AtomFilms Agrees to a Merger With Shockwave.com

Two of the leading entertainment sites on the Internet, Shockwave.com and AtomFilms, said Friday they have agreed to combine their operations in a deal that reflects the mounting consolidation pressure on companies trying to build online audiences for short films and animations.

The two companies have attracted millions of viewers, but also lost millions of dollars, in an online sector that has seen an exodus of competitors and willing investors in recent months.

Shockwave and AtomFilms have pursued different strategies, but analysts said they have complementary strengths, and that their combination creates a clear leader in a struggling space.

“The new company is really going to be the center of gravity in online entertainment,” said Eric Sheirer, a senior analyst at Forrester Research in Cambridge, Mass., who predicted that the deal would mark the “beginning of a wave of consolidation in the space.”

Shockwave and AtomFilms are privately held, and executives declined to provide financial details of the transaction, except to say that it will involve a stock swap, and that AtomFilms shareholders will end up with 30% of the combined companies.

AtomFilms founder Mika Salmi will be chief executive of the new company, bumping aside Lawrence Levy, who had recently left a top position at Pixar Animation to head Shockwave. Levy will be leaving the company, Shockwave executives said.

In an interview Friday, Salmi said AtomFilms and Shockwave have a combined 300 employees going into the deal, but expect to reduce employment to about 200 positions once it is completed. He also said a name for the combined companies has not been selected yet, but that he expects to preserve both brands and both Web sites. Seattle-based AtomFilms will move its operations to San Francisco, where Shockwave is based.

Rob Burgess, who was chairman of Shockwave and will hold that position with the new company, said the partners improved their prospects dramatically.

“This is a stronger business,” he said. “By combining these companies, we end up with a much better business model, with revenue higher and losses lower.” He predicted that the company could be profitable sometime next year.

The deal solves a daunting financial problem for AtomFilms, which in recent months had failed to secure funding it needed to continue operations, and had to accept a $5-million “bridge” loan from existing investors.

But executives from both companies stressed how the combination fills gaps in their businesses and strategies.

AtomFilms, founded in September 1998, was one of the first to begin showing short films on the Net. It is known for acquiring content cheaply and making most of its money licensing its library of more than 1,500 films to offline businesses ranging from HBO to United Airlines.

Shockwave was founded by Macromedia Inc. as a showcase for that company’s animation and interactive software technology. Shockwave has been more profligate, paying to produce much of the content that appears on its site, and even hiring such Hollywood luminaries as director Tim Burton to create works for the site, paying them with stock in the company.

But Shockwave also has one of the biggest audiences of any online entertainment company, largely because Web users flock to the site to download its Flash player, a piece of software needed to view most animated works on the Net. While AtomFilms attracts about 1.3 million different visitors a month, Shockwave attracts 10 times that, according to the companies’ estimates.

Industry experts said the combination of AtomFilms’ offline distribution, and Shockwave’s online draw, could be potent.

“The two main problems of entertainment on the Web are getting enough people to see your content and finding other revenue streams for that programming,” said Jim Moloshok, former president of Warner Bros. Online, and now managing director of Windsor Digital, a Westwood company with an investment in AtomFilms. Combining the two companies helps solve those problems, Moloshok said.

The deal comes in the wake of a series of disappointments and retrenchments in online entertainment. Icebox.com, an online animation site based in Santa Monica, recently laid off half of its staff of 100. Before that, there were the high-profile collapses of Digital Entertainment Network and Pop.com, a site founded by a group of Hollywood heavyweights including Steven Spielberg.

Analysts said the deal between Shockwave and AtomFilms will add to the pressure on remaining sites, including Icebox and Z.com.