dialogue with Strauss Zelnick

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ZelnickMedia has been in the headlines of late as the operator of video game company Take-Two Interactive. But the firm, launched in 2001 by Strauss Zelnick, former BMG CEO and 20th Century Fox president and COO, has invested in a range of companies, including media agency ITN Networks, online research firm OTX and Japan-listed indie label Columbia Music Entertainment. While media and entertainment stocks have been under pressure in recent years, ZelnickMedia's investments have shown an internal rate of return of more than 30%, sources said. Zelnick recently spoke with The Hollywood Reporter New York bureau chief and business editor Georg Szalai.

The Hollywood Re- porter: How do you choose investments, especially in a tough market?

Strauss Zelnick: Typically we're looking for companies that are exposed to new digital media, where we think that the opportunity is — though not always — in front of the company. When we got engaged in our record company Columbia Music Entertainment, it had a great brand, a somewhat challenged operating history and a terrific catalog — the oldest and deepest catalog of recordings in Japan. Today, nearly 10% of that company's revenue comes from digital. The other thing we look for often is some management need for us as operators to run the business more effectively.



THR: Do you see yourself as an investment firm or what?

Zelnick: We see ourselves as a new kind of diversified media company. Our balance sheet looks different, but we run our businesses as a diversified holding company of high-growth media assets.



THR: With recession fears and the credit crunch, how does that affect your investment decisions?

Zelnick: We didn't benefit from the credit boom because we don't like to put a lot of leverage on our assets. We like to sleep at night. Because we're seeking high-return deals, the return enhancement you get through significant leverage really doesn't add much for us. But it does increase the risk, and we're pretty risk-averse people.



THR: You usually partner on deals.

Zelnick: We have always had partners who have supported our activities. We now have raised our own fund, so we have direct investment capital available as well. But we are really proud of our relationships in the finance community, and that allows us to do rather small deals and very large deals.



THR: How happy are you with your investment success?

Zelnick: We have a track record of creating value. And we have never suffered a loss.



THR: Which sectors of media do you like?

Zelnick: We are very, very excited about interactive entertainment. It's really the only growth area in the pure entertainment business. That's why we're in the Take-Two deal. That will be a really exciting field for the foreseeable future. Wireless is interesting, too. And any kind of business opportunity related to knowing who individual members of your audience are, having a direct relationship with them and creating a transaction with them is pretty interesting. We think the business is really morphing from a one-to-many business to a one-to-one business, and we tend to think that way about everything we do.

THR: You mentioned you are always looking for digital opportunities. The big media companies are still experimenting in this area. How do you know you have the right approaches?

Zelnick: I have a lot of respect for management of big media companies, and it's much harder to turn around a battleship than to build a day cruiser. With (Bob Pittman's) Pilot Group, we bought OTX, a leader in the nascent field of online market research. There are only two companies doing that. So, we got in on the ground floor. We didn't have to re-create a legacy company. We also tend not to have to worry about destroying value in other operations. A large company like Time Warner has an obligation to steward its many traditional media operations as it exposes itself to new media. I think they have done a phenomenally sound job, even though the bulk of their revenue is still from traditional media.



THR: Take-Two has been in the headlines with your rejecting a takeover offer from Electronic Arts. Are you open to a deal if they come back with a higher offer?

Zelnick: We are here for our shareholders. They made a (specific) proposal, we rejected it. Next!



THR: Many industry experts see value in gaming consolidation. Do you see value in a combination?

Zelnick: I think we can expect consolidation. I'd rather not speculate on the nature of value creation. It has a lot to do with the capabilities of individuals and the goals of employees. This is not just a math lesson, this is a creative enterprise. Does consolidation create better games for consumers? Does it create better careers for the creatives? Those questions are just as important. If all stakeholders aren't taken care of, then none of the stakeholders will benefit. We've been at Take-Two only for 10 months and are really proud of the progress we've made. And we think this company has a really bright future as an independent company. In the absence of an opportunity that our shareholders value more than this approach, that's our business model.



THR: What lessons did you learn at BMG?

Zelnick: Most people felt we were at the forefront of the digital revolution. That said, we didn't do a very good job at building a legitimate digital alternative for consumers as quickly as we could have or would have. That helped drive people to piracy. The movie business has done a much better job at beginning to create legitimate alternatives for customers, as has the interactive entertainment business.
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