PAUL ALLEN: NEW AGE MEDIA MOGUL
He has put $1.7 billion into entertainment ventures. Is there method in his mishmash?
Surely the third-richest man in America always travels in luxury and high style. But here is Paul G. Allen, with a fortune of about $8 billion, stuffing his large, ungainly frame into the back of a small, rattling van. He's on his way to a home game of his basketball team, the Portland Trail Blazers, and crammed in the van with him are his mom, his aunt and uncle, and his old college roommate. Throw in a journalist and a couple of other friends, and it's hardly a billionaire's power circle ready to dress up the floor seats.
Once at the Rose Garden, the high-tech $262 million arena Allen built for the Blazers, the team's owner takes his seat next to a basket and smiles shyly as he twice catches out-of-bounds balls. The Blazers go on to beat the Los Angeles Clippers. To celebrate, the Allen clan piles back into the van and heads for Powell's, a cavernous bookstore in a somewhat shabby Portland neighborhood. Allen and his family blissfully wander the stacks for a half hour. And what piques the interest of the co-founder of Microsoft Corp., the techno-wizard who put the backslash in DOS? Allen buys a movie magazine. "I'm fascinated by the entertainment industry. I read all I can to learn more about it," Allen explains as he crawls back into the van.
Paul Allen always seems somehow out of place, never quite meshing with his surroundings. He has vast wealth but is utterly devoid of glamour. At 43, he lives in a lakeside Seattle-area compound (outfitted with a full-size basketball court and a 20-seat movie theater) that he shares with his mother, Faye. He's a technology visionary, but he lacks the single-minded drive of techie empire-builders like his boyhood friend and Microsoft co-founder William H. Gates III. Thinking he was terminally ill, Allen left Microsoft in 1983. He beat what turned out to be Hodgkin's disease but spent several years largely absent from business life. He held on to his Microsoft stock, now worth $7.3 billion.
Over the past few years, though, Allen has become enthralled by the entertainment industry, and he's spending a good chunk of his fortune founding or making investments in at least a dozen young media, entertainment, and technology companies. Having laid out $1.7 billion so far, the reclusive billionaire is emerging as one of the most active individuals investing in media in the U.S. "He's on everybody's radar screen. If any significant media asset is being sold, Paul is approached on it," says Michael L. Yagemann, who heads the media and entertainment practice at Bear, Stearns & Co. and has worked on many Allen deals.
ODDBALL. Can the pioneering technology billionaire remake himself as a New Age media mogul? In the glitzy world of show business, the intensely shy, awkward Allen is more of an oddball than ever, whether he's riffing on his electric guitar with rockers Peter Gabriel or Dave Stewart, shooting baskets with a few Blazers, or hobnobbing with Hollywood celebrities.
Nonetheless, Allen is building an empire in his own quirky image, one that marries the entertainment content he adores with the power of technology that he understands better than most. From the fledgling DreamWorks SKG movie studio to the just launched WebTV service that enables consumers to use their televisions to access the Internet, to Starwave Corp., which produces Web sites like the popular ESPN Sports Zone, Allen's grab bag of companies aims to deliver the jazzed-up, wired entertainment content that Allen, as a consumer, craves. "Content plus computing power" he says, is where he likes to place his bets (table).
Soon, outsiders will get a better look at the operations of a few of the companies that Allen founded or controls as they explore initial public offerings. Asymetrix Corp., a lackluster software company Allen founded in 1985, is considering going public. In an encouraging move for Asymetrix' prospects, Tokyo-based Softbank Corp. bought a stake in September, and a senior Softbank executive joined Asymetrix' board. Starwave is also mulling an offering.
And in mid-November, Ticketmaster Group Inc., the ticketing service that Allen acquired 80% of for $240 million in December, 1993, is going public. Lead underwriter Allen & Co. (no relation) preliminarily valued Ticketmaster at $494.2 million. The ticketing company is branching out from its live-entertainment base to online ticketing, electronic commerce, and even traditional print magazine publishing, and it is expected to go on the acquisition trail after the offering. Revenues since 1994 have grown 28%, to $241.3 million for the year ended Jan. 31, 1996. Largely because of costly expansions into online ticketing and other new areas, Ticketmaster's operating earnings have dipped 2.4%, to $23.7 million, for the same period.
After the Ticketmaster IPO, Allen's stake will be worth only about $268 million. That lackluster return only reinforces Allen's mixed reputation as an investor, with some inspired hits and some head-scratching misses. In fact, many in entertainment and finance regard Allen as a dabbler who overpays. "The guy is clearly starstruck," says one investment banker. "He's definitely on [any] list of [potential media] buyers. And when he does buy, it's a good deal for the seller." Internet market analyst Betty J. Lyter thinks that Allen's laid-back, low-pressure investment style actually hobbles the financial performance of otherwise promising ventures. "He has made a lot of investments in companies that haven't achieved profitability as quickly as peer companies have," she says. Allen's great wealth "can make a company less than focused on driving and developing a business model."
Also skeptical is venture capitalist Stewart Alsop, who has observed Allen for years. "Media companies are evaluated [by their success in] spotting the public taste and responding to public need. Paul's really working for an audience of one--himself," says Alsop. "It's kind of a lonely position to be the one guy in the world who has $8 billion and doesn't care about making money."
PATIENT INVESTOR. Allen insists that what his critics regard as overpaying is just the mark of an extraordinarily patient investor who has the resources to wait years for promising ideas to pay off. "I like to place higher-risk bets" than most investors, he says.
His real objective may well be to secure for himself a role in the creation of a fully wired world. "Most people invest to get a return. Paul Allen does this, but he also is able to invest in ideas he believes will change the world," says Roger B. McNamee, a partner with Integral Capital Partners, a technology investment firm that has no financial relationship with Allen. "Few people have the luxury of investing that way. The fact that Paul can makes people jealous." Adds DreamWorks co-founder David Geffen, a close friend: "He's a very smart man. He didn't inherit the money; he earned it. The reason you don't know what he's doing with his money is that he doesn't go around making a big deal about it."
Those investments that are now public can speak for themselves. Allen invested $20 million in 1994 for a 3.9% stake of direct-broadcast satellite company United States Satellite Broadcast Co. The company went public earlier this year, and Allen's stake now has a market value of $46 million. He also plunked down $11 million in 1994 and 1995 for a 22% stake in CNET: The Computer Network, a fast-growing Internet-and-TV production company that aims to be the MTV of the cybergeneration. CNET went public in July; Allen's stake is now worth $44 million.
The flops, of course, never made it to market. One was SkyPix, an early direct-broadcast satellite company that went bust in 1992, shortly after Allen invested $10 million. Allen lost an undisclosed amount on Virtual Vision, which made goggles equipped with a TV monitor. And Allen's experience with America Online Inc. was a strategic failure, if not a financial one. Excited by the boom in online chat and the possibilities of the Internet, Allen in 1993 bought nearly 25% of AOL's stock. But AOL didn't want Allen to have a role in the company and rebuffed him. Though his bankers encouraged him to mount a hostile takeover, Allen instead gradually sold, more than tripling his money in the process.
Allen's experience with Microsoft, where he still sits on the board, gives him a keen appreciation for getting in on the ground floor. Given that and his affinity for risk, Allen's guiding investment criteria are fairly straightforward: He must like and trust the managers, he must be interested as a consumer in what they're making, and the business must be poised to profit greatly from an emerging technology that will soon make its products better, faster, or more compelling than anything else on the market. "These really aren't speculative investments," notes Michael Wolf, who heads Booz, Allen & Hamilton Inc.'s media practice. "He's investing in companies that are beginning their growth curve. The approach appears to be a savvy one."
Allen doesn't run or manage any of these companies, even the ones he wholly owns; he has never claimed to have executive skills. He is remote and lacks vitality in one-on-one encounters. Operating executives at each company are pretty much free to make sense of his overall strategic vision and run the businesses on their own. Allen relies on three key aides to conduct whatever oversight there is of the portfolio companies. Vern Raburn was an early Microsoft employee who now plays a sort of supervisory, management counselor role to some of Allen's companies. Bert Kolde, who was Allen's freshman roommate at Washington State University, also takes on many day-to-day administrative duties, overseeing the Blazers and serving on boards on Allen's behalf. David Liddle, once head of Xerox Palo Alto Research Center and now head of Interval Research Corp., a think tank Allen is funding with $100 million, acts as a technology sounding-board for Allen and the executives at the companies.
Generally, Allen leaves the companies to themselves. Starwave, which he founded in 1992, has had significant success on the Internet with ESPN SportsZone, a venture with Walt Disney Co.'s ESPN cable network that provides sports fans with thousands of pages of glossily presented information about sports each day via the Net. SportsZone averages 18 million hits a day, and its attractive demographics have lured such big-name advertisers as Gatorade, Microsoft, Pizza Hut, and several auto makers. Starwave CEO Mike Slade says the company will post revenues of more than $10 million this year and may turn a profit next year.
But the boss is in no hurry to draw dividends out of Starwave, Slade says. "Our strategy is get out ahead and run like hell. Only five [other companies] in the world are willing to spend what we're spending. This is cable TV in 1980. We're investing as if the size of the market is 10 times what it is today." Just launching Starwave seemed to outsiders to be a huge gamble four years ago, but Allen never doubted its viability. "Paul is one of those people who likes to make big bets, and he's a leapfroggy kind of guy," says Slade. "The incremental pace of the software industry always frustrated him. When we started this, there was no World Wide Web. We had to assume the infrastructure would happen."
DIFFERENT AGENDA. Many who have dealt with Allen say that his cancer scare 13 years ago, when he was only 30, left him with an agenda quite different from that of other moguls-in-the-making. When his disease went into remission in 1983, Allen didn't return to Microsoft; rather, the college dropout traveled, read widely, learned to scuba dive, and spent long hours with his intensely close-knit family. He was dealt a further blow that year when his father, Kenneth, underwent minor knee surgery and died suddenly when a loosened blood clot caused a fatal stroke.
Never married and childless, Allen remains exceptionally close to his family and old friends. His mother lives in a house Allen built for her on the grounds of his Seattle-area estate, and the retired librarian still assigns him books to read. His sister, Jody Allen Patton, runs Allen's charitable foundation, oversaw construction of the Trail Blazers' Rose Garden, and is the executive director of the Experience Music Project, a $60 million music museum that grew out of Allen's abiding passion for the music of Jimi Hendrix, another Seattle native son. The museum is scheduled to open in downtown Seattle in 1999.
Allen's tentative efforts to restart his business life after his illness and his father's death met with little initial success until he hired his first real financial staffer, William D. Savoy, in 1990. Since then, Allen and Savoy have worked out a comfortable symbiotic relationship. When Allen pinpoints an area he thinks will soon benefit from an impending technological advancement, Savoy begins scouting for companies that fit the bill, and oversees the due diligence on the company's financials.
Savoy, 32, says that his "job is to listen very carefully to `wired world' ideas articulated by Paul and invest in companies that fit with that vision." As Allen has become more widely known as a rich and patient source of investment capital in media and technology circles, Savoy and his staff of six are flooded with proposals--4,000 last year alone.
Allen has been carefully shopping for media and entertainment properties since 1991. Especially after he bought Ticketmaster in 1993, Allen's profile as a buyer of media properties grew more prominent. In 1994, he was invited to investment banker Herbert Allen Jr.'s (no relation) annual retreat for media moguls. There, Allen met Geffen and struck up a friendship. The two have vacationed together on Allen's yacht, and Allen consults Geffen as he considers different media investments. "We've looked at every movie studio, every music company, starting with Orion [Pictures Corp.] in 1991," says Savoy. They came close to bidding on Miramax Films Inc. and Castle Rock, Savoy says. Allen also seriously considered buying Seagram Co.'s then 15% stake in Time Warner Inc. before Time Warner's dilutive acquisition of Turner Broadcasting Systems Inc. was announced.
They passed on all of these, and the only big-ticket buys they made in this period were Ticketmaster and DreamWorks, which counts Geffen as a principal. But scouting for more media content continues to top their agenda. Executives in the entertainment industry say Allen and Savoy have been spending a good deal of time kicking tires of media properties in Los Angeles lately. Savoy declined to elaborate on specifics but says that "we're definitely [making] more investments in content rather than infrastructure."
Once Savoy identifies a likely prospect, Allen gets very involved in evaluating the company. In 1994, Minneapolisbased Hubbard Broadcasting Inc. was looking for investors for its USSB satellite system. Stanley E. Hubbard, the CEO of USSB, vividly remembers Allen's due diligence that summer. Allen visited USSB's dish-manufacturing plants in Minneapolis and Indianapolis and removed the cover of the receiver boxes to scrutinize the circuits inside. Allen is "a genius," Hubbard says. "He goes beyond being technologically bright because he can put it in perspective."
PSYCHIC REWARD. Any significant synergies among his companies seem a ways off, and Allen in his passive way isn't inclined to force the issue. Starwave designed the Web site for Ticketmaster Online, for example, and Interval has provided some research on music trends to Trilobyte Inc., producer of such CD-ROM hits as 7th Guest and The 11th Hour. Allen acquired 12% of Trilobyte in 1994. "Each of these companies has to compete in its own sphere," Allen says. "If the corporate cultures aren't [compatible], that's not a recipe for success." Still, he says "for a lot of these companies, markets are developing rapidly. [Cross-fertilization] can be a real help, and a tremendous opportunity for new products." Allen is preparing to bring his wholly owned companies under one roof in a 60-acre corporate campus, soon to break ground in suburban Seattle.
What does Allen hope to build from this tantalizing mishmash of technology and media holdings? He hasn't the soul of an ego-driven empire-builder: He is most satisfied when he makes his guesses, places his bets, and is proved right. But he clearly loves being in business, just as he loves to play guitar with rock stars and shoot baskets with pro basketball stars: It's fun, and it makes him feel alive. "To me, the real psychic reward is to be involved in creating new products, new ideas," he says.
Perhaps Allen's eclectic grab bag of entertainment properties will never really make sense to outsiders. But in the meantime, in his low-key way, Allen is carving out a role for himself as a media investor who marches to a decidedly different drummer. "Some people are important because of the force of their personality, some are born important, some are important because of their resources," says Integral Partners' McNamee. "Paul comes out of that latter category. Some people think that's all he's got. And they're missing something. [But] I'm sure Paul couldn't give a damn." Someone in the entertainment industry not caring about image? The mark of a media mogul for a new age if ever there was one.By Elizabeth Lesly in New York, with Kathy Rebello in San Francisco and bureau reportsReturn to top