Anna Frolova, Danya Setiawan, Edbert Mulia
WebTV Case
Canvas Deliverable:
What are the three most important terms that WebTV should request, in order of priority? 1. Money: Perlman is in desperate need of money (Page 9 “Running on Fumes”). The company has 2 ways that they can get money, either from a partnership with a CE (and they will get an automatic 1.5 million from their initial investor, Miles Davis) or they can continue partner up with a VC such as Brentwood in exchange of ownership. 2. Partnership: Perlman is pressured to partner with a CE from his initial investor and from the dwindling bank account. WebTV can’t really make any profit until they have this kind of partnership, unless they decide to go an entirely new route and try to go at it alone, which is very risky because of their current financial condition and the market itself. Another partnership they are considering on doing is with a VC called Brentwood, but it was not mentioned how much of the company’s stake the VC wants with a $30-$40 million valuation range. 3. Control of Company: This is a very important term for WebTV in the company's point of view. WebTV is introducing a new product to the market where they have received positive feedback from surveys (page 4), they would want to keep as much control as they can to keep the prestige of being the first ones to have this product as well as hold the decision making power regarding their product. However, they are running out of funds and should make a compromise with other companies. For CE’s they have three possible partnerships, LSI Logic Corp where they will invest $3 million ($30 million valuation) but they will have to use LSI semiconductors, Sony where they will have to grant them the “exclusivity clause,” and with Philips that were inconclusive (page 9). Also, making a deal with a VC like Brentwood would result in a loss of company ownership in exchange for money with $30-$40 million valuation.

What should their walk away position be?
Since they were already valued at $30 million dollars, their next deal should value them at least at that point. They need to make a CE partnership because that will bring in revenue from both the company partnering with them and from their initial investor. Sony is the best company who can partner with them, but they were turned off by the idea of an “exclusivity clause.” Allowing Sony to have exclusive use of WebTV’s technology might cause them to lose their advantage of being the first and only, company to offer a TV-based internet solution. It would be similar in a way to LSI where WebTV would lose the uniqueness in their product and technology by sharing it with another company. In addition, Sony must value them at $30 million dollars or higher, or they should walk away and do a deal with Brentwood to keep afloat until another CE comes along.

What are the three most important terms that Sony will ask for, in terms of priority? 1. Exclusivity Clause: Sony insisted on an “exclusivity clause” where there would be able to use WebTV’s technology exclusively in exchange for their investment on WebTV (page 10). Being a consumer electronic firm, Sony could highly benefit from this new technology WebTV was going to launch to the world, it could possibly help them with improvements in their own products. However, Perlman was unwilling to grant Sony their full demand to have the full exclusive rights to their technology, therefore this was a possible cause to why Sony rejected their deal with Perlman. 2. A Successful Product: It has been said that over the previous decade, almost every attempt to launch another consumer electronics product in Silicon Valley has failed (page 8). Many people have invested in new electronic products but ended up not benefiting from this investment. Sony would not want to invest their resources and money for a product that would end up failing in the market therefore would want to make sure that Perlman is creating a successful product that has market viability. If Sony agreed to the deal with WebTV and the launch of this new product failed, Sony’s brand name and reputation could be on the line. 3. An Effective Team: Sony is a large company and is one of the most respected consumer brand (page 8). Partnering up with a startup company could help them gain a new team that could give them a new perspective on consumer electronic products as well as have a team with a new set of skills that could possibly help the company. This new team would also need to be able to work effectively with people within Sony where compromises could take place. The fact that both parties did not want to compromise on the “exclusivity clause” could indicate the incompatibility of the two parties to work together.

Recommend and justify a course of action for WebTV if they walk away:
If WebTV walks away from Sony, it is because they want to keep control of their company’s technology. This is why the deal with LSI didn’t appeal to them. The next step WebTV should do is to choose either Brentwood’s offer of $30-$40 million valuation (ownership percentage unstated) or seek another CE to team up with. If in the short run they have no CE to turn to, we would recommend to accept Brentwood’s offer if the ownership offer is not very high. Additionally, the experience from partners of Brentwood such as Jeff Brody would be a benefit to the development of the company.

Major Risks:
Team: They have a great team who a very skilled and knowledgeable in electronics/technology. But what their biggest downfall is that they feel the need to be so secretive. This secrecy is even limiting their options on who they will partner with (VC or CE) because they will have them sign nondisclosure agreements. And this also prevents them from releasing a beta product to the consumers (like IMVU did) because they are too worried about having their idea stolen. Another pitfall of WebTV is that Perlman is too concerned with the control of his company. He doesn’t have the leverage or capital to have that position.

Capital: Investments from Brentwood Venture Capital would provide Perlman with a limited amount of fund for the company, depending on the deal that they agreed upon. Capital is still one of the major risks in pursuing this course of action because WebTV is running out of money (page 9). Brentwood’s investment would help them for a period of time but this fund will not be able to sustain WebTV in the long run. Marvin Davis was also blunt that he would not give Perlman a second round of funding if they did not secure a CE partner, showing how their resources for funds is very limited.

Market: At this time, there is huge market risk for the consumer electronics market in the Silicon Valley. WebTV unveiled their product in July of 1996 (page 6), but during the years of 1993-1998, there were failures in consumer electronics (page 8). This also hurts their chances in making a partnership with a CE or VC because it’s risky for them to put money in something that has a chance to fail.

Technology: WebTV has a new “convergence” technology which allows users to access the internet through TVs. They are already underway in building the concept of prototype development, however with technology, there is always a risk that the system would not function how Perlman and his team want it to be.