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Yahoo! Should Make Movies if It's Smart

NEW YORK (TheStreet) -- Yahoo! (YHOO - Get Report) recently saved the TV series Community from being cancelled and forgotten. Many fans were thankful that the Internet portal decided it wanted to break into the business of higher-quality content distribution.

Can opening a movie studio be far behind?

It won't be, if Yahoo! is smart. Reliance on advertising as a business model is certainly valuable, but it's easy to see how the company is just one more site that generates and collects articles and photos and videos, has an email client, provides a search engine, etc. It's just one more commodity searching for a way to differentiate itself in front of all the eyeballs out there.

Making movies, telling compelling stories, distributing them beyond Yahoo! itself -- that's what will fully differentiate Yahoo! from its competition.

Amazon (AMZN) figured out that content can be king even for what is essentially a retail operation. Amazon also wanted to keep its disruptive reputation intact by opening Amazon Studios to the public. Got a screenplay or TV series script on your hard drive? Upload it to Amazon and see if the company wants to option it. (Full disclosure: I've uploaded a few pieces; I've still got my day job.)

Greenlighting movies is one thing; planning a release strategy is another thing entirely. While Yahoo! probably would want to show its content exclusively on the portal as a way of capturing revenue in its own ecosystem, distribution to theaters and other platforms is a must for true expansion of top-line opportunities.

Plus, it would allow for all kinds of experimentation. Yahoo! could debut a film in a theater or a TV show on, say, Disney's (DIS) ABC, and then show the products on its own website shortly thereafter.

CEO Marissa Mayer should take a cue from Amazon Studios, though. Even though the initiative didn't really live up to its original promise -- which in in my opinion would require cutting costs by engaging only unknown talent -- Yahoo! should still attempt to find unknowns who are talented and who come cheap. It could create a submission platform that would allow for the uploading of pitches, scripts and series bibles. Yahoo! could exclusively generate content in that fashion, searching for the next great hit.

There is the temptation to work with professional writers, to be sure. It's understandable, and it will have to be part of the mix, especially in the overall development process.

But by primarily using cheap talent, it will allow Yahoo! to generate higher-margin profits that can be used later on to fund projects involving costlier talent. No matter what, even then, the goal should be to limit compensation packages, especially first-dollar-gross participation, with which Hollywood has an addiction.

This content-generation model could also work for companies like AOL (AOL) , Facebook (FB) , and, believe it or not, even a retailer like Barnes & Noble (BKS) .

Think about it: Barnes & Noble cannot compete selling books anymore. There's nothing unique about that. Coming up with original filmed entertainment -- well, there's something to be said about that. A great example to support the point: Hasbro (HAS) has delved into the Hollywood system, licensing its intellectual properties. It's probably only a matter of time before the toy concern moves deeper into the production process. Even Activision Blizzard (ATVI) is rumored to be interested in starting a movie studio.

Companies that have access to technological innovation are natural candidates for making movies. Costs of production have come down, since everyone these days is walking around with a device, and our culture demands a constant stream of original entertainment.

Businesses like Yahoo! that operate thriving web presences always run the risk of obsolescence. Uniquely generating desirable content that has the cultural impact of a show like Community will help to keep the company current.

At the time of publication, the author was long ATVI.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate YAHOO INC (YHOO) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, solid stock price performance, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

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