Viacom to Buy Online Media Firm

By Chris Gaither and Thomas S. Mulligan
Times Staff Writers

August 10, 2006

SAN FRANCISCO — MTV Networks said Wednesday that it would acquire online video and games distributor Atom Entertainment Inc., accelerating the race of old-media giants to snap up websites that cater to young audiences.

The $200-million deal for Atom, a survivor of the dot-com bust, signals the increasing rivalry between MTV parent Viacom Inc. and Rupert Murdoch's News Corp. as they diversify into new media.

News Corp. has turned heads with its acquisitions of MySpace and other Internet businesses. But Viacom has quietly spent nearly $600 million to assemble a broad stable of websites offering amateur video, short independent films and games to go alongside its digital offerings from MTV, Comedy Central and Nickelodeon.

"We feel like we're building a great portfolio of brands," MTV Networks Chief Executive Judy McGrath said.

Like many of its peers, Viacom is trying to navigate a shifting media landscape and capture some of the advertising dollars moving to the Web. Online ads are expected to generate nearly $17 billion in revenue in 2006.

Atom will provide Viacom with several websites, including AtomFilms for short movies, Shockwave and AddictingGames for games and AddictingClips for the kind of user-created video that has made YouTube an Internet phenomenon.

"It's a great move for Viacom," said Allen Weiner, an analyst with Gartner Inc. "This immediately puts them in the viral social video community without having to spend the kind of money that YouTube would have commanded."

San Francisco-based Atom said that it had turned an operating profit since 2002 and that it generated tens of millions of dollars in annual revenue. Known until recently as AtomShockwave, the 100-employee company was formed by the 2001 merger of Atom Corp. and Shockwave.com, which were struggling to survive the Internet crash.

Some of the entertainers and directors who struck development deals with the company — including Will Smith, David Lynch, James L. Brooks, Tim Burton, Jim Belushi and "South Park" creators Matt Stone and Trey Parker — own shares or hold options to buy shares.

Atom executives had struggled with whether to move toward an initial public stock offering or to sell the company, especially as the online video landscape became more crowded with media giants such as Viacom. Several big-media companies kicked the tires before Viacom closed the deal Wednesday.

"I feel like this is the next level for us," said Mika Salmi, the Atom founder and chief executive known for skateboarding to work down San Francisco's perilous hills. "What these guys help us in are things like mobile and global distribution."

Atom joins former rival IFilm Corp. at Viacom, which has also acquired such online businesses as Neopets, Xfire and Gametrailers. Viacom also came close to acquiring onetime social-networking king Friendster late last year before pulling out of the deal, a Friendster investor said.

"We want our content to be on multiple platforms," Viacom Chief Executive Tom Freston said during the company's quarterly earnings call Wednesday, in which it reported that digital revenue rose 58% to $51 million.

Viacom's first choice is always organic growth, he said, but "there are always holes we can fill or a certain demographic we can reach" through small acquisitions.

Josh Bernoff, an analyst with Forrester Research Inc. in Cambridge, Mass., called Viacom's strategy of modest acquisitions prudent, given that it, like most of its competitors, "has no idea what's going to work" in the digital world.

He noted that Atom was an important producer of short independent films that are more polished than much of the video seen on the wildly popular but sometimes raunchy YouTube. Advertisers may ultimately be more comfortable with Atom and IFilm content, he said, because it is more predictable.

"Crest will put ads next to Atom films, where they might hesitate with YouTube," Bernoff said.