Can you run through how you wound up buying and taking the deal to get Take-Two Interactive?
You know, interesting. It's not a story that we've told, and part of the reason is stories like this tend to be sort of self-serving because it worked out well, and not everything works out well. In fact, most deals don't happen, and deals that do happen don't always work out. This one did. It's kind of a set of one of one. The way we did this deal has never happened before, and I'm pretty certain it will never happen again because we essentially did a hostile takeover with no money. The reason we did that is we had no money. So it was really our only choice. But I had a background in the video game business and started ZMC with partners, and the goal of ZMC was to buy, in certain instances turn around, and in all instances build up and create value in companies that stood at the intersection of media and technology. And the idea in '01 when we started the business was that technology would supercharge media and create lots of value and destroy value. And of course, that's a story now that's more resonant than ever. I thought in '01 it was pretty obvious, but it was non-obvious to the entertainment business.
I guess we should give some context. By that time, you had already spent two decades in the entertainment business.
About that, yeah. And I've been in every entertainment business there is.
So why was it obvious to you in 2001 and not obvious to other people in the industry then?
I was the new media guy. So my goal getting out of grad school is to run a movie studio, an old business even when I graduated from grad school. So I got to Columbia Pictures in a very junior job. It was the only job I was offered, and by definition, the best I could get in the entertainment business. I was responsible for international television distribution, which was basically the last stop on the train of distribution of film and television. In those days, there weren't many outlets. With motion pictures, you went to cinemas, and then you went to the very beginning of home entertainment, the very beginning of pay television, the very beginning of cable television, and eventually free television. And my job was to distribute to free television. So I'm sitting around, and new media has come along to the entertainment business. In those days, believe it or not, new media was home entertainment, which at that time was video cassette distribution and paid television. And this is in the '80s.
Okay. So that's new media in '83.
So that's a new term still used all the time 50, almost 50 years later.
So at big companies like Columbia Pictures, which made their money in film and television production and distribution and were really old-line companies who were just beginning to modernize, I was one of a small cadre of business school grads who had been recruited into the business, which was atypical for the industry until the early '80s. So they realized, like, we need a new media guy, like the way today everyone needs an AI guy or AI, you know, army. And so they looked around, they're like, who is the least valuable executive at this company that we can put in charge of new media? And that was me. So, in addition to my day job, I became responsible for new media, which was the best thing that ever happened to me because I had always been a futurist. My thesis in grad school was a history of the electronic entertainment business from its inception in 1895 until when I graduated in '83. And I tried to stay current since then. So the notion of looking ahead sort of came naturally to me. But now I had to do it for my job. Oh, and I had to deliver revenue in that job as well. So that was my initial exposure to new media. And actually, if you look at my career, it has been the combination of traditional businesses and new businesses driven by technology, which is why this is such an exciting time with all things AI.
I want to interrupt you one second. Did you say so you were a futurist by looking back though? Did I just hear you were studying?
You didn't have to be a futurist by looking back.
So wait, you started back in 1895. What was happening in 1895?
The beginning of electronic entertainment, recorded music, beginning of motion pictures.
What is the record, the beginning of recorded music is photograph?
Well, in those days it was a wax cylinder, but you don't really need to know about it. I'll go into it if you want, but actually a wax cylinder looks like this. You can see them in museums. And that was the beginning of recorded music. That and player pianos.
I'm more interested in like what insights you were deriving from the past and then how you thought you were applying them in the '80s.
So there are many insights obviously, and we can go into them, you know, one after another. But the insight I guess that spoke to me that probably helped me the most was you always have to embrace new technologies. If you fight against them, you'll be left behind. Number two, and I've said this at all the companies I've been at, most human beings are wired to believe that which is going on now will never change. But the actual state of play is exactly what is going on now will change. It will always change. For example, people whether they like it or not think today's political environment is what it is. If they like it, it's going to stay forever. If they don't like it, they're moaning that it will stay forever. But it won't stay forever. It'll change. The economy will change. And media and entertainment will change. And because I've always been wired that way, I was able when I started ZMC to make sure I have an idea. Let's not buy legacy businesses that are under pressure. Remember this is '01. So it was non-obvious. Like let's not go into the movie business. It's a terrible business. You know, as a business, it's fun creatively, but as a business, it's a bad business. Let's not go into deficit network television production. Just a bad economic business. Different today than it was, but it was really bad then where you would deficit these shows in hopes of creating enough episodes that you could syndicate them, and if you didn't get there, you had a massive loss. And if you occasionally got there, you had a huge hit, which is what motivated everyone. But the economics looked a lot like winning the lottery. But I don't win the lottery. But yeah, but that's not my life experience. But there are many other lessons as well. But the biggest lesson I think is that new things come along and they can grow. Old things in the media and entertainment business take a really long time to die. Sometimes they don't. Sometimes they stay in the business forever. Sometimes they come back.
What would be an example of that from the '80s where we're talking about new media and that's what your focus is?
Home entertainment, which was basically video cassette distribution, which became DVD distribution, which became digital distribution.
Which was a tiny market at that time that drastically expanded. It was just beginning to boom in the early '80s.
And you were an early believer in that.
Well, so much so that I left Columbia Pictures to go to the largest independent home entertainment company, Vestron.
Okay. So, tell me about that.
Well, I've been very fortunate at Columbia Pictures. I figured out how to double the division's revenue in six months, which was good for my boss's career and therefore good for mine. So, I became the youngest vice president at Columbia Pictures, and then I was recruited. I got sort of a reputation for like how this guy figures stuff out, and I was recruited to a company called Vestron, which was then the largest home entertainment company that had ambitions to become a diversified entertainment company, which was also my ambition, you know, just refreshing conversation from earlier. I wanted to run a movie studio, wanted to start a movie studio. So I left to go to Vestron, where within I think about, pardon me, about nine months of arriving, I became president. So I was now president of a public entertainment company, and I was 29, three years out of school. Was not my expectation. And then I had this, you know, ability to take on the new movie division that hadn't actually made any pictures yet. So it was very early. I didn't start it though. I got there and the team was already there, but I'd gained responsibility for it, and we started making movies.
Go to the new media part though. So the biggest part of Vestron's business was home entertainment distribution, which was video cassette distribution. They would create movies and put them on video cassettes, which you would rent in video stores, you may recall, and they would also ultimately make movies and put them through the entire distribution system.
Would they buy other content made by other people?
Yeah, that was actually how the business started.
That was the majority of the business.
It was the business when I got there until they started their own production. And then the idea is, okay, let's, we're already...
We got to do this ourselves.
In the same way that Netflix started as a distribution company and realized how to be in production.
I've been a subscriber, never returned from Netflix, and when they were just mailing me DVDs in those, I don't know, 20 years or...
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How did you get from new media is, you know, DVDs and home entertainment to, oh wow, I think I'm going to have, I have a religion on video games and I want to like move myself into that industry.
So, I was not a pioneer in the video game business. The video game business started in the late '70s and began to grow in the early '80s. And just by way of background, I was really contrarian about video games because Hollywood had a horrible video game experience, which I'm not sure too many people would remember today, but in 1982 there was a huge hit called E.T. and Warner Communications, very forward-thinking, had purchased Atari, which at that time was a leading video game company, and they made both hardware and software. And software in those days was cartridges, and cartridges were expensive to make and had a long lead time. So before you released something, you had to decide how many you're going to sell and order it all. And if you were right, you did great. And if you're wrong, you had excess inventory. You didn't have just-in-time inventory with cartridges. It took too long to create. So Warner has Atari. They're doing well with it. And they have E.T. and they're like, 'We should make an E.T. game.' And because they didn't really have a lot of experience in how video games were made, they basically made the game in five weeks and put it in the box, and it was a terrible game. And then they manufactured more games, more cartridges than there were Atari consoles. Not sure what their idea was, but they did. And then it was a disaster. No one bought the game because it was terrible. And there were visuals of the cartridges being plowed into landfill that you can find online today. And the entertainment business is a small business. And everyone was like, 'Oh my god, that nearly tanked Warner Communications.' I think they took a write-down in '82 of $400 million, which was a lot of money in '82 for Warner Communications. So, the rest of the business is like, 'This is a disaster. Like, don't ever get involved with video games. It's a terrible business.' Okay, roll the clock forward. I've been at Vestron. I made a bunch of hits. The first picture I greenlit turned into a huge hit. That was very good for my career. Sometimes, you know, it's better to be lucky than smart. That got me recruited to become president of 20th Century Fox just a couple years later when I was 32. So now I'm at Fox, and we turned around Fox. We went from last place at the box office to first place.
Who recruited you to Fox?
Joe Roth, who was chairman of, had been newly named the chairman of the studio with the support of Barry Diller and Rupert Murdoch.
Okay. So what was Barry Diller's role at Fox at this point?
He was CEO but then Rupert Murdoch...
Well, he was the owner and he corp owned it.
Okay. But this was a flat-out turnaround.
The studio part was because they were in last place at the box office and they weren't doing well at all. Weren't making a lot of money.
How do they identify you as the guy to hire for this?
So this is sort of a long complicated story. So I'll try to compress it.
Give me whatever version you want.
So in those days, imagine like the independent business is over here siloed and the major business is here and never the twain shall meet. So Joe Roth was an independent producer and he had never worked in a major studio, and he made movies for Vestron. That's how I knew him. He made Young Guns and Young Guns 2 for Vestron, which were hits for us, and he and I became friendly in the way that I am, well first of all a friendly person if you don't know that right. Secondly, like when I work with people I want to develop relationships with them, and he was a highly creative person, a good guy. So we became friendly, not intimate friends, but friendly. So I'm now at Vestron for a couple years. I'm getting very worried about Vestron's business model for an array of reasons and Vestron's senior leadership, the person I reported to.
Does that have anything to do with technology?
It had to do with the fact that the reason for Vestron to exist was that they were pioneer in home entertainment, but everyone else got into home entertainment. You can never have a competitive advantage in the entertainment business through distribution only. That's why Netflix produces content. You can start with distribution only if you're a pioneer, but you got to immediately go into production. Production is a very tough business as I said earlier. So, Vestron is not capitalized to be a diversified film and television production company with a video store division, not video games. And it's apparent to me they're going to have a problem. So, I start looking around for a job, and remarkably enough at the age of 31, people are not exactly lined up knocking on my door to ask me to be president of a major film studio. But Joe gets this job as chairman of Fox, and behind the scenes, and this I was not aware of, but I became aware of it, Barry said to Joe, 'Look, you've never worked at a major and you've never run a business. You're an independent producer, but he needed a creative engine to turn around the studio.' He was aware of that, which was true. 'You got to hire a business guy to support you here, like to be your partner in building the business.' So Joe comes from the independent world, remember, totally different world than major world. He has no relationships in major world. But in an independent world, like I'm kind of well-known. Like I'm president of the biggest independent. We've done really well. I greenlit 30 Dancing, which was the highest-grossing independent film of all time then and stayed that way for a very long time until, pop quiz.
Blair Witch, many years later. So he's looking around. He's like, 'Well, who's the number one guy to be the business guy at the studio?' Now to say that I was, I wasn't the number one guy. I was not the number 100 guy. I was the number one guy in this little narrow independent entertainment business. So he called me up and he was like, 'Do you want to?' Well, I called him actually to say, 'Congratulations.' He said, 'Is that the only reason you're calling?' I said, he said, 'Might you want to come here and work here?' I was like, 'Coincidentally, yes.' And he said, 'So, do you think you'll be in LA anytime soon?' I'm like, 'Yeah, like how's Thursday?' And so he's like, 'Good.' So, we meet at the Bel Air Hotel for breakfast, which was a big thing in those days.
I'm very familiar with that breakfast.
Yeah. And that's where in those days like if you were chairman, you went to Bel Air for breakfast. If you were president, you went to the Polo Lounge. But anyway, separate issue. So we're meeting at Bel Air on a Friday morning because I think I said I'm coming Thursday anyway. Meeting Friday morning for breakfast. And we have a very nice breakfast. And he says, 'Do you want to do this thing?' And I said, 'That sounds pretty interesting.' He said, 'Are you free to meet with Barry and Rupert this morning?' And I said, 'As it happens.'
No, I'm a little busy. Tied up.
Yeah, I have to rearrange my sock drawer. So I go over to the studio and I walk into a room with Barry and Rupert, and Barry asks the very incisive questions that he does, and Rupert sat rather quietly. I'm not sure he even asked me a question.
Is that normal for Rupert?
Yeah, he's a great listener. And in those days, he was learning the film business. And remember, I was only going to be responsible for film production and then worldwide film and television, home entertainment distribution. What year are we in?
So, what is the scope of Rupert Murdoch's business at this point? Is it just the newspapers?
It's News Corp. No, it's pretty big business at this point. It's worldwide newspapers. That's a lot of it. And then of course the Fox assets is pretty much what it was. But it was a big business.
All right. All right. So, take me back to you're in a room with a room, and I can visualize it like it was yesterday. And we have, and Barry asks me these really tough questions, and I leave the office, and the head of HR walks toward me and says, 'Okay, would you like to do this?' And I said, 'Sure.' And I walked into his office and signed the contract, and that was how it worked.
But did Barry say you're hired or they just, it was...
I just walked out and it was like, yeah. Like the HR guy was like, 'Okay, come on.' And then that was how, doesn't happen that way anymore.
What did you, I want to go back to the story, but I'm curious because I just finished reading Barry's autobiography, which I thought was excellent.
What did you learn? Because you've like worked with him and like known him.
No, no, let's be clear. I worked for him for four years and I learned an enormous amount. I've stayed friendly with him ever since. I have lunch with him a couple times a year.
So, can you tell me like some of the things that you've learned from Barry or things that you think stand out just about him as a person?
Yeah, I mean I learned, I mean he taught me the entertainment business. So, I learned everything from him because remember I knew very little. I mean I was really, and I thankfully I knew what I didn't know. To this day I'm good at knowing what I don't know. And I'm an avid learner but I've never resisted learning more and I'm comfortable asking questions including dumb questions. I have to be because I kept getting thrown into these big jobs much earlier than I should have been.
He kind of had that in his career, right?
In a different way. He really came up more on the creative side.
And he also innovated more creatively than I did. If I can give myself credit for innovation, it would be more on the business side and less on the creative side.
But is there anything that you remember like discussions you had or stuff he told you like implicitly that you applied?
No, I just remember the form of the discussion which was a lot of very robust debate with a lot of heat around it. And I used to say to people, you know, we argue all the time, Barry and I, and he's right 99% of the time, but 1% of the time I'm actually right. So that's how I learned from him. And he was patient with me most of the time. But you had to have a strong stomach to, I mean he was famous and fierce in those days. He was not like junior. He was very senior in the industry already, never mind what he's done since. And he was scary. Oh, and by the way, like it's not like if this job didn't work out at Fox other people are lining up to hire me. Like I was young. I was newly married. I had a kid. I had a mortgage. Like I needed to keep my job. But I understood that this was his dialectic. And if you backed down, if you didn't argue, you were done. I understood it wasn't personal. It just wasn't personal. Other people took it personally, like a personal attack or criticism. I just knew that it wasn't. It's not like it was personal on the good side either. It's not like if he were sitting here, he'd say, 'Oh, yes, I love Strauss. I thought he was so amazing.' He might not even remember I worked for him in those days. Therefore, I knew it wasn't personal. It wasn't about me. It was about the thing itself, arriving at the right conclusion. And I wanted to arrive at the right conclusion, too. And I wanted to learn. I had some really bad days with him, don't get me wrong. And it was very, very taxing. One of the senior execs at the studio was a woman named Lucy Salhaney who ran television. And Lucy and I were very close, and we had a so-called president's meeting every Monday which was Rupert and Barry and all the division heads, and I was in that meeting and I was, I don't know, 10 or 15 years younger than the youngest, next youngest person in the meeting, and I was the one who would argue, like I argued all the time. Many other people are just like, 'Shut up and sit there.' And Lucy said, 'You remind me, remember when you were little and you had that blow-up clown doll that everyone had that you would punch and it would go over and then bounce back up. Remember that?' Yes.
Everyone had that. I had that.
And she said, 'That's you. You just get punched, you go over, you keep coming back up.'
But are you naturally like argumentative?
No, not at all. I'm much more collaborative.
I thought so. This is the vibe I get off of.
But that matter, I wasn't in charge. It was his style and I had to comport with his style to get to the right conclusion.
What are you learning from Rupert at this time? I mean, you're in these weekly meetings with him.
With maybe, but he's maybe the most successful person in media of all time.
What I learned from him really was in a different moment, which is he over-leveraged the company during my tenure there by buying Star, and the company had real trouble with its debt facility. And my recollection is they had a diversified debt facility with like 150 banks and a whole cross-default mechanism, which was great when things are going well because they kept the interest cost low, and horrible if things go badly because the cost of falls. Suddenly things go badly, and he was at risk of losing the whole thing. I went on the road show with a bank road show with him for a couple of the visits. And what I found remarkable was he was cool the whole time. He wasn't overconfident. He just wasn't ruffled. I mean he was at risk of losing his whole business which had been his family's business, and it just didn't faze him. He just kept going. And he was laser-focused on the conclusion, and he reached the conclusion just by being focused and calm. That's really what I learned from him.
It's incredible. Okay, so you're 32, you're doing this turnaround. What are the insights you are driving at Fox that you're going to wind up using later on when you do Take-Two?
So the biggest insight, well, we can get into how I work with creative people because that's probably the most important long-term thing. But I think going back to your question about video games. So, it's now mid-'80s because I've been there for a couple years, and I now really understand the economics of the movie business. Like maybe I'm slow to pick it up, but I got it. And they're terrible. They're terrible underlying economics. And they were bad and they've been bad since 1955, since the consent decree that basically disaggregated distribution from production and turned the motion picture business from a studio system into a boutique system. And a rubric for good versus bad entertainment business is a boutique system is generally bad and a studio system is generally good or can be good. The studio system was long gone. And studio system means your creative talent, all your talent is on the payroll. Boutique system is they're not on your payroll. They can auction their services. And obviously if talented people are auctioning their services for every project, it's going to be much more expensive than if they're on your payroll in success. So you have a structure in the motion picture business since '55 essentially. It didn't happen overnight '55, but by the late '60s, early '70s, mid-'70s where it's heads I win, tails you lose. If the project does well, the boutique extracts a lot of the value because the deal they were able to negotiate. So they didn't go across the street. And if it's a flop, you as a studio bear the entire cost of the flop, obviously. Whereas in a studio system, recorded music before its most recent changes was essentially a studio system, video games to this day is a studio system. In success, you obviously pay your creative people, and we are incredibly generous in the way that we compensate our creative people for success. But the company also has an opportunity to create a return. I was aware that the economics of the film business were really lousy and that you can't fight that. There was a Buffett aphorism which I'm going to get wrong, but the aphorism was to the effect of...
If you take a management team with a reputation for brilliance and a business with a reputation for being bad...
It is the business's reputation that will stay intact.
And again, I didn't, that wasn't an elegant version but you get the idea.
So I saw this in Forbes magazine. Those days you read magazines, it was in the back. Remember they had quotes in the back of Forbes, and I read it and was like, that's what I'm dealing with here. And I've been really fortunate, did well because we made hits, and Fox is doing well because we make hits.
But you can't fight the underlying structure of the business.
So my blinding flash of the obvious was I thought to myself, see here's the thing, as it turns out my ambition had been to run a movie studio, and as it turns out my ambition should have been to run a movie studio in 1927, not a studio in 1991, whatever it is. So I think to myself, what is the moral equivalent of the motion picture business in the 1920s? I thought it's a video game business. How did you know that? Because I was a student of the business and I was aware that video games were a thing, and I was aware that they were, despite the issue that Atari and Warner Communications had, it was still a growing business. And by the early '90s, it was a real business. It was a small business, but it was a real business. And I looked at it and I said, 'I think this is going to be huge.' And remember that was a very unpopular view in the entertainment business because of the Atari disaster, which people still saw in bright flashing neon.
So almost the way you get what you called in the past like the religion on video games is by comparing it to like what is the movie studio version of that today.
Yeah. To your point about being a student in the business.
Okay. So then you have that insight.
Yeah. So now I've been at this studio for whatever it was, nearly four years, and we've had a great run, and I think I got to go do the video game business.
So what's your next move?
I went to Rupert and I said next big business is the video game business, and I remember sitting in his office and I said so I think we should be in that business. He said great, go start one. And I said yeah, I'd love to do that, you know, while I do my day job, which was now I've been promoted. I was now running the creative and business side, working for then Peter Chernin, because Joe and Barry both had left. And he said, 'Great, you could do it. We'll give you the capital. You can pursue it. Build a video game business.' And I said, 'Well, the only thing is like I see it as an entrepreneurial venture, so I'd like a piece of it.' And he said, 'No interest. Like that's not on offer.' So I was like...
Because Rupert doesn't have partners in his businesses except his public shareholders.
And it's just his, you know, there's nothing wrong with that. It was just his approach, and he didn't pause, but it wasn't like he paused, 'Oh, let me think about it.' He was like, 'No.' So I was like, okay, I guess I have to think about, you know, am I serious about this thing? And then coincidentally I get a call from a recruiter saying there's a startup, pre-revenue video game business in Silicon Valley that is doing the most advanced video games. They're really going to be the next generation of video games. Are you interested? And I left. I took a 95% pay cut and moved my family from our beautiful house in West LA to Atherton to a rental house that was going to be torn down. So it was maybe a little dated inside. It was about to be torn down for a golf course.
Because you wanted equity. You wanted ownership in the...
I wanted to build something and I wanted equity. Primarily what motivated me was this notion of being at the cutting edge of media and entertainment, and the fact that it was driven by technology made it even more appealing.
Did you think that you were always going to be an entrepreneur? Because at this point, if I understand your career, you've always just had jobs. You were a phenomenal operator. You're the business guy, but did you, in your heart, you're like, I feel like I should be running my own thing. I should be an entrepreneur.
Yes. And I wasn't ready as it turns out. So, but I did think that, and I know I wasn't really a born entrepreneur because I was a good employee and I liked running big businesses for other people, but I also knew that if I really wanted to build something meaningful, I had to take a risk.
Why do you say you weren't ready?
I didn't have much money and I had a young family, and I think there are kind of two stages in life to be an entrepreneur. Before you have anything and any responsibilities and obligations, and after you have some protection. And I was right in the middle. I had some responsibilities. I had no protection. So emotionally it was very challenging for me, and I don't think I was emotionally ready. So I did it for a couple years. Crystal Dynamics was very successful. Not hugely successful but it still exists today.
I don't think I know the story of Crystal Dynamics.
That was the company that...
Tell me about the company.
Well, it was set up by Kleiner Perkins backing two very talented women with backgrounds at Sega at the time, and they needed a CEO and they wanted a CEO from the entertainment business. So, hired me.
And literally it was a video game studio.
Yeah. So, I set it up. I got them distribution deals. I raised a bunch of capital, lots of capital because I hadn't raised much capital. And then I was recruited to go turn around a huge record company back in the days when that was not an oxymoron. And I decided I'm really not ready to be an entrepreneur going forward quite yet given this opportunity. And that record company, which was called BMG, agreed that I could start a video game division inside the company.
Okay. Because I was going to say the jump from, you got religion on video games and now we're jumping from video games to music. Why'd you do that?
Okay. So another turnaround. It was really interesting. I'd never done music, and they said I could start a video game company.
Strauss Zelnick prides himself on running what he calls a rational organization. He said that he tells his talent that the company they build will be efficient, organized, will make sound decisions, we will be calm, and we will be well-financed. He tells them that no one will let their ego interfere with what you do, and no one will take credit for what you do. We won't do anything crazy, and we won't go bankrupt. I've spent a bunch of time with Adam who's the founder of AppLovin, and I would describe the way that he runs his business and the way that Strauss runs his business as hyper-competence matched with ruthless efficiency. Both Strauss and Adam want to build world-class products, and that is exactly what Adam and his team have done with their advertising platform Axon. Axon connects you with over a billion potential new customers. Axon allows you to capture undivided attention. Axon ads are full-screen videos that are watched for an average of 35 seconds. That is retention that blows other ad platforms out of the water, and you can launch in minutes. You set the goal and Axon achieves it. No complex setup, no expertise needed. And Axon scales quickly. They can put your ads in front of over a billion potential customers. Other businesses have seen immediate results, scaled to hundreds of thousands of dollars a day in spend, and increased their revenue by millions. So, you want to get started quickly before all of your competitors are on Axon. And you can do that by going to axon.ai/enra. That is axon.ai/enra. So, talk about starting the video game company inside of BMG.
So, I'm going to hire Jay Moses who is now on the board of Take-Two, and the model was external development. So making deals with external developers, and we were going to use the BMG recorded music distribution system to distribute worldwide, which was pretty smart because we had this massive worldwide system of local offices, so we could slot right into it without adding any overhead. That was the beauty of doing this.
Well, in those days when you distributed records you actually had to have, you know, physical offices to go sell physical discs, CDs, the beginning of CDs and the end of vinyl, to stores. Very similar to video games at that time because you're buying physical...
Exactly. You're buying cartridges and then eventually discs.
Were any other music companies doing music and video games? No.
No. So, we put aside a small amount of capital for BMG because in those days BMG's revenue was $5 billion a year and it was very profitable. And I think we devoted around $40 million to investing in this basket of games and building up the distribution system and hiring a team.
At this point, video game, like there's no free-to-play. There's no, you can't download anything over the internet, right?
So the economics of the video game is very similar to recorded music. It's you're buying...
Somewhere between toys and recorded music. It was a top-10 business and most of the sales were in the fourth quarter. It had a lot of aspects of the toy business, and we were, there were still cartridges. It hadn't shifted entirely over to discs. So, you had all the messy inventory characteristics of a cartridge business. So, it had plenty of hair on it as a business that it no longer has.
But did you have any inclination at that time that there would be the...
There would be an end to the cartridge or...
Oh, sure. No, I knew it was becoming a disc business. Absolutely.
Well, you couldn't predict what was going to happen after discs.
So, go back to where we were in the story. Sorry.
So, anyhow, I'm by the way, I'm running the record company. That's my day job because it's a big business that Jay is building up the video game company with my oversight, but it's a skunk works project. It's tiny little...
Yeah. He said 40 million compared to like a rounding error.
Okay. And his team created a whole bunch of properties and we're getting ready to distribute some of them as they had been completed. And there was a new CEO at the parent company at BMG, whose name was Thomas Middelhoff, and he decided the video game business was a terrible business and he told me to divest the whole thing. And I said, wait, we've already invested. The only thing left to do is distribute the titles. That's the only thing that's left. So, let me do that and then you decide depending on how it goes. And he said, 'No, just sell it to the highest bidder.' I said, 'But there won't be any bidders. It's like in production video games. There's not going to be a lot of appetite for this.' And he said, 'I don't care. Just sell it.'
He was a person who, you know, bet on his gut. It didn't work out very well for him at all. But that's a separate story for another day. And so we go out to market and not a lot of bids and we find a buyer and the buyer agrees. It's a little tiny public company with a, I want to say, roughly a hundred million market cap and they agree to give us 20% of their company in stock for the business such as it was. So $20 million. And so we close that deal. Now we own 20% of this company. And I go to Thomas and I said, 'Listen, we have five billion in revenue. Like, this is $20 million of stock. It's a rounding error on a rounding error. Why don't we just hold the stock, see what happens?' He said, 'No, sell the stock in the open market.' So, we sell the stock in the open market for, wait for it, $14 million. So a month later this public company launches the first property that we had completed into the market.
Oh no, don't tell, don't say.
So the name of the public company was Take-Two Interactive and the first release was Grand Theft Auto.
We're going to pause right here though. Grand Theft Auto is the most successful media property of all time. Is that...
All right. So that's my war story on being in the video game business. Now remember now I'm out of the video game business. I'm running a record company.
You had to be pissed off at this time, right?
You know, I didn't own the company and I don't get pissed off easily. Like I understood I'm on the payroll. This is my boss. He gets to make strategic decisions like this. I knew it was a foolish decision.
But how could you think that you were going to work? Did maybe you didn't. There's no way if you see this person making decisions like that that you're like, 'Oh, I'm going to work for this person.'
That's correct. I did leave. I did leave.
Okay. Yeah. So then what happens next?
Well, I realize it's time to go and now I'm ready to be an entrepreneur because I have a vision for what I want to build and I have a few bucks in the bank so my family is not going to starve. Because I saved well and I made a lot of money, you know, as a professional executive. So I decided to start ZMC.
Explain what ZMC is though.
Well today it's a private equity firm. So we raise capital from institutions in funds and then we buy companies and build them and then eventually sell them to create a return.
But at that time that wasn't the vision. The vision was to create an entity that would build a portfolio of media and entertainment properties that are supercharged by technology. That was the thesis. And again this is '01. And I thought it was a pretty obvious thesis but in retrospect it was not. And if that is your thesis, then video games is the perfect...
Actually, I didn't have an appetite to go back into video games when I started ZMC. First of all, I've been there and done that twice. Secondly, it still was kind of the top 10 fourth quarter toyish business with bad inventory characteristics.
Oh, because it's 2001. Okay.
Yeah. And it was cyclical and, you know, the console generation would cause the business sort of come and go and I wasn't anxious to get back into that business.
What's the first thing you're doing with ZMC?
We started buying direct marketing companies that were becoming digital. Market research companies that were becoming digital. We turned around a Japanese record company of all things. So, you know, whatever deals that we could find, often very, very troubled companies. Because remember we had no capital. Oh, I left that part out. We had no capital.
So, how do you start a company with no capital?
Exactly. So, I put in $300,000 of my own money. I convinced people to work for free. We borrowed offices. We had one fewer chair than we had people. And I'm not kidding. The offices were so horrible that if you went to the restroom, like half the time it was flooding. And by flooding, I mean like water sheeting down the walls. And I mean like you couldn't believe this was actually going on. And I would run around and talk to capital providers, you know, professional financial services firms, and say, you know, we're trying to, here's our vision. We're trying to buy companies to build them up and create value. And they would be like, 'Okay, well, show us the company you want to buy. We'll consider putting capital in.' And then I would go to targets, to companies and say, 'I'd like to buy you.' And they'd be like, 'Okay, great. Show us the capital that you have to buy us and we'll have a conversation.' So, this is going on for like six months. And I'm like, hm, there is a problem here like empty suitcase and going to a lot of meetings. It became obvious to me that it was an issue when we were at this very fancy private equity firm and they said the same thing. They were like, 'You guys are great. You all have great resumes. So, we'd love it if you would bring us a deal and, you know, we'll put money into the deal.' And it was at the end of the day and we're packing up and they've left the room and there was a cleaning person who's emptying the garbage and I said to my colleagues, I said, I guarantee you that after we leave someone who works here is going to go to that person and say, 'Incidentally if you see a really interesting company why don't you come talk to us about it we'll finance it for you.' I realized like these were empty words. They said it to everyone. They were just looking for free options. So, I had to find this lightning in a bottle where there'd be an opportunity to buy a company with third party capital. And thankfully, one came along. It was called Columbia Music Entertainment. It was a deeply troubled Japanese record company. And I had recorded music experience. The short story is amazingly enough, we turned it around and...
Because your idea is to buy, improve, and sell. You're not holding for...
Correct. We did. It took us a long time. It took nine years, but it was very difficult because it was recorded music in the early 2000s. It was Japan. It had a 0.5% market share. It had way too much debt. It had no hits whatsoever.
