It’s official, IDG announced that Infoworld will fold its print operations and focus on events and digital operations. And you know what? It’s about a decade too late. But better late than never.
Who Reads Print, Anyway?
A couple of years ago, I sat in IGN’s board room in Brisbane, California. CEO Mark Jung and his lieutenant Richard Jalichandra were telling my President and I - leading online publishers in the men’s lifestyle space - that it was a matter of time before most if not all of print would go digital. “Women only read magazines,” we were told.
Technolgoy and video games (what IGN focused in) would first see that outcome, but over time, all print would become digital. Over time, I realized, they were right, but not the first to say that. Rupert Murdoch, who went on to buy IGN eventually for $650M, had told his lieutenant back in the 1980s that all news would be digital.
Media Moguls Know Best?
And most media moguls have seen the writing on the wall, and those who adapted are thriving; those who did not are now paying the price.
Look Up, Literally
Canada is usually behind the curve, in many ways. But if you take a look at two of the media moguls that have stood tall at one point or another, Canada has offered some good lessons to media ownership groups.
In the 1990s, Thomson - one of the largest media groups in the consumer space - completed what they had started in the 1980s, by almost completely getting out of the print newspaper consumer space and embracing digital. You can see this some more in this interactive timeline of Thomson.
Today, no matter what magazine or newspaper you read, if there is any underlying data from the worlds of legal, health or business, there is a very good chance that the source credits Thomson. When Ken Thomson died a few years ago, he was Canada’s richest man with a net worth over $20 billion. His company was handed off to his son David Thomson (Ken himself took it over from his father) and is today generating north of $8 billion in annual revenue.
Ken Thomson, that’s David’s father, was known to be stingy. When he sold most of his assets to a lad named Conrad Black, many people wondered what value Black would wring out of them if Thomson could not. The word was, that while Thomson’s management style was stingy, Black’s was brutal (as Lord Conrad Black’s trial is going on in Chicago, any day now I’ll be publishing a long profile on the man who at one point boasted one of the largest media companies in the world with over $2B in annual revenues in 1999 and 2000).
But even Black realized by 2000 that newspaper companies’ valuations had peaked, and he began to unload his assets, one by one.
Today we see many newspaper companies scrambling to survive, Infoworld is following in the footsteps and doing digital and events. It’s a matter of time now before more and more consumer and trade publications follow suit.
Silver Lining: Buy Low, Sell High
However, the space holds a lot of value, and as we showed in the valuation comparison between 2003 and 2007, a lot of the negativity surrounding print has to do with market sentiment.
A wise investor might consider buying up and rolling up assets in print - be it newspapers or magazines - restructure them, slash costs, leverage resources and reposition them as digital news and information organizations that offer a unique yet tremendous global and local reach to advertisers. There’s plenty of value there. Maybe it’s because I already operate online, but if I had a $5 billion warchest, and I had to go out and look for value, I would probably go lookout for assets in print and take them online.
That’s the problem of the print literati, they are so attached to their past that they never learned to appreciate and value their potential future.
What’s that saying? “The first generation creates a business, the second makes the fortune and the third destroys it.” If you rank every single family running a newspaper empire, I sure do wonder which fall under which.
But then again, I am not on the inside, and maybe therein lies my willingness to shatter the model and build it back up again, reflecting the realities of a 21st century in the post digital revolution landscape.
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WatchMojo NewsletterI wrote earlier about how armchair QBs were wrong about bashing Sumner Redstone (man, I am getting old and crusty if I am defending Mr. Redstone, next thing you know I’ll be singing the praises of Rupert Murdoch…) and that his two-pronged strategy with YouTube with CBS/Viacom made sense.
Here’s a perfect example.
1. I come across something on ESPN pertaining to sports business and the NFL.
2. I go to our sports blog to write about it.
3. I see my colleague, the Jackhammer, has embedded something from CBS’s coverage of NCAA Division 2 March Madness… with the title “One of the best finishes in the history of sports.”
Naturally, before I type up my post, I click and watch. Indeed, ”one of the best finishes in the history of sports,” I suggest you watch it, it’s the final 45 seconds of the Div II NCAA finals, Barton vs. Winona.
4. I am amazed. I will now pay some attention to college hoops, and this kid in the video.
5. I might actually watch some of the tournament… ok, probably not.
But, the point is: that’s why Redstone’s not crazy. He is right that the value between live basketball programming and Jon Steward-esque material is very different and that YouTube represents something very different. With basketball programming, if I am a fan, I will watch it live. With Jon Stewart, fan or not, I would not stay up to watch it live, I’d catch highlights the next day… In one, YouTube is clearly a promotional tool, in the other, it’s a Tivo.
Tesla vs. Marconi, meet Sanger vs. Wales.
It’s funny, and I guess refreshing, that a non-profit is stirring up such a battle.
Apparently Jimbo Wales is not the founder visionary who founded Wikipedia.org, or so says Dr. Larry Sanger, founder of the new Citizendum, who lists a myriad of sources strengthening his argument.
Will Yahoo! regret not buying Facebook? Maybe.
Reading what was mentioned, and not mentioned, in the WSJ article on Facebook, I’d like throw out my call that Mark Zuckerberg’s company will file for an IPO sometime in 2008 [Editor’s note: for a valuation analysis of Facebook, click here]. To be clear, I do not know if they will:
- file in 2008 for a 2009 IPO or
- file in late 2007 for a 2008 IPO or
- file in 2008 for a 2008 IPO,
but I am pretty certain that Facebook has priced itself out for an M&A, having turned down $800M and $1B offers from Viacom and Yahoo!, and will be going for an IPO. That much seems certain, it’s the timing that is up for debate. I am calling for 2008.
1. IPOs will replace large M&As in new and old media for the next few years.
We covered this aplenty in Will the IPO replace the M&A in media?
2. Facebook has priced itself out of an M&A, anyway
A few words: Viacom, Yahoo!, $800M, $1B. Move on, nothing more to see here.
3. MSFT Deal Reality
In August 2006, MSFT and Facebook announced a deal for MSFT to power contextual ads on Facebook. MSFT had just lost its bid to power ads on MySpace to Google. The #2 social network Facebook was a great consolation prize.
It should be noted that the deal was initially slated to expire after 3 years, in 2009. A couple of quotes to consider:
Facebook directs its own advertising now but under the deal will outsource it exclusively to Microsoft until mid-2009. The ads are to start appearing in the fall.
MSFT search head Mr. Berkowitz said the deal was “not comparable to the MySpace deal because we focused on the right economics for both parties.’’
Early in 2007, CEO Mark Zuckerberg said the advertising contract with Microsoft had been extended until 2011, a deal “reportedly guaranteed to deliver about $200 million in ad revenue through 2008.”
Social networking sites are horrible performers in terms of clicks, the metric that drives performance for ads. We’ve heard rumblings about Facebook not been a top performer, right or wrong, that is not a surprise.
Right now, MSFT’s stock is in neutral, Google continues to ramp up market share, paying a premium and taking a hit on ads falls under “the right economics” for MSFT. In a few years, it won’t. That is always the case in sales… tolerance for pain and losses is high initially, over time, the buyer wants out. Facebook was smart in extending the deal before MSFT wakes up.
I do not mean to come down on Facebook, I actually love what Mark Zuckerberg has done and think Facebook is worth quite a bit, we’re just trying to do some impartial number crunching here.
But Facebook is trying to build up revenue, and will be in that mindset, if its audience was a goldmine, it would do everything inhouse. Why give up any revenue to MSFT? Because MSFT guarantees more revenue than Facebook can generate alone. Sure, the company line might be “we’re focusing on product and marketing,” but you generally want to be in charge of your advertising relationships, until you can generate more by outsourcing them, as is the case with Facebook.
4. The Magical $100M per annum in Revenue
A recent article in MSNBC confirmed what many have suspected: Facebook is “on target” to generate $100 million in revenues this year. IPOs usually call for companies to generate $100M in revenues, and Facebook, which has raised $38.5 million in financing from folks like Peter Thiel, know that having passed up offers of $800M and $1B means that M&A options are far and few, and having learned from the 1994-2000 era, realize that openings for IPOs are not always permanent.
But if you put two and two together, you will see that MSFT accounts for the lion’s share of Facebook’s revenues,
- ”Facebook is on target to generate $100 million in revenues this year.”
- ”The MSFT deal is reportedly guaranteed to deliver about $200 million in ad revenue through 2008,” or roughly $50-75M per year (I guesstimated the yearly breakdown).
Do the math and that means that without MSFT, Facebook generates a lot less. Of course, it could be argued that Facebook has an opportunity cost by outsourcing sales to MSFT. That’s true, but it was widely stated that Facebook made about $1M per week, or $52M per year. In other words, the MSFT deal effectively doubles the Facebook revenue stream.
Now ask yourself if this is really the “right economics for both parties.’’ Yeah, we didn’t think so either. This is a loss leader for cash-rich MSFT who is trying to win street cred in search and social networking. And, frankly, that is a wise deal.
Note that MySpace, which is much larger than Facebook according to these stats by HitWise, and helped by Fox Interactive Media and News Corp.’s selling prowess only mustered $25M in Q4 2006 sales, Q4 is usually the most robust.
Even though MySpace is much larger than Facebook, we agree with Mark Zuckerberg’s assessment that his market is slightly more lucrative than MySpace’s, as such, we think that Facebook can generate more revenue per user than MySpace, but even that does not guarantee that Facebook can generate $10-20M per month without MSFT. Before MSFT, they did $1M per week, or $4M per month, so hitting $10-20M is assuming a massive spike in sales, traffic, etc. This is not obvious.
5. Post IPO Reality and Challenges
If Facebook does an IPO in 2008, it will come four years after it launched. But more importantly, this gives them a full three years to build up sales and advertising relationships before the MSFT deal is over.
It does not take a genius to figure out that click though rates (CTRs) on text ads on a social networking site targeting 16-24 year old will be very low, meaning that MSFT is losing money on the deal. Much like Yahoo! did not renew its deal with MySpace to power search and serve up contextual text ads and then Google signed up MySpace parent Fox Interactive Media to a $900M deal as a defensive move to push off MSFT and Yahoo!, we suspect that unlike Yahoo!, MSFT will probably renew that deal no matter what because they are desperate for “search relevance.” But, in those discussions, word will get out that Facebook is bombing on CTRs, and as such, that would hurt Facebook’s appeal with advertisers, so Facebook would rather this be kept quiet, or done after it has been sold or IPOd. And since the price tag is way too high for anyone to really want to digest it - and Mark’s quirky style of management - Facebook will file for an IPO.
6. Demand for Facebook Stock will be Robust
The company is slated to make the obligatory $100M in revenues per annum, and it is one of the largest social networks. Of note, MySpace sold for $580M via parent Intermix, so public shareholders will be hungry to bid up shares of the #2 social network in the US in the hope that its shares could emulate what many suspect has happened to MySpace’s intrinsic value. RBC analyst says MySpace could be worth $15B in a few years, Rupert Murdoch says MySpace worth $6B now (though that imples FIM is worth more separate than combined).
Marc Andreessen, who made a fortune during his 20s as co-founder of Web browser pioneer Netscape Communications, is among those who believe Facebook is going to become even more valuable during the next year or two.
“Facebook is doing the smart thing. If you are in a big market like social networking, you are usually better off waiting (to sell),” said Andreessen, who is now chief technology officer for another social-networking startup, Ning Inc. Had MySpace remained independent, it would probably be worth $5 billion now, Andreessen estimated.
Peter Thiel, co-founder and former CEO of Paypal, and now hedge fund manager extraordinaire, came out and pegged Facebook’s value at an eye-popping $8B. We covered that here.
Translation: Mark Zuckerberg and his posse of backers are setting this puppy up for an IPO.
7. Growth in Social Networking Advertising
A few months ago, November 1st 2006, to be precise, we ran another analysis (yes, we have an army of number crunchers and bean counters here) and projected Facebook’s value for 2010 to be $2.3B if indeed social networking ads grow to be a $2.15B per year by that year. Our analysis implied that Facebook would get 10% of ads in the category, which is very conservative when you consider than 85% of students are on Facebook (and that figure comes from 2005).
The bottom line is that for Mark Zuckerberg, who owns 30% of Facebook, cashing out now at $1 billion is admittedly less interesting than holding out for a few more years, but not much more than that. Judging by this graph, and the fact that history repeats itself, we think that 2008 sounds about right… independent for an M&A or an IPO.
[Editor’s note: for a valuation analysis of Facebook, click here].
Fred Wilson offers some explanations as to why seed investing is less risky than late stage, this seems fairly straightforward and obvious, but it’s always nice to read Fred break down the VC game. Conventional wisdom would imply that as a company develops, some of the operational and financial risk is squeezed out, but indeed, I think that there are many other forms of risks that creep up, and Fred does a good job of listing some of the examples you would see on the front lines.
I’d paraphrase, or simply say instead: seed investing = less money at play, and thus, less risk. And since the returns are far, far higher, then it’s a no brainer to be in the early stage investing mindset, of course, some funds have billions to invest, and doing $250,000 to $2,000,000 rounds seems like trying to drain the world’s water with a cup.
Increasingly, for some reason, everything I read online about the state of media, be it new or old, I put in the context of how will we look back at this in a few years.
Justin.tv launched recently, it’s about a guy (Justin) who’s headcam is on 24/7 and available on justin.tv. The novelty wears off, quickly, but it does create for some funny and irreverent material, as any headcam that is on for 24/7 would.
Now we’re seeing a company - Ustream - come out and offer just about any clown this same opportunity. Mark my words, this will go down as a watershed moment where in a few years we’ll say: “on the same weekend that journalists at newspapers were getting the axe, any guy off the street could be on, 24/7.”
You can argue whether that is a good or bad thing, I don’t care and my opinion does not matter that much more than the next guy, but ask yourself if we’ve seen, done and heard things like this before (yes, yes, yes, 1999-ish) and let’s hope “this time, it’s different.”
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