the explosion of the usage of digital media, there was a consensus that the company would have to open their walled garden “at some point”, as opposed to enforcing end to end proprietary solutions - even though their ability to out-innovate their competitors on the end point device might keep them going for a while.

All in all, nothing really new, but an interesting and enjoyable discussion.

Comments

[Daniel James]

A couple of notes;

In talking about gaming, two new investments were mentioned; Tim (DFJ) in Evil Twin Studios and John (Menlo) in imvu -- both said to be interesting takes on the avatar / item sales business. imvu.com has their product available to download, eviltwinstudios.net is stealthy.

Brad talked about Onlive, which was rolled into Electric Communities / communities.com (not real Communities) a fascinating early company in this space with a product that never quite made it. A tale of their demise is here: http://thecan.org/in/communities.html

Otherwise a good writeup of the session!

[Jeff Clavier]

Daniel> Thanks a lot for the comment, I fixed Electric Communities, and appreciate the additional information.