Hulu’s growing pains are emblematic of old media’s challenges and symptomatic of its pedigree.
Hulu is the free premium video site that was launched by News Corp. and NBC and today also includes Disney/ABC as a third parent. A bit of a disclaimer: WatchMojo supplies Hulu with a plethora of videos across multiple categories.
Let’s first look at Hulu’s pedigree to understand why this script ending should not have come as a surprise to anyone.
Too Many Cooks in the Kitchen?
According to Mediaweek: “Observers predict that the already complicated arrangement is likely to become more so, particularly given the prospect that NBC Universal may be sold to Comcast—which already operates its own online video site (Fancast) and has a markedly different philosophy regarding just how free TV content should be on the Internet.”
I’ve always feared that what led to Hulu’s quick ascent - access to great content - would in turn mean that its media owners would eventually bicker and have divergent opinions on strategy. After all, while Google’s YouTube is Big Media’s frienemy, over time, Big Media’s biggest enemies are one another as they vie for market share.
That is half of the equation.
Market Timing Never Works, You Have to Stick to Your Guns
Old Media makes decisions based on today’s conditions, which ensure that in a few years time, when the project has taken off, the conditions might no longer be conducive to their strategy and execution.
Case in point: Hulu decided from Day 1 to go free, this helped the company’s traffic take off: Hulu has soared from 12.5 million unique users in September 2008 to 38.7 million this past September, per comScore.
When the site launched, the decision to go free was smart. After all, the challenge was to change consumer behavior and thwart piracy.
To put things into context, in the summer of 2007, Rupert Murdoch’s News Corp. was seeking to acquire Dow Jones and there was talk of making Dow Jones’ Wall Street Journal website - the most successful paid content website in the world - go free to capture more advertising dollars.
At about the same time, Hulu was moving from an idea to beta to launch. Never was there talk of making consumer play, not because Hulu’s media owners (which included Murdoch’s News Corp.) cared about user preference, but because it was an advertising play.
The Economic Meltdown Changed the Script
With the 2008 economic meltdown came a slowdown in advertising. This slowdown affected traditional media and advertising more than online. As a result, the downward pressure on media companies’ share prices accelerated and this forced them to reconsider the free, ad-supported content model.
Incidentally, there is no more talk of converting WSJ.com into a free site, in fact, Mr. Murdoch today talks of serving less users on his web properties but charging them to access the content.
Yes, times they change.
Hulu is a great partner of ours. We really wish them well. The CPMs they command are so much higher than the industry standard that we wish that they grow as a site so we grow with them. But the story twists we read in the press should come as no surprise because media companies are impatient and desperate.
Have We Seen This Movie?
What they fail to realize, ironically, is that no matter what plan they hatch today to get users to pay, by the time these plans are implemented, the advertising market will return and they will find themselves on the inside of the pay wall looking out, once again finding themselves going against the grain.
A couple of years ago I asked “how much is NBC worth?”
Bear in mind, this was before the media market meltdown… before online began to eat away at TV’s might… but nonetheless, my valuation pegged NBC at $32 billion.
Today the rumor is that Comcast bought NBC for $35 billion.
Not bad.
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.
Daily Motion is escalating the battle for #3 in their space (after YouTube and MySpace TV).
Online video advertising is growing, quickly.
Online video advertising is where search advertising was in 2000-01: a major part of the web ecosystem desperately looking for a business model.
Unlike search - where traditional media companies failed to invest and even new media companies gave up in favor of portaldom - a lot of companies are vying for online video supremacy. My read on it is that we will never have a Google of video. That’s right, even YouTube - incidentally owned by Google - won’t command the kind of revenue within its segment that Google does. The reason for that is lack of competition and monetization ability. On the former, YouTube has a lot of competition in the monetization race.
Either way, looking at the stats, the numbers are impressive:
An estimate of the US online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the US online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the US online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the US online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the US online video ad market for 2011 - set in 2007: $4.3 billion | Source.
An estimate of the Worldwide online video ad market for 2011 - set in 2007: $10 billion | Source.
An estimate of the US online video ad market for 2012 - set in late 2007: $7.1 billion | Source.
An estimate of the US online video ad market for 2012 - set in early 2008: $6.6 billion (all broadband at $12.2B) | Source.
It’s thus not surprising to see the sheer volume of money that is being invested in the space, here is an incomplete snapshot:
Judging from that, investors better be patient because only YouTube has exited, handsomely, to the tune of $1,650,000,000 (that’s $1.65B, in case you’re wondering). I’d like to remind everyone that more money does not equal more return, but I digress.
It’s worth noting, too, that YouTube raised less money than everyone else in its peer group but I highly doubt anyone in that group will be worth more, ever, than YouTube.
I am personally hoping that WatchMojo.com pulls the same feat in its peer group. I won’t say “jokes aside” because I am not exactly kidding, admitting that yes, indeed, we’ve raised - and spent - less than $5M to build our content and distribution, which is actually bigger than some of our peers. You might notice that I do not call the players in our group competitors because we are the bastard children of the broader video space: everyone is betting heavily on platforms and user-generated content and our category is definitely going against the grain.
Lastly, I think most of these players are pricing themselves out of exits:
- IPOs will be very hard: yes online advertising is growing quickly but I suspect traditional media (that owns rights to the content) will garner a big share of the online video ad pie. In this context, hitting $100M in revenues or more becomes very challenging, especially with the low-quality content most of these sites are trying to monetize.
- M&A becomes nearly impossible because you need to sell for more than you have raised, and judging by Revver’s fate (who raised $12.7M and sold for less than $5M) that becomes quite hard.
It’s a good thing I am no low-expectations mofo… just because we have not raised boatloads of cash (yet anyway) does not mean we’re not gunning for a big payday one day, but realizing that such a day might not materialize tomorrow, I respectfully think a lot of the companies in the broader video space and our content creation space in particular have dug too deep of a hole for themselves.
To each their own.
This is a work in progress, I am adding CMS platforms (Brightcove, Maven, etc.) and CDNs (Limelight, Akamai, etc.) as we speak. If you have more companies and funding amounts, or if I made a typo, leave the correction in the comments or email me at ash@mojosupreme.com.
If you find it odd that both Comcast and a consortium of four newspapers today launched plans for ad networks, it’s worth re-reading a couple of quotes from David Moore, CEO of 24/7 Realmedia, whom WPP picked up for $649M last year.
From an SAI interview:
SAI: Assuming we’re facing an ad slowdown, what’s going to happen to online ad rates?
Moore: The fact of the matter is the Internet has been either dramatically underpriced or offline media is dramatically overpriced. Right now a reader of the Wall Street Journal might be worth a dollar, but for someone reading the online Journal you get a nickel. That’s 20 to 1 offline versus online pricing. You need 20 online readers to replace one offline reader. So when you talk about pricing overall I think the web is dramatically underpriced already.
SAI: Haven’t ad networks played a role in holding down online CPMs?
Moore: I dont think its the networks that are doing it. I haven’t spoken to anybody who thinks media fragmentation is going to stop. I think we are dramatically underpriced compared to offline. The amount of money newpapers and magazines have been getting per thousand is outrageous. Newpapers and magazines are still getting roughly 30% of all advertising expenditures–yet if you look at their share of media usage, they’ve got between 7% and 9%. Thats why they’re having so much trouble.
It’s worth noting that at $649M, 24/7 Realmedia will probably be a steal over time. WPP’s $59B in annual billings is 10-20% of the total advertising pie, and as more of that goes online, they need something cohesive to manage it all, especially the search part, which accounts for 40% of the online pie.
Either way, if Moore is right, then you understand why I think online ads will take over TV sooner than later.
The headline of this post ends with !? because Yahoo!’s name includes a “!” and the sentence is in fact a question.
But, even were it not the case, upon finding out that Yahoo! had shelled out $680M for the 80% of Right Media it did not own (after paying $45M for 20% of the company six months ago), any headline would have been followed by !?$%$(*&#.
The Business Model: Do ya get it?
When Right Media launched in 2003, I got a call in my capacity as VP of Ad Sales of an online publisher. Right Media told me what they did: in the words of a current executive, Right Media is ”an enabler that provides tools and techniques to participants and creates a virtual space to do business more efficiently. We serve like a stock market, we price display ad inventory and allow participants to discover as much as players allow to be discovered within the ecosystem and we make the data transparent…”
In 2003, I spoke to a couple of brothers who worked at Right Media, they wanted me to grant them a portion of our ad inventory for them to price and auction off to other networks. We did 250M ad impressions per month, and we sold out some 75% of the ad inventory, the remaining 25% we doled out to networks. These networks paid us anywhere from $0.25 CPM to $1 CPM. On the premium inventory, I’d be able to sell that for anywhere from $1 CPM to $20 CPM.
CPM stands for cost per one thousand of ad impressions. For more on CPM and other terms, as well as a landcape of all of the participants of the online ad ecosystem, click here.
A Practical Example
At the time I was as cordial as could be, but I did not have much time to allocate to Right Media’s offering, because we generated $190,000 per month from the 75% of our ad inventory that we sold out to advertisers large and small, and made about $10,000 from the networks. Even if that grew 100%, to $20,000, I figured that my time would be better served focusing on the 75% of premium inventory that we had.
To some extent, I was right. To some extent, I was wrong.
We had 250M ad impressions, selling out 75% to premium advertisers was feasible. When you are a large publisher with billions of ad impressions, you tend to sell out even less. At the end of the spectrum, for sites like MySpace and Yahoo!, you sell out a lot of less and are left with remnant inventory.
Long Tail of Ad Inventory
Yahoo! sells out a lot more of their inventory as premium compared to MySpace, the reasons for that are numerous, but one major one is that MySpace is user-generated content and less desirable to advertisers. If you add all of the variables and consider that today user-generated content accounts for more aggregate traffic than adult content does, you start to understand that times have changed, and many people found value in Right Media’s - and networks’ in general - offering.
Right Media, knowingly or unwittingly, was positioning itself for the burgeoning traffic coming from the explosion in user-generated content. This is not to say that all of Right Media’s business emanates from user-generated content, it’s to demonstrate one source of demand for Right Media’s offering, an exchange matching buyers with sellers of ad inventory in an auction format.
That last part, my friends, is the key. What eBay did for Pez dispensers, Right Media sought to do for the $20B online ad industry. In other words, the ad inventory I represented was largely irrelevant to Right Media, but the large majority of the ad inventory that was to mushroom online would be a perfect fit for Right Media.
Times, They Change
Fast forward that to yesterday’s announcement that Yahoo! was paying $600M+ for Right Media’s 80% that it did not own.
Don’t get me wrong, I am not saying the deal was a bad one, I am saying that as both a writer covering the space, someone who had worked with Right Media in the past, a shareholder in Yahoo! and a web entrepreneur positioned in online advertising, I fell off my chair.
Some people like Fred Wilson shouted hooray, others did the opposite, questioning the rationale:
“Now that they’re owned by one of the largest sellers of space on the Web, does that make Right Media less of a middleman?” said Jeff Ratner, North American digital director of MindShare Interactive. “Will I find more of my inventory winding up on Yahoo as opposed to somewhere else?”
I am not sure, maybe, who knows? All I know is that Yahoo! has a lot of impressions, of which little is premium. Yahoo! needs a better way to monetize this long tail (hate that word, because people apply it to everything, but it does apply here…) inventory. As a Yahoo! shareholder, that gets me excited, but the flip side is that Yahoo!’s CFO Sue Decker was quick to add: “Yahoo’s shareholders shouldn’t expect to see profits from this investment until at least 12 months after the deal closes, if the companies follow through on their immediate intentions to improve the marketplace, then media planners, buyers and publishers may see the changes quickly.”
Hmm, that’s a lot of “if’s” for a company that quadrupled in value in six months. Of course, Right Media itself has soared in size, particularly since the Yahoo! 20% investment.
According to itself back in February 2007:
“Right Media Exchange revenue has increased 81% over the past six months, with 566 billion ad impressions traded during the period.”
The milestone represents only a partial measure of Right Media’s broad, substantial growth since it formally launched the Right Media Exchange last summer. In that period, the company has also seen a 50% increase in headcount, a 49% increase in Exchange membership and an 84% increase in impressions served. Over one trillion impressions have been served on the Exchange since the company launched its auction platform in April of 2005.
“All signs point to the fact that the digital advertising market is embracing the exchange model,” said Right Media CEO Michael Walrath. “Buyers and sellers on the Right Media Exchange are getting a fair opportunity to develop new relationships, increase scale and drive more value, and they’re clearly taking advantage of it.”
There are currently 127 network, advertiser and publisher members with seats on the Exchange, including Yahoo!, Fox Interactive Media and LookSmart. Exchange members represent over 6,000 buyers and 13,000 sellers. More than 175,000 creatives are currently active in the Exchange.
There are cases where Right Media has done wonders, ZDNet points to Tickle.com as an example where it saw a 771% spike in revenue. That’s not bad at all. I wonder how much the $10,000 I generated from 25% of our non-premium inventory would grow at a growth rate of 771%. Of course, demand for online ads have changed quite a bit since then, but you get my drift.
Value is in the Eye of the Beholder
Is Yahoo! getting something valuable? Of course.
Would I pay $800M for it? Well, as I said yesterday, iVillage fetched $600M, MySpace parent Intermix got $580M and my former one-time employer IGN got $650M from News Corp. Of course, this was all over two years ago. Last month, Google paid $3.1B for privately held DCLK.
Wait a minute… Right Media too is privately held… could it be suddenly that public shareholders are showing restrain while their private brethren are not? Of course, Right Media and Doubleclick were acquired, not by public shareholders directly, but by managers of these, at Yahoo! and Google respectively.
When the Google/DCLK deal went down, I wrote aplenty on that:
- Google Buys Doubleclick for $3.1 Billion; Blocks MSFT Acquisition
- Questions in Wake of DCLK/GOOG Deal; MSFT/YHOO Repercussions?
- Two Variables in DCLK/GOOG Deal: Dart for Publishers/Advertisers; All Cash Deal
- Why GOOG’s DCLK Makes Little Sense (To Me)
- DCLK Winners: Hellman & Friedman; Losers? DCLK’s Shareholders?
- aQuantive Under Spotlight
One of my main points of contention in that deal was that saying that DCLK gave Google an “in” into the display business was akin to saying that MSFT was in real tight with ad agencies because agencies use powerpoint in client pitches, in other words, DCLK’s strength was in software, and not media, ever since it unloaded its media business to MaxOnline/L90.
One reader of this blog who agreed was Right Media’s own Vice President Bennett Zucker, as he commented to one of the old posts.
I’d argue that Google was practically reckless in paying so much for DCLK, and Yahoo! showed some eagerness to maintain its lead in display advertising, and perhaps arguably fear as well, and Right Media did the sensible thing for its shareholders by gladly accepting this offer. Their venture capital backers Redpoint must be ecstatic, as are the staff at Right Media.
I spoke to Bennett today about the deal.
Hailing from the world of publishing, Zucker serves as an evangelist for Right Media’s exchange, trying to convince publishers to give it a try. He’s also served some time at Tacoda (wouldn’t they love an exit like this one, by the way?) in the area of behavioral targeting…
I asked Bennett:
Q: What on earth transpired between last fall and this spring besides Christmanukwanza?
A: “We had been working with Yahoo! for a year before the 20% investment materialized, and Yahoo! did a lot of tire kicking before it became a customer. Yahoo! has since been trading a lot of its non-premium, and I mean deep, real deep inventory on the exchange. And, the result validated things and they were really successful.”
Q: Did other companies show an interest to invest or buy them afterwards?
A: “Once that happened, the floodgates opened and all lingering doubts evaporated.”
Q: What was it that made Yahoo! value you so much more today than they did six months ago?
A: Sue Decker pointed out three things in her analyst call yesterday:
1 - increased value of YHOO’s own inventory;
2 - extend YHOO’s inventory across the Web;
3 - create new businesses working together.Q: Do you expect changes in structure, personnel?
A: We had aggressive hiring plans, and they got more aggressive. CEO Michael Walrath will now report to Sue in Sunnyvale.
Q: Is this an answer or challenge to Google, or are we all supposed to think it’s not?
A: We were working with Yahoo! months before Google and Doubleclick closed, so while it is certainly related in some ways, it’s not totally coming out of nowhere.
Q: Fair enough, but isn’t this an acknowledgment or admission by Yahoo! that they see little growth in their core premium inventory and need to look at non-premium?
A: Clearly there is a lot of value in boosting rates on non-premium, which runs deep on Yahoo!, but I would not rule out high-end opportunities.
Q: Are we in a period of euphoria? I mean, Yahoo! paid what they did for you, good for you. But today we hear that MSFT might buy TFSM for $1B, which is madness, it was worth $400M on Nasdaq two weeks ago… I would not call it a bubble, because stock prices of TFSM, AQNT (a stock I own) and VCLK actually fell because an analyst at Citigroup cut the rating for AQNT… which shows some common sense… but don’t you get a sense that something is off?
A: Well, we certain are happy and euphoric. We will obviously eventually reach a limit. But in the end we feel that we can do a lot with Yahoo!
As a Yahoo! shareholder that just paid a chunk for your business, I sure do hope so.
Interestingly, while everyone got excited about this, the main story of the day - in my humble opinion - was Comcast’s deal with Yahoo! That was a great one. Read more about the details here. Of course, the irony of it all is grand, Yahoo! just got the right to sell ads on Comcast, which means a little bit more of premium ads with a helluva lot of non-premium inventory… having Right Media in-house might make that deal even better.
Earlier this year, we wrote here that billion dollar acquisitions are over and that large companies will pursue IPO routes over sales. Facebook is one example that comes to mind, having turned down offers from Viacom for $800M, Yahoo! ($1B and $1.6B). When you realize that Google’s two billion dollar babies - dMarc and YouTube - have had challenges, you see that there is a line that is being drawn in the sand.
New companies that have “clean” capital structures with relatively no skeletons in the closet can continue on an independent route, because their financial backers are patient and they are not war-torn.
But companies that survived the dot com explosion of 2000-02 are increasingly making the decision to cash out:
Yesterday, Comcast bought Fandango for a reported $200M.
Today, Paid Content is reporting on rumors that are circulating that Yahoo! is about to plunk down $100M for Rivals.com.
Both Fandango and Rivals.com face considerable competition, but both have strong businesses in their own right. Ultimately, the founders, managers and investors want out, fearing that if they don’t cash out now, they might miss yet another golden opportunity.
New businesses, even those that are much smaller than Facebook, tend to have a more patient outlook, thinking that this time things will fare differently. Regardless of the outcome, things are getting very interesting.
PLAY
