Hollywood, SiliconValley still slugging it out over future of digital media

Out of chaos comes opportunity -- and war.

As the rise of social media and digital content upend both the tech industry and the entertainment business simultaneously, the battle of ideas between Silicon Valley and Hollywood is heating up.

The conflict was on vivid display this week at the NewTeeVee conference, put on by the GigaOM Network in San Francisco.

There, at a table on a stage in front of several hundred attendees, a discussion among venture capitalists about where the money will be made in online media erupted into an argument that stopped just short of devolving into something worthy of a World Wrestling Federation cage -- or a Jerry Springer episode. 

In this corner, our challenger -- social networks. In the other, the bloody but reigning champion -- content. 

I've been attending and writing about tech conferences for 12 years and this was by far the fiercest test of wills I've ever seen.

What's ironic is that the main antagonists on the panel -- Dennis Miller of Spark Capital and George Zachary of Charles River Ventures -- both work for investment firms based in Massachusetts. That's proof that this turf war between the tech industry and the entertainment industry goes beyond their respective capitals in Northern and Southern California.

With billions of dollars to be won or lost depending on which man's theory of the future of the online media business proves correct, I'm guessing New York also has a passing interest in the outcome. That kind of booty tends to lead to wide conflicts -- and sharp knives.

"I just don't think a lot of money will be made on content," Zachary said. "It will be distribution, it will be merchandising," he said, guessing that George Lucas may  have made more on Star Wars action figures then on his movies. "I view content as middleware," Zachary said, referring to the unglamorous software that allows databases to work with application programs.

(Given that Oracle's Larry Ellison just offered several billion dollars to buy middleware maker BEA Systems, Zachary may have been referring more to its image as the red-headed stepchild of the software industry, rather than to its long history of profitable sales.)

"News Corp. is using MySpace wrong," added Zachary, an MIT alum and former lead developer at Silicon Graphics who's had a bunch of successful exits as a VC. "They should be making it the premier piece (of their online strategy), not just a small chunk." 

Miller, whose resume includes having run both the TNT Network and Sony Pictures and who invested in College Sports Television, which was bought by CBS, had a different view.

"I disagree with George. I think social media is the new 'It Girl.' Everyone wants to follow Facebook. Everyone wants to develop a bunch of useless apps. People have been making a lot of money in the media business for years and will continue to make it."

He then called cable mogul John Malone, an embodiment of the old-school cable industry who would never win a popularity contest in Silicon Valley, "one of the great VC investors ever." 

Mike Hirshland of Polaris Venture Partners, who sat between the two men and thus had the best view of the contest, tried a bit of mediation, pointing out that it sounded like the two men agreed that distribution was where the money was.

The attempt failed. 

"I disagree with everything George is saying," Miller reiterated, even though he had said earlier that all the money in Hollywood  "is made by the distributors." Earlier, he's said there is too much money chasing too few digital content deals and that "there is road kill already, and there will be massive road kill" to come.

During that earlier exchange, Miller had spoken of "people who don't know anything about the film business, who are going to Hollywood and getting taken." Whereas it had previously been Japanese investors, or Canadians, Miller said the current suckers come from the hedge fund industry, whom he predicted would lose their shirts.

That prompted Zachary to share that he had been pitched the movie "My Big Fat Greek Wedding," -- "probably because I'm Greek," he said. But even though it was a big hit, "the return was 40x, that's not big by VC standards. There's no Google or Skype-like returns" in the film business.

Which prompted Miller to allude to "VCs who talk about Google and Skype, when eight out of 10 things they fund don't make any money."

If this had been 18th-Century France, a duel with pistols surely would have followed.  But given our time and place -- and the fact that both men are fabulously rich thanks to their previous investments -- prudence dictated that proving their respective investment models is superior wasn't a principle worth dying for.

But it was worth arguing over some more.

Miller once again called out "people who don't know anything about the media business and have a lack of information." 

Tim Haley of Redpoint Ventures gave his opinion about how the two fit together, saying "digital media is a great tool for socializing and interaction," something Miller scowled at.

Zachary then challenged Miller. 

"You want to bet?" Zachary said.

"Bet what?" Miller replied.

"Whether social media or content will make the money," Zachary said.

Miller waved him off, but not before pointing out that "the lack of monetization on YouTube is phenomenal." 

Michael Copeland, a writer with Fortune magazine, then did what all good panel moderators are supposed to do in the post-Springer, post-McClaughlin era of TV: he threw a bomb across the table that landed in Miller's lap.

Copeland alluded to Spark co-founder Todd Dagres, who "went to Hollywood to make films. That ended badly."

Then, fate intervened. Before anyone in the audience could yell, "two men enter, one man leaves," the session was over. Everyone involved stood up, took a drink of bottled water, and checked their BlackBerries, hoping for word about their latest deals.

Michael Rolnick, a partner with the Palo Alto-based venture firm ComVentures who witnessed the session, later described it as "a smackdown." 

(We got Miller on video after the session, but couldn't track down Zachary.)