Back in the mid-1990s, Nancy Griffin published a book called Hit and Run: How Jon Peters and Peter Guber took Sony for a ride in Hollywood. It showed how Sony Corp (ADR)’s (NYSE:SNE) $3 billion purchase of Columbia Studios turned out to be a money pit.
This is certainly a cautionary tale as mega tech operators are now hunkering to plunk down huge sums to make a play for the entertainment industry. And yes, it looks like one of the most aggressive is likely to be Facebook Inc (NASDAQ:FB).
It’s true that the company has some inherent advantages. With nearly 2 billion users and a thriving video platform, FB certainly has enough distribution. What’s more, the company has a nice cash hoard.
It is also encouraging that other tech companies have had success with premium content offerings. They include Amazon.com, Inc. (NASDAQ:AMZN), Hulu and Netflix, Inc. (NASDAQ:NFLX).
Oh, and even old-line tech firms have made big wagers. Just look at the AT&T Inc. (NYSE:T) $85 billion deal for Time Warner Inc (NYSE:TWX) and Comcast Corporation’s (NASDAQ:CMCSA) acquisitions for NBC Universal and DreamWorks Animation.
But, then again, there is another way to look at this: FB is entering a market that appears to be reaching saturation levels. Last year, there were more than 455 scripted TV shows, according to a report from the Wall Street Journal.
As a result, production will be far from cheap (note that FB could pay as much as $3 million per show).
But, there are some other nagging issues as well. Let’s face it, the company has been mostly about user-generated content, not creating engaging entertainment. True, FB does have the advantage of extensive user data, which can allow for relevant targeting.
But, this analytics approach is far from guaranteed. Just look at Zynga Inc (NASDAQ:ZNGA). Even though the company has ultra-sophisticated algorithms and machine learning, the fact is that there have not been enough hits to really move the needle.
Interestingly enough, there are already some ominous signs for FB. Consider the company’s $2 billion acquisition of Oculus. Despite heavy investments, the VR effort has been mostly a bust. Part of this has been due to technical glitches and pricing. But, FB has also failed to develop compelling content to gin up sales of the headsets.
FB Stock and the Move Into Entertainment
The entertainment business is incredibly difficult, especially when targeting a younger demographic, which FB plans to do.
As William Shatner once noted, “You and I and everybody in show business and the entertainment industry fly by the seat of our pants. We don’t know quite what is going to happen.”
But, there is something else that should be a concern for FB: the company’s brand. For the most part, people go there every day for content that is not really polished. Instead, it’s often about families and friends. So, if high-end entertainment starts to pop up, there may be dissonance with users, which could erode the experience.
This is not to imply that FB stock is headed for a MySpace-style hit. The good news is that management has a very good track record. Often this is about measuring results and making ongoing corrections.
And, I suppose the same will be the case with FB’s moves into the wild world of entertainment. Although, for the most part, it’s a venture that will likely take time to fine tune.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
