Mogul of Music and Big Movies Is in a New Phase That’s Less Showy
January, 12 2004
New York Times, 01.12.04
Strauss Zelnick has run a worldwide music company, a video gaming start-up, and a movie studio. But where he once cut deals with Whitney Houston and rolled out "Home Alone," Mr. Zelnick is now spending his days worrying over the next Lillian Vernon gift catalog and Time Life Inc.'s forthcoming collection of gospel hymns.
It is a long way from greenlighting movie blockbusters like "Speed," but life in the slow lane seems to suit Mr. Zelnick. After years of running large media enterprises for others, he and a set of partners are building their own version of an empire, albeit out of fairly prosaic assets.
His New York company, ZelnickMedia, also runs Columbia Music Entertainment, a Japanese music company formerly named Nippon Columbia. Other properties range from National Lampoon to a professional bicycle racing circuit.
Last week, with the backing of Ripplewood Holdings, the company bought Time Life Inc., which uses a heavy rotation of cable commercials to sell music like "The Ultimate 70's Collection" and "The Worship Together Collection." The company followed this up by purchasing the online market research firm OTX in partnership with the Pilot Group, a media investment firm headed by Robert W. Pittman, the former chief executive of AOL.
Mr. Zelnick, 46, and his partners expect to use their expertise and a variety of financial backing to transform their mundane portfolio of assets - much of it consisting of direct marketing companies - into a multiplatform media enterprise.
Mr. Zelnick says he can grind out growth, one sale at a time. "Direct marketing is a science, not an art, and I have a lot of direct marketing in my background," he said.
When he was chief of BMG Entertainment, the music unit of Bertelsmann, during the 90's, he took over operational control of the troubled record club. He doubled the club's profits in a year by closely managing costs. But while he now has some storied brand names at his disposal, they are somewhat tired.
"One of the things that appeals to me about these businesses is that you have the opportunity to test what you are doing before you make a huge investment," Mr. Zelnick said. "In the movie business, you never know whether you have a huge hit or a write-off until the first weekend's box office, and by then you can't do anything about it."
More important in the current arrangement is that if profits accrue, some of them will accrue to Mr. Zelnick and his partners.
After stepping down as chief of BMG Entertainment at the end of 2000, Mr. Zelnick formed ZelnickMedia in 2001 with four partners, each of whom has extensive experience in various forms of old and new media. The company began investing in and buying several businesses.
The businesses would seem to have little in common, save the fact that most of them are distressed. Lillian Vernon, a long-established catalog with items like clothes, housewares and jewelry, is showing signs of age; it lost $9.1 million in fiscal year 2002. Time Life Inc. lost more than $50 million in the first nine months of 2003 (including restructuring costs) under previous owner Time Inc., the publishing division of Time Warner.
Mr. Zelnick and his partners bill themselves as turnaround artists and see plenty of opportunity in their portfolio, even though it is little less showy. Mr. Zelnick said that will come later.
"Steve Ross started in parking garages," said Mr. Zelnick, referring to the man who was chairman of Time Warner. "Sumner Redstone was in the theater business and Barry Diller started in home shopping." (Mr. Redstone is the chairman of Viacom, and Mr. Diller is the chief of InterActiveCorp.)
Mr. Zelnick, a graduate of Harvard Law School with a dual degree in business and law, began his career in the international television division of Columbia Pictures. He moved to Vestron Inc., an independent film company, before going to work at 20th Century Fox as president and chief operating officer.
He left Fox to work as the chief executive of Crystal Dynamics, a gaming software company, before going to BMG in 1994. He became known as something of a turnaround artist after taking the company's music division to second place from fifth among the top five music companies, but eventually clashed with Thomas Middelhoff, then Bertelsmann's chief executive.
Many former media executives are on the prowl for deals, but ZelnickMedia is unusual because in addition to investing in properties, the group has made deals in which it has received significant equity in return for its expertise and management.
The bandwidth of the company's media and financial expertise is substantial. In addition to Mr. Zelnick, the company includes Jim Friedlich, who worked in sales and marketing in senior positions at Dow Jones & Company; Ben Feder, a founder of MessageClick Inc. and a former executive at the News Corporation; Scott Siegler, an executive who has worked at NBC, CBS, Columbia Pictures Television and Warner Bros. Television; and Karl Slatoff, a former new media executive at BMG Entertainment.
All of that expertise will come in handy, since the company has a number of complex deals with different partners in some very different businesses. It will take time, and a great deal of work, to make it all add up to something more than a grab bag.
"Strauss and his partners are amassing equity without a lot of investment, which is a low-risk model," said Scott Peters of the Jordan Edmiston Group, a media investment bank. "He is able to do what a lot of other people haven't because he is a highly regarded guy who is well networked in the global media business."
In a fairly lethargic deal environment where sellers are waiting for valuations to rise before they market their assets, there is a premium on who you know - like Richard D. Parsons, Time Warner's chairman, for instance.
"He and I have breakfast three or four times a year," Mr. Parsons said of Mr. Zelnick. "He talks to me about what his plans are and he has said all along that if we ever are selling an asset that might fit into what he does, I should let him know."
Mr. Parsons called Mr. Zelnick last spring in part because he thought that Time Life would be a fit with ZelnickMedia's catalog business, and in part because he did not want to be selling a company called Time Life Inc. to just any old body.
Mr. Friedlich said the company expected to integrate back-office functions like distribution, fulfillment and finance between Lillian Vernon and Time Life Inc., and migrate some of the marketing from catalogs and commercials, which is expensive, to the Web. There has been some success so far - Lillian Vernon's Web sales have risen to 35 percent of all sales, from 17 percent when the company bought the property last spring.
But Chip Block, who uses direct marketing to help publishers sell magazines at USAPubs, is not certain that the businesses have a lot in common. "I am not sure how they fit together other than the back end," Mr. Block said. "And beyond that, you are competing with everybody who is selling directly to the consumer, which includes Amazon and just about everybody else."
The Time Life unit had stopped selling books, but ZelnickMedia wants to revive the book business by marketing products that are less cost-intensive. It hopes to sell series-driven genre books in health, romance, and how-to instead of lavishly produced coffee table books.
The executives at the company expect to be able to avoid the general mayhem in music created by downloading because their customers are older - the average age is 45 - and much less prone to downloading.
And Mr. Zelnick has sold records before. According to SoundScan, during Mr. Zelnick's tenure BMG's share of album sales grew to 20 percent in 2000 from 14 percent when he took over in 1994. But he and Mr. Middelhoff did not see eye-to-eye over the company's alliance with Napster - Mr. Zelnick felt there was little prospect that the outlaw music service could become a significant business.
"I didn't like what Thomas was doing with Napster, but it's not why I left," Mr. Zelnick said, adding that he was ready to go into business for himself. Mr. Zelnick left at the end of 2000, halfway through fiscal year 2001, a year in which the division lost $300 million.
Mr. Zelnick left the ranks of moguls at the tender age of 43, a time when most executives are just beginning to enter the top echelon. Mr. Zelnick achieved a rarified status at a young age - he ran 20th Century Fox when he was 32 - but he now finds himself in a second act that includes making sure that Lillian Vernon's heart-adorned charm bracelets remain a staple of Middle American consumers.
"Many people who have had success have taken some pretty mundane businesses that they bought low and then used that currency to go farther out on a limb in terms of risk," Mr. Zelnick said.
In the meantime, he and his partners are busy looking after the small stuff. "If you are not prepared to go to the trade show for crafts and schmooze, you shouldn't be in this business," he said. "Going there is the fun part."