The Globe & Mail’s Mathew Ingram describes an almost surreal story about Business Week asking people not to link to it, in 2008!
I canceled my subscription to Business Week earlier this year. It was the last subscription I had. Business Week spills a lot of ink on innovation and the Web economy… so it’s surprising to see them this archaic on understanding how the Web works and recognizing that asking people not to link to you is impossible, let alone impractical.
Anyway, it got me to think, in light of McGraw Hill’s so-so recent results (Ad revenue at BusinessWeek.com grew 10.5 percent in the quarter and 14.8 percent for the full-year 2007), was this backwardness affecting BusinessWeek.com’s traffic and revenue?
BusinessWeek.com is a good site, but I wondered, how does it do compare to a peer that seems more progressive, say Forbes.com?
Here is one graph comparing Forbes with BusinessWeek, as you can see, both sites have been pretty flat (yes I know Alexa sucks etc.)
Actually, the quote is a nice touch.
Anyway, so I wondered: what about taking linking to the extreme. If BusinessWeek.com does not want your stinking links, the site at the other extreme that really wants your links would be, well, Digg.com.
So what about a social media site such as Digg?
Notice how Digg seemingly took off in traffic just as BusinessWeek.com levels off, and falls?
But this is an incomplete assessment. What about sites who embraced Digg buttons. The NYT did that in late December 2006. What happened to its traffic?
Come to think of it: NYT did not seem to get a boost from Digg. Of course, one argument is that Digg - along with Reddit and other social media aggregators - democratized media by evening the playing ground between big media sites and blogs.
Or, maybe Alexa sucks and this doesn’t mean anything.
Either way, now maybe this is something worth linking to.
Digg this Blog
Share on Facebook
WatchMojo on Twitter
WatchMojo on YouTube
Add to Favorites
WatchMojo NewsletterShareholder activism.
Get used to it. Something tells me that we’re going to see more and more of this. As a Yahoo! shareholder with a 6-digit investment in the company, I am personally growing tired of Yahoo!’s direction, management and rhetoric. Last week I published a post called “Memo to Yahoo!: Barbarians at the Gates.”
CNET has braced itself for a hostile takeover from Jana Partners.
It’s not just new media, old media is also getting the similar treatment.
As reported in the NYT itself (pretty cool, I must say):
An Alabama-based hedge fund gave notice Friday that it would try to elect directors to The New York Times Company board, a day after the same hedge fund gave similar notice to another newspaper company, Media General.
The hedge fund, Harbinger Capital Partners, a part of the Harbert Management Corporation, controls less than 5 percent of Times Company stock, a level that would require a declaration to federal regulators. It has accumulated control of more than 18 percent of Media General stock.
Of course, due to these companies dual class share structure, the ownership in percentage terms by any one shareholder - be it individual or institution - is meaningless:
Even if it was successful in electing a slate of directors, Harbinger would not be able to take control of the board without an about-face by the controlling family at each company.
At the Times Company, the Sulzberger family owns the great majority of the Class B stock, which elects 9 of the 13 directors. The Bryan family, longtime owners of Media General, holds a similar position. Both families have stated that they do not intend to sell or to abandon the two-class arrangement that preserves their control.
Are the families running these companies realistic in wanting to preserve such structures? It depends. It’s complicated, that is for sure. You have to respect ownership and such great families who have contributed so much to the history and legacy of publishing. But, on the flip side, you have to honor your fiduciary duty to shareholders once you decide to accept the public’s money. This is a difficult balance to maintain.
In a statement, Arthur Sulzberger Jr., chairman of the Times Company, said, “We have a strong and independent board, but our board’s nominating and governance committee will review the nominations and make a recommendation to our shareholders in due course.”
Words are cheap, critics would say. The market is right and the market is not very encouraging.
Times Company stock, which traded as high as $53 in 2002, closed Friday at $14.66. The company remains profitable — through three quarters of last year, it reported net income of $155.7 million, or $1.08 a share — but like the entire industry, it has been hurt by falling advertising revenue.
In addition to The New York Times, the company owns The Boston Globe, The International Herald Tribune and 15 other newspapers, and a number of Web sites, including About.com.
Digital Dreams
Ah yes, About.com. I listed NYT’s purchase of About.com as one of the best Web M&A deals of all time. I included that deal when I published the list all the way back in Fall of 2006. But now, it’s been 18 months since that list was published, but more importantly, it’s been 3 years since the deal took place. The deal was pretty cheap, at $410M, relative to prices these days. But how much has the NYT leveraged About.com to accelerate its digital strategy? I don’t know.
I commend the NYT for investing in Wordpress (HipMojo.com is powered on Wordpress), and NYT is extremely progressive with its overall digital strategy.
Martin Nisenholtz seems to be one of the most gifted digital heads of a traditional media company, and this explains why NYT is a massive online operation and the largest of any print company’s… but why is it not more?
Missed Opportunities
From my vantage point, I am shocked, for example, at some of About.com’s missed opportunities.
Take for example About.com’s relative lack of video content (disclaimer: WatchMojo.com has pitched About.com numerous times on a video content partnership). Consider the video library available on About.com:
food - 441 videos
health - 270
home and garden - 180
computing & technology - 221
parenting - 134
style - 43
autos - 20
electronics & gadgets - 25
travel - 65
cities & town - 37
entertainment - 74
business & finance - 55
A quick calculation shows that the final count is a “mere” 1,500 videos. That’s not bad compared to most media organizations’ library size, but come on: 1,500?
WatchMojo.com is a self-funded, bootstrapped startup with a (relatively speaking) tiny staff and we have more than twice that many videos since launching two years ago on January 23, 2006. Two years ago!
That’s inexcusable, especially since online video is very much incremental for print media companies (though it is cannibalistic for TV companies). All in all, I’m not sure what will happen with Harbinger Capital Partners’ efforts, but if the situation at CNET is any indication, this story will be popping up in the headlines in the weeks and months to come.
Related:
- Can Magazines Create Video Content?
- Digital Revenues are Never Incremental for Old Media
- How To Videos: Demonstrating vs. Storytelling
Web sites and services need to develop and harness a strategy to engage audiences away from their proprietary properties. Google won search by buying Applied Semantics, launching AdSense, and acquiring Sprinks to consolidate the contextual text link business. Yahoo! took a cue from Google last year by buying Blue Lithium and Right Media to extend its invisible hand away from Yahoo! properties (which remains the world’s largest property).
In the same spirit, Facebook has consistently opened up over the past 18 months: first by opening up to non-students, then by opening up their platform, then by launching a pretty open ad platform (in the sense that closed was restricted by privacy concerns) and Friday, they announced that, in the words of CNET’s VP of Editorial and Editor of ZDNet Dan Farber:
With this new library, the number of sites, and site owners, that can deploy Facebook applications just increased dramatically. All that remains is for someone to write a turn-key Facebook application creator, as Ning has already done for it’s own hosted social networks, and we can expect to see Facebook widgets rapidly proliferating across the Web.
In fact, Facebook is trying to stay one step ahead of competitors MySpace and Yahoo! and fend off Google’s OpenSocial initiative:
[The latest initiative] allows you to make Facebook API calls from any web site and makes it easy to create Ajax Facebook applications. Since the library does not require any server-side code on your server, you can now create a Facebook application that can be hosted on any web site that serves static HTML without any server site scripting.
Henry Blodget is right: in a pure business strategy kind of way, this move is pretty smart. But let’s press pause and consider reality.
Facebook is a great tool, but it’s a cesspool.
Ever since Facebook opened up to non-students, it lost its focus. It was not the end of the world, because connections - which Facebook has mastered the database thereof - transcends being in school, granted. But once it opened its API and allowed a helluva bunch of crap to infest its site, Facebook is noisy, messy and frankly useless. It might not be competeley useless, yet, but give it more time and droves of users will flee it. Don’t take it from me, that is how history has treated every single social networking darling before it. To drive my point home, let’s revisit Farber’s comment that:
With this new library, the number of sites, and site owners, that can deploy Facebook applications just increased dramatically (…) We can expect to see Facebook widgets rapidly proliferating across the Web.
This is a good thing? If you’re anything like me, after the honeymoon stage (that being the period from when Facebook opened to non-students until the launch of the API program) I’ve found Facebook less and less useful and more and more chaotic. What kind of social utility is that? That’s a social burden.
When the day comes that developers build useful applications on Facebook, then maybe this is a welcome news. But so long as building an application on Facebook remains a risk to your business’ long term health, then this will be one small step for Facebook but one messy step for the Web.
Pardon the over-simplifying in the first paragraph, bear with me… you will see why.
Assets, liabilities and shareholder equity. Any financial transaction boils down to that: Leverage assets to obtain resources (which usually creates a liability of some kind) in order to create value.
Assets can be:
- Talent/People
- Content
- Audience
- Rights
- Technology
These are usually reflected on a company’s balance sheet, and help generate Sales and Profits, after Costs are subtracted, which are captured on a company’s income statement.
Revisionist History
This week I heard that John Battelle had turned down a $100M buyout offer for Federated Media to instead consider raising money. He hired Savvian, an investment bank with ties to old media buyers and sellers. As many noted, recently, Battelle came out and criticized his former boss for not selling the Industry Standard at the height of the boom. From Battelle’s own site (which offers some great insights into the industry):
I tried for all of 2000 to get Mr. McGovern to let us sell the company to a stronger buyer, one who believed in our vision of the Internet Economy. He refused, and pushed us to go public instead. It was this very conflict that led to our differences and, partially, to our demise. I had three very real offers on the table that I took to McGovern, and three times he refused them, telling me that instead, we’d make more taking the company public or, at the very least, telling the potential buyer to double the price. Given that the price was between $250mm and $750mm, such a response was, to my mind, nonsensical. But he owned the majority of the shares, and his word was what mattered.
It was thus odd that Battelle was turning down a cool $100,000,000.00 offer (just thought I should spell out all the zeros in case Battelle was reading this), especially with the start of 2008 thrashing securities’ value. Mind you, just last week, former Paypal co-founder Max Levchin raised $50M on a pre-money $500M deal… that was important, for Levchin spins Slide’s story as a glorified ad network for social networking sites. I am not sure that is a fair assessment, but that is for another post. The point is: in one week, the mood of the markets had changed.
This does not mean that this change is permanent, in fact, it was a needed dose of reality given the steady climb of asset prices throughout 2007.
But if Battelle passed on a $100M buyout offer, you have to ask: is he crazy for passing on the deal or was he crazy to consider it.
Battelle is smart and accomplished. But it’s one thing to chronicle the history of the search engine industry (as he did in his book The Search) and it’s another thing to have predicted. I, for example, am man enough to admit that I left the search engine market just before it took off (in 2000). I did that because I found a great job in online publishing… but if I were driven by money alone, then let’s face it: I misjudged the opportunity. In all fairness, I knew search would explode, but I found search boring. So all things being equal, if the decision were to be based on money alone (and with me it’s not, has not been and never will be alone) I should have stayed in search until about 2003 or 2004 and then gone into publishing then. But as I said, revisionist history is not good for the mind, body and soul. Why is this important? Because if Battelle is refusing to sell his ad network for $100M, it is because he considers the opportunity to be far greater than people are giving him credit for.
Let’s face it: online ads will be enormous in years to come (surpass TV ads by 2021). The question is: to whom shall the spoils go to?
Plenty of Foreplay, No Action
So, much the same way that Battelle questioning the non-sale of the Industry Standard is moot, for anyone to ask whether he should have accepted the $100M buyout offer for Federated Media is a bit foolish and a waste of time.
- Was there really an offer?
- Who was the buyer?
- What were the terms (cash vs. stock, earn-outs, non-compete’s, etc.)
I’ve had interested parties inquiring about Mojo Supreme and WatchMojo.com in particular, but without an actual offer, in black and white, I discount such “offers” and write them off as mere flirting.
But, we’re not talking about me and our company, we’re talking about John Battelle’s Federated Media, which is essentially an ad representation firm. I’ll spare the 1,000 words on my thoughts on that, if you want more, click to read The curse of ad representation which I posted when Fark.com left… you guessed it, Federated Media.
Is Federated Media worth $100M? Well, let’s see where Federated Media ranks in the ecosystem. To do that, we need some comparables.
We defined assets as:
- Talent/People:
John Battelle is the figurehead of the company but you will see that the company seems to have a lot of talented people. My first reaction was “lots of overhead” but I think you need to cater to advertiser and authors’ needs.
- Content:
FM does not own any of the blogs and sites it represents.
The sites he represents are all very solid ones, for sure, they include:
- tech publications: Tech Crunch, GigaOm, Mashable, VentureBeat, Silicon Alley Insider, ReadWriteWeb, BoingBoing, Ars Technica
- leading blogs: Paul Kedrosky’s blog, Fred Wilson’s blog
- social media sites: Sphere, Digg
But, the fact that he does not own any of those sites means that he should trade at a discount. But, a discount to what? It is said that Gawker Media is worth $100M. So if Gawker Media is a blog network that owns all of the underlying blogs, which include Gizmodo, Wonkette, DealSpin, Valleywag, Gawker, etc., then by logic Federated Media is worth less.
- Audience:
This one is tricky. Via partnerships with these underlying sites, FM reaches the audience and is exposed to the readers’ therein, but it does not own the audience. In other words, while FM gets a lot of props for building a network (we know buyers love network effects) it is not quite an owner of said network. Again, FM would trade at a discount for this reason. Using an example: WatchMojo.com owns the audience on the WatchMojo.com URL, but 99% of our streams now come on our syndication network, on sites like YouTube, MySpace, Veoh, and 100 others… so while we reach audiences on those massive sites, we do not own those audiences. I am candid enough to realize that that is less valuable that if we owned those audiences (we make up for it by diversifying our distribution access points, so I would argue that at least the sum of the parts of those audiences make up for not owning it, but that’s another post).
- Rights/Contracts/Relationships:
Rights are valuable. We own rights to our content (because we produced it) and via 1,001 contracts, to many other things. FM has rights to represent and sell advertising on all of those sites, but they are all probably about 60 to 90 days away from cancellation via an out-clause (the reason why it’s 60-90 days is because FM might have submitted RFPs - or request for proposals - to advertisers and that time span ensures that the underlying sites will honor the deals). But the fact remains, sites like GigaOm, Tech Crunch etc. (I presume) will over time want to develop their own sales channels, if they have not already. This means that the rights that FM have are an asset, for sure, but not fool-proof by any stretch of the imagination. Think of how Fark swapped out FM for Maxim’s sales force (in all fairness, Fark is a far better fit with Maxim than FM, which is tech-oriented).
- Technology:
This is the key. Above, I alluded to network and you might have noticed it was italicized. Networks were the bread and butter of the investment banking M&A business last year (see all 2007 M&As here). But most if not all of those networks’ drive up value thanks to their technology.
- Right Media (Yahoo! / $725M) has an auction mechanism technology platform that made it worth a lot to the buyer.
- BlueLithium’s (Yahoo! / $300M) clickstream technology made it a leader in the ad network insdustry.
- aQuantive (Microsoft / $6B) was a very diversified play in the online ad market, but Razorfish and SBI were leaders in technology; AtlasDMT was a very strong ad serving platform, etc.
- Doubleclick (Google / $3.1B) was all about technology and is in fact the world’s largest software in the cloud operation in the online ad sector, and thus, all about technology.
- Quigo (AOL / $340M) was a great challenger in the text ad sector, building an impressive client list while competing with industry behemoth Google.
The list goes on, and on.
Tale of the Tape
So, if Battelle wants to push the enevlope and benchmark FM to these comparables, he can. But any sophisticated buyer would ultimately benchmark him more to Gawker Media, or rather, Gorilla Nation Media. Gorilla Nation bills itself as the world’s largest ad representation firm. I know its two founders, Aaron Broder and Brian Fitzgerald. I first interacted with them as a VP of Sales at a mid-size publisher. One of America’s Top 500 Fastest Growing Companies (according to Entrepreneur Magazine), GN’s sales have soared from $1.6M in 2002 to $28.3M in 2006. Unlike FM, Gorilla Nation actually has owned some of the sites, for example, it sold Quizilla to Viacom. Gorilla Nation is not an incidental comparable. It raised $50M in private equity from Great Hill Partners last year. The valuation was not disclosed, but I presume that is the deal that Battelle is eyeing as a comparable these days.
What about Investors?
Battelle needs no advice or counseling. The man is smart, connected and has the backing of a seemingly unlimited amount of investors with even more unlimited funds. They include JPMorgan Partners, The Omidyar Network, The New York Times, Mitchell Kapor, Andrew Anker, Mike Homer, and Tim O’Reilly.
He’s only raised $4.5 million in a Series A round two years ago. Tech Crunc’s Erick Schonfeld mentioned that Battelle is a controlling shareholder, so assume at the very low end he owns 51% of the company, though I presume he owns much more. As it stands now, he can make his investors very happy but if he does go ahead and raise $50M (or anything that maddening) on a $125M pre-money valuation, then he would have to build a $500M or $1B company to add to his already very impressive reputation and track record.
Seller Beware
Battelle needs to be careful, however. If the sites he represents put a lot of weight on the $100M rumor, sooner or later, they’ll ask, why use Federated Media… why not go direct (to marketers and agencies). This is what I talked about in The curse of ad representation.
M&A vs. Funding - So, what is FM Worth?
According to MergerMarket, via TechCrunch in a March 2007 article, FM’s revenues were $4.5M in 2006, with forecasts of $30M in 2007. FM probably pays out 30-80% out to sites he represents.
COO Jason Weisberger said “If Federated Media keeps performing the way we’ve predicted in 2007, it would be a really ripe time for a media player who understands this space to buy us now rather than having to buy us for a whole lot more later.” The article also said “While he was unsure how much Federated might sell for, Weisberger said similar companies have gotten 8x to 10x gross revenue…Another possible valuation for a sale of the company is a multiple of 25x EBITDA.”
If FM owned the content, audience and technology, this is all plausible and feasible. But 25x EBITDA is too rich for an ad network that lacks technology. The article continued:
There was a laundry list of possible acquirers mentioned by Weisberger, including media companies (AOL, CBS, Google, IAC/Interactive, Fox, Yahoo were mentioned) and advertising agencies (Universal McCann, Ogilvy & Mathers, aQuantive, Saatchi & Saatchi, and TBWA/Chiat/Day).
While media companies such as AOL, CBS, IAC, News Corp. and Yahoo! are potential homes, advertising agencies are not at all going to be buying FM, or any content site. The reason is simple: there needs to be a Chinese Wall between media planning/buying (what ad agencies do) and owning the sites that they place ads on (FM’s sites). This is why today ad agencies do not own TV stations, radio stations, magazines or billboards. The conflict of interest would be immeasurable.
But the fact remains, a company like CNET might be interested, because it gives them access (rights) to a lot of great blogs without having to worry about the overhead etc.
In light of this, I think I understand why Battelle does not want to sell (presuming the $100M offer is actually legitimate).
Since talent poses a flight risk in any M&A but is usually invigorated by a funding round (change in ownership vs. more resources) and he lacks technology, I suspect he plans on raising more money to develop some technology. That would change the complexion of his company and jack up the price to revenue and price to sales multiples he could command.
But, the flip side is that by raising $50M on a $125M value, he might make his company unsellable because he would:
- in the process lose majority control and
- getting a 5x or 10x - let alone a 100x - return will make it very hard for Battelle to pull off.
Of course, because:
- Battelle won’t be running out of money any time soon
- His moneymen are richer than God
- Online advertising is booming
- FM diversify and move into non-tech verticals
- FM can build technology first
- FM can buy some sites to own the content,
then I suspect he won’t sell. Is he right to do that? Only Battelle knows the answer. But bear in mind that once he starts to invest in all of those areas, his costs will shoot up, his margins will suffer and his profitability will take a hit. In turn, that affects his P/E and P/S and all this work might not sufficiently raise the value of his company (when you take into account the time value of money).
If I were Battelle, I could think of 3-5 creative ways to considerably drive up revenues and create value. But it’s not my place to suggest those, frankly… and this post is getting long enough as it is.
History Repeats Itself?
In the end, Battelle seems to want to make up for the fact that he did not strike vast riches with the Industry Standard… which is fine and respectable. But you know the saying: Those who do not learn from history are bound to repeat it.
Here’s hoping that Battelle is as familiar with The Industry Standard’s history as he is with The Search’s.
PLAY
