From NY Post via Business Insider:
Ny Times CEO Arthur Sulzberger thinks that physical newspapers will stick around as well. “The best analogy I can think of is — have you ever heard of the Titanic Fallacy?” he asked. We hadn’t. “What was the critical flaw to the Titanic?” We tried to answer: Poor construction? Not enough life boats? Crashing into stuff? “A captain trying to set a world speed record through an iceberg field?” he said, shaking his head. “Even if the Titanic came in safely to New York Harbor, it was still doomed,” he said. “Twelve years earlier, two brothers invented the airplane.”
Okay, so let us get this straight. The publisher of the New York Times is saying that getting into print journalism is like getting on the Titanic?
“We are trying to convert shipping companies to airplane companies,” said Sulzberger. “Same business: transporting people safely across long distances. Different cost structure, different way of doing business, but the same core business. There is still a very vibrant business in shipping. It’s just not taking masses of people across the Atlantic. It’s now taking families around the Seychelles, or something like that. There will still be passenger ships, but they’re not going to be in the same business. So print will still be here, I believe, decades from now. But will it be the driving force? No.”
I had a chance to sit down with Barbara Corcoran. She’s currently on Shark Tank alongside Robert Herjavec, Kevin O’Leary, Kevin Harrington and Daymond John.
We chatted about numerous things, to read the interview from the beginning, see Part 1 here. Here is Part 2:
WatchMojo: You were quoted as saying that the worst students make the best entrepreneurs. I actually understand why you would say that, but do you think that good students make for bad entrepreneurs?
Barbara Corcoran: With a few exceptions, I would say generally so, yes. And, this is my logic, and I don’t really know, because I’ve not done a survey, but just on my life experience of meeting entrepreneurs’ day in and day out. I think great students operate very well in a defined role, okay? And so, the problem that happens as an entrepreneur is you’ve got to redefine your role constantly, and you’ve got to do it for yourself. You also have to set your own great standards, so you are not reaching for a program that’s been outlined that you can succeed at; you have to create your own program.
I think very often great students don’t have incredible imaginations, whereas kids that are terrible students have the whole school day to daydream. So, they have much more opportunity to practice being creative, because they’ve got to fill in their brain with something while they are not figuring, while they are not getting what’s going on in the classroom. And so, I think entrepreneurs who are terrible students often have a head start of a great student who is stuck with the program.
And then lastly, kids that don’t do well in school can’t wait to get out of school, and so when they get out of school it’s like getting out of jail and they burst out. And, their shear relief of being let go out of the confines of the school role usually creates great energy. And so, they are much more comfortable in a freewheeling, high risk workplace without rules than they are in something that’s defined; that’s my own theory, I don’t know if that’s to be true.
WatchMojo: From my own experience both from working with great entrepreneurs and starting a company I think there is a pattern.
Generally speaking if you are good at working within a framework, I think that makes you excellent to actually take direction and do great things. But, I think entrepreneurs generally like to work when there is no playbook; you throw them in the wild and ask them to solve the problems, that’s when we excel.
Barbara Corcoran: Oh, definitely.
WatchMojo: Now, the interesting thing is whether it’s New York City in particular, the panel on Shark Tank, the real estate world or business in general, women are generally out numbered. Their voices aren’t even heard oftentimes, or if they are heard, they’re not always taken as seriously as they should be. So the question is, how has being a woman played a part in your success?
Barbara Corcoran: It’s been an absolute advantage, or certainly that’s how I perceive it. Because, I walked into an old boys club where the large firms were owned, controlled by men. And, when I would meet, when I would walk into any industry event, I was the only person in skirt, and I made sure I had a red suit on to be noticed. So, I was noticed more, because I was the odd duck, so that’s an advantage to be noticed in any business for better or worse to be noticed is better then not being noticed, right?
WatchMojo: Exactly. That’s why I haven’t changed my name…
Barbara Corcoran: Yeah, right. Because, for you it’s true, isn’t it?
WatchMojo: Yes.
Barbara Corcoran: Because, people will remember your name. And then, the other thing is women operate very differently than men, and in the real estate world even though in my day it was owned by men, it was worked by women. And so, I intuitively knew how women liked to work, what was important to them; how to build a great workplace for females, whereas the men had to guess about it? You know, so I was closer.
WatchMojo: That’s a very good point, because you can have a fantastic company and provide all these opportunities, but if the women are not comfortable, you are right, you are going to lose a lot of talent and a male boss might not even understand why.
Barbara Corcoran: Yeah. We were the only firm in New York City where we designed our offices like spas where we had, you know shoe shine guys, massage therapists. Why, because 80% of my staff was female and they really liked that, I don’t think a guy would have thought of that one.
WatchMojo: Do you spend more of your time looking for ideas for your production company or investments on the show?
Barbara Corcoran: Both, I have one leg in each. I, you know I had both seat in looking for the story ideas and getting more television appearances, that was my career. Since I’ve been on the Shark Tank, I would have to say I’ve got one foot in each arena, because it’s not just doing the Shark Tank, it’s when you buy the businesses, and I bought twelve in the first season. Once you buy the businesses, now you have to tend to them. You know you’ve got to get the contracts done, you know arrange the funding.
You have to start working, getting to know your entrepreneur. So, clearly you can imagine how much time is involved in that. And, I’ve also had to build a financial team that I didn’t have going into that TV show. I had to hire venture capitalist to work for me, because I don’t want to lose my money.
WatchMojo: Who would?
Come back tomorrow, where we continue our discussion and I ask Barbara what the common traits of the businesses she’s invested in were.
Rupert Murdoch points out the obvious:
“If you look at the Tribune Company, their big papers—the LA Times, Chicago Tribune—I bet you they’re still making money individually. But they can’t pay their interest bills. Bankruptcy doesn’t mean the end of a newspaper. It just means that someone’s goi
Via PaidContent.org, watch it all here:
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.
The Tribune company’s Chicago Tribune is laying off 20% of its newsroom. That’s got to hurt.
The Boston Globe is asking itself: What went wrong? The Globe belongs to the New York Times company, which publishes the eponymous paper.
Not to be outdone, the NYT itself was the victim of a great piece / hit job by Vanity Fair, which by the way, very well could be the best magazine out there (despite the fact that the rag now publishes, oh I’d say 2 articles per issue, apparently), if anyone still read magazines, that is.
Anyway, for what it’s worth, I think it’s absurd to blame newspapers for not “doing more sooner”. The more they would have done, the sooner they would have shrunk their businesses and gone out of business. Seriously, would the train companies really fared better had they dived into the airline business? Probably not. Would record labels really be bigger companies generating more revenues if they dove into digital music? Nope.
The truth is: before the Web came around, companies profited because they took advantage of an inefficiency.
Newspapers prospered and profited because they exploited the inefficiency of capturing data, aggregating it all, then publishing it to the masses. At its core, the web flattens the world and removed that inefficiency. It creates others and others are exploiting those inefficiencies. Google is doing it one way, Amazon in another, Apple yet another… and in our own little way, WatchMojo.com in yet another. That is how innovation and entrepreneurship works.
Here’s a fact: you don’t need that many people to do a job that you used to need to do the same job, thanks to the Web.
The newspapers are bloated, and I cannot think of any other 150 year old industry that wouldn’t be. Unless they are willing to accept massively leaner company structures, smaller top lines and probably lower bottom lines, I don’t think they will survive. It is a shame, it is a loss, but isn’t this what capitalism is all about? Aren’t these the “freedoms we fight for?”
I came across this 2008-era study on why online video presents a major opportunity for newspapers which concludes:
While still a small percentage of total and local online advertising, online video represents an enormous opportunity for newspapers to grow revenue and audience.
As the CEO of an online video content producer, this begs the questions:
Who is most likely to invest in and acquire online video startups: TV media companies or print ones?
Both have their reason to go long on web video, but when you start to look at what is actually happening in the marketplace, you realize that we’re seeing a case of
1- those who don’t learn from history are doomed to repeat mistakes,
2- people tend to react to ensure their short term survival, which can be explained by the fact that professional managers who run companies don’t share the long term views of investors and founders.
Survival - To Some: Avoid Getting Murdered; to Others: Fear of Cannibalization
Here’s how I read it:
A - Newspapers
The “supposedly clueless” folks running newspapers seem get it, and as a result, are starting to adjust their product to offer more video. McClatchy features some of our content across their websites. I am sure they’re not alone (in either supplying video or supplying their reader our content).
B - Magazines
The magazine guys are being reluctant, because magazines might very well survive - albeit in a radically leaner and smaller existence - the digital revolution, whereas newspapers won’t unless they drop the papers from their monikers and reinvent themselves as simply news - or rather, content - companies. And to do so, naturally, the Web must be central to their strategy and online video can be the savior. For more in this, read “who’s more doomed: newspapers or magazines?”
Incidentally, before I started WatchMojo.com, I was the VP of Ad Sales for an online men’s lifestyle magazine and I think magazines would do very well diving into video content, but they’re set in their ways. The upside for magazines is probably even bigger, because unlike news, magazines can produce evergreen content which has a longer shelflife, and thus, higher ROI. I speak to magazine executives about partnerships, investments, and yes, full on acquisitions… and it’s like they get it but don’t want to hear it. Or, maybe it’s just me. Probably both. Maybe they’re just too focused on the ever-shrinking size of their magazine. Who knows.
After all, do you really think that publisher of Maxim and Blender Alpha Media Group’s EBITDA would have fallen from $28M to $8M in one year if they would have focused on video? Probably not. Video inventory would more than make up the falling print sales. But again, don’t listen to me people.
C - Television
TV executives view online video much the same way that the print (both magazine and newspaper) executives saw the web early on: as a threat. Over the past few years, we’ve seen some exercises that seem to serve as tactics to shut up the critics who question the lack of digital strategies, but they are not strategies at all. Ultimately, television executives know that down the road the future of television might suffer from the same fate that print media did at the behest of the Web, but since this is a few years, lest a decade away, current executives cannot be bothered.
Digital Dimes vs. Analog Dollars
Yes, online video fetches a premium relative to text content online, but relative to traditional television revenue, online video is a joke. To a disruptor company like ours that seeks to create high quality content and distributes it online, the income is incremental and welcome. To an established company, it is not. This is why this comment from Doug Poretz caught my attention:
Content Is More Important Than Distribution Channel.
I’ve been engaged in this business long enough to know one thing: content is king. Compelling presentation is important, as is selection of the right distribution channel, but if the audience doesn’t immediately sense value in the content they are seeing, they will move on to the next site. That means a provider of high quality content can virtually come from nowhere to capture the attention of an audience and dethrone an industry leader. Bloomberg versus Dow Jones is an early example. More recently, the simple graphic presentation of Google is more than trumped by the value of the content it provides, and because of that, Google changed the way people use the Internet.
It makes sense therefore for investors to consider which entrenched leaders might not be as entrenched as once thought, especially when smaller, hungrier, more innovative and more aggressive competitors develop new ways of providing high value content.
No, I don’t wake up every day and try to put CBS, News Corp., Disney, ABC, etc. out of business. I don’t even think it’s possible (or maybe I am being coy and diplomatic, who knows)… but I do think that we can build a library that will be worth a bundle and a business that boasts the industry leading return on equity, whereas all of those companies will see a loss of revenues, profits and value in years to come.
The problem, of course, is time. The guy currently running a traditional media company can’t be concerned with the mess he will leave behind for the guy running the ship in 10 years, so too bad.
Strategy is Relative
In this context, while it makes a lot of sense for the TV based media companies to invest and acquire in new media studios, I don’t think they will.
If one were to play the conspiracy theory card, one would wonder: did CBS acquire Wallstrip for a mere $4M specifically to shut it down? Probably not. But all of a sudden, it’s not that crazy of a thought. If Wallstrip was creating a video product that would compete with CBS’ television offerings, it would almost make sense. I don’t actually believe this, by the way; we’re just trying to make a point.
Yet for the print guys, particularly the newspapers (McClatchy, Tribune, NYT, etc.), online video makes a lot of sense. It’s a matter of both economics and survival. The problem for these companies is the massive debt they carry, and the losses they’re seeing. In Canada, Canwest is on the verge of missing a second consecutive interest payment. Not sure if this allows them to pull the trigger on a big online video deal even though the prevailing logic is considerable.
As I’ve argued before, while digital sales are not enough to make up for losses in traditional revenue streams, they just might if you embrace video content, since video can fetch up to ten times the rates that text content garners. Cost per thousand (CPM - more on online lingo here) prices for text content ranges from $1 to $20 but for video content can go from $10 to $100.
This is why 2009 will mark the year that traditional display banner ad inventory will make way for all sorts of rich media placements featuring video.
Social Media Inventory = Warm Bucket of Spit
We’re not talking about social media pages, which get about $0.01 to $1 for text and $1 to $10 for video. We’re talking about professional content. As far as advertising revenue potential goes: user-generated content (UGC) is dead on arrival, though in terms of publishing in general, UGC is growing more powerful than ever. The problem with UGC’s “value proposition” is that direct marketers (who might not mind UGC’s low quality and raciness) don’t like the low performance whereas branded advertisers (who care less about the ROI in the short term) cannot take the risk to market alongside it.
Those Who Can Won’t and Those Who Want Can’t
Newspapers, on the other hand, have another problem. They lack the DNA to tackle video, and therein lies the irony of online video: “those who can won’t and who who want can’t“.
Add it all up, and I think you see where the buyers will be found, hint: not in tinseltown.
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.
The Grinch Who Stole Q1
Tech Crunch has been making the rounds and the projections for Q1 2009 online advertising are bleak:
Display advertising revenue is going to fall of a cliff in January according to a number of content sites I’ve spoken with who rely on advertising for revenue. “Sales through December were mostly strong as advertisers used up their marketing budgets,” said one sales exec. But, he added, “there are few buyers for this next fiscal quarter, and those few that are buying are looking for steep discounts.”
Just how bad will it be? I’ve heard estimates of 30%-80% revenue drops over the next three months from companies that serve a variety of content (games sites, tech news, celebrity news, political news, etc.). The median pessimism point is around 50%. The people I’ve spoken with work at large public companies and small one-person blog shops. Absolutely no one I spoke with said they expect an up quarter.
Negativity Begets Negativity
At some point (and we’ve passed that point, folks), the bad news becomes a multiplier effect for more bad news:
- a media buyer sees this kind of article, uses it to lowball a publisher,
- the publisher sees little bright news, so they give in,
- the rates fall downwards, the bookings become rarer and rarer,
- next thing you know, indeed, we’re in a down quarter.
D stands for Deflation…
The web economy and online advertising sectors represent tiny pieces of the bigger picture. The buzz word in 2009 will go from subprime to deflation… so if we operate in a climate (or think that we do) of falling prices, then I wonder why we’re shocked to realize that ad rates and overall ad revenue might fall. I think at the macro level (all marketing) this might - and will - happen. From AdAge, via MediaMemo:
… and Display Advertising!
But as we outlined in our 2009: The Year in Online Advertising, yes, display will be weak, but I think publishers are buying into the glass-is-half-empty outlook because of bearish reporting. The truth is, my gut says things will go down a bit differently:
- marketers will push for video ads (and rich media ads in general) in display advertising real estate,
- the definition for video advertising will move away from purely instream ads (pre-rolls or overlays, for example) to include in-banner video ads,
and by mid-year, the actual display advertising figures will be fine (when you include the video / rich media units).
I do agree that traditional display ads will be weak… mainly due to a horrible Q1.
Let’s be honest: CPA and CPC are for suckers
While many are using the downturn to suggest that performance-based advertising units will see a boom, I’d like to point out a truth that most publishers fear admitting: CPA and CPC ads don’t really work for publishers, so even in horrible CPM times, I don’t think you will see a boom in performance priced ads in a downturn. For more on the entire CPC, CPA and CPM and other online ad terms, click here.
CPA and CPC revenue does not pay the bills, and quality publishers generally reject giving up prime real estate to CPC and CPA inventory.
But don’t take this from me, just follow the market: why else do you think Doubleclick, Blue Lithium, aQuantive and Right Media all got bought out (they all pay out largely in CPM terms even if on the back end they arbitrage inventory on a performance basis) whereas Valueclick remains standing, with no one to partner up with. At its peak, Valueclick was worth $3B with talks that it could fetch more. Even before the market meltdown, it was trading at $1B. Today, in the post media meltdown market, it is trading at $562M in market cap, with an enterprise value of $460M. The point being: in my experience dealing with of all the ad networks, from the publisher’s perspective, Valueclick was the most exposed to CPC and CPA and thus, most expendable.
Now this is all just my gut, but my gut has been right before: here’s one example of CBS buying CNET.
All Things Are Relative: At Least We’re Not in Radio, TV or Print!
If online advertising sentiment is this bad, even if the outcome is half as bad, then imagine what the radio, TV or print outlook is right now. Can you really imagine a media buyer paying $1M - let alone $50M, as Dell balked at - to be in print? What about radio or TV, which represent a black box in advertising where you don’t get to even track or target anything?
Newspapers like NYT and Tribune are - or are at risk to - defaulting right and left. TV companies like CBS are seeing declines in revenues. Radio companies are not faring better.
The point I am making is: there is a bull market somewhere at all times - even these times - and that market is online. It’s time to balance the reporting, too. I find it appalling (alright, strong word) that a site like Tech Crunch inflated the bubble on the way up, and is now ringing the bells of doom in the downturn… but that is publishing… and Tech Crunch does it well.
Who does the doomsday scenario thing best? Henry Blodget. Reading his Alley Insider, you’d think he and his talented staff of writers were typing on a ledge somewhere, choosing between the Publish button and jumping out of the window. For a great piece on his comeback, read this Wired piece. Mind you, in all honesty, I am technically guilty of this as well, the title of this piece should be “Will Online Ads Fall by 50%”, and not “What Happens if Online Ad Revenue Falls by 50% in Q1?” - but when I started writing it, I was thinking more of the impact on print… but then I started to ask myself, can this even really happen?
Well, maybe. At the end of the day, we just saw a major evaporation of wealth throughout 2008 in the housing, financial and automotive sector, to think that online advertising will go on unscathed is foolish, but to alternatively expect a 50% decline in what is the only bright spot in all of marketing is equally foolish.
Rupert Murdoch is attacking NYT not by a hostile takeover (not sure the Feds will allow it, though admittedly the Feds are busy with trying to save the dying vestiges of capitalism) or even by trying to win over subscribers, he’s poaching advertisers.
Microsoft, meanwhile, is “over” with trying to acquire Yahoo!, so it is now poaching its employees, Yahoo’s VP of Search Technology Sean Suchter just left Sunneyvale for Redmond.
This is a new, old kind of warfare, I think, and it reminds me a lot of General Electric’s chairman, John F. Welch Jr., who earned the nickname Neutron Jack on his reputation for eliminating people while leaving building intact. In this case, the attacking party leaves the company intact but strikes at the core of the asset: in NYT’s case (a print media company) it’s the advertisers and in Yahoo!’s case (a #2 in search), it’s the brains behind… the algorithm and unit organization.
PaidContent.org’s Staci Kramer put it best:
“For the dramatic interpretation, read this from SAI while listening to Celine Dion”.
Not quite sure if the NYT is a modern day Titanic… but the more we dive into the Gray Lady’s balance sheet and income statement, the greater we doubt that she can go on.
The implication is pretty clear: the NYT won’t be buying any assets any time soon, it will be a seller. The problem is, for the past decade, the Old Media Malaise led traditional media firms to acquire new media and technology startups; right now, that malaise has become a full blown meltdown, and while the need to digitize their businesses is greater than ever, their leverage (in the literal sense) is at an all-time low: stock prices down, cash dwindling, greater difficulty in raising debt.
Another reality which makes M&A tougher for startups, frankly, is that the past few years has seen a wave of consolidation: when CBS bought CNET for example, two would-be buyers became one. Initially, the idea then was that CNET would use its web expertise and leverage CBS’ balance sheet to acquire companies, but with CBS being now worth a third (!) of what it was last year, that won’t really be happening, especially with the backdrop of this economic meltdown.
This means one thing and one thing only: if you are a startup, you have to have a clear path to profitability, let alone revenues. In fact, I definitely think that in the months and quarters to come (at this rate: maybe weeks), VCs will start to shut down companies that lack revenue models and give companies with revenue streams a limited time to become profitable. Don’t take it from me, take it from the dean of VC investing, Alan Patricof:
“We have 24 companies in our portfolio, and when we were considering investing in any of them, we didn’t say, ‘We’re going to take this public in two years or three years and try to extrapolate a public valuation.’
We approach the market on a very realistic basis, and I think most people in the business do. For the most part, our companies are either going to make it on their own as freestanding enterprises that generate their own profitability and cash flow, or they’re going to be sold to another company.”
It’s pretty cut and dry these days: show me the money, or die. Which leads us to a counter argument to my hypothesis. Maybe traditional media companies will have much more leverage in a figurative sense:
- they are still sitting on large piles of cash,
- the sellers lack leverage because they know that the pressure is on from their VCs, so their asking price will be more reasonable…
We shall see what happens, but the unintended consequence of this meltdown is that web companies are being asked to grow up very fast and become actual businesses, no longer being afforded a pass on having sound economic fundamentals.
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