• by Diane Mermigas , September 28, 2007

Big media company dynamics generally impede innovation and risk-taking needed to create the new forms of content, advertising and distribution demanded by a robust digital marketplace.

Instead, media giants--ranging from more traditional players such as Time Warner to newer companies such as Yahoo--opt for safe, predictable extensions of their existing branded assets into the Internet and other digital interactive spaces. But those values and formats don't always translate.

When Big Media buys a new media concern, it may continue to grow organically while managed for more commercial designs (News Corp.'s MySpace), or it may struggle to regain its footing (Time Warner's AOL). In either case, integration, entrepreneurial vision, continued funding and patience are a challenge. Old-line media companies are used to locking up their content and directing consumer interest with heavy marketing spend--none of which is possible on the Internet and in a viral interactive universe.

Even as they try to be more nimble and experimental, Big Media strains to recreate what upstarts such as Facebook and YouTube have built, using their social networks' free user-generated content and distribution. YouTube spent only $13 million to create the entity Google paid $1.65 billion for a year ago.

Economic and structural legacies will inhibit many big media companies from casting a broader, more profitable net in the new digital arena, and it will lose them talented employees. Google is an obvious exception--able to mandate and fund innovation from within, yet willing to buy edgy concerns like YouTube and DoubleClick when internal efforts can't deliver.

Former AOL CEO Jonathan Miller and former Fox Interactive Media CEO Ross Levinsohn (the force behind New's Corp.'s MySpace acquisition) are products of the quixotic media grinder. Both have opted to build their own hybrid media company from scratch, rather than struggle with big media's strained status quo.

At the time of their respective and unrelated departures, both executives expressed concern about the reluctance of large media concerns to do what it takes to invest in and nurture innovation and enterprise in the digital media space. Sources say Miller was thwarted in his one-time push for Time Warner to acquire YouTube, while Levinsohn was said to have become disenchanted when News Corp. became timid about acquiring more online or digital media companies. (That's after its $580 million MySpace acquisition escalated into what is now an estimated $10 billion holding.) Both executives decline to discuss the details.

As partners, the duo's future investments in or acquisition of young companies providing new forms of digital content, distribution, monetization and platforms will be backed by General Atlantic LLC, a New York-based private-equity firm that has committed nearly half of its $15 billion in capital to building or buying more than 160 companies in more than six major industries.

Since 1995, GA has made more than $1.3 billion private-equity investments in more than 20 media companies, the most recent: online marketer Webloyalty, career Web site Dice, global e-marketer AKQA, and leading India entertainment and news producer NDTV. The two media executives also will serve as advisors to GA.

Velocity Investment Group, formed by Miller and Levinsohn in August, is being advised by Allen & Co. It is in its first serious discussions with at least four target consumer-oriented Internet companies. Velocity's investments or acquisitions could range from $50 million to $500 million each, but likely remain collectively below $1 billion, sources said.

Miller and Levinsohn are looking at content startups whose online advertising revenues they can accelerate and scale by selling across multiple properties. They also are looking at young companies that broker advertising for Web sites. Reportedly, one of the many companies they are eyeing is Broadband Enterprises, which is involved in online video distribution.

They plan to create a hybrid digital media company that eventually can be spun off or go public.

Although funding generally has become more cautious and tight, Velocity enters at a time of booming interest in new media and tech startups that can fill marketplace voids. Valuations of even smaller companies and startups have been hiked during the recent stretch of aggressive buying. Venture capital funding for nascent or startup Internet businesses rose nearly 10% to about $14.5 billion in the first half of 2007.

"There are enough tools available on Google and in other places today so that anyone can create, distribute and monetize their own content. And they can do it cheaper, faster and more flexibly than they can at any of the established, larger media companies," Levinsohn said.

"That makes this a very competitive market. You can't be sure who is doing what. But we're willing to bet on ourselves and our ability to identify and bring together the pieces and people we need to build something different," said Levinsohn, who forged Fox Interactive into a viable economic force.

Both believe that AOL and MySpace generally are being managed by their Big Media owners with more traditional and conservative--rather than innovative--sensibilities. But even Yahoo is doing the same with some of its assets.

Without belaboring the circumstances of their big media exits within the past year, Miller and Levinsohn say they have garnered enough experience on both sides of the so-called new and old media fence to scope out a compelling hybrid play as independent entrepreneurs. They point to the undeveloped spaces on the Internet and on the digital spectrum, where new businesses are being carved.

By coupling its masterful search engine with text ads, Google created the template for a lucrative contextual paid search business. Video advertising, as well as mobile advertising and content, are in the earliest stages of development. "There are just some things too difficult to do inside bigger media companies, and at the same time, there are many voids in the digital space," said Miller, who has worked for Barry Diller and led AOL's difficult transition from a subscription-based dial-up to a Web and advertising-based portal. "These things need to be worked through, and smaller companies are usually the best place to do it."