BREAKING… EXCLUSIVE… UPDATED: WME held a mandatory staff meeting this morning to announce internally that a “strategic equity partner”, techno-savvy Silver Lake Partners, is taking a 31% non-controlling minority interest in the agency. Ari Emanuel and Patrick Whitesell stressed to the tenpercentery that the investor will have no ability to acquire an additional stake or to force a sale/IPO on the agency: “WME’s day to day operations will continue to be run by its current leadership team and management board.” The internal announcement was made on the 3-year anniversary this week of Endeavor merging with the William Morris Agency. Egon Durban, a Managing Partner of Silver Lake, will join WME’s Executive Committee along with the company’s Co-CEOs and will also help create a new Technology Advisory Council that “will identify technology related growth opportunities which would benefit WME’s clients”. Emanuel, Whitesell and the entire management team have all renewed long-term contracts with WME. In a statement, the WME Management Board said: “Our partnership with Silver Lake will accelerate WME’s transformation into a technologically innovative entertainment and media company and ensure we can best support our clients across all digital media channels. This investment will give WME access to Silver Lake’s expertise, resources and relationships across the global technology industry, ensuring our clients and the content they create are strategically positioned for the future as the convergence of technology, entertainment and media accelerates.”
Insiders tell me the primary reason for the cash infusion is to take to the next level for clients those digital space initiatives (like “direct-to-consumer” release of content by talent) which WME has been self-financing up to now. “We needed this real Silicon Valley expertise and relationships and background to build out these things for our clients,” Patrick Whitesell tells me. Today’s announcement caps a 2-year discussion with Silver Lake Partners, the Silicon Valley-based private equity firm focused on leveraged buyout and growth capital investments in technology and technology-enabled industries and founded in 1999. Headquartered in Menlo Park, it has a global presence with over 100 investment professionals and value creation specialists across offices in New York, San Francisco, London, Hong Kong, Shangai, and Tokyo, and manages approximately $14 billion. The Silver Lake portfolio includes or has included technology industry leaders such as Alibaba, Allyes, Ameritrade, Avago, Avaya, Business Objects, Flextronics, Gartner, Gerson Lehrman Group, Groupon, Instinet, Intelsat, Interactive Data Corporation, IPC Systems, MCI, Mercury Payment Systems, MultiPlan, the NASDAQ OMX Group, NetScout, NXP, Sabre, Seagate Technology, Serena Software, Skype, Spreadtrum, SunGard Data Systems, UGS, Vantage Data Centers and Zynga.
I’ve learned that veteran Silicon Valley venture capitalist Marc Andreessen, who was involved with Silver Lake on the Skype investment, made the introduction with WME, and the agency’s Silver Lake point person is Egon Durban. Silver Lake Partners “are not Hollywood guys who make Hollywood investments,” Emanuel tells me. “Instead, they are going down a path offering a lot more opportunity than just on a balance sheet.” As Emanuel added, “They talked with us about converging worlds. Everyone got comfortable with each other. Then all of a sudden there was an ‘aha’ moment: ‘These stupid idiots from Hollywood were already in tech.'” WME claims it had no shortage of capital wanting to be in business with them. “But money was the least requirement. Here was private equity that was digital related and that now would allow the agency to move faster, supercharge initiatives, synthesize thought processes,” Emanuel said.
Here’s an internal talking points memo distributed by WME today to explain its need for digital expansion:
The Convergence of the Technology, Media and Content Industries
The technology, media and content industries are increasingly converging: Across the global media and entertainment landscape, digital forces are disrupting and transforming how content is produced, distributed and monetized. Technology has already transformed the music industry and is reordering the print media and publishing industries, and will ultimately influence all forms of digital content.
• Music – For the first time, digital music sales are larger than physical sales, accounting for 50.3% of all U.S. music purchases in 2011. After a downward slide for several years, album sales were up in 2011 for the first time since 2004 due to growth in digital music revenue. Physical sales of CDs are on the decline (down 5% in 2011).
• Books – The publishing industry is being transformed through the online disintermediation of retail chains by internet distribution (e.g., Amazon) of both traditional books and electronic books. E-books have grown from negligible market share in 2008 to 6.4% of the market in 2010 , and this upward trend is expected to continue: E-books: $4.6 billion in 2011; will grow to an estimated $10.0 billion in 2015 (+21% CAGR). Printed Books: $26.8 billion in 2011; will shrink to an estimated $18.9 billion in 2015 (-8% CAGR).
• Television – “Over the Top” (OTT) channels (e.g., Amazon, Hulu, Netflix, YouTube, Amazon Prime, iTunes) are driving a new paradigm – increasingly both buying and creating original content, and have already surpassed traditional cable providers in audience reach. Netflix today has 23 million domestic streaming customers, compared with 22 million subscribers for Comcast, the largest cable system. Hulu has four new original series in development and plans to spend $500 million on TV shows and films in 2012. YouTube: More video is uploaded in one month than the 3 major U.S. networks have created in 60 years. Sixty hours of video are uploaded every minute.
• Film – The film industry has experienced a decline in traditional distribution (e.g., DVDs) as digital distribution increases: U.S. DVD: $11.2 billion in 2011; estimated to be $5.5 billion in 2015 (-16% CAGR). U.S. Digital Distribution: $3.5 billion in 2011; estimated to be $9.2 billion in 2015 (+27% CAGR). Social media is used for cost-effective advertising of new film releases.
• Traditional distribution channels are also increasing their expenditure on content: Over the past decade, the top 10 cable networks have tripled their expenditure on content and have doubled the number of original primetime programs. Cable operators are beginning to purchase digital and TV distribution rights in order to roll out their own OTT offering (“TV Everywhere”).
WME cancelled its normal all-company meeting for this hush-hush town hall meeting with Ari and Patrick. All offices were watching at the same time via video conference. There is still no public statement about Deadline’s scoop. Today’s news follows two big investments made by WME with experienced partners creating new businesses: a worldwide marketing business, and separately a global media fund. These strategic partnerships demonstrate how Hollywood agencies want and need to reinvent themselves. Hollywood agencies recently have had mixed success bringing in outside investors. At ICM, Chris Silbermann’s goal over the past year has been to take over the tenpercentery and obtain more ownership of the agency from its major investor: Connecticut-based Rizvi Traverse Management which has owned 40% of ICM since 2005. At CAA, TPG Capital made an investment tantamount to hundreds of millions of dollars in equity and debt based on a huge valuation of the agency more than double what’s been previously estimated as its worth. CAA disclosed that the agency and TPG created a $500 million pledge fund, providing “access to significant capital for future investments” in exchange for a 35% non-controlling minority interest in CAA with the private equity investment firm. At Paradigm, owner Sam Gores is backed by his billionaire investor brothers Alex and Tom Gores.
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