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How Facebook could remake the entertainment industry

By Fred Vogelstein,

Two years ago, Hollywood talent agent Ari Emanuel made a remarkable statement about the future of media. He said he could see a time when certain movies premiered on Facebook instead of in theaters. “For the $150 million movie, you’ll still need to go to Warner Brothers, but for the $25 million movie, probably not,” he said at a San Francisco conference.

After a decade of war with Silicon Valley, big chunks of Hollywood’s establishment are thinking about technology differently. Instead of freaking out about how high-tech companies will drain their pockets, Hollywood executives are increasingly looking at deals with firms such as Facebook, Google, Apple and Amazon as a way to line them. As we spend more time online — almost as much time as we spend watching television, according to Morgan Stanley — these companies are becoming TV networks for the digital age. They are hugely valuable advertising and distribution engines for Hollywood content.

The initial public offering documents that Facebook filed this past week reveal just how big an advertising and distribution juggernaut it has become. The company said that last year it made $1 billion on $3.7 billion in revenue, making it more than twice as profitable as Google was when it went public in 2004 and almost as profitable as the CBS television network is today.

Facebook’s reach turned out to be even bigger than previously thought — it has 845 million monthly active users (more than a third of the Internet), 483 million daily active users and more than 37 million fan pages. Most of the top-ranked fan pages are for celebrities such as Lady Gaga, but there are companies on the list, too. The firm with the largest number of Facebook fans, after Facebook, YouTube and Coca-Cola? Disney — with nearly 32 million.

Going public is a seminal moment for a company. It means the world gets to see once-private financial statements. Employees and investors who have been paid largely in stock or some other illiquid compensation finally can turn that into cash. And most important, the company can suddenly buy things previously out of its reach. Not only does a firm raise cash in an IPO, it gains a currency — its stock — which is often as legitimate as cash.

Facebook has $1 billion in cash now. It will have at least $6 billion when its IPO is complete later this year. And it’s not hard to imagine where some of that money is headed: content deals with Hollywood. Almost from the day he started Facebook, founder and chief executive Mark Zuckerberg has talked about it as a next-generation media company. It’s no accident that two of his six board members are media executives — Netflix founder and chief executive Reed Hastings and The Washington Post Co.’s chairman and chief executive, Donald Graham.

Already, Zuckerberg has signed up Netflix, Hulu and the music service Spotify as content-sharing partners. Meanwhile, studios have been cozying up to the social networking site for more than a year. Facebook has launched a movie-rental application with Warner Bros., debuting last year with “The Dark Knight.”Paramount has made its “Jackass” films available for rental on the site. And last month, Lionsgatemade its 2011 movie “Abduction” available to rent on Facebook.

But that’s probably just a glimpse of Zuckerberg’s ambitions. Even for a company with Facebook’s massive distribution, true content deals with Hollywood don’t get done without hundreds of millions of dollars changing hands. As a private company, Facebook didn’t have that kind of money. As a public company, it will have it in torrents. Competitors Google and Apple are already hard at work on TV offerings. Expect Facebook TV — or whatever Zuckerberg ends up calling it — sometime soon as well.

It’s ironic that Facebook’s IPO announcement came only a couple of weeks after the flare-up of hostilities surrounding Hollywood’s online piracy bills. Pundits and even a few Hollywood executives have been openly worrying about a return to the bad old days of a decade ago, when the recording industry sued Napster out of existence and when top executives at Disney and Intel screamed at each other during a 2002 congressional hearing.

It is misplaced hand-wringing. Silicon Valley, with its social networks and mobile devices, has enabled consumers to profitably access entertainment content in places that media moguls could once only dream about — in line, on the bus, in the elevator, in the back of a car and even in the restroom, as well as in a movie theater and in front of the living room TV. The world’s eyeballs are increasingly online. It is where Hollywood — or anyone who wants their content to be widely seen — will go as well.

fvogelstein@gmail.com

Fred Vogelstein is a contributing editor for Wired magazine.

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