Seeking younger viewers, media giant is betting on gonzo digital outfit

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 and 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 24, 2016 02:47 ET (06:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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