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Why WME is Betting on VHX as the Next Big Thing in VOD

VHX - H 2013

The talent agency, as well as an early Twitter and Tumblr investor, see something in this forward-thinking streaming company. What is it?

Two years after Louis C.K. sent shockwaves through the entertainment world by successfully digitally distributing his stand-up special from his website, Brooklyn-based VHX has created a self-serve video distribution system that allows content providers to market and sell their films directly to customers. Currently in beta mode, VHX already has 300,000 paying customers bringing in $2 million in gross sales, and with recent investments from Union Square Ventures (early investors in Twitter and Tumblr) and WME, there's smart money betting they'll continue to grow. Yet in a space dominated be giants like Apple, Amazon, Netflix, Hulu and the cable companies, the question is how big of a market is there for upstart DIY distributors in an already crowded VOD field.

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New York Times film critics Manohla Dargis and A.O. Scott, in reflecting on the over 700 films they reviewed last year, declared, "We are living in a time of cinematic bounty" offering a "dizzying variety of choices." Yet at the same moment of this expansion, the pool of films viewed as "marketable" by Hollywood is rapidly shrinking. Most indie producers, with little to no money to publicize their films, rely on intimate knowledge of their niche markets, with social media and the Internet giving them direct contact to their potential customers to generate buzz and sales.

For these indies, which can get shut out or lost in iTunes, being given the tools to distribute directly to their audience makes VHX an intriguing option. And so far, VHX has been able to lure some of these films -- most notably the critically acclaimed Upstream Color, David Grohl's documentary Sound City and popular comedian Aziz Ansari's stand-up special.

Jamie Wilkinson, co-founder of VHX, also points to their recent success with lower-profile films, like the Korean documentary State of Play, as an example of the untapped markets VHX can help reach. State of Play is a Korean-language documentary about professional StarCraft video game players. Traditional platforms, Wilkinson argues, "would view a foreign-language documentary as unmarketable," but what they are missing "is how many gamers love StarCraft" and how much buzz a StarCraft doc can create on the Internet -- most notably with an article about the film being voted up to the front page on Reddit. The result was sales that "vastly outperformed" VHX's expectation.

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From Wilkinson's perspective though, the real future of VHX isn't limited to niche market films like State. As he sees it, the entire VOD market is being "drastically underserved" by the traditional platforms. So what does VHX offer that Amazon and iTunes doesn't?

For starters, a "significantly" better division of profits than the traditional 70-30 split of sales (pricing will be transparent once VHX fully launches and is available to everyone). "As we continue to scale out our model we've actually been able to reduce our prices over time," says Wilkinson, who adds that their plan is to bring existing customers' prices down even lower at the time of the launch. Another key aspect of VHX's pitch to content creators is that while every other distribution platform still wants you to be on their website, VHX offers the tools to publish from your own website. VHX clients choose from a series of Tumblr-like themes, which VHX will help customize, at no extra cost, to match the content's unique look and feel.

"We make money when the filmmakers make money from selling their movie," Wilkinson explains. VHX is betting that creators are the best marketers of their product and therefore supplying them with the best software tools is the way for them both to make money.

The lack of transparency in the VOD sphere has become a hot-button issue in Hollywood and it's here that Wilkinson sees VHX's biggest opening: "With traditional platforms, there's no data -- you know zero about your customers. That's the old model of control and justifying your position as the middle-man, whereas the Internet model is one of openness and empowerment, giving people as much information as possible about their customer base to help you figure out what's working and what's not."

To that end, one of VHX's biggest selling points is not only sharing customer data with their clients, but supplying them with tools to watch their sales in real time. One service VHX does not offer is rentals. For Wilkinson, offering rentals is emulating an old, physical goods model of going to the video store to pick up a tape, which he feels makes zero sense in the digital transaction age: "We are fundamentally opposed to limiting the relationship between the content and the person who bought it. Why artificially create a lower-priced good out of the same good? The better approach is asking, 'How do I create a better, higher-priced product from my goods?' The better approach is asking, 'How do I add more value for a cheaper price?' "

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Wilkinson sees the digital distribution world divided into "old" (video store) and "new" (Internet) models, but, luckily for him, VHX isn't the only one to see this dichotomy. Union Square Ventures, a venture capital company with a near unparalleled run of success -- they invested in companies like Foursquare, Etsy, Kickstarter, Twitter, and Tumblr -- recently invested in VHX. Their reasoning was because they too see the current model as outdated: "Most of these video distribution options available today are outdated. They were designed before channels like Tumblr, Twitter and Facebook even existed. The filmmaker's role is secondary to the marketplace, and the creator has no direct relationship with the fans and customers of their product. As a result, new methods and opportunities to distribute content have opened."

It might not be surprising that a venture capital company specializing in finding cutting-edge companies would invest in VHX, but an investment from WME, whose client roster doesn't exactly consist of scrappy up-and-comers, certainly raised some eyebrows.

"[WME] works with a number of nontraditional, as well as traditional, players who own their content," Wilkinson explains. "We've been working with WME for a while and have gotten a good number of referrals from them. So when it came time to raise capital they were at the top of list of people we wanted to talk to."