Quincy Smith of CBS Interactive chats with Om Malik at New Tee Vee Live:
CNET’s ZDNET, Iran and Yahoo!? You know this would not end well.
I was very surprised to read that Yahoo! had handed over names of Iranians youth to the authorities. Turns out it was false. Interestingly enough if a blog would have written that, it would have gotten much less consideration… but at the same time, because a “well respected, traditional, new media source” such as ZDNet reported it, it’s a big deal.
Some time ago, online media professional Dave Haber (and reader of this blog) emailed me an article from MediaPost, titled “How Can Independent Video Producers Compete In The Super-Premium Era?”
The article was written by Lewis Rothkopf, who is vice president of network development at BrightRoll, one of the pre-roll networks out there. As a side note, I really admire Brightroll’s CEO Tod Sacerdoti. Unlike most of the pre-roll intermediaries who seem to be either in denial or out of touch about that the pre-roll format, Sacerdoti is realistic about the pros and cons of the format, not insulting people’s intelligence about why his firm focuses on the unit.
Anyway, for some time, I was considering writing a related piece on indeed how independent video producers (such as WatchMojo.com, the company where I am the CEO) can compete in the super-premium era. It was the first time I’d seen someone else use those terms, because for some time, we’ve separated “premium content” (what new media producers like WatchMojo.com produce) from “super premium content” (what TV networks and film studios create).
Rothkop’s three tips included:
1) Compete on quality.
2) Compete on price.
3) Compete on advertiser-friendliness.
As proud as I am about WatchMojo.com’s content, I don’t think that economics permit premium content quality to surpass that of super premium. It won’t happen. After all, with text content, a kid in a basement can pass off for a Pulitzer-prize winning journalist. In video, that is pretty darn hard.
So while his ideas are good, I would add that you should also compete on:
4) Rights: giving partnerships the opportunity to go global and multi-platform
5) Frequency: the drawback with traditional media is that it does not really update as frequently as online consumers of media (be it listeners, viewers, readers) are grown accustom to.
I could list a few other things, but the purpose here is not to give away too much of our secret sauce.
The purpose of this article, in fact, is to look at how traditional media companies can avoid the music industry’s fate by understanding how new media companies fit in their strategies and ecosystem.
Tenet 1: The Web Shrinks Traditional Media
Due to the economic meltdown and subseqent slowdown in advertising, a lot of cable companies are regretting putting their shows online for free.
It’s not just the cable companies, though. From Michael Lynton, the CEO of Sony Pictures, via HuffPost:
I actually welcome the Sturm und Drang I’ve stirred, because it gives me an opportunity to make a larger point (one which I also made during that panel discussion, though it was not nearly as viral as the sentence above). And my point is this: the major content businesses of the world and the most talented creators of that content — music, newspapers, movies and books — have all been seriously harmed by the Internet.
Is that true? I think the Web shrinks the traditional media business (producers of super premium content) by giving an enormous opportunity for new media creators like WatchMojo.com (producers of premium content) to disrupt things.
Tenet 2: Amongst Traditional Media, With Online Video: Those Who Can, Won’t. Those Who Want, Can’t
As I’ve long argued: online video can be a salvation to print media, at least they should care about online video. The problem is that print media lacks the DNA - be it in terms of asset or people - whereas TV-centric media firms have the DNA but lack the financial incentive.
Either way for traditional media, it does not look good. Those who can, won’t; those who want, can’t.
Tenet 3: Super Premium Content vs. Premium Content
On the traditional media video company side of things, you have companies who slant towards scripted entertainment, news and sports (CBS, ABC, NBC and FOX) and then the non-fiction ones, such as Discovery Communications, Liberty Media (who owns the Travel Channel), Scripps.
The advertising budgets in television are massive. As such, these companies spend what it takes to produce “super premium content”.
Memo to New Media Guys: Know Your Role
I don’t think new media producers have the budget or financial incentive to create super premium content. Startups who raise tons of venture capital money to do so end up making mistakes because they borrow traditional media’s inefficient and wasteful ways and burn a lot of money early on, before the web video market (be it in the form of ads or subscriptions) materializes.
This is why, I think, you have seen companies like Mania TV shut down. I am not saying they were producing “super premium” content but by attacking the music category, they ended up adopting traditional media’s bad habits.
At WatchMojo.com, we made a counter-intuitive decision to avoid focusing on one niche and produce content across the main verticals: Automotive, Business, Education, Fashion, Film, Food, Health, Music, Politics & Economy, Space, Sports, Technology, Travel, Video Game categories. A lot of accomplished people thought I was crazy to do so, but we are one of the few media companies (traditional of new media) that gets guaranteed, recurring licensing fees. Judging by our revenue breakdown, the bet paid off:
The proof is in the pudding: our content is of high enough quality to merit getting licensing fees, but in the really grand scheme of things, I am not delusional: I don’t pretend that our travel content is going to trump The Travel Channel’s, or that our Science videos will put the Discovery Channel on the brink of collapse, or that our cooking videos will put the kybosh on the Food Network.
Of course, that is not the point. Right now, our content beats 99.9% of the content out there, and the 0.1% that traditional media’s super premium content represents is still only being tested online. I think Discovery’s CEO David Zaslav is 100% right to say:
“I’ve spent a lot of time looking at the economics. If you take out a pen and you add it up, there’s not a lot of economics there [of putting full shows online]. The business model is not that strong…we get substantial value by distributing our content on dual-revenue-stream platforms, domestically and around the world. We’ve been able to take the best of our content and use pieces of it through HowStuffWorks.com or on our other sites..there’s no reason for us to take a fire hose and take a fantastically valuable library and make it available on the Web for free.”
He’s right. The web right now, and potentially never (yes, I am saying never), will grow large enough to become bigger than TV is today. However, I think that TV will shrink enough and online will grow enough for the Web to surpass everything else.
I’ve compiled the experts’ projections and ran the numbers myself, it is highly possible that online video advertising will surpass search ads by 2018 as online ads altogether take over television advertisings by 2021.
Tenet 4: Is The Objective Not Maximizing Value?
If and when that happens, the television business will have shrank by so much and online video companies will have grown so much that the disparity in market value could very well be in the favor of new media players.
Right now, it is a given that Netflix is worth more than Blockbuster. Netflix is worth $2.25 billion; Blockbuster all of $135 million. That’s right. But ten years ago, that seemed impossible and 13 years ago, Netflix didn’t even exist.
Mind you: in 2008, Blockbuster lost $375 million on revenues of $5 billion; Netflix earned $83 million on revenues of $1.3 billion. Ultimately, it’s about each company’s prospects.
Don’t get me wrong, in 10 years, traditional media companies like Walt Disney (parent of ABC and ESPN), CBS, GE’s NBC unit and News Corp.’s FOX division might make more money each year than any new media outfit, but mark my words, some of the new media outfits involved in the production and distribution of premium content (such as our own WatchMojo.com, but also the Revision3’s and Next New Networks and countless others who get less coverage) will be worth more than some of those venerable traditional media brands.
I know, I sound crazy now, delusional. But you judge for yourself:
In all likelihood, there will be an enormous amount of consolidation and an outfit that amalgamates the pieces will be worth a lot. If the traditional media guys get it right, they will outright buy everything in sight now, and leave them alone for a while.
I respect the hell out of the CBS brass, but while they made a prescient bet on acquiring Wallstrip, they dropped the ball in the market meltdown of 2008 by rushing to shut it down. Again, this is not about CBS or Wallstrip per se, it is about the interaction between traditional media and new media content companies as one market shrinks rapidly and the other balloons faster than anything else.
Tenet 5: Actually, TV Can Avoid the Fate of the Music Industry
I came across this graph by Magna Insights via the GrowYourBusiness blog. If we were to extrapolate it to the video business (all filmed entertainment, be it theatrical releases, home entertainment, or television programming), you’d think that television is as doomed as music, but it need not be that way.
Regular readers know that I don’t think anything will “kill” television outright, but this graph does suggest that online video will shrink traditional video, as was the case in music. There is a rationale to support this argument:- if the traditional media companies don’t legally make their content available online, then there is the threat of piracy. Think of music labels.
- if they do publish their content online, then they shrink their businesses via the threat of cannibalization. This is what happened to print companies, the more aggressive ones actually shrunk much quicker than those who weren’t very aggressive (think NYTimes, or the Chronicle).
But, I think it doesn’t have to be this way.
Here’s my thinking:
Music is one-dimensional in every sense of the word: it’s just audio, meaning that despite what the crack-smoking analysts seem to think, advertising-supported music is dead on arrival. For music to generate revenue online, it would require subscriptions, and consumers don’t want to pay. Media companies might pay record labels for the right to distribute music, but record labels want such massive fees that this becomes killer, too. So ultimately, because of music’s limited scope, there is really no viable business model to support it.
This is why music is increasingly seen as promotional fodder to drive merchandising, ticket sales, etc. The artists get it, the labels are adapting to it.
Video content is different. Ad-supported economic models won’t replace offline revenue streams, but they can grow to become material over time. Of course, this isn’t enough to offset the losses in traditional revenue streams, I get it, but in music, the independent artists that used the Web to promote themselves did not generate any revenue for traditional record labels per se, however, in video, new artists can represent new revenue streams for traditional TV and film companies. As such, to illustrate the point, in addition to digital sales off traditional libraries (represented by the purple), there would be additional incremental revenues from new media studios (represented by the green), as I’ve tried to demonstrate in the make-shift graph below:
But the same way that music has become promotional for other, related activities (merchandising, ticket sales), I would argue that if traditional media companies use the promotional card righ, they can actually stop the pace that traditional television is shrinking. Notice I didn’t say reverse it. I don’t think anything will reverse it, but with the web, they can optimize their inefficient production processes:
- You know what will be a hit and won’t be a hit without having to burn tens of millions of dollars in production fees.
- You can advertise your television and theatrical releases online, which is cheaper than offline media.
- etc.
The point is, even if revenues get clipped, costs should fall too. If this is managed right, then the traditional media companies’ can technically preserve their profit margins.
I think it is sheer lunacy to take a $1M production made for TV - where the economics are sound - and put that online and get nothing. But using the examples I outlined above, since audiences are increasingly online, I think there’s an argument to be made for:
- the Travel Channel to partner with us on our travel content;
- for Discovery Channel to partner with us on our science content;
- for the Food Network to partner with us on our food content;
- etc.
Tenet 6: Gobble, or be Gobbled
Eventually, though, I think traditional media companies can use new media companies for much more than just promotional vehicles. In fact, they can use the CBS/Wallstrip example and outright acquire new media ventures and commercialize the new media library while protecting the core value of their offline stuff, which can be showcased online, but not in its entirety.
Does this open the door for some piracy? Sure. But Wolverine was pirated but in the end, it probably helped augment buzz for the movie.
CBS is working now with EQAL, for example. Eventually it might outright buy them. It might not, of course.
Tenet 7: It’s All About the Multiples
Ultimately though, as the traditional media companies become more digital, via
a) the acquisition of new media companies
b) the digitization of some of their traditional assets
c) the convergence between shrinking offline revenues and growing digital revenues
their price-to-sales and price-to-earnings multiples will grow… meaning that the companies can remain very valuable, avoiding Blockbuster’s fate.
Tenet 8: Print Shall Strike Back
Of course, because print media companies lack the DNA to dive fully into video, and because online video is purely incremental, I suspect a lot of the print companies (both newspapers and magazine ones) will put the new media video companies in play on the M&A front.
It is possible that the current wave of managers in print still likes to stay within their comfort zone (behind a typewriter/computer) and not behind a camera, but the economic argument over time will be too great to overlook. To clarify on this point, it is not that I suggest that in 2009, online video revenue can make up for print loss of revenue. Rather, I suggest that print revenue will do dry up in the next decade and online video will so grow that these two will converge, and unlike for TV companies, this revenue will be incremental.
Tenet 9: The Reality Remains the Same, Though
But despite all of this, the reality remains the same: old media is fundamentally inefficient in today’s digital and connected world. Perhaps the carnage of the past 6 months has forced traditional media companies to cut back, but many have not. The NYTimes has a staggeringly large newsroom, its relevance and survival is at risk by leaner new media outfits.
Tenet 10: History Repeats Itself
A decade ago, a lot of savvy media folks didn’t quite recognize the full extent of online media’s risk to print. Today, the writing is on the wall.
Ultimately, if television wants to avoid the fate of music labels, then maybe it can dive in to the history of newspapers.
Live coverage of ad:tech San Francisco by David Shabelman.
In a roundtable on the state of the digital advertising industry at the ad:tech conference Wednesday morning, panelists emphasized that even with all the knowledge Web sites can gather on their users, challenges remain in digital marketing.
First and foremost, panelists emphasized that content remains king and that the message being delivered to consumers remains an important factor, though it must also be followed up with a great product. Carol Kruse, vice president of global interactive marketing for The Coca-Cola Company, said “if the story isn’t compelling, it doesn’t matter how well targeted it is, people aren’t going to look at it.” One of Coke’s most successful online efforts is a fan page on Facebook that wasn’t even created by the company, but has attracted millions of users that enjoy the product.
Neil Ashe, president of CBS Interactive concurred, saying despite all the information it has on its users, “the most measurable medium is the most difficult to understand.” While CBS is able to do effective advertising on its video game Web site Gamespot, he admitted it still is learning how to better serve products like Coke.
One solution, they said, is to enhance a consumer’s experience with the message rather than be seen as a disruptive. As an example, Coke worked with CBS in its online efforts that surrounded college basketball’s March Madness. Rishad Tobaccowala, CEO of digital consulting firm Denuo (a part of Publicis Groupe), said advertising agencies must increasingly work with not only with their clients, but also with the technology company delivering the advertising.
Panelists also mentioned how mobile platforms are becoming a larger part of online marketing programs. Jeff Berman, president of sales and marketing for MySpace said the site has seen a five-fold increase in mobile traffic over the past year. Suffice to say, no word on the rumors that his CEO Chris DeWolfe was stepping down as CEO of MySpace.
For more coverage ad:tech SF, visit our overview page here.
According to AdAge, via Paid Content, Spot Runner is being sued by WPP. Spotrunner is a self-serve TV ad platform.
The company’s investors include:
Since launching three years ago, Spot Runner has raised $111 million from number of investors, including UK media group Daily Mail (LSE: DMGT) and General Trust, Spanish-speaking media giant Grupo Televisa, hedge fund Legg Mason Capital Management, French luxury group Groupe Arnault/LVMH, who were the most recent. Original backers include Allen & Company, Battery Ventures, Capital Research and Management, CBS, Index Ventures, The Interpublic Group, Tudor Investment Corporation as well as WPP.
Adding insult to injury, Spot Runner has had 3 rounds of layoffs.
How does that $111M in funding break down? According to Crunch Base:
- Series A = $10M invested in January 2006
Battery Ventures
Comerica Bank
Index Ventures
- Series B = $40M invested in October 2006
Allen & Company
Battery Ventures
Capital Research and Management
CBS
Index Ventures
Tudor Investments
WPP
Lachlan Murdoch
Vivi Nevo
Interpublic Group
- Series C = $51M in May 2008
Daily Mail and General Trust
Grupo Televisa
Groupe Arnault/LVMH
Legg Mason
That list of investors is almost Madoff-esque, no?
It’s official, here is our latest syndication partnership, with CBS’ TV.com. See some write-up’s here and here.
TV.COM ANNOUNCES CONTENT AGREEMENTS WITH NCAA® AND THOUGHT EQUITY MOTION, STARZ MEDIA AND MORE
Adds to Existing Line-Up of Premium Content Providers, Bringing TV.com’s total Video Library to More than 2,000 Hours of Content
SAN FRANCISCO, March 17 — TV.com, the place where television lives online, today announced content deals with NCAA and Thought Equity Motion, and Starz Media, along with niche content providers like Smithsonian Channel, Comedy Time, Howcast and WatchMojo. This adds to its line-up of existing agreements with premium content companies, including Endemol USA, Metro Goldwin Mayer Studios Inc., PBS, SHOWTIME, Sony Pictures Television and CBS. The addition of this content brings TV.com’s total video library to more than 2,000 hours of content, spanning everything from today’s most popular shows to coveted classics.
“TV.com already benefits from a massive online community, and our job from here on out is to layer more content on top of this great community to further engage and expand our audience,” said Anthony Soohoo, Senior Vice President and General Manager, TV.com. “We continue to see massive growth in video viewers and streams as more and more people turn to TV.com for information and content around their favorite television shows. We create a highly complementary experience to television, one that uses content to fuel active discussions among our community of TV fans.”
Through a deal with CBS, the NCAA, and NCAA content library rightsholder Thought Equity Motion, all available semifinal and final games from the Men’s Final Four between 1982-2008 are available for viewers to watch in either a full-length format or a condensed two-minute highlight package at TV.com. Additionally, viewers also can watch NCAA highlight packages set to music, including classic footage from NCAA Division I Men’s Basketball Championships including the 1979 Final Four championship game featuring Larry Bird and Magic Johnson, and many other great games and players from the past.
Starz Media’s Manga Entertainment content available on TV.com will include full episodes of Astro Boy and Virus, as well as short-form videos from titles, including Ninja Scroll, Kai Doh Maru, Street Fighter Alpha, and Hellboy: Blood and Iron, with many more to come.
“Starz Media’s Manga Entertainment library has proven very popular with anime enthusiasts and we are very pleased to make some of our best content available to TV.com users,” said Marc DeBevoise, senior vice president, digital media, business development and strategy for Starz Media. “We look forward to expanding this content lineup in the future and building our partnership with TV.com.”
Smithsonian Channel will offer shows including “Stories from the Vaults” hosted by Tom Cavanagh, “Remembering Vietnam: The wall at 25,” and the Emmy® winning Nature Tech. Comedy Time, which offers stand-up comedy and original episodic programming known as “Funnysodes”® from today’s best comedic talent, will offer content from its brands including “Comedy Time,” “Comedy Time Latino” and “Comedy Time Urban.” The TV.com audience will also have access to videos from Howcast, the best source for fun, free, and useful how-to videos, and WatchMojo.com, one of the largest producers of original, professionally-produced, evergreen, ad-friendly high-quality video content, will provide profiles and interviews with musicians and filmmakers, scripted entertainment comedy skits, and fashion shows from runways around the world.
TV.com’s content providers have their videos viewed by one of the most active and largest community of TV fans online. People come to the site for its rich content and dedicated community, posting an average of 6 social contributions per second – things like forum posts and poll votes – for a total of more than 18 million social contributions per month on the site. In addition, as the site continues to layer more premium video content on top if its community and information features, TV.com posted a 184% increase in unique viewers, 844% increase in streams, and 3101% increase in minutes year-over-year (Nielsen VideoCensus February 2009).
About TV.com
TV.com is one of the leading unbiased destinations for premium entertainment and community around TV. The site features video content such as full episode streams, video-clips, live-event coverage and behind-the-scenes footage, plus expert editorial content like entertaining features and weekly podcasts. The site also provides in-depth show summaries, episode guides and downloads, bios, photos, news, and more on over 19,000 TV series. This content is greatly enriched by one of the largest and most vocal communities of TV fans who express themselves via show summaries, reviews, ratings, blogs, forums, polls, and videos.
About the NCAA
The NCAA is a membership-led nonprofit association of colleges and universities committed to supporting academic and athletic opportunities for more than 400,000 student-athletes at more than 1,000 member colleges and universities. Each year, more than 54,000 student-athletes compete in NCAA championships in Divisions I, II and III sports. Visit www.ncaa.org and www.ncaa.com for more details about the Association, its goals and members and corporate partnerships that help support programs for student-athletes. The NCAA is proud to have the following elite companies as official Corporate Champions—AT&T, Coca-Cola and Pontiac—and the following elite companies as official Corporate Partners—Enterprise, The Hartford, Hershey’s, Lowe’s, Sheraton and State Farm.
About Thought Equity Motion
Thought Equity Motion is the world leader in providing access to high quality film, video and music content. The company’s forward-thinking approach to digital video has produced an array of products and services to meet the exploding demand of emerging media. Widely recognized for its expertise in licensing rights, Thought Equity Motion is the licensing agent for renowned media companies including Paramount Pictures, MGM, NBC News, HBO, National Geographic, Sony Pictures, the NCAA and hundreds of others. With offices located around the world, Thought Equity Motion offers the broadest, deepest content collection available. This vast collection, combined with leading-edge technology, makes Thought Equity Motion the preferred destination for multimedia professionals. To learn more, go to www.thoughtequity.com.
About Starz Media
Starz Media, LLC, is a programming production and distribution company operating worldwide. It includes the Film Roman, Anchor Bay Entertainment, and Manga Entertainment brands. Its units create animated and live-action programming – including theatrical films – and programming created under contract for other media companies. It distributes that programming, and programming acquired from outside producers, through home video retailers, theaters, broadcasters, ad supported and premium television channels, and Internet and wireless video distributors in the US and internationally. Starz Media (www.starzmedia.com) is a controlled subsidiary of Liberty Media Corporation attributed to the Liberty Capital Group.
This post should be titled: Screwed If You Do. Screwed If You Don’t, or better yet, We Tech Bloggers Are a Bunch of Hypocrites!
Was it not just a few months ago (technically, quarters) when we lambasted “big, dumb, slow, old media” for not doing enough M&A of online assets?
My, my, how times have changed. Looking at CBS’ stock chart:
Erick Schonfeld over at TechCrunch comments:
Consider, for example, that CBS’s entire market capitalization is now only $2.5 billion, which is not much more than the $2.1 billion its digital division CBS Interactive paid in cash over the past two years for Cnet ($1.8 billion) and Last.fm ($280 million). (It also made a number of other smaller acquisitions and investments). As of December 31, 2008, CBS only had $419 million in cash on its balance sheet.
When it bought Cnet last May, CBS’s market cap was $16.5 billion. If CBS had instead paid in stock for CNET, that stock would be worth only $273 million today—less than what CBS paid for Last.fm two years ago.
Imagine of they had merged with Facebook in a 1-for-1 stock deal (when CBS was worth $16B and Facebook got its implied $15B valuation)? Or for that matter, imagine had they paid a billion dollars for Bebo. Oh, wait. Someone did.
However, I think it’s unfair to be too critical in hindsight. Sure, prices have come down, but while online media will return with a vengeance, the same cannot be said about offline / traditional media. Print media is a leading indicator of what TV media can expect, look at McClatchy’s stock price:
What’s crazy here is the 52-week range. The stock is now at less than $0.50/share, but it was as high as $11.21 over the past year. So if the company - the third biggest newspaper company in the US, mind you - is now sporting a paltry $40M market cap, then just a year ago it was valued at $1B!
This being said, if I were traditional media, I’d be buying up more and more online assets because prices and expectations have probably gone down, but not as much as traditional media revenues have. If I am CBS (or News Corp., Time Warner, Viacom, etc.), I would not expect the trend to change.
While 2008 finished off with companies doing their best to cling on to anything to avoid from being sucked into the maelstrom, I think - despite the continued stock market meltdown - that many companies are seeing some stabilization in their core business. In other words: yes, 2008 Q4 saw a rapid evaporation of booked business, but 2009 is not looking as dire as some expected.
Online Remains a Beacon of Growth
Let’s face it: online media remains a growth area regardless of the fact that growth targets have been reduced. If you are CBS, News Corp., GE’s NBC, Walt Disney, Viacom or Time Warner, you have to look at ways to spruce up your online assets and acquire new ones. If you are Yahoo!, Microsoft, Google, Amazon, Apple, Cisco, Comcast, or IAC, you are looking at online assets as more reasonably priced relative to the previous couple of years.
A couple of companies that remain wild cards are print-based media firms Conde Nast and Hearst, who unlike their newspaper brethren (Tribune, NYT, etc.) are not on the verge of banktrupcy, but whom might fare a similar fate if they don’t take action soon.
This, I believe, is what explains the latest report by JP Morgan analyst Imran Kahn, who (Via Paid Content) in a new report, says:
“Mergers and acquisitions among internet companies could grow significantly. Since most companies cannot look to the economy for growth (JP Morgan estimates GDP will decline 2.2 percent this), Kahn believes healthier internet companies will turn to acquisitions, and that they will target inexpensive smaller internet companies.
Small is Beautiful
I’ve mentioned for some time that microdeals are the wave of the future:
- companies just don’t have the financial wherewithal to go for grand slam deals, and
- integration becomes a nightmare.
Lowered Expectations
Where things get interesting for big media companies is that VCs have been blindsided by their own investors inability to meet capital requirements, so many will accept lesser exits… though truthfully, heavily-funded VC companies are going to get sidelined in the M&A song-and-dance because entrepreneurs might be more realistic whereas VCs will never be able to pull their investments “in the money” when they agreed to nosebleed valuations for some of these bubbly Web 2.0 fares (Digg, Slide, Facebook, Ning, etc.).
Kahn seems to agree:
“Kahn believes healthier internet companies will turn to acquisitions, and that they will target inexpensive smaller internet companies.”
Build vs. Buy
The other variable we’ve touched on Big Media’s Buy vs. Build dilemma for some time:
Large internet companies may re-consider the “build vs. buy” strategy—they’ve been moving recently toward the “build” side of that continuum, which resulted in only 45 acquisitions in 2008 versus 94 in 2007, according to Kahn. While he predicts large internet companies will still increase their R&D spending by 8 percent in 2009, that is much less than the 25 percent increase in 2008. As they spend less on innovation internally, large internet companies will probably be on the hunt for smaller companies.
Balance Sheet vs. Income Statement
This plays into the nuance between balance sheets and income statements. A company’s income statement captures the revenues and costs over a period. Right now: revenues are going down (or at best flat) whereas costs remain high. Yet companies do have cash on their balance sheet, which captures a firm’s assets and liabilities (and shareholder equity) at a given time. In other words, even if companies revenues go down, their cash remains idle. But if revenues are flat or going down, a company cannot justify adding to costs (and thus “building” in house) because this will push the company into a money-losing status, which in a tightening credit market might mean lights out if the company’s financing and credit facilities dry up.
As a result, while cash is king, too much cash on a balance sheet is inefficient.
“Finally, the large internet companies have stockpiled a ton of cash as they grew significantly the past several years, and they will be looking for ways to make a solid return on that money.”
In case you are wondering who is going to be taken out, here are some of Kahn’s picks:
As for which public companies are most likely to be acquired? Kahn evaluated them according to brand strength, product leadership, ease of integrating the smaller company into the larger company, and barriers to entry to determine that Omniture, the online analytics company, and MercadoLibre, the Latin American e-commerce company, are the most likely to be acquired. Shutterfly, The Knot, and Expedia were also attractive candidates, according to the report.
There are a few others I can think of… but we’ll leave that for a separate post.
In a down market, I guess it’s every man for himself.
News Corp./NBC’s joint venture Hulu.com just pulled its content from CBS’s TV.com, which has now been repurposed from a listings guide to a Hulu-inspired site with its own share of premium content.
This should not come as a surprise: before the market crash, the traditional media companies played nice long enough (manifested in the Hulu joint venture, for one) because they were all trying to chase YouTube. But now that the market is down (and a flight to quality has ensued), it’s evident that they’re less concerned with YouTube and more concerned with not giving up an inch to one another.
When CBS hired Quincy Smith to head up its online efforts, the former Netscape dealmaker and Allen & Co. investment banker joked that CBS’ efforts at building a video destination called Innertube might have been called CBS.com/NoOneComesHere.
Lacking much presence online (as in, it was not in the Top 10 properties) it then embroached a “distribution over destination strategy”, launching the CBS Interactive Network. Indeed, with online video it is possible to build distribution on third party sites (as we’ve done quite well) but near impossible to build a destination without considerable investment.
Then, of course, it bought CNET for $1.8B - something that we called a couple of months before the deal was announced.
While the meltdown in media stocks (and all assets, in fact) might make that deal seem foolish in the present - even CEO head honcho Les Moonves said he might not pull the trigger on that deal if he knew how much equity prices would tumble and ad market would slow down - long term it will prove to be a decent buy, as it catapulted the Tiffany network into the Top 10 rankings of largest Web properties (Last.fm, the other $100M+ deal it did also helped, of course). Another reason why it was a savvy deal was the portfolio of URLs that over time should prove accretive, too.
With the Web 2.0 era firmly a bust, you will see the merits of a 1.0 notion - the portal - return. As such, with the large Web audience under its wings, today we get confirmation that CBS will toss its hat in the ring by relaunching TV.com and take on (though the corporate spin might very well be that they’re not competitors, etc.) Hulu, Joost, Sling.com, etc… while success in these endeavors is anything but certain, if CBS can leverage its content to build something of value and hatch a successful destination at TV.com, then it might make everything else it got in the CNET deal the cherry on the sundae. After all, it has been reported that Hulu.com might generate more revenue in 2009 than Google’s $1.65B pet project YouTube will…
TV.com’s success is anything but guaranteed, but this does seem to prove a nice lesson: with the right content, you can always catch up on distribution and build a destination yourself… but without the right content, you’re dead on arrival. Of course, it helps to make one key acquisition, regardless of its form.
Disclaimer: Joost, YouTube, Hulu, Sling are all WatchMojo.com’s distribution partners.
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