Zelnick: Bad Times, Good Buys

These can be the best of times for Strauss Zelnick, whose diverse media experience and independent funding sources make him an opportunistic buyer in a troubled market.

In seven years, ZelnickMedia, a private equity and advisory firm, has built an estimated $2.5 billion portfolio of growth companies in the interactive media sector. He says he has improved the profitability of every portfolio company he has owned. Video game publisher Take-Two Interactive is expected to turn profitable in less than two years from its acquisition by Zelnick, who performed the same kind of quick turnaround as CEO of BMG Entertainment. His company has flipped assets such as Time Life for many times the purchase price. The Harvard Law School graduate has been turning around and building companies since he left television and film positions at Columbia Pictures, Vestron and Twentieth Century Fox.

ZelnickMedia's first controlled institutional fund this year will initially provide what sources say could be several hundred million for new acquisitions in a market rife with undervalued properties. Zelnick, who declined to discuss the new fund, had this to say about the current economic climate:



Mermigas: How do you invest in these precarious times?

Zelnick: We have been waiting for this because we are value investors. We just raised new capital. Our existing portfolio is doing very well. Our hair is not on fire due to any preexisting situations, as it is with so many other companies. The opportunities are greater when the prices are down, and when other people cannot borrow money as freely. The credit crunch and the decline in prices are a help, but a long-term economic slowdown would not be good for anyone.

Mermigas: What do you want to buy?

Zelnick: Some immediate buying opportunities do exist in sectors where we own assets and some where we don't. We are looking for businesses that we can buy inexpensively that have management challenges and digital opportunities. We like smaller businesses of about $100 million that have digital components.

Mermigas: With video games considered recession-proof, will you acquire more related companies?

Zelnick: We expect Take Two to continue to grow and do well, but we probably won't take a separate situation in video games. We are definitely looking at all kinds of interactive entertainment. We like all kinds of marketing services businesses. We're in the market research business, and we like advertising-related companies with exposure to the Internet.

Mermigas: Are you concerned many advertisers are not satisfied with the data they are getting?

Zelnick: That is right, and I think that will change. What is appealing about Internet advertising is that it can be targeted and is measurable. We're looking at businesses where we can help people be more effective in their adverting by creating new metrics or measuring things better. [Advertisers] paying on a transaction is obviously the holy grail. Paying based on impressions is a lot tougher. How do advertisers confirm who they think is watching is actually watching? That is hard to do. Creating a better advertising vehicle on the Internet is a compelling notion.

Mermigas: How difficult is it to determine accurate valuations in this environment?

Zelnick: There may be some downward pressure on valuations. Some people's balance sheets will put them into a position in which they won't have any choice but to sell.

Memigas: What is the key to transitioning print content to digital?

Zelnick: The Wall Street Journal has done it great, and a lot of the Time magazines like People have done it well. You have to have a powerful brand that has authority and then deliver a quality product that consumers want. If the brand doesn't stand for anything, it is much more difficult to transition online. People and ESPN and MTV mean something and have special resonance with consumers.

Mermigas: How much will brands guide you in your future investments?

Zelnick: We have been sort of allergic to trophy assets. People usually overpay for them, and we're focused on returning value to shareholders. Time Life and Take Two are trophy assets, and were special opportunities. Generally, specific, niche brands matter more than general big brands. That said, the nature of brands has changed. Brands today are more ephemeral than they were, say, eight years ago, when Napster was huge. No one cares any more. It can be difficult to take a legacy brand and resurrect it.

Mermigas: What have you learned from past deals and businesses that you would apply today?

Zelnick: To have moved the digital landscape farther for music than we were able to. We didn't get as far along as we should have. There should have been a legitimate business model out much earlier. There should have been a public service ad campaign explaining to consumers that piracy is stealing, and offering them a legitimate alternative. Everyone should have been more aggressive about building new business models. One of the biggest mistakes the music companies made was so jealously protecting and grabbing everything for themselves. There was no business in it for digital retailers, who you need to sell your products. The only reason Apple works is because it makes money on the hardware.

Mermigas: Is that where video content is now?

Zelnick: I think that's right. None of the creators of entertainment properties are very good at dealing directly with consumers. They go through retailers. And their concept in digital is they don't need a retailer, per se, but that simply isn't the case.

Mermigas: How can video avoid the same pitfalls as music?

Zelnick: There's room for user-generated content and professionally created content. I don't really see new business models for audiovisual content except for offering anytime-anywhere on different economic terms. It would make sense to create an opportunity for digital retailers who sell their products directly to consumers.

Mermigas: So everyone from the studios to the networks to the creators must learn to share the wealth?

Zelnick: Yes. You want ubiquitous distribution. In order to induce that, distributors have to make money. All of the big creators of product right now are too focused on keeping 100% of the margin, and that didn't work for the music business.

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