Disruption in the entertainment business can sometimes come in unlikely forms. Witness Chicken Soup for the Soul Entertainment, whose earnest name and humble corporate headquarters in Cos Cob, CT, belie its aggressive acquisition drive and canny knack for outmaneuvering larger rivals.
The company’s Brooklyn-born CEO, Bill Rouhana, is a longtime media industry veteran who founded and ran Winstar Communications in the 1990s after a successful run as an entertainment lawyer specializing in film finance. In 2008, he bought Chicken Soup for the Soul, known for its eponymous, mega-selling line of books. A few years later, he expanded its operations into video-on-demand and TV programming.
As he looked to feed the entertainment pipeline, Rouhana took the company public on the Nasdaq in 2017 and then engineered the acquisitions of Screen Media, Ashton Kutcher’s APlus.com and a controlling stake in Sony Crackle. The Crackle deal, which closed May 14, rebranded the free, ad-supported streaming service as Crackle Plus and positioned Chicken Soup as a leader in the AVOD arena. After years under the radar, AVOD has become a hot sector of late, with Viacom plunking down $340 million for Pluto TV last January and NBCUniversal and WarnerMedia both announcing big ad-supported streaming plans.
Mike Grondahl, an analyst with Northland Capital Markets, rates Chicken Soup’s stock “outperform,” with a 12-month price target of $15. Shares were trading at $7.18 at mid-day Tuesday, on light volume, and have slipped 7% in 2019 to date despite a spring surge on the Crackle news. “With Crackle Plus included in results, the business becomes much less lumpy,” the analyst wrote in a recent note to clients. “CSSE migrated Crackle to a shared platform used by other Sony networks, reducing costs by two-thirds to about $5 million annually. … Crackle is fully integrated, so CSSE can hit the ground running with a focus on more content and adding to the ad network.”
Rouhana recently sat down with Deadline in his compact office inside a two-story office building down the road from Greenwich that an optometrist, an acupuncturist and a liquor store also call home. The CEO discussed the path to a deal with Sony, the future of Crackle, and where his company fits into the media industry’s intensifying streaming wars. The following is an edited transcript of the conversation:
DEADLINE: What was the entry point for you in the media business?
BILL ROUHANA: We started with TV series, which sounds kind of stupid, but it’s anything but that because what we were doing was creating revenue and EBITDA and building relationships with sponsors. The way we did it was by having all of our series be 100% funded by sponsors and we would keep all the rights. The trade for a sponsor was a couple of things. You could count on the fact that you wouldn’t be embarrassed by the programming – this YouTube worry that sponsors have (‘I might appear next to something disgusting!’). We’re a loved brand. Sponsors knew us. And you could see they were struggling with how they were going to reach customers because the more fractionalization, migration, DVR stuff, SVOD stuff, there were fewer and fewer places where ads were being watched. If they could get a message into a show itself, if they could find a way to integrate their messaging into the content, that would be a big advantage to them. So, all of our series – I guess we’ve done 11 now over four years – every one has been that model.
DEADLINE: How did the Screen Media deal come about and what did it do for you?
ROUHANA: We bought it for two reasons. One, it had a 23-year track record of buying finished programming and re-selling it around the world at a profit. And we thought, OK, now we’ll be able to buy finished programming, distribute it around the world, keep the AVOD rights, keep the VOD rights and have made money doing it that way too. So now we had a program creation business and a distribution business, both of which would give us access to content. And they had a library. And they had Popcornflix. So we were now actually in the VOD business.
DEADLINE: Once Sony announced in the summer of 2018 that they were exploring strategic alternatives for Crackle, how did you end up with that prize when no one saw you coming?
ROUHANA: By understanding our advantages. If you’re in [Sony’s] shoes, you’re not happy with the results for a long time. You don’t know quite why. You have a new company with new leadership. Your focus is on producing and distributing in traditional markets. Your parent company [Sony Corp.] is saying, ‘We’re going to be profitable from here on out. We’re not going to be investing in things that lose money.’ And yet, you know, you absolutely know that the leading network in a space [AVOD] that without question is going to be really big. So how do you actually deal with that? When they announced last July that they wanted a partner, they weren’t kidding. That was the best answer for them. So when they gave Moelis & Co. the job of figuring out what to do, Moelis went out with a book and they got mostly offers to buy. For us, the road was a little more circuitous because they wouldn’t give us the book. We were too small.
DEADLINE: But you eventually got the book?
ROUHANA: Yes, and when we finally got it, I was so excited. It was such a mess! But it’s really not. And I thought, it’s going to put off most of the people who should buy it and the guys who will bid will try to low-ball.
DEADLINE: How was it a mess?
ROUHANA: They had a business plan in there that was driven by the current approach to the business.
DEADLINE: Meaning a lot of spending on expensive original programming?
ROUHANA: It required you to have an appetite for meaningful investment on a money-losing basis for an extended period of time. So, you looked at our two companies. I had the fifth-largest AVOD business at the time, in Popcornflix. I was at 3 million [monthly active users] a month. They were at seven. Together, we were incredible. They also had their ad-rep business, which was another five million people that we would add to it. They had a great sales force.
DEADLINE: What about companies like Pluto, which says it has 16 million users? Are they a direct competitor?
ROUHANA: They’re not in the same business we’re in. They’re an internet streaming business. They’re a bundled cable business that’s online. It’s not VOD. I don’t even understand how that makes any sense. I think it’s a stupid, short-term business that has to disappear, for two reasons. One, consumers are being trained to get what they want, when they want it. To be able to start it and stop it as they choose. They’re being trained not to accept linear programming. Over time, the people who are coming on are going to absolutely reject that form of programming. Two, the premise of internet streaming is there being hundreds of cable channels and by definition there will not be. Because between subscriber fee losses and reduced ad returns, you will not be able to stay in business if you are a cable channel. So their programming sources are going to disappear.
DEADLINE: So this pushed you toward the on-demand approach of Crackle.
ROUHANA: Putting our VOD businesses together gave us scale for advertisers that would really change the way they could interact with this space. The kind of scale that would encourage them to pay us higher CPMs and scale that would turn us into the go-to place for a certain kind of advertiser, which has already started to happen. And we had the same approach, which was true VOD. Two big libraries. Our library was 3,500 films and TV shows. Theirs was the same. Putting them together was going to give us a plethora of content and the ability to create even more networks if we chose to and start to organize them around a thought, around a certain kind of programming.
DEADLINE: But you have a very different view of original programming.
ROUHANA: Our strategy was making money, and we didn’t need to spend too much money on originals, which, when you looked at the numbers, didn’t really drive traffic. Which was kind of interesting. Traffic was driven by library. We looked at their situation and said, ‘The library is driving your business.’ We’re in that early phase of this [streaming] business where, just like Netflix used to be all library and nothing else, this is where we are in AVOD. That’s going to change, by the way. It has to.
DEADLINE: Why else did your offer for Crackle stand out?
ROUHANA: It was their ambivalence, I understood they really didn’t want to sell it. But they also didn’t want to have the obligations of keeping it. They were in this Never-Never Land — ‘We’d love to own it, but not have to fund it, not have to run it, not have to think about it. But wouldn’t we love to own it?’ And I went to them and said, ‘You can own half of it — 49% — if you let me control it, if you let me take over the responsibility for it. I’ll fund it. I’ll take care of it. And you can keep 49% of it. So long as you change your head to where ‘we’re an investor.’ And start thinking about ways you can invest the great competencies you have in this business in ways that are productive. Give us access to your library on a reasonable basis. Figure out how to share technology costs, so we reduce that. Give us free reign on your lot and in your buildings for a year or two. Do things that help us, where you can help us, where it’s really no cost to you. And that’s where luck came in. We presented a credible plan and a proposal that left them exactly where their hearts were: half-in, half-out. But we were the only ones who did that. Everyone else started offering checks.
DEADLINE: Does Sony have a chance to exit in the near term?
ROUHANA: No. What there is is a very complex deal structure where they get an option to get out in a year.
DEADLINE: Do you think that could happen?
ROUHANA: It’s all about investment. It’s all about being like a Google. Being like a high-tech business. That’s what I told them. I said, ‘Look, guys, look at the big tech companies. You admire them, you respect them. You think they’re smart. They don’t try to incubate little companies inside themselves. They go make investments. They put entrepreneurs in charge and let them do the heavy lifting.
DEADLINE: So is it a partnership or an acquisition?
ROUHANA: From an accounting point of view, it’s an acquisition. In industry terms, it’s definitely a joint venture. We’re working together to build it. But see, what happened to this was, it became us versus a really big check. Because right in the middle of this, the Pluto deal happened [with Viacom]. And boom, the phones started ringing off the hook. And I was worried at that point that we lost it. Because all of a sudden there’s tons of cash, we didn’t hear from anybody for two weeks. The good news was, we had them believing at that point. So the debate for Sony became, ‘take a check now and risk that two years from now this thing is worth $5 billion and it’s the leading AVOD business and we used to own half of it or all of it. We took this tiny little check and we’ve given up a strategic asset.’ It’s not just a business. It’s a strategic asset in the industry. If $80 billion [in linear TV advertising spending] moves over to AVOD, that pie is going to be cut up in a few places and there are going to be some big companies.
DEADLINE: What impact did NBCUniversal’s announcement have on the process, when they said in 2020 they are rolling out a major AVOD service across 52 million households in the Comcast and Sky pay-TV footprints?
ROUHANA: So you look at all this — this is happening, and Sony is going, ‘We could take a $300 million check, or we could believe that this is a big opportunity and we have the biggest with this thing.’ The combination mattered. The other 3 million [from Popcornflix] really made a difference. Now, we were the biggest. All the library we had. If you just looked at our business and how we ran it, if you were them, you would want us to run your business. It wasn’t like we were some other guy, who didn’t run an AVOD business. We were the next biggest. Which very few people understood. No one understood Popcornflix was as big as it was. We were growing it as fast as we could and had plans to grow it even further. So we said, ‘Hey, how about putting them together, and let us run it for you? And let’s make you a lot of money, and you could buy it from us later if you want.’ So they said yes.
DEADLINE: I’ve heard you use “Chicken Soup-y” as an adjective — in reference to something that reflects the family-friendly, optimistic values of the company. So, how Chicken Soup-y will Crackle Plus be?
ROUHANA: It won’t be. It’s going to have the same voice it does now. We didn’t do anything to Popcornflix either. The real question is, are we going to change the name of the company? Right now, the name is misleading.
DEADLINE: Is a name change under consideration?
ROUHANA: Yeah. We’d definitely have to consider it because we’re now so big that Chicken Soup for the Soul is only one part of what we are. The name is kind of limiting and sends the wrong message. It’s kind of like a hip fake. It’s really not telling what we are. And you have to go underneath the name to get to who we are. And that may not be the smartest thing for us.
DEADLINE: Sony spent some money doing presentations for Crackle during the NewFronts or TCA or in those kinds of industry settings. Will we be seeing more of that?
ROUHANA: No. Not now. Makes no sense. It’s stupid.
DEADLINE: Tubi is spending a good amount of money trying to make a splash in AVOD. Do you see them as a competitive threat to Crackle Plus?
ROUHANA: What good does spending money do you when you’re not able to sustain your business? So let’s say they’re a legitimate alternative.
DEADLINE: Why are you so quiet compared with Tubi?
ROUHANA: They’re making a lot of noise because they want to sell the company.
DEADLINE: They almost did.
ROUHANA: If Tubi sells for anything close to what they’ve been asking for, our company is worth billions. I’m rooting for him.
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