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.
Amazon.com is taking on Ze French by trying to offer consumers free shipping. On the surface, you wonder, why is the French government upset? But looking at the nuances in the matter, I agree with the French.
Booksellers have complained about Amazon.com’s decision to waive S&H, the matter has gone to court and Amazon has lost. It has been forced to pay a $1,000 fine every day for 30 days, after which point the Courts could lower or raise the fine. Amazon is trying to reverse the rule:
Cédric Manara, a law professor and e-commerce specialist at Edhec, a French business school in Nice, said he would not be surprised if the court raised the penalty, and that Amazon “had no chance” with its appeal.
The law is “really clear,” Manara said. “There is no way you can read the text to find a different result. And the court would have evidence of the firm’s deliberate will to violate the law.” A similar law regulating the price of books in Germany does not affect free shipping for Amazon.de, Mantello said.
The 1981 Lang law was passed at a time when booksellers were losing sales to supermarkets and other new competitors. It was meant to assure that the French public had equal access to a wide variety of books, both high-brow and low-brow, not just heavily marked-down publications.
The law has twice come before the European Court of Justice and both times it has been affirmed. The law is not considered anticompetitive because all book retailers are held to the same standard, Manara said.
Is it just me or should Amazon simply offer a bigger rebate to offset the S&H fee?
On the one hand, I like that Amazon.com is sticking to its guns and trying to lower price and what not, but at the heart of the ruling is a mechanism to protect competition, so I think Amazon.com is not helping itself with its arrogance in the matter.
They are helping in the short-term but in the long-term they will end up driving many of the small, mom and pop-style booksellers out of business and in turn, Amazon.com would control what books the French can and cannot read.
For this reason, Amazon.com will lose the case, again.
The risk it runs, frankly, is to come across as a “arrogant American company” telling France what to do… and that might create much more badwill than Amazon.com bargained for.
What ever happened to think global, act local Jeff?
2007 will go down as the year of the book. All right, that’s a blatantly false statement, but it does make for a good headline, no?
Maybe 2008 will earn that title. After all, what gathers steam and momentum in one year can always trace its roots to the previous year, no?
In 2007, Amazon launched Kindle, a wanna-be iPod for books. Also this year, you are certainly seeing more and more book-related ventures:
- Goodreads: which according to Tech Crunch helps you find that perfect book.
- Red Room: a social network for authors, read more on Paid Content.
I am sure there are more. But the point is, ironic that one of the first web startups, Amazon.com, sought to tackle the book industry yet we seem to now focus mainly on music and movies. Maybe a sign of things to come?
Probably. Read my previous post on The Publisher of the 21t Century.
Apparently, traditional media’s love and hate relationship with YouTube took an interesting turn tonight: NBC canceled its channel on YouTube.
I won’t comment on that directly since WatchMojo.com is a content provider on YouTube and enough people are already commenting on the unconfirmed news, but I’ve been meaning to look at the interesting dynamic between traditional media companies and web video startups, and this is one more chess move in the big game that’s really only starting.
When you realize that Web Video is a $150B market cap opportunity by 2011, but not for traditional media and What The Math Suggests Old Media Should Do with Web Video (invest, not acquire), it’s not a surprise to see media companies wanting to be in control of their destiny.
NewTeeVee has a fantastic overview of media companies’ investments in web video startups, which I will shamelessly copy, paste, update (they forgot CBS’ stake in Spotrunner, for one, amongst a few others). I’ll also add some color.
Does it help or hurt companies when they get an investment by media companies?
Like most fine questions, answer is: It depends.
Why Strategic Money Helps
When it comes to strategic investments, one school of thought is that it encourages VCs to invest because they see a clear connection between investment and exit. From an operational perspective, clearly, getting a media company to invest in you will help in terms of validation, sales and marketing. Right Media said that they got a lot more calls for business after Yahoo! bought 20% for $45M. In their case, it also helped prop up the value of the company, subsequently selling the remaining 80% for $680M. Of course, what helped Right Media mainly was the market environment that saw 24/7 RealMedia, aQuantive and Doubleclick get acquired for high multiples.
Why Strategic Money Hurts
Now, the flip side on selling a stake to media companies: The other school of thought suggests that this also closes potential upside in any negotiations: if (say for example) NBC owns a strategic stake, that is great in many ways, but they might ask for a First Right of Refusal (FROR) in any M&A talks, meaning that it’s their right but not their obligation to match any offer and buy you.
The problem with this scenario is not in theory but in practice, because a would-be buyer, say CBS for example, would not even consider looking at buying you because it means they have to spend time and money on due diligence and then the holder of the FROR can walk in, match the offer and win.
Worse off, there’s nothing that forces the holder of the right to initiate talks. They have the option to do so, but not the obligation. It’s also not like you have the conceptual equivalent of a pull option, which is the right to sell. So while I myself love the allure and operational upside of getting a media company to back you, I also understand why some investors that I talk to don’t share that optimism and bullishness.
So technically, while some amongst the “smart money” might love strategic money, as an entrepreneur, I’d be wary (in all candor, I’d also consider it and reach out for it because the benefits are long and clear, too).
How to Structure a Strategic Investment by a Media Company?
When I was at the Tech Crunch 40 conference, Jason Calacanis (who raised money from News Corp. for his Mahalo project) suggested that the optimal way is to have an institutional investor (such as a VC) set the terms and have other strategic investors tag along, instead of have the media company set the terms. I think that is probably the wisest way to go, though one might not always have the luxury, of course.
What About Derivatives in Lieu of Equity?
Of course, some times a media company does not actually invest cash, but they strike a business deal and want to get some skin in the game. In this case, you can look at derivatives, such as warrants.
We’ve seen this happen before, too. Google did that when AOL and Yahoo! used Google to power their search engine and did not actually invest any money.
I’m not recommending any entrepreneurs to pitch warrants in lieu of equity in exchange for a cash investment… I’m pretty sure if you have NBC, CBS, News Corp., Walt Disney’s ABC, etc. sitting in front of you and showing interest to invest cold hard cash and you suggest warrants, they’d spit in your face and pile-drive you into the boardroom.
I’m just saying that in those rare events when it’s a business development partnership, an entrepreneur should consider warrants, as Google did, to get the larger media company interested in seeing you grow, cause the potential capital gain is a nice incentive and bonus.
Investments Made by Media Companies in Web Video Related Startups
Anyway, here are some investments by media company courtesy of NewTeeVee, with a bunch more I’ve added. I’ll continue to update this and if I missed anyone email me at ash@mojosupreme.com.
- Brightcove: video-publishing tool provider
- BroadLogic: video processing chips (with Comcast Interactive Capital)
- Ripe Digital Entertainment: on-demand TV network for young men
- ScanScout: contextually relevant video ads
- Veoh Networks: online video platform
- Visible World: video advertising for TV and broadband (with Comcast Interactive Capital)
Comcast Interactive Capital (CMCSA)
- BlackArrow: video advertising platform for cable
- BroadLogic: video processing chips (with Time Warner Investments)
- Revver: video-sharing with revenue sharing for all creators
- RGB Networks: video networking systems
- Visible World: video advertising for TV and broadband (with Time Warner Investments)
- Vitrue: white-label video sites and advertising services
Peacock Equity (GE)
- Firebrand: commercials as content portal (launching next week)
- Adify: contextual video ads.
- NBC also has an investment in Worldwide Biggies, a digital studio.
Hearst Interactive Media (HTV)
- Brightcove: video-publishing tool provider
- Sling Media: place-shifting hardware devices (sold to EchoStar)
- The NewsMarket: news video archive
- Worldwide Biggies: digital studio
Steamboat Ventures (Wall Disney’s VC Arm)
- Move Networks: streaming television platform
- 56.com: Chinese video-sharing site
- CTS Media: Chinese video advertising
- Netmovie: Chinese VOD
- UUSee: Chinese Internet TV platform
Yes, I noticed the obsession over China.
Bertelsmann Digital Media Investments
- UITV: Chinese Internet TV site
- Joost
- Spotrunner
- Stake in male-oriented video-sharing site Break.com.
- Brightcove: video-publishing tool provider
Yes, everyone owns Brightcove.
That’s just the investments, if you consider acquisitions, the list would be longer, and that’s something I’ll start working on.
You might notice the notable absentee is News Corp., and I don’t think it’s a coincidence.
Yes, they own 5% warrants in ROO, with the option to buy 5% more, but that was given to them… When News Corp. makes investments, they’re not small, they’re in large entities, see for yourself.
As I said, this is not a coincidence. When I was attending another conference, Paid Content’s EconSM shindig, I was in the audience when Mike Lang, Executive Vice President Business Development & Strategy at Fox said that News Corp. wasn’t interested “in leasing companies, he was looking at buying companies” and if I were News Corp., I’d share that outlook, frankly…
Not all media companies have that outlook, of course: it is interesting that CBS’ Quincy Smith and Michael Marquez have decided to take CBS Interactive in a different direction by mainly investing in - and not buying - young new media companies.
Time will tell which decision yields the best results.
Related on HipMojo.com:
- What Old Media Should Do with Web Video: The Math
- Web Video is a $150B market cap opportunity by 2011, but not for traditional media.
Paid Content reports that RH Donnelly bid the highest for Business.com, going all the way up to $345M for the company that started off with a $7.5M purchase of a URL and a subsequent $10M funding round.
RHD, a publicly traded firm, did $1.895B in 2006 revenues, but only 2% of that (according to PaidContent) - or $38M - came from the Web. So, to remain relevant in the 21st century, it is spending over 10x that in order to reposition itself and strengthen its online presence. In a way, it makes sense, I can’t for the life of me imagine upcoming and existing generations turning to books and print in general for directories and what not…
Interestingly: it has $75M of cash according to Y! finance but $10B in debt, so it is really leveraging its books to shift things online. Of course, is Business.com the best $345M can buy? Probably not… but when you get a paltry $38M out of nearly $2B in revenues from online and your clients are moving online, what’s $345M?
During Euro 2004, I got an email from IGN Entertainment’s VP of Corporate Development regarding a relationship between my company and his. We were the largest men’s lifestyle publisher, they the largest publisher of video game information. They were about 5 times larger than us in terms of audience. Their revenues dwarfed ours.
Between then and May 2005, IGN was in acquisition talks with us and it was becoming clear that we would soon be acquired and my job would become redundant. A part of me tried to stay, but IGN basically showed me the door. As such, I began to contemplate my next venture as early as 2004.
The Big Idea
Never one to be short of ideas, I thought I had come up with the next big thing: a community and marketplace for intellectual property, with a first application for writers and the publishing community.
In today’s lingo, basically, the concept was a social network for the publishing world.
If my memory is correct, this was in late 2004 and throughout the early 2005 months. I know that because MySpace was still a part of Intermix and had not yet been sold to News Corp and we had not sold to IGN yet.
The rationale was that:
- eBay created a marketplace for products and services and became a $40B market cap firm.
- Monster created a marketplace for labor and became a $6B firm.
So I figured, why not create a community and marketplace for Intellectual Property, with a first application for Writers.
I actually reached out to a couple of VCs but no one bit. This was 2005: social networks, though they were not coined as such, where not very popular.
The name of the venture was TradeMojo.com. Trade implied craft and exchange. Mojo is that charisma and attraction that all creators command and crave respectively. TradeMojo.com was the first product or service within Mojo Supreme, but ultimately, it never saw the light of day.
Of course, subsequently MySpace, the grand daddy of social networks, got bought by News Corp. Today MySpace and Facebook have ultimately cornered the social networking market in the sense that they can unleash niche applications at will. Of course, I’m sure there are upstarts in each field. I even know and root for a few. And in the spirit of disclosure, I might be advising one such firm.
Today, News Corp. did what I expected them to do: HarperCollins, MySpace to solicit teen writing. Sure, there’s a million things that can go wrong, but this is long overdue and a great first step. Note, News Corp. bought IGN, who bought my old company.
I am not sure if News Corp. and MySpace will win but publishing is a market that is perfect for social networking. The problem, really, is that they risk not doing it right… or staying too true to what makes publishing what it is.
Why Publishing? Writers + Agents x Publishers = Inefficiency
I have written two books, I never had time to really search for an agent being a busy executive and writer for a mid-sized online publisher. But having the sales and marketing experience, I went ahead and published them.
My first book is Course To Success: Everything You Need to Succeed Beyond School and the second one is The Confessions of Alexander the Great: 33 Lessons in Greatness. Technically McGraw Hill and Random House showed varying degrees of interest in each one respectively, but ultimately the offers were not attractive. There was no guarantee of them being published and the advances were modest.
I self-published the books, kept the rights and they have sold 2,500 paperbacks each along with well over 2,500 ebooks each. Most of this, if not all, has come on the strength of what drove me to create this concept.
The experience taught me how much publishing could benefit from the Web.
News Corp. and MySpace are dipping their toes today with their move. I fully expect leaner companies coming out of the woodworks and giving them a run. I also fully expect CBS’ Simon & Shuster to do something similar over time, though they lack the social network component. Time Warner is another company that can do something similar with Warner Books. Bertelsmann, always an innovative media player, will probably experiment with Random House, too.
Naturally these publishers will have a comparative advantage by virtue of being a publisher, but that same strength can easily become a weakness because it makes them look at the opportunity through a set of eyes that have grown myopic…
The publisher of the 21st century will be very different from the inefficient one of the 20th century. The winning formula will allow:
- writers to create content and build their identity on the Web,
- readers to search, browse, navigate and ultimate read full and partial screenplays, manuscripts, plays etc.,
- readers, agents, other authors and publishers to comment and share/recommend content and create readership / fan base,
- publishers look for promising writers and reduce risk in projects.
Target Market and Benefits of Concept
We’re not talking about the 1% of writers who are in the category of landing deals with million dollar advances, we’re not even really talking for the second tier ones who land agents easily etc., I’m referring to the 99% of aspiring writers who might be good - or not - and whose works never see the light of day.
I’d humbly argue that publishing is a very inefficient model: it’s limited to geography and one’s circle etc. Finding writers, that is. Moreover, even once a writer signs on and gets published, some bookstores have excess inventory gathering dust while others lack supply to meet demand.
Music was inefficient, too, and remains to some extent, but it has changed dramatically. Book publishing has not, but it will and has begun to in fact. But it’s still way too early to know how it will fare.
Bottom line: The process whereby someone lands an agent, gets a book deal and publishes books is preventing publishers from capitalizing on the bulk of the iceberg.
Think American Idol for Writers - Online
Admittedly, publishing is a very subjective thing to begin with, but as things like American Idol have demonstrated:
a) almost anyone with the right mix of talent, creativity and drive can be a star if given a platform,
b) talent and quality is subjective to some extent,
c) such a concept drastically reduces marketing costs,
d) such ventures create a valuable asset that can be monetized in some other way,
e) launching a platform to showcase talent increases the likelihood of success for the intellectual property in question.
Less risk, more reward. It’s almost a no-brainer. Of course, at the core of publishing come agent/author/publisher dynamics, but like I said, this is not something that many in the upper tier will look at… this is really creating value where nothing existed.
First Wave of Social Networking
Furthermore, we’ve seen web properties like MySpace, Facebook and others lend credence to social networking, but applications to specific niches that crave for such a platform have yet to proliferate. Given everyone’s obsession over music and video, those are areas that will garner more attention, but not everyone can play an instrument, technically everyone can write.
Blogs: Self Publishing, Citizen Journalism
Blogs are popping up every day, too, but the growth has slowed down as writers ultimately crave audiences and self-publishing (what blogs are) ultimately provide limited upside for any self-respecting author. I can tell you I care little about sales when I write a book, I want people to read it and tell me what they think. Of course, the model I envision is somewhat win-win-win for authors as well, in fact it empowers them… which will lead to user adoption.
A Virtual Bookstore
In fact, if one was able to mesh the concept of the physical, local bookstore and embed the bells and whistles that come with web communities, it could be argued that there is a lot of value creation possible.
After all, I can walk into a bookstore, pick a book, sit down, sip on my latte and if I want to, I can read the whole thing for free, but we still buy books, no?
Market Ripe for the Taking
That, in a nutshell (not sure this constitutes a nutshell), is/was the concept of a product I had called TradeMojo.com.
I never ran with it. To me, the social networks were too large and seeing how MySpace was in the hands of News Corp. and News Corp. owned Harper Collins, it was a matter of time before they did this and make my project moot. So I ventured into web video and vertical search instead.
Diane Naughton, vice president of marketing at HarperCollins Children’s Books, said that the challenge has shifted from the publishing industry holding the Internet at arm’s length to worries about how to prove value from online marketing efforts.
One way HarperCollins plans to tackle this challenge is to team up with MySpace, according to Naughton. In the fall, the social network plans to build and launch a new “create and share” writing tool in partnership with HarperCollins, Naughton said in an interview at Mashup. Teens and college kids on the site can write prose and then share it with friends on MySpace. People can then vote on the best writing, she said.
I’m not sure if MySpace is the best platform though, too much clutter. And I don’t think, frankly, that it makes sense to create one global marketplace for IP. Indeed, since today context is king, it makes more sense to create vertical communities, one for books, one for music, etc.
No one has really been able to create a marketplace for Intellectual Property. I thought I could. I didn’t.
Of course, based on what I read and saw, News Corp./MySpace is not going all the way with this… if they included all of the features that would make this a winner, Harper Collins could really take this places.
I’d outline what those features are, but not today.
All I will say is this: life has a funny way of unfolding. When I left IGN, they made a token offer for me to find a new gig within IGN (so not even within News Corp. or MySpace) but not report to my then boss. The problem was that I’d have to continue to work out of the same office… which made their offer pretty hollow.
Anyway, I thought of suggesting TradeMojo.com to them… but for a myriad of reasons, I didn’t. To me it was inevitable that they put two and two together and combine MySpace with Harper Collins. Today, a whole two years after the acquisition of MySpace, the inevitable happened.
Will MySpace Books Win?
Well, time will tell, but this is one story that has yet to be told…
PLAY
