At the Crossroads

Q+A with Michael Wolfe: At the Cross Roads

Michael Wolf tells Joe Mandese why we are at a turning point brought on by the collision of media and technology

Michael Wolf is one of the smartest and most influential figures in the media industry that most people have never heard of. If you have, it's probably for his stint as president-COO of MTV Networks, where he presided over a number of high-profile digital media acquisitions and revamped the sales organization. Before that, Wolf was the man many of the industry's top moguls and digital innovators relied on to make some of their most strategic business decisions. As a former director of McKinsey & Co., Wolf headed the management consulting firm's Global Media and Entertainment Practice, and served as the chief consultant to a who's who list of media titans. Before that, Wolf was a senior partner at Booz & Co., where he spearheaded its fledgling media and entertainment group.
He left MTV Networks in 2007, after former Viacom ceo Tom Freston, who had hired him, stepped down. media recently sat down with Wolf to catch us up on what he's been up to since going on sabbatical, what he might be up to next and where he thinks the media and advertising industries are headed.

You left MTV in 2007. What have you been doing since then?
We're living in such an exciting time, I wanted to make sure I could use this time to immerse myself in the culture of technology, understand what's going be relevant and what's going to happen next with technology. At the same time I wanted to look at countries like China and India, which are going to be in the vanguard of what's likely going to happen here in the U.S.

Rather than looking at this from the perspective of people who run big companies, I started looking at what I saw at home, and the three people in my household who were born digital: my 16-year-old and my ten-year-old twins. I was very inspired by what I saw. My 16-year-old has gone beyond being a user; he's now becoming a creator and a programmer as well. He's already shooting and uploading his own video, and he's in the process of building his own Web 2.0 site and business.

Has he retained you yet?
No, but I am asking for a piece of the equity.

My 10-year-olds take for granted that they can call their friends with Skype, that they can get applications on their handsets, and so they inspired me to see where the world of technology is going. And as a result, I've spent a lot of time - practically every other week - in the Bay Area. And I got a close-up look at a lot of the start-up companies that are focused on the media space, or that are focused on the transition from entertainment. I joined the board of Max Levchin's company, Slide. I've advised Max as he's been building what is probably one of the largest social entertainment companies in the world and the principal developer of Facebook apps. Right now, Slide has over 130 million people using its applications each month and they've created an entire ecosystem for users to build and sell virtual goods.

I've also spent a lot of time in places like China, looking at how their culture and technology is changing. I started off with a visit with my 16-year-old, and we spent a couple of days cool-hunting in Shanghai with a friend. We went to look at things like user-generated content in which users were creating their own T-shirts, and people building their own computers, for example. This was all happening in a place where the mobile handset has already leap-frogged the PC.

As a result of that, I think I have a different glance of the future than I would've had before.

Does part of that glimpse include what Michael Wolf's future might be?
Yes, and to a large extent it comes back to the lens I've gained on the world. We're at a turning point, where it's much easier, given what's happening with technology, and what's happened with business, for new, small companies to not only disrupt big companies, but actually to reach into the hearts of those businesses and take away their sweet spots.

I think we're going to see this over and over again, and not just with traditional media companies. We're seeing this with newer digital media companies, too, like when eBay became an established company, Google came along and overbuilt eBay. Or, likewise, what we've seen with the progression of users from MySpace to Facebook and now to Twitter. In each case, there are going to be a lot of new businesses and applications that emerge.

So it sounds like it's more likely that you will do something entrepreneurial than go back to a C-level role in a big media company?
All I can tell you is that the areas I'm focusing on are going to be driven much more by the tailwinds of technology.

So how has all this changed your perception of the industry and how are you going to bring that to market?
I have a perspective now on how the worlds of media and technology are going to collide versus converge. There's a whole new wave of things that are about to come down the pike that will change not just the way that people consume and use technology and content and tools and applications, but also the whole way that this world of media and technology work. Just to give you some examples, we're going to have an explosion of virtual goods and virtual currencies, which creates almost a whole new economy in which it's not about companies creating it, but about people creating it. Today, we can see - in just about any of the social application sites - people are actually creating their own virtual goods, and making money in the same way they used to make it on eBay.

It's the next wave of smartphones and what they're going to enable. It's the entire social gaming space. It's about how a whole new set of media measurement tools are likely to change the way advertisers and agencies provide a metric for the audience they are reaching, and the extent to which they can target that audience, and whether or not somebody saw or reacted to it, or bought something. It's about systems that aren't based on samples, but are truly based on censuses.

Q+A with Michael Wolfe: At the CrossroadsSo all the action we're seeing now, whether it is CIMM, or Nielsen, or whatever, are they just rearranging deck chairs?
While the data exists, there so far hasn't been a perfect solution to use it. So the cable operators haven't been willing to pass along information about users. They know what people are watching. At MTV, we worked with OTX to understand the level of engagement. And while we had similar levels of viewership as other networks, we found out that our viewers were much more engaged, and much more engaged with the brands.

You've raised some interesting points about media and technology that you see as being change agents. How do you think they are specifically going to impact the distribution of media and entertainment?

I've been looking at companies like Redbox [self-service kiosks for DVDs] and Netflix, and to some extent they're creating an environment where the consumer is three to five years ahead of where distribution companies are at today. At any city I go to, I do store checks at Walmart or Best Buy or Costco to see what's moving. Redbox and Netflix are providing what people want, and they may not necessarily want packaged media. And on-demand, online, I can now get from Comcast - albeit as part of a test - what I want. This ultimately should be better for the studios, because it gets them out of the packaged content business. And the distributors, whether they're cable or any other electronic means of distribution - this is where the world is going.

When you look at Hulu, part of the reason why it's successful is because it gives people the ability to select shows to watch on their schedule. It also gives them a very easy user interface that is extremely elegant proving that design absolutely matters.

We live in an era of digital, on-demand media, but why haven't video-on-demand and online on-demand technologies become more popular?

Netflix is quickly evolving into a download-to-rent model, YouTube looks like it's making deals for $3.99 download-to-rent or streaming-to-rent models, and iTunes is doing the same thing. The barriers have been the studios holding back content, and you'd expect that the films opened day and date. "Dark Knight" had a huge amount of anticipation built around it, and yet it opened in the traditional sort of windowing. The same thing is true of "Avatar." Now "Avatar" is going to be in digital. It's going to be in Imax. It is going to be a great experience in the theater. But a lot of people, for no other reason than economics, cannot go with their family to a film. In that scenario what's holding on-demand video back is the studios. Once again the consumer is three to five years ahead of what the studios want to do.

When do we reach the inflection point? When is the consumer going to be in charge of the distribution?
The inflection point is likely to come when studios realize that it's not economical for them to be in the packaged goods business. This is especially true as stores like Best Buy are limiting the extent to which they carry back catalogue. That trend has created value for Netflix, because it's a great repository for those older film titles. Once we go over the precipice to on-demand video, it's no different than the shift that happened from VHS to DVD, or before that when the studios unlocked their vaults and took out some of their great films and put them on VHS.

Page Count: Magazines Are Just One Indication of Secular Change

We've been seeing a shake-up in the magazine industry, including Conde Nast's recent decision to shut down several titles, including Gourmet, which had been around for half a century. There was a surprisingly visceral reaction from consumers, and people in the industry alike. That decision was based in part on a recommendation from McKinsey. So generally, where do you think magazines are going? And specifically, what do you think about the Conde Nast decision?

Well, if you want to talk about traditional media, let's not just talk about magazines. Let's look at other forms, too, like radio and direct mail, and some of the approaches that people look at as legacy businesses. Magazines are likely to be strong businesses going forward for a couple of reasons. One of them is that it is a physical product, which is better than what you can get online. There is something very appealing about the tactile nature of holding a magazine and being able to go through it to look at the glossy pictures.

If you look at magazines like Vogue or Cosmopolitan, these are more about an emotional attachment that a consumer feels with them. There's also the fact that the magazine hangs around and can be shared, which is very different than most other media. I do think, though, that every magazine company is going to have to make some very tough decisions about which titles they invest in, and which they don't spend as much money on.

There are things that are reshaping the magazine business. First of all, there are special interest titles, which give a reader much, much more targeted content. There is also diversity in frequency. Why does a reader have to get a title 12 times a year? Maybe they can receive it less, perhaps four times a year is enough. I think we'll see more of a "bookazine" model, where a person pays $10 or $12 for an InStyle fashion guide, which would be lost in a book store, but is sold very easily on a magazine newsstand. I'm very upbeat about magazines. I'm also upbeat about the fact that there are a lot of people advertising in magazines.

So what about other traditional media? Radio, newspapers, outdoor, direct mail?
I actually believe radio's future is much brighter than people expect. Radio is one of the few media outlets where the audience is growing. Many of the things that people thought would be disruptive to radio broadcasting just haven't turned out that way. Satellite radio has turned out to be more of a transitional technology. The penetration of satellite radio in cars is much slower than anyone expected. It's also not a great model to ask people to pay.

Radio remains a very strong local advertising medium. If you are a local car dealership, or a multi-market retailer, or a fast-food restaurant chain, radio is still one of the best ways to sell in your market. If you look at one of the most analog of all media, outdoor, people used to look at it like Hamburger Helper. But the thing about outdoor is you cannot skip it. You pretty much know that people are in the neighborhood. I really got this view from China, where companies like Focus Media are putting video screens everywhere. We're starting to see that here, with screens now in gas stations and stores. They're able to create a medium that sells products. In China, given the absence of a lot of television advertising, outdoor is a very effective advertising vehicle. As the technology advances for outdoor, we will see that rise in value.

I'm excited about the prospect for what a lot of people like to call traditional media. The bottom line is that digital is going to continue to grow but, for a lot of advertisers, traditional media is a more effective vehicle. I've always been a huge believer in digital, but it's not sufficient for drawing the kind of sales and brand-building that most companies want. What it's really most effective at doing is creating an immediate sale. A lot of the other forms, whether it's television, or magazines, or radio, really provide the tools that marketers need to build their brands.

What does this say about the future of advertising agencies? They seem hell-bent on retooling themselves into digital media organizations.
Advertising agencies are going to play a critical role as the media landscape continues to change, but they're going to need to change how they operate. Advertisers have a new set of expectations. They want their agency partners to know much more about the marketing of their products.

As the world aligns around a whole new constellation of media companies led by Microsoft and Google and Platform A, as well as the television networks and other big media companies, advertisers want tools to optimize their media. [WPP Chairman-CEO] Martin Sorrell has already transitioned his business to the point where less than 40 percent of his business is in traditional media spending, and much more of it is in tools, measurement and marketing services, which is where marketers want to go. His challenge is integrating them, because the old model was that advertising agencies looked at these things as separate businesses and left them alone.

While integration was the Holy Grail, they never did it very well. I also think advertising agencies are going to try and groom their people to have the skills necessary to operate in this environment - people who are digital and that understand the next wave of media.

What about the big vertically-integrated media companies? How are they positioned for the next wave?
[Liberty Media Chairman] John Malone recently said that he expects massive restructuring and consolidation of media businesses, and yet, there's a lot of talk today on whether media companies should consider break-ups versus marriages. That thinking follows Disney's acquisition of Marvel in August for about $4 billion. Its previous acquisition of Pixar. Comcast's talks to buy NBC Universal. The split up of Viacom and CBS.

There are places where it makes a huge amount of sense for companies to put together businesses, and to really achieve scale. Comcast created an enormous amount of value from its purchase of AT&T [cable systems]. They were able to take AT&T's systems and upgrade them. They were able to make them much more service-friendly, and able to get much more high-speed data. You can see lots of examples where real value is being added from consolidation. If you look at companies that have been acquired, or even some of the larger companies that have been the acquirers, ultimately there has been value created for their investors.

One thing we're not seeing is very cash-flush companies like Google and Microsoft making acquisitions and rolling up traditional media companies.
We're living in a time when it's easier to build, and you can create a lot of value by doing so. I think you're going to see companies like Microsoft, which is very much about innovation, either creating it themselves, or buying smaller businesses that provide the seeds for growth. Google acquired Grand Central 18 months ago, which has now become Google Voice. So you've got businesses that will focus on things they can start, or buy early. Additionally, we'll see more vertical consolidation in the media industry. Consolidations that put cable networks together with cable networks, or even film or TV studios where there is a tie into an existing business.

Based on the deep dive and soul-searching you've been doing for the past couple of years, what do you think is the most disruptive media industry development over the next few years? What are the most game-changing things you see on the horizon?
To a large extent, the next wave of technology is going to create a large amount of opportunity, but that's not necessarily going to be for existing companies. How will companies that exist today take advantage of 4G mobile, which will be a dramatic increase in hand-held processing power? Will they take the approach of a handset or something like a Mac tablet, or the next wave of a Kindle, or a Sony reader, or a netbook?

If existing companies don't drive their own innovation, they're going to find that somebody else innovates around them. Take the gaming industry, as an example. Many companies have been selling packaged games, but they're now in a position where they know the trend is going towards social games, casual games, and games in which a great deal of the game play doesn't take place on a console, but on a handheld mobile device. They either need to ride that wave, or they're going to find themselves marginalized. I think the same thing is true across every form of media. 4G will enable people to watch television on their phone. The cable operators already know they will need to provide ubiquitous bandwidth and services.

TV Everywhere?

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