By Keach Hagey
When Vice Media held a board meeting in Las Vegas early last
year, Chief Executive Shane Smith was riding high.
He had just won $1 million at blackjack, and now the digital
media company and representatives of Walt Disney Co. were in the
Bellagio Resort's presidential suite to seal a deal that would give
Mr. Smith the prize he long sought -- a Vice television
channel.
But there was a sticking point. Sony Corp. had just been hacked
in apparent retaliation for a movie that offended North Korea's
leader. That made Disney nervous about blowback it might face from
Vice's gonzo online reporting of everything from Islamic State to
sex toys. The home of Mickey Mouse was demanding veto power over
content on the channel, according to people familiar with the
matter. Vice directors pushed back, refusing to cede editorial
control.
In the end, the companies came to a "happy compromise" by
creating a process to air problematic content to a special
committee, with Disney maintaining an "escape hatch" to exit its
investment if the sides can't come to an agreement, the people
familiar with the matter said.
The compromise must have been pretty happy, because by that
evening, Mr. Smith was using his gambling winnings to host Disney
strategy chief Kevin Mayer and a couple dozen other executives at a
$300,000 dinner at the hotel's Prime Steakhouse, complete with
$40,000 bottles of French Burgundy, say people who were there.
By the end of the year, Disney would become Vice's largest
outside investor and Vice would be on its way to becoming the first
digital-media company to get its own television channel.
That the companies want to align, despite their inherent
differences, speaks to the scale of the challenges rippling through
the media industry. Disney's stock took a hit last year when Chief
Executive Robert Iger revealed that subscriber losses at ESPN, the
company's profit engine, would put earnings projections in
jeopardy. The announcement highlighted Disney's need to find a way
to reach the young, male audiences who are fleeing pay television
for digital alternatives.
Vice has long promised partners unique access to this very
audience, largely thanks to its provocative aesthetic and early
move into online video. As a result, it has attracted interest from
every major media company, including Viacom Inc., 21st Century Fox,
Time Warner Inc., Discovery Communications Inc. and Comcast Corp.,
all of which have either invested or held talks about investing in
Vice.
Powered by Disney's $400 million investment, Vice is in the
midst of a huge international expansion of its fledgling Viceland
channel, which is owned in the U.S. by the Disney-Hearst Corp.
joint venture A+E Networks. Vice said it plans to launch the
channel in 44 countries by next year.
Started as a punk 'zine in Montreal in 1994, Vice has ballooned
into a global online media empire with increasingly large
footprints in traditional media outlets like HBO.
Disney's 18% equity stake in Vice has led to speculation it will
ultimately purchase the company. Mr. Smith, a tattooed 46-year-old
bon vivant who co-founded the company and today controls it through
supervoting shares, does nothing to play down that notion.
Sitting aboard a private plane sipping red wine in white vintage
Rod Laver Adidas tennis shoes and a button-down shirt, he says Vice
can multiply its current valuation by a factor of 10 to about $50
billion in three or four years, and ultimately become the largest
media company in the world.
Asked if he'd rather just sell the company to Disney, he laughs
and responds, "That's the question. I don't know."
That said, the potential of such a combination has clearly
crossed his mind. "If you look at the brands like Pixar, Marvel and
Star Wars that have [sold] to Disney, they have all gotten bigger.
They have all been more successful," he said.
People close to the company say Disney hadn't made an offer to
buy Vice, which preserves the right to sell itself to any other
company. None of them deny that Disney makes sense as an ultimate
home.
Disney declined to comment on the possibility of a combination,
though Mr. Mayer, the company's strategy chief, echoed Mr. Smith's
logic.
"We are believers at Disney in strong media brands, umbrella
brands under which content with a certain voice can really resonate
with consumers," he said. "Vice fits that description to a T."
He played down the notion of dissonance between the companies'
brands.
"We're pretty adept at keeping separate brands separate," he
said.
Vice's last funding round in late 2015 gave it a valuation of
nearly $4.5 billion, by far the highest of any digital media
outfit. The company is on track to bring in between $750 million
and $850 million in revenues this year, up from $500 million last
year, and to cross the $1 billion mark next year, according to
people familiar with the matter.
The company pulls in big sums from advertising deals in which it
agrees to produce "branded" content for marketers through its
in-house ad agency. It has also been diversifying into content
licensing, particularly overseas.
Mr. Smith is Vice's most recognizable on-camera star as well as
its chief dealmaker, trotting around the globe taping segments for
Vice's HBO show and forging new business partnerships.
His punk-rock past is never far behind him, even in the rarefied
chambers of old money. One afternoon this spring at the Paris
offices of investment bank Lazard Ltd., Mr. Smith was sharing a
couch with Lazard France Chief Executive Matthieu Pigasse as the
men announced a joint venture to expand Vice France. Mr. Pigasse
bragged he once played guitar in a Baudelaire-inspired outfit whose
name translates to "The Mercenaries of Despair." Not to be outdone,
Mr. Smith revealed his own former band's name: "Leatherassbuttf --
."
Mr. Smith grew up middle class in Ottawa, Canada, before moving
to New York City in the late 1990s with the newly renamed Vice in
tow. It fast became the profane voice of Brooklyn cool. While Mr.
Smith and his two partners all wrote for the magazine, he excelled
at selling advertising, forging relationships with the record
labels that advertised in the magazine by interviewing and putting
on shows with their bands. The breakthrough came in the early 2000s
when they moved into online video at the instigation of
Oscar-winning filmmaker Spike Jonze.
That led to a joint venture with Viacom in 2006 called VBS.TV,
which featured reporting from places such as illegal arms markets
in Pakistan. "It scared Viacom to death," said former Viacom
executive Jeff Yapp.
The partnership was ultimately unwound, but not before Mr. Smith
formed a friendship with former Viacom Chief Executive Tom Freston,
who became a kind of Sherpa for Mr. Smith as he scaled the Everest
of global media.
"I enjoy Shane's boundless ambition," Mr. Freston said. "They
would ask for outrageous sums of money from people and would get
it."
Building off a marketing deal with Intel Corp., in which people
familiar with the matter say Vice earned as much as $40 million
year for getting bands to play concerts and appear in videos
focused on technology and art, Vice in 2011 raised $50 million from
Mr. Freston, WPP and Raine Group, the merchant bank, valuing the
company at nearly $200 million.
Raine's Joe Ravitch, who joined the board, introduced Mr. Smith
over Scotch to another powerful American media figure: top News
Corp executive James Murdoch, son of media titan Rupert
Murdoch.
Mr. Smith says he really got to know the younger Mr. Murdoch
when Vice tried to buy News Corp's News of the World tabloid at the
height of its phone-hacking scandal, arguing he could use the
paper's notoriety to turn it into a new kind of international news
outlet. The idea didn't fly, but Mr. Murdoch "liked our cockiness,"
Mr. Smith said.
In 2013, the elder Mr. Murdoch split his media empire, putting
the entertainment assets in 21st Century Fox and the publishing
assets, including The Wall Street Journal, in News Corp. Fox soon
thereafter bought a 5% stake in Vice for $70 million.
Talks between Fox and Vice about cooperating on the takeover of
the music channel Fuse fell apart because of opposition from Chase
Carey, then Fox's chief operating officer, who questioned the
company's long-term prospects, Vice executives say. Discussions
with Time Warner Inc. also struggled, in part because the company
couldn't stomach the $2.5 billion valuation Vice demanded,
according to people familiar with the matter.
In August, Mr. Freston called his friend Mr. Iger and said that
if he wanted to invest in Vice he should move quickly to beat out
Time Warner. Disney swooped in with an offer by the end of the
summer, through A+E Networks, that valued Vice at $2.5 billion and
included a good-faith agreement for a Vice-branded cable
channel.
Meanwhile, A+E Networks Chief Executive Nancy Dubuc had been
cultivating a relationship with Vice's top brass for more than a
year and had a channel that needed revamping. H2's World War
II-heavy programming drew respectable ratings but had an older
audience.
Doing the initial deal through A+E gave Disney a bit of distance
between its brand and Vice's, though by the fall of 2015, Disney
was comfortable enough with Vice to invest $400 million
directly.
The chaotic work of launching Viceland happened at Vice's
Williamsburg, Brooklyn headquarters, whose loft-like polished
concrete floors, bright white walls and oriental rugs look
accidentally funky until you see the offices in London have been
decorated with an identical aesthetic.
The company has to host regular screenings with pizza and beer
so that its largely 20-something staffers can actually see the
shows they spend their days making. "Not everyone has cable," said
Guy Slattery, the channel's general manager.
The network launched in February 2016. On any given evening,
viewers can watch doctors examine a six-year-old rape victim in the
Democratic Republic of Congo, courtesy of the earnest Gloria
Steinem-hosted "Woman, " or see a grown man defecate in a box in
the back of a van as part of the skateboarding competition reality
show "King of the Road."
Ratings on Viceland U.S., the cable channel, aren't published by
Nielsen, but Nielsen ratings reviewed by The Wall Street Journal
showed the network averaged 45,000 viewers among adults 18 to 49 in
prime time in July, 51% fewer than the channel it replaced on the
cable dial, A+E's History channel spinoff H2.
"You have to look at what is the promise of H2 10 years from
now, versus what is the promise of Viceland 10 years from now,"
said A+E's Ms. Dubuc. Viceland's viewers' median age in July was
40, or 17 years younger than H2's, according to Nielsen.
The company isn't programming for peak ratings, but is instead
selling the idea that it can help marketers engage young people on
TV in an era when ad-skipping an ad-avoidance is rampant by
reducing ad loads and inserting native advertising, which is
designed to look and feel like the content on the channel. For
instance, an ad campaign for Samsung Electronics Co. consisted of
short documentaries about a virtual-reality project that Vice and
Samsung created together. Vice has reeled in such deals with other
big advertisers like Unilever PLC and Bank of America Corp.
Married with two daughters, Mr. Smith moved last year to Los
Angeles, into the $23 million mansion once featured in the HBO show
"Entourage." He is fond of saying he has made his money and could
retire. But he still relishes the role of barbarian at the
gate.
"Everything's f -- d right now," he says of the media industry.
"That quite frankly is good for us, because otherwise we couldn't
get in."
--
Ben Fritz
in Los Angeles contributed to this article.
Write to Keach Hagey at keach.hagey@wsj.com
(END) Dow Jones Newswires
August 23, 2016 11:06 ET (15:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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