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Vice Has Many Media Giants Salivating, but Its Terms Will Be Rich

Vice Has Many Media Giants Salivating, but Its Terms Will Be Rich

By JONATHAN MAHLER and RAVI SOMAIYAJUNE 22, 2014

A black S.U.V. recently rolled through the streets of Williamsburg, Brooklyn, and stopped in front of the converted warehouse that is the global headquarters of Vice Media. Out of the vehicle stepped the media mogul Rupert Murdoch.

Mr. Murdoch’s 21st Century Fox owns a small stake in Vice, and he was visiting Brooklyn to meet with Vice’s chief executive, Shane Smith. Among the topics at hand was a rumor that Vice was negotiating to collaborate with, and perhaps sell a large stake to, one of Fox’s competitors,Time Warner.

Fox is discussing a deal with Vice, too. So isDisney. Any agreement is likely to value Vice, which started as a free magazine in Montreal in 1994, at $1.5 billion to $2.5 billion. A partnership could take many shapes. But Vice, which has produced just 11 hours of programming expressly for television, is seeking its own TV network, a movie deal and a lot of money for its founders and investors.

The digital disruption that is transforming the news and entertainment businesses has led to many odd alliances, but few seem more incongruous than one that would join Vice with a corporate media conglomerate. Though financing itself mostly by making videos in partnership with large corporations, Vice has assiduously cultivated an insurgent image, with its tattooed news correspondents, hand-held cameras and journalistic stunts like sending the former basketball player Dennis Rodman to North Korea.

Along the way, Mr. Smith, 44, has routinely criticized the mainstream media and traditional television. If he can reach a deal with one of these companies, he will be joining the club he has professed to disdain.

And yet here he is, in negotiations involving the likes of James Murdoch, Rupert’s son and Fox’s heir apparent; Robert A. Iger, chief executive of Disney; and Jeffrey L. Bewkes, chief executive of Time Warner. All of them are desperately scrambling to reach a generation of consumers who are more attached to their mobile phones than to traditional television.

The executives covet Vice’s unruly, D.I.Y. sensibility — “News from the edge” is the tagline for its 30-minute weekly program on HBO — and, above all, the connection it has established with its core audience of young men.

Now that he is in conversations that could net his company hundreds of millions of dollars, Mr. Smith, normally brash and outspoken, is trying to be discreet. Though he would not speak about the various deals Vice is discussing, he talked about his vision for the company’s future and television’s role in it recently at his office.

“It’s the next step in our evolution,” he said. “Our mobile and online stuff is going to grow exponentially, but we want a three-legged stool, and the third leg is TV.”

Bearded and bearish, Mr. Smith looks as if he belongs at a Viking feast, drinking mead from his helmet. Instead, he was sipping chilled premier cru Chablis poured by an assistant.

Fox, Disney and Time Warner all declined to comment.

Deals that join heavily hyped digital companies with large media conglomerates do not always end well. News Corporation bought the website Myspace for $580 million in 2005, and sold it six years later for $35 million. Time Warner’s 2000 merger with AOL is now taught to aspiring M.B.A.s as the worst business transaction in history.

Mr. Smith contends Vice is different. The company’s finances are private, but a person familiar with its business said it expected to generate about $500 million in revenue in 2014. A vast majority comes not from online news content but from videos created to resemble news content, paid for by companies like Intel and AT&T.

Vice would also arrive with a devoted following, though the size of its audience is hard to verify independently. The hope is that it will not become another Myspace, but a modern, multiplatform MTV. Tom Freston, a founder and former chief executive of MTV who went on to run Viacom, is one of Vice’s investors and closest advisers.

MTV was built on an original concept: the pop-music video. Vice’s appeal is that it has branded a certain kind of cool, but coolness is an ephemeral concept. And there is exponentially more content to compete with now than when MTV began in 1981, making it harder than ever to stand out.

Vice got its first taste for television when it started producing its weekly newsmagazine show for HBO last year. It recently broadcast the final episode of its second season, featuring reports from crime-ridden Camden, N.J., and refugee camps in Chad and Darfur. (In last year’s infamous finale, Mr. Rodman and three members of the Harlem Globetrotters played before Kim Jong-un in North Korea.)

In its first year, Vice’s HBO show averaged 821,000 viewers a week, including the original broadcast and viewings in the next seven days, according to Brad Adgate, the director of research for Horizon Media. Weekly viewership fell to 760,000 in its second season. HBO says the numbers are substantially higher when online and on-demand viewing are included.

People familiar with the negotiations say the talks with Time Warner have made the most progress. It could buy a large, minority stake in Vice, and give Vice control of the cable channel HLN, or they could operate the network as a joint venture. The deal would give Vice a 24-hour news network that reaches more than 100 million households. Time Warner would get a potential solution to a channel that has struggled to find an audience.

But the companies remain at odds over how much influence Time Warner would have over Vice and HLN, said the people familiar with the talks, who spoke on condition of anonymity because they are continuing and delicate. The two also disagree about the total value of Vice. Time Warner contends it is worth about $1.5 billion; Vice says it is worth at least $2.5 billion.

These people also cited another matter. In March, Mr. Smith delivered a profanity-laced assessment of CNN — also owned by Time Warner — to The Daily News in New York, calling the network “a disaster.” The president of CNN, Jeff Zucker, was furious, a Time Warner official said. If Vice were to take over HLN, Mr. Zucker and Mr. Smith would be colleagues.

Among its other suitors, Vice has the strongest relationship with Fox, which last year bought a 5 percent stake in the company for $70 million. James Murdoch is on Vice’s board.

But a Fox deal faces hurdles, too. The company does not have a logical single channel to give Vice, which is what Mr. Smith most wants. “You can’t be MTV without a TV network,” he said.

An agreement might instead call for Vice to program blocks of time on a few Fox networks. And, of course, Fox’s defining news brand, Fox News, is not popular among Vice’s core audience.

The talks with Disney were initiated more recently — it is not clear at whose prompting — after news of the Time Warner discussions broke. It is also unclear how a deal might be structured.

Disney has recently pursued digital media assets that cater to a younger audience. In March, it acquired the YouTube video production network Maker Studios.

Mr. Smith said Vice was in a powerful bargaining position. “It’s not like we’re beggars coming cap in hand saying please give me a network,” he said. “We’re bringing Gen Y, we’re bringing mobile, we’re bringing social, we’re bringing all of these things that they don’t have.”

Vice has focused most of its energy and resources on the web. But while its sixYouTube channels and various websites attract plenty of digital advertising, those rates pale in comparison to what Vice’s shows could potentially command on television.

More to the point, the move into television might also allow Vice to become less financially dependent on advertising agency work and corporate partnerships. In other words, it could try to evolve into a pure content-only operation.

Even if Vice can make a deal, there is no guarantee that its fans will follow the company to television in an era when young people are getting their news, increasingly, on other types of screens. “News on TV skews very old,” said Tom Rogers, the chief executive of TiVo, who helped start CNBC and MSNBC among other cable channels. “Most news channels have average audiences of 60 or older.”

The average age of Vice’s HBO viewers is 46 to 50, Mr. Adgate said. Its online audience is a good deal younger, but on television anyway, it has not reached the elusive millennial demographic.

Developing a television show is also very different from developing a web series. Michael Lombardo, the president of programming at HBO, said the network had worked very closely with Vice to shape the newsmagazine show into something it felt could build an audience on television. The conversations were not always easy, he said.

“When you’re in the digital space and you’re looking for clicks the idea is to just be noisy,” he said. “That impacts not only the subjects of your story but the way you tell a story. It’s different when you have someone sit down to a half-hour or hour show.”

Last week, the talks over Vice’s future moved from Brooklyn to Cannes, the site of an annual international media conference that attracts many of the world’s biggest companies. Vice rented three villas for the occasion, and, hosted a couple of big parties. One had been scheduled for a French strip club, but the guest list grew so long that it had to be moved to a more conventional location, the Palais des Festivals.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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