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Deals slides team 1 (1)

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Deals slides team 1 (1)

  1. 1. A Joint Venture Between RealNetworks & MTV Networks<br />Team 1<br />Kevin Barnett<br />Chelsea Childs<br />Charlotte Lange<br />Joe McVicker<br />OleksandrPankiv<br />
  2. 2. How Rhapsody Works<br />Catalog of over 8 million full-length songs<br />Choose from 2 plans:<br />Rhapsody Unlimited ($12.99/mo.)<br />Rhapsody To Go ($14.99/mo.)<br />MP3 Store<br />
  3. 3. Basics of the Deal<br />Joint venture announced in August 2007<br />Limited Liability Company (LLC)<br />Rhapsody America = 51% RealNetworks + 49% MTV<br />Managed by Michael Bloom, Vice President of Digital Music for MTV<br />Alliance with Verizon Wireless<br />
  4. 4. Cash<br />Current Rhapsody subscribers<br />Third-party contracts<br />Personnel<br />Rhapsody.com domain<br />Rhapsody brand license<br />Music content<br />License of Rhapsody IP<br />Cash<br />URGE subscribers<br />Third-party contracts<br />Personnel<br />Brand licenses<br />Music content<br />$230 million five-year note for advertising <br />Contributions to the Joint Venture<br />
  5. 5. The Parties<br />
  6. 6. About RealNetworks, Inc.<br />Founded: 1994<br />Headquarters: Seattle, WA<br />Industry: Internet software & services<br />Products/services: Rhapsody, RealPlayer, SuperPass, GameHouse<br />Revenue: $604.8 million<br />Net Income/Loss: -$243.9 million<br />Employees: 1,993<br />
  7. 7. RealNetworks’s Role in the Deal<br />Venture partner with 51% ownership stake<br />Expertise in Internet and software technologies<br />Experience running a subscription-based service<br />
  8. 8. About Viacom International<br />Founded: Established in 1971 by CBS, spun-off in 1973<br />Headquarters: New York, NY<br />Industry: Cable TV, motion pictures<br />Businesses: MTV Networks, BET Networks, Paramount Pictures<br />Revenue: $14.6 billion (2008)<br />Net Income: $1.25 billion (2008)<br />Employees: 11,500 (3/09)<br />
  9. 9. About MTV Networks<br />Founded: 1981<br />Headquarters: New York, NY<br />Owner: Viacom International<br />Industry: Music, TV<br />Channels: Over150 worldwide, including MTV, VH1, CMT, Logo, Nickelodeon, Nick at Nite, Noggin, Comedy Central, TV Land & Spike TV<br />
  10. 10. MTV’s Role in the Deal<br />Venture partner with 49% ownership stake<br />Most recognized music brand<br />Rhapsody featured at MTV Video Music Awards<br />Access to TV networks and websites for marketing<br />MTV channels (e.g. VH1, CMT) will be Rhapsody playlists so consumers can download new music featured in the TV shows<br />Popular with key demographic of potential Rhapsody users<br />
  11. 11. About Verizon Wireless<br />Founded: 2000<br />Headquarters: Basking Ridge, NJ<br />Owner: Joint venture of Verizon Communications (55%) & Vodafone (45%)<br />Industry: Telecommunications<br />Products/services:<br />Revenue: $49.3 billion (2008)<br />Employees: 87,000<br />
  12. 12. Verizon’s Role in the Deal<br />Direct marketing through Verizon retail locations<br />Verizon’s V CAST Music service allows customers to:<br />Download music to phones<br />Upload music from PC to phone<br />Access ringtones, etc.<br />
  13. 13. The Online Music Services Industry<br />
  14. 14. Online Entertainment Industry<br />
  15. 15. Digital Music Revenues Increasing<br />
  16. 16. The Competition: Apple’s iTunes<br />$2.5 billion in net sales revenue from music-related products/services<br />Catalog of over 12 million songs (4 million more than Rhapsody)<br />Over 10 billion songs downloaded<br />
  17. 17. Other Industry Competitors<br />
  18. 18. Joint Ventures & Pre-Contractual Risks<br />
  19. 19. Pre-Contractual Risks and Costs Addressed by Joint Venture Form<br />Adverse Selection<br />Expensive, inefficient information gathering process<br />Protracted, difficult contracting process resulting in inflexible or overly-specific contract terms <br />
  20. 20. Adverse Selection<br />Adverse Selection risks exist where informational asymmetry permits opportunism<br />Parties may exploit informational asymmetry in contract or acquisition negotiations<br />
  21. 21. Information Gathering Process<br /><ul><li>Accurately valuing assets can be extremely difficult and expensive
  22. 22. Cost of pre-contractual information development affects value of the transaction</li></li></ul><li>Inflexible ContractTerms<br /><ul><li>Rigid contracts not effective in long-term dealing
  23. 23. Strategic alliances require sustained best efforts of the parties</li></li></ul><li>How the Joint Venture Form Limits Pre-Contractual Risks and Costs<br /><ul><li>Parties remain tied to the success of the venture
  24. 24. Joint venture form combats over-valuation of assets
  25. 25. Joint venture form combats information asymmetry</li></li></ul><li>The JV Form Allows for Necessary Flexibility<br /><ul><li>Because of JV structure, parties become co-fiduciaries
  26. 26. Not a discrete exchange: parties must “cooperate to an extent that cannot be specified by contract”
  27. 27. Reduces risk of inflexible, dysfunctional long-term contracting arrangement </li></li></ul><li>Joint Ventures & Post-Contractual Risks<br />
  28. 28. Transaction Cost Economics<br />Field of study that examines the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures<br />Underlying assumption = opportunism<br />Transaction costs occur when parties to a transaction do not operate in unison<br />
  29. 29. Asset Specificity<br />Concept of transaction cost economics<br />Creates risk of opportunism at the expense of the party who developed the specialized asset<br />Leads to poor performance in a joint venture<br />Formal contracts can mitigate asset specificity<br />
  30. 30. Article IX:Management of the Company<br />Section deals with actions on behalf of Rhapsody that either MTV or Real need permission from the other to take: <br />Changing Rhapsody’s budget;<br />Incurring indebtedness;<br />Making loans;<br />Transferring Rhapsody’s brand name;<br />Committing Rhapsody to merger or sale of its assets;<br />Beginning any litigation; and<br />Neither party may amend the LLC Agreement<br />
  31. 31. Business Plan<br />Parties must follow the Plan for 5 years<br />Includes operating budget, target capital contribution schedule, strategic outlook, etc.<br />Provides for cases where parties cannot agree on operating budget<br />
  32. 32. Limited Exit Opportunities<br />
  33. 33. Four Exit Opportunities<br />MTV’s Put option<br />RealNetworks’sCall option<br />Drag-Along / Right of First Refusal<br />Tag- Along<br />
  34. 34. MTV’s Put Option<br />The put allows MTV to force RealNetworks to buy its 49% interest<br />Not at will; only exercisable in two ways:<br />If RealNetworks undergoes an “extraordinary transaction” without MTV’s written consent<br />If an “impasse” exists<br />
  35. 35. Types of Extraordinary Transactions<br />Special cash or non-cash distribution or dividend<br />Extraordinary repurchase, redemption or acquisition<br />Incurrence of debt<br />Direct or indirect sale or disposition<br />
  36. 36. RealNetworks’sCall Option<br />Allows RealNetworks to force MTV to sell its 49% interest to it according to specified valuation techniques<br />Not at will, only exercisable if an “impasse” exists<br />
  37. 37. Impasse<br />Both the put and the call vest if an impasse occurs<br />According to the definition, an impasse can only occur if, for two consecutive Fiscal Years, there has been a Budget Approval failure and any of the Impasse Financial tests have not be met<br />
  38. 38. Drag- Along / Right of First Refusal<br />RealNetworks may transfer its interest to another party and ‘drag-along’ MTV’s interest<br />Option requires MTV to sell its interests on same terms to a prospective purchaser of RealNetworks’sinterest<br />MTV reserves the right of first refusal<br />
  39. 39. Tag-Along<br />MTV may ‘tag-along’ its interest into sale to the potential bidder if RealNetworks decides to transfer its ownership <br />Tag-along sale is on the same terms<br />
  40. 40. Conclusion<br />
  41. 41. Rhapsody America’s Results<br />Spent roughly $119 million on advertising<br />Subscribers in 2010 are down from 2009 by 100,000 to 700,000<br />Apple’s iTunes is still the dominant player, even without a subscription-based offering<br />
  42. 42. The Spin-Off<br />Press release announced spin-off to independent entity<br />RealNetworks to contribute operating capital<br />MTV to contribute advertising<br />Both RealNetworks & MTV will retain slightly less than 50% interest<br />
  43. 43. Conclusion<br />Rhapsody America failed (so far) to compete with iTunes<br />Parties faced pre- and post- contractual risks when structuring the deal<br />Joint venture form meant to address these risks<br />Spin-off concedes failure, but demonstrates parties’ commitment to the venture’s potential<br />
  44. 44. Questions?<br />

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