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.
Everyone is freaking out over the fact that YouTube is trying to monetize but 4% of its massive inventory.
Truth is, I thought that number was lower. But whatever the number, it’s a good thing.
YouTube is much bigger than its competitors. I do not think it’s easy for an outsider to realize just how much bigger YouTube is than Veoh, Daily Motion, Revver, Metacafe, etc.
We syndicate clips to a lot of places, and trust me, relative to its peers, YouTube is eons larger. We also syndicate clips to MySpace TV. MySpace is unique, in that MySpace.com is gargantuan, so if and when a clip gets a push off MySpace TV, it can spike your traffic.
Anyway, we love all of our partners… but the point I am making is that YouTube has so much inventory that even if it could sell ads across 100% of its inventory, all that would do in the short term is pummel ad rates because supply for video ads would shoot up but demand won’t change.
The problem is that the TV companies are generating the bulk of online video ad revenues, but they control their content, so you are seeing a bottleneck of video advertising revenue on a few major sites, such as the portals and the traditional media companies (and judging from the list below, the lines blur due to partnerships and joint ventures):
- Yahoo!
- MSFT and NBC’s MSNBC.com,
- Disney’s ESPN.com, ABC.com and Disney.com
- Viacom’s MTV.com, Atom.com, Spike.com, etc.
- News Corp.’s FOX.com, and MySpace TV (despite what the denigrators say, the much vilified MySpace did do $750M of Fox Interactive Media’s $900M in revenue, people)
- Time Warner’s AOL.com, CNN.com and related properties also probably generate meaningful revenues…
- CBS - who until its recent $1.8B acquisition of CNET was out of the Top 10 properties - has embraced a more open distribution strategy, but I suspect that will tilt to a more closed (or balanced) as it owns a larger web audience where it can keep 100% of revenues (this is why, I think, you will see CNET and CBS start to get more serious about web video, something that, well, both companies should be stronger in).
Then, of course, there is market darling Hulu, who reasonably and fairly can do no wrong. Hulu - whom many miss the point about its raison d’etre - can generate revenues off 100% of its inventory, but its inventory will always be relatively small compared to Veoh et al., let alone YouTube.
The problem is these high quality sites already charge an arm and a leg in ad rates for traditional placement (banners, etc.). Then for video, they want you to take out a second mortgage. Technically, new players like YouTube, Veoh, etc., would be ideal places for more cost effective video ads… but with these, the problem is UGC. In this case, UGC stands for User Generated Crap, or User Generated Crime (as in piracy). So net-net, advertisers balk and the entire inventory (or in YouTube’s case, 96%) becomes untouchable.
But here’s the thing, in YouTube’s case, this is a Godsend, anyway:
YouTube commands a 75% market share… maybe more. So even if it can generate revenues off only 4%, well 4% x 75% is still a meaningful chunk of the ad dollars up for grabs. Trust me, Google might refer to the 4% as a problem to get Wall Street off its back, but any self-respecting ad sales man will tell, it’s the inventory, stupid.
I am not saying that ceteris paribus (did we just break out the latin?), YouTube would not prefer more sellable inventory… of course it will… but that is over the mid and long term, when advertisers come on board and embrace online video.
Right now, they just ain’t.
Hmm. Two and a half yars ago when I started WatchMojo.com, media companies didn’t bother replying to our overtures… looking down at us. When I say media companies: read all of them, but put a particular emphasis on print and TV companies.
Pretty quickly,
- print companies looked at us as potential lifelines, because they looked at online video as a brave new world that could save their dying print franchises (I could insert a hyperlink for each word in that sentence).
- TV companies began to feel the way print and music media firms did in the late 1990s-early 2000s.
Today, in our private talks, they “admire our vision” and “respect our foresight”. Translation: their businesses are about to join print, music and radio in the toilets.
More from our vault:
- Understanding TV executives Angst and Envy
- Web Video Represents $150B market cap in 2011, but not for TV companies
- Digital Revenues are Never Incremental for Old Media
- Will TV companies face same fate at Print Companies?
- If You’re Old Media, What Would You Do?
Scripps is one of my favorite media companies.
Admittedly, Scripps is one of the many sources of inspiration when I came up with WatchMojo.com’s programming and editorial strategy (re: HGTV, Food Network, DIY Network, Fine Living). Other influences are Discovery Networks (Travel and History Channel), Viacom (VH1, MTV), etc., so admittedly, it’s varied.
However, trying to wrap my head around their strategic plan for the entire company is not an easy thing to do.
What is Scripps?
The E. W. Scripps Company, through its subsidiaries, operates as a media company that provides content and advertising services via the Internet. It operates through four segments: Scripps Networks, Newspapers, Broadcast Television, and Interactive Media. The Scripps Networks segment operates national television networks, including HGTV, Food Network, DIY Network, Fine Living, and Great American Country. The segment also provides video-on-demand and broadband services. The Newspapers segment operates daily and community newspapers in the United States. It also owns and operates Scripps Media Center, as well as operates Internet sites, offering users information, comprehensive news, advertising, e-commerce, and other services. The Broadcast Television segment operates ABC-affiliated stations. The Interactive Media segment offers online comparison shopping services. It operates a comparison shopping service that helps consumers find products offered for sale on the Web by online retailers, as well as operates an online comparison service that helps consumers compare prices and purchase various essential home services. The company also offers BizRate, which is a consumer feedback network that collects consumer reviews of stores and products. The E. W. Scripps Company also offers other services, including syndication and licensing of news features and comics. The company was founded in 1878 and is based in Cincinnati, Ohio.
Like most media companies, Scripps is facing a threat of cannibalization.
Consumers and advertisers are flocking to the Web, but the core business of Scripps - along with all traditional media firms - remains offline.
It’s a harrowing experience. One that keeps executives awake at night and creates anxiety and envy. Occasionally, they’ll make $500M decisions that puts them in a corner.
Anyway, interestingly, Scripps is in the process of spinning off its slower growing and mature businesses from its higher growth web business. But when you dive into their 10-K, you see a lot of interesting tidbits that shed light on how confused some traditional media companies can become in these digital days.
Tale of the Tape
Scripps is worth $6.8B in market capitalization.
For 2007, the company’s total revenues were $2.5B with net income of almost $400M. This translates to a P/E of 18 and a P/S of 2.75.
It makes sense, in some ways, to spin off the new media assets, granted… but you have to wonder about the broader repercussions and realities for old media.
From the 10-K, via Paid Content:
“Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005.”
It should be noted that these are advertising sales only. Indeed, Scripps Interactive also consists of Shopzilla and uSwitch. In fact, in 2005, Scripps paid a whopping $525M for Shopzilla, then named Bizrate. At the time of purchase, in 2005, when Scripps bought Shopzilla:
Founded in 1996, Shopzilla, formerly BizRate, is a privately held company that is expected to generate $30 million to $33 million in EBITDA profit, also excluding investment results and unusual items, on revenue of $130 million to $140 million for the full year 2005.
As such, with a price tag of $525M (in cash, no less), at a $135M in revenues, this converted to a 3.9x P/S ratio.
As of Q3, 2007:
Shopzilla and uSwitch, which together make up Scripps’ Interactive Media division, generate upwards of $54M per quarter, driven largely by CPC and CPA-style referral fee revenues.
For what CPC, CPA and CPM mean, along with other standard online ad terminology, click here.
If you project the $200M or so that the referral business generates, at the same 3.9x P/S ratio, the unit should command a whopping $800M in a sale. Scripps is adamant that Shopzilla is not for sale, but that’s not what the rumor mill suggests.
I should disclose now that Shopzilla was an advertiser of our sites in 2007. We do not have any inside information on this matter, however.
Advertising Has Inherited the World
But advertising is everything these days. Free, ad-supported content is what drives value these days… and much of what Scripps is doing is all about unleashing shareholder value. So let’s focus on that.
Doing the math and focusing only on “Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005,” then that’s growth of 100% in 2 years but effective annual growth of 54% from 2005 to 2006 but only 17% from 2006 to 2007 .
What about 2008, you ask?The 10-K continues:
“Interactive media segment profit is expected to be $13 million in the first quarter”
Multiplying that by 4, you get $52M. From 2007 to 2008, this would be growth of 30%… not bad. What happened in 2007 to kickstart growth from a paltry 17% to 30%?
Acquisitions, that’s what.
“In July 2007, we reached agreements to acquire the Web sites Recipezaar.com and Pickle.com for total cash consideration of approximately $30 million.”
Scripps can file this under “Advice You Didn’t Ask For”, particularly since I’m biased, but I am not sure Scripps is wise to be buying UGC sites, frankly. Don’t take it from me: CNET regretted acquiring Webshots; from my vantage point, Scripps will regret buying UGC sites, too. What these sites need is not more low-quality inventory… they need to pull a AOL/Webshots and find a way to create low cost, high quality video content.
What this means for the spin-off?
Regardless of what I, a mere mortal, thinks of such acquisitions, the fact remains: the company spent $30M from Scripps’ cash hoard to load up on interactive. That of in itself is wise.
Scripps balance sheet shows $58.95M of cash but nearly $600M in debt. At even 5% interest charge (presume Scripps $2B in sales guarantee it a low interest rate or cost of debt), that is an annual $30M interest expense. In other words, in 2007, it paid $30M in annual carrying fees to spend $30M in acquisitions to kickstart its interactive growth. That makes sense, I guess: invest today for tomorrow’s growth.
That’s also why, I presume, they want to spin off the new media company: more capital for more acquisitions, and to pay off debt (I am guessing about the latter, I have no idea what management’s actual use of funds and strategy is).
Benchmarks
The Web’s online ad markets are growing at 25% per annum, but with quality content you expect Scripps to outgrow the market.
Moreover, while the growth rates are nothing to sneeze at… in absolute markets, they’re puny when the offline unit does $2.45B in annual sales.
You cannot, after all, simply shift your offline content online and expect the same revenues. TV ads in the US were a $75B market in 2007 while web video was a $750M market. Web video and online media in general cannibalizes traditional media and TV in particular cannibalize offline revenues… Scripps is a textbook example of a victim of this phenomenon.
What about the Stock?
Of course, it’s all about the share price and market cap… so maybe the financial engineering makes sense. Does it?
Double the P/S and P/E for the online segments (since they are higher growth segments, this basically means that investors would bid twice as much for the growth), a $40M revenue in 2007 x 5.5 P/S ratio project a $220M company. Of course, that is just the online advertising contribution, the referral fees generate over $216M per year (if we simply take that Q3 2007 amount of $54M and multiply it by four).
But multiples on referral fees are in the gutters relative to multiples on ad revenue…
With the obsession over advertising these days, you have to presume that P/S for referral-based businesses is down. But since the Web does indeed command a premium to offline media, we’ll eliminate any discount or premium and simply say that today Scripps would be able to get the same multiple, 3.9x.
But the problem with this rationale is that with $200+M in revenues, that would project nearly $800M in value. I don’t think anyone would pay nearly $1B for Shopzilla.
In fact, given the herd mentality of investors and buyers in general, I doubt they’ll get $525M for Shopzilla because buyers would prefer to spend such an amount on sexier things: video, social networking, video games, etc. As such, if you work backwards and agree that a price is what the market will pay for something, it’s hard to imagine Shopzilla getting $500M on the market, so this means a P/S of about 2.5x.
So what would all of Scripps Interactive be worth?
Regardless, if you combine the businesses comprising interactive:
+ online advertising = $40M in 2007 revenues at 5.5x P/S = $220M
+ referral fees = $216M in 2007 revenues at 3x P/S = $648M
You see that the interactive business should be an almost $1B company.
If Scripps is indeed worth $6.8B… then the rationale is that you can carve out a faster growing segment, sell a portion to investors, raise money, pay down some of the debt, and then make acquisitions at a lower cost of capital.
Of course, this entails that they buy the right assets and the right people. Will they? Time will tell. But considering Scripps bought - then sought to sell - Shopzilla for $525M… you have to understand why the company is going to tread carefully.
PLAY
