Media Bonds and Media Futures

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Pregão da BM&F
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Earlier this week, I attended a dinner where I met and had a good chat with Tom Coates. We got on to discussing the whys and wherefores of the BBC’s venture into peer-to-peer networks.The net itself threatens the BBC charter (PDF file) since the public interest and providing lofty content part of its charter could be filled by content providers catering to a global audience (so long as there was an English soundtrack or closed captions) as part of the long tail.

This makes things interesting. In this global market:

  • Which copyright laws would hold sway?
  • What would happen to differentiated pricing since there would be little global barriers?
  • What about morality and censorship issues, governments would find it even harder to control? the media, whether it was pornography or ‘unfriendly’ news channels?
  • Who would be the payment gatekeeper?

The world would have a massive media exchange, however much of the more interesting work at the far end of the long tail would take a long time to payback and turn into profit. I thought that there may be an opportunity for ‘media futures’ where financial institutions like Citigroup or Goldman Sachs would securitise future earnings on online media, thus providing media companies with a more immediate income and working cash to influence in future productions.

  • There would be a number challenges left:
  • How much is the media future that you are buying really worth?
  • How do you put a value on future earnings?

The Black-Scholes model for valuing options may be a good point to start from, if building a model for media futures; though some of its assumptions are well of the mark. Media futures offer existing media companies a huge benefit, many of them are sitting on back catalogues that will never be reissued. Being able to put them online and receive some earnings upfront from this content gives them a revenue stream they otherwise would not have.There has already been an offline precedent for media futures: investment banker David Pullman of Fahnestock & Co. securitised future earnings of David Bowie and Motown back in 1997. Studios have also used similar devices to offset movie production costs. The reason that such practices did not become more commonplace is that investement bankers would only touch acts with a very large catalogs that generate steady sales.

This hurdle can be got around by bundling large amounts of rights together and securitising them, big banks have the experience and web services could reduce the barriers to entry for the media owners, in the same way that Ad Sense reduced the barriers of online advertising allowing access to mom-and-pop operations.

Massive bundles could also be a risk management technique, a particularly important consideration when mutual funds and pension funds seek to find investment opportunities that can provide a reasonable return.