Slide raised $58M and today lays off a bunch of people and none of the “influential” tech blogs come out and say anything remotely… anything.
Om Malik, whom I respect quite a bit, publishes a post that doesn’t really say much. Read his post a few times and tell me what are you supposed to walk away with? Of course, Om is a VC as well, so he probably won’t berate any of these crappy companies that have too much VC money riding them anyway.
Here’s what I want Om (or anyone) to say:
Slide was a joke, everyone outside of the Valley’s incestuous circle knew it, and Facebook-based business models were a joke (just as Twitter and Twitter-based business models are a joke).
Here’s a crazy prophecy: at a $500M valuation at its latest round, Slide will shut down before you know it. No way will their VCs want them to burn through their $58M in capital to find out.
Expect many more such clunkers to die soon. One more thing, Max Levchin is probably a brilliant bloke, but just because you kicked ass as a CTO, CIO, CXO somewhere doesn’t make you a badass CEO.
Hey Max, if you’re looking for a gig, let me know. You might found this hard to believe ut with $58M in funding, your VCs might be a bit unhappy with the state of affairs.
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.
I hate to post my third anti-VC rant in two days… but upon learning that some former Facebook staffers are looking at unloading some of their vested shares at a value of $3-4B (when supposedly Facebook locked in a $15B value earlier this year), it sort of reiterates my whole argument for providing liquidity preferences to founders, and in some exceptional cases, executives and employees, too. Read more in Bulls Make Money, Bears Make Money, Hogs Get Slaughtered.
Trust me, if you surround yourself with the right talent, cashing in some of your chips definitely does not make you less hungry for success… it just makes you more patient for it.
But, VCs go through their box of deceitful cliches to lock in talent and vest shares rigidly in the hope of retaining hungry employees and luring them into a bigger payoff when all they do is end up looking like jerkoffs. Oh, look, it rhymes.
But ask yourself how effective it is to invest money in a company and not let anyone take any money off the table, only to realize that some former Facebook staffers (who probably left because Mark Zuckerberg had no desire to sell any time soon) are cashing in their chips for 33 cents on the dollar? Way to go geniuses. No wonder your batting average is in the toilet.
SAI and TechCrunch have more on this seemingly unbelievable story. In the broader landscape, I personally think that Facebook is surely worth something, but $15B? We all know that was MSFT agreeing to that in order to you-know-what block Google from the deal. But the reason why Facebook board member Peter Thiel pushed for such a lofty valuation wasn’t just greed to push up his investment in the social networking site, but because he knew that the Ponzi scheme effect would also push up the value of his investment in Slide… which is basically valued as a function of Facebook.
I probably don’t make too many friends saying this, but I predict that our generation’s answer to Pets.com won’t be Dogster.com (that actually makes sense), but rather, the Slide’s and Rock You’s of the world. I could be very, very wrong… but no way is Slide worth $100M, let alone $500M.
Anyway, if what Tech Crunch is saying is true - that Facebook just deleted one of Slide’s applications - then Slide might not be worth $5M, let alone $500M.
Investors in Max Levchin’s ride (still don’t understand how someone who helped build PayPal would think that Slide is a good way to deploy his skills but then again, who cares what I say) might want to read up on our post on why building your business on Facebook might not be a grand idea and shall inevitably slide you into oblivion.
Mind you, the way the Web is now operating in bizarro mode, maybe this is a glitch and Facebook will apologize for the mistake and reward Slide with even more shelf space of its otherwise useless and nefarious apps.
Or, maybe, the bong effect has worn off Mark Zuckerberg and he realized that his otherwise useful and intuitive social network was becoming as valuable as a warm bucket of spit thanks to the Rock You and Slide’s of this world.
Worth noting that Founders Fund (Peter Thiel’s fund) is an investor in Slide, Thiel is an investor in Facebook. If this is not a mistake and Zuckerberg did in fact put the kibosh on Slide, then I am sure Thiel has been in the middle of some interesting exchanges in the last 24 hours, but, of course, we’re speculating.
Step 1: After f*cking over Sean Parker at Plaxo, Sequoia is shunned from participating in Facebook funding, who raises money from former Paypal President Peter Thiel.
Step 2: Sequoia is snubbed once again from Facebook craze when Slide - founded by former Paypal encryption wunderkind Max Levchin - launches slide show maker for social networks. Social networking craze ensues… then starts to fizzle.
Step 3: Having had enough of being shut out of the FB ecosystem, Sequoia leads Series A (in January 2007 at $1.5M) and Series B (in March 2007 at $15M) rounds for Rock You, Slide’s arch enemy in FB app ecosystem. Note timing of Series B: right before FB launches apps.
Step 4: Realizing FB apps is as valuable as a warm bucket if spit, Sequoia (along with initial investors First Round, and Lightspeed Ventures) pass on investing in Series C round to display greater fool theory in mimicking Slide’s mammoth $50M round, get DCM to ride on Sequoia and First Round’s coattails by investing a $35M - the day after Slide says FB apps are pretty much useless. It’s worth noting, by the way, that according to one contributor on TheFunded, “would not take money from DCM if offered”.
Step 5: Sequoia can brag that they are participating and helped finance the FB craze… blah-blah-blah until next fad; DCM can claim that they invested alongside the great and venerable Sequoia.
Rock You now has raised over $51.6M in funding. Slide is up to $58M. That is early $110M in funding alone… would you pay $110M for both companies in a buyout?
I wouldn’t… see our first piece here.
UPDATE: Venture Beat notes: “Doll Capital Management led the round, providing $30 million. The remainder $5 million was provided by existing investors, Sequoia, Partech and Lightspeed.”
Yeah… that changes everything I said. Right…
M&A can happen quickly, but financing is a mind-numbing process that takes 6, sometimes 12 months.
As such, learning that Rock You just raised $35M for Facebook apps, you have to wonder, how do the investors feel upon learning that just yesterday, the #1 in this “space”, Slide, signaled a shift in strategy by stopping to develop new apps.
The money did not come from dumb money:
The round was led by venture firm DCM, with contributions from several private investors. Previous RockYou investors include Lightspeed Venture Partners, Partech International, and Sequoia Capital.
But all factors being equal, VC-backed ad-supported companies are prone to fail: no freaking clue how advertising works and too arrogant to admit it, too.
Three months ago I asked “why is there no YouTube fund” to match Facebook or iPhone funds, even though online video will be far bigger than social networking ads, and wireless ads is really hype driven for the time being (for the record, I am far more bullish on the iFund than the FB funds). Today’s announcement by YouTube that content owners can sell ads against their own content and monetize their content is validation and support of my argument that there is a need for a YouTube fund. After all, online video ads in the US is supposed to grow from $1.25B in 2008 to $7.1B by 2012… while social networking revenue projections are being reduced. To drive the point home: YouTube’s market share in video is more strangling in video than Google’s is in search, yet right now, YouTube only does $75-200M in annual revenues… so the upside - while both clear and unclear - is there.
As I said, some investors must be waking up today feeling rocked. To see how something so stupid can even happen, click here.
Fake Steve Jobs was absolutely correct in saying that the “Facebook and Slide ecosystem” represented a ponzi scheme of sorts. No one in the Valley will say this, because they would run the risk of burning too many bridges… but the truth is that while Facebook has created an interesting business, it also lost a lot of value by opening up to developers and whoring their audience. I log in to Facebook less and less frequently, and I am probably not alone.
But the euphoria that fanboy developers had for Facebook’s platform helped lock MSFT’s interest to the tune of a $15B market cap, on paper… it was not a coincidence that no one other than Slide founder Max Levchin stood up at the F8 event and hailed Facebook’s platform as the platform to pick up the baton from MSFT’s Windows ecosystem. That kind of developer envy led to MSFT’s investment… which by of itself was smart (it c*ck-blocked Google from Facebook and ensured that no one but MSFT could ever buy Facebook if an exit was warranted).
But running with the ponzi scheme analogy: once Facebook locked in their $15B valuation, then it let follower Slide lock in its own crazy valuation: $500M pre-money for what is really nothing other than noise on an otherwise useful social network.
Alas… much the same way that one year into the journey Facebook is no closer to developing a business model, Slide now realizes that a Facebook-obsessed distribution strategy is folly… and a Facebook-centric monetization strategy is as realistic as an orgy starring Santa Claus and the Tooth Fairy.
Facebook can actually build a very valuable ad-supported business if it gets off their “we’re a technology company” mantra and accepts that it needs to act more like a media company. If it does not want to be a media business, which is fine, then stop it with the advertising business model mirage-chasing.
Facebook has a shot at making that $15B valuation into reality, Slide? Not sure… Today’s move at least makes me realize they realize that, too.
Uber angel investor JF (you call him Jeff) Clavier raised some eyebrows last year when he was quoted as telling startups that their income is “noise”, even if said income is approximating $300,000 in monthly revenues. A $300K monthly revenue implies an annual run-rate of $3.6M.
Maybe he’s right: Ning just raised $60M on a $500M pre-money valuation despite making $1.7M in revenues. That’s also the valuation Slide got, and it too probably commands an eye-popping revenue multiple. Any way you dice it, Clavier’s $300K per month revenue would be for a company with twice as much revenue as Ning. In a linear world, that would be a $1B company (if Ning is indeed wirth $500M at $1.7M in revenue). Obviously, we’re playing with numbers, because a company with $1.7M in revenues should not be worth half a billion… but who cares, obviously investors don’t, argues Macromedia founder Marc Canter, who sold his firm to Adobe for a cool $3.4B a few years ago.
To put that $300K figure in context, when I left my old job as VP of ad sales for a mid-sized online publisher, I had taken our company’s ad sales from $0 to $300,000 per month, or $3.6M per year. That’s not noise anymore; that’s called independence. Any self-respecting entrepreneur should care about that word: independence. When you raise VC money, you lose freedom. When you raise $102M, chances are you lose a lot more than independence, even if your name is Marc Andreessen.
I wonder what kind of deal terms Ning had to agree to to raise that $102M in financing to-date. Of course, as the founder of Netscape, Andreessen can raise money for a pile of crap. I am certainly not saying Ning.com is crap, it’s a smart idea… but I don’t really think Ning is worth $100M, let alone worthy of raising $100M. But who cares what I say.
Anyway, back to Clavier, in all fairness, he says his comments were taken out of context and were in fact “off the record”. I commented on that here, the gist being:
I agree that focusing on revenue is a bit moot. For us at WatchMojo.com for example, worrying too much about running pre-rolls to generate revenue from our millions of video streams is indeed secondary to getting as much content seen in as many high-traffic destination points online… but guess what: unless we have some revenues, we’ll die… so I don’t think either extreme works. You need some revenue, but you should probably not think about revenue alone.
Let’s face it: no self-respecting new media company gets acquired for the income component, all investors look for that capital gain payoff… and I suppose Jeff Clavier is the epitome of that… in all fairness, his track record is good enough that one cannot blame him.
I said that then… and I still believe it… However, the sooner an entrepreneur gets money in the doors, the sooner he frees himself from the false sense of security that financing provides. Financiers are not your friend, much the same way your lawyer (or your doctor, accountant, gardener, etc.) is not your friend. They’re professional with a finite amount of time trying to make as much money in said time. The only difference is that financiers make more money when they own more of the company, instead of how much time they actually spend on your company. So guess what? Your investor’s objective is to own as much of the company for as little time as possible. That’s how they earn the highest IRR on their time.
The point I’m trying to make is: Clavier isn’t right or wrong, but he represents a more laid-back West Coast mentality where revenues don’t matter; a mentality that has become the envy of East coast money managers who have seen gargantuan fortunes created before they get a shot at investing in those projects (by the time they go public).
As such, I don’t find it surprising that both Slide and Ning had to go out East to raise their recent round. There’s no money in revenues, one is led to believe. One company that will make money off both Slide and Ning is of course Allen & Company, and more props to them for being the intermediary on both Slide and Ning’s massive rounds. Some companies never cease to amaze me, and Allen & Company is one of them.
When push comes to shove, entrepreneurs need to realize that VCs earn a living by maximizing their investments, and if that means stepping on and pushing entrepreneurs out, then so be it. They have no qualms about doing just that.
The only way to protect yourself [as an entrepreneur] then is to be conservative and pursue revenues, or as Clavier calls it, noise. That’s half the equation, the other half, frankly, is to keep costs down. This is why a lot of companies that raise too much money are making twin sins… but I digress. More power to them if they can raise oodles of money.
But it’s worth noting that just because you can does not mean you should. Chris Rock once said “just because you can drive with your foot doesn’t mean that you should”. I concur.
John Battelle recently said something in the wake of raising a whopping $50M (somewhat ironic, I presume):
“I went through the most insanely scarring experiences of my life, which was The Industry Standard. We went from $200 million in revenues to $50 million in four months. I had $80 million in leases over 10 years, and had 400 people. That, of course, shaped my experiences in how I built FM. Now I have 20 percent of the staff and 8 percent of the lease. I built this company with the idea that it had to be nimble and lightweight…that was something I was studying with Web 2.0, effects of search on media, etc”
Well, I don’t buy this social media mumbo jumbo (it’s the latest incarnation of wireless, or B2B) but I agree that what we have seen during the Web 2.0 period is not to let costs get out of hand. However, by raising over $100M, Ning has no option but to let costs go up. Investors don’t want you to sit on the cash, they want to see their capital at play.
I always thought investors backed entrepreneurs. They don’t. They back entrepreneurs they know or models they can trust. Paul Graham is right: VCs have lost any semblance of risk taking, adopting a me-too approach to investing in what the greater fool has plunked money into. It’s not even herd mentality anymore: it’s turtle mentality.Yes, it’s the CEOs job to explore all options and one of those is raising external financing, but it’s the VC’s job to actually invest. Let them do the heavy lifting. The only thing you should avoid is falling for the trap of raising money just because you can, or raising as much money as you can when you can… those are cliches VCs use to fool entrepreneurs to dilute too early, get expectations get too far out ahead of realistic options and ultimately lose control.
Paid Content refers to a NYT article on CBS which calls for the company that Bill Paley built to make digital acquisitions, which begs the question: should they go for a big purchase or make small moves?
Of course, answering that question alone without addressing the backdrop to that question yields an incomplete picture.
CBS has hit some rough patches, according to Paid Content:
The parent company is under a mini-siege of sorts about
a) its performance,
b) Leslie Mooves’ salary,
c) Katie Couric’s disastrous tenure at the company,
d) layoffs (even on the digital side, as others are ramping up) and other issues (…)
e) CBS’s need for an acquisition is becoming apparent. Some CBS executives privately agree.
All right. I want to dive in and comment on e) but let’s run through this list quickly.
a) Its Performance
We’re not sure if they are referring to its financial performance or its stock’s, either way:
As per the NYT:
“Without the cushion of Viacom’s other properties, CBS has been more exposed to the struggles of the advertising market. In 2007, it earned $1.25 billion, down from $1.66 billion the year before. CBS stock closed at $21.40 on Friday, compared with $30.99 a year earlier.”
While no company or manager can control what happens to the stock price, I think big media will see a lot of revenue loss over the next few years. Print-centric media companies shrank, why would TV or radio-centric media companies be any different in the next wave of the Web’s growth?
After all, 1994-2003 saw text-based media explode online, 2003 is about audio/video-heavy media.
CBS is seeing this sooner and faster due to its exposure to TV and radio. However, they are strong in outdoors, the challenge there is the upside there won’t account for the downside in more traditional media.
So all hope signals point to online… which explains why:
“On Monday, the company’s interactive unit will officially open a fully staffed office in Menlo Park, Calif., in Silicon Valley, to stir innovation and content development.”
Ironically, the CBS Interactive brass gets the Web quite a bit, but it’s true that they have been overly cautious, too. Being cautious is a bad thing in booming times and a great thing in corrections. The problem for CBS is that the correction is coming offline and online continues to charge ahead… so indeed, CBS does need to make some bold moves. But what are those moves?
Last year, we suggested an outright merger with Yahoo! With MSFT’s $45B gamble, those bets are off (hmm… are they?).
b) Leslie Moonves’ Salary
Last week Henry Blodget wrote: “CBS CEO Moonves Gets 29% Raise, Just Reward For Job Well Done“.
Clicking through, I realized he was being sarcastic by pointing to the seemingly inverse relationship between Mr. Moonves salary and CBS’ performance. While I appreciate Henry’s position, the truth is that CEO pay is determined on a number of things, frankly.
It’s also about the demand and supply for talent. As the CEO of CBS, Mr. Moonves could probably command a much larger salary elsewhere, if CBS’s Board wants to pay him $100M because that is what it takes to retain him, I am not sure CBS or Moonves should be blamed. For the record, he did not make $100M but rather $37M. Is that a lot of money? Yes. But the company made well over a billion dollars in profit and $14B in revenues. Of course, I’m an executive so my perspective is going to be different than that of an analyst or journalist.
But my point is: running a shrinking business in a mature market is not something most executives would embrace, to lure the best (or retain them), guess what? It takes a generous compensation program.
c) Katie Couric
Don’t care personally, but indeed, this is becoming an albatross and if indeed she is that horrific (I don’t watch TV), it’s time to try something else. I recognize she might not be best suited for news, but surely there is plenty of things she can be doing for CBS in other capacties (infotainment, mainly).
d) Layoffs
Layoffs are always demoralizing, especially when a company is making over $14B in revenue and remains profitable. But what about a case - like this one - when the company is shrinking? This is a tough question.
My gut says Jack Welch’s “the lowest 10% should leave” is not a bad thing… so while I don’t want to dehumanize the layoff dynamics and their effect, I think it’s unfair to question the layoffs.
Of course, I do wonder why layoffs are taking place in online areas… which is what both Paid Content and NYT refer to. But just bear one thing in mind: many traditional media companies are not necessarily well structured in new media; divisions and structures are sometimes borne out of legacy organizational systems and sooner or later a correction or adjustment is called for. If this is the case, then I don’t think it’s fair to bash CBS on this point.
e) Acquisitions
The question remains: should CBS make one big hairy and ambition acquisition or should it buy a number of smallish companies and roll them up and/or foster their growth?
For the record, CBS has done both. In fact, it’s done everything including investments in Spotrunner, Joost and many others. In terms of acquisitions: Last.fm was a mid-sized / big one; Wallstrip was a small one.
What would you do if you were Quincy Smith and company? Buy? Merge? Sell?
ACQUISITIONS:
You know what, I admit a small acquisition won’t move the needle, but a major acquisition won’t either. Who would they have bought?
- Bebo? Is a company that marketers love really well-served by serving advertisers social networking inventory? Nope.
- Facebook? Too expensive to buy. Nothing to see, here (perhaps a merger? See below).
- Gawker Media? That might be an interesting addition. But I think Gawker Media founder Nick Denton wants to become CBS, and not sell to CBS. Anywa, Gawker Media lags in video, CBS needs to look ahead and not look back.
- Speaking of video, one company that might position it for future growth is Blip.tv, but Blip.tv does not own any content… so that is a risky move because CBS might buy a great video platform with amazing bells and whistles but then lose all of the content therein. [Disclaimer: Blip.tv is a partner of WatchMojo.com]. In the same broad category as Blip.tv are Brightcove and Video Egg. Bright Cove also does not own any content and is way too expensive, having raised $80M in funding. Video Egg ain’t cheap either, with $40M of funding in the tilt.
- Then there’s all of the YouTube/MySpaceTV competitors: Revver, Veoh, Metacafe, DailyMotion, Break, etc. Mind you, CBS invested in Joost… so what message would that send? As well, Revver was on the auction block and I presume CBS looked at it and then balked. Again, none of those companies own any content, CBS needs to be stronger in web content. That would be the hedge for CBS going forward, of course, it also needs better distribution. I see CBS works closely with Veoh… but is Veoh big enough as a distribution source? [Disclaimer: WatchMojo.com syndicates video to all of the sites listed here]
- Craigslist.org? Not sure Craig Newmark would sell, no matter how progressive Quincy’s team might be. This is Big Media after all… but Craigslist.org would not unleash CBS’ digital revenues.
- Glam Media? That would be a shot in the arm with regards to bolstering its female audience online… but here’s the problem: female audiences still watch TV… what CBS might be better suited for is getting access to a men’s audience. [Disclaimer: Glam Media is one of WatchMojo.com’s syndication partners, too]
- Digg? Not a fan of this one, frankly. Maybe a combo Revision3 / Digg? Even less of a fan of that. Revision 3 is way too niche: it’s too tech-oriented and relies on two hosts, largely. Given how Kevin Rose’s interest waned from Digg to Revision3, then to Pownce, I am not sure he’s buyable because he’s the main asset of Revision 3. [Disclaimer: if you look very broadly at all video content, then WatchMojo.com is more or less competitive to Revision 3, though I view them as rather complementary to our programming].
- Federated Media? Too tech-focused and they don’t own any of the content on the blogs they rep. Big media needs to own content to make it worth their while. Sorry, but that’s just the way media works.
- Gorilla Nation Media’s audience might be a better fit, but as an advertising representation firm, it faces the same challenges: You are buying a stack of contracts that at any point could be severed. Unless you own the underlying content, those contracts are not worth the paper they are printed on.
- Heavy.com? They have a men’s audience, for sure. But if CBS is to buy a destination, it needs to be an enormous destination, I am not sure Heavy.com would move the proverbial needle. In fact, in 2005, News Corp. bought IGN Entertainment, but IGN was doing over $70M in revenues on the strength of its Media Properties (IGN.com, RottenTomatoes.com, etc.), had a lot of technology (in-game advertising + digital distribution of movies, music and games). Moreover, IGN Entertainment was far and away the leader in terms of men’s 18-34 audiences.
However, if Fox Interactive Media has become a new media behemoth, it has more to do with MySpace’s burgenoning audience than with IGN’s properties. That being said: IGN Entertainment does give a lot of content and audiences that marketers look for. The challenge for IGN is that a major chunk of their inventory comes from their message boards, which are notoriously hard to sell and monetize.
This being said, when one looks at how instrumental MySpace and IGN’s acquisitions were, it’s fair to say that the ROI has hitherto been higher on the MySpace deal. I am surprised at this, I won’t lie. But this lesson would encourage CBS to look for a MySpace and not an IGN.
I am not that familiar with Heavy.com’s business, frankly, but I am not even sure if Heavy is an IGN.
- IAC is way too e-commerce oriented. Its search engine Ask.com does not really fit with CBS, either. So pass.
- There’s Meebo, but at $250M or more in value… I am not sure if CBS would even know what to do with it. And, who are we kidding: do marketers really even want to advertise in instant messaging communications? That one makes sense in theory but in practice? Not sure.
- There’s the barrage of search video tools: Blinkx, Pixcy, etc., but CBS remains a media company; it should be technology-centric, I think. What I mean by that is that its content should be compatible with all tech platforms to make it was widely available as possible.
- There are a number of ad networks: Tribal Fusion, Specific Media, Casale Media, Adconion etc. I think the obsession over ad networks will pass. Moreover, a lot of media companies will build and launch their own, which is a mistake as well. I am not sure if CBS should plunk down $100-$500M on an ad network. Advertising.com rescued AOL’s butt because AOL was transitioning from a walled garden to a normal website but the fact remains, that says more about how poorly AOL was doing than how great Advertising.com has done (for the record: it has done great).
Valueclick is publicly traded, but expensive.
If it was interested in ad networks, it might as well skip over display ad-based ones and dive into video networks such as Tremor Media or Broadband Enterprises. Again, I am not sure being in the ad network business is the best capital allocation move.
- It could - much like how NYT invested $29.5M in Wordpress - make a bid for Six Apart (makers of Movable Type) or even Wordpress. But, again, I am not convinced it makes sense for a media company to own a platform without the underlying content. News Corp. buying MySpace made sense because the content on those sites become News Corp. property, or at the very least, MySpace gets a license to profit from it…
- Slide? At the company’s last $500M pre-money valuation, I think CBS would gain street cred in one block on SF by buying Slide but see Wall Street punish it. Hey, just being honest here folks: that is one expensive widget company with moutain-fulls of unsellable inventory!
- There’s TheStreet.com, though I am not sure if it’s big enough or whether CBS really wants to get that deep into finance and investments. Bear in mind Wallstrip was all about investing… so this would be a doubling down on one category. Moreover, at a market cap of $250M, it would eat a lot of money the company could spend elsewhere.
- CNET remains very tech-oriented but it has embraced a lot of lifestyle properties, too. In fact, CNET would be a good fit with 100M uniques, $400M in revenues etc. In fact, trading at $1.2B, it’s not that expensive. CNET would give CBS some web DNA and CBS would open up swarms of traditional advertisers to CNET. This could be the best move yet: unlike most other options, CNET owns a lot of content. It also owns a lot of URLs such as TV.com that with CBS’ help could come to life.
Updated: Oh, wow, they listened to me: it’s official.
MERGERS
- CBS could in fact merge with Yahoo! I wrote about this and frankly, this remains an option.
- It could merge with Facebook; won’t happen. At a market cap of $14B technically Facebook is worth roughly the same as CBS. This would be a bizzarro world deal where Facebook trades in growth for CBS’ $14B in revenue… but this one is so loopy.
- As crazy as it sounds, it could undo the merger with Viacom; won’t happen.
SALE
What about a sale to News Corp.? News Corp. owns FOX, it would love to own CBS. But for this to happen, it would mean Sumner Redstone and my old boss Rupert Murdoch would have to come to terms; won’t happen.
Incidentally, last Friday, GE lost 12% of its value, or $40B. It could have bought two CBS’s. By buying CBS, GE’s NBC Universal would own two of the three main networks, making this an impossibility.
That same obstacle is present in a sale to Disney, who owns ABC.
CONCLUSION
As you run down the list… you realize that all CBS is actually a great media company that just needs some tweaking. Yes, indeed: “Nobody likes negative growth, from the guy who shines shoes to the C.E.O. Everybody feels the pain” the truth is no one wants to blow something up either.
My two recommendations for CBS:
- Buy CNET for $1.5B - $2B (that would be a 25% to 66% premium), which would take its digital revenues from “$200M” to $600M. Combining CNET with Last.fm would also yield a lot of upside in digital music and video tie-in’s. But even then: for a company with $14B in annual revenues, does $600M mean much? Many analysts only give credit to a media company’s stock if digital revenues account for 10% of total sales. Even News Corp. or Disney do not claim that.
CNET remains one of biggest acquisition targets that represent meaningful revenue opportunities, and even that won’t move the needle. So what other options are there?
OR
- Merge with Yahoo!
Actually, there’s also one more option:
GO PRIVATE?
One way that no one will care about a) Performance or b) Les Moonves salary is if it were not publicly traded. Moreover, Wall Street is being unreasonable: yes the company is shrinking, but it will take time for digital revenues to grow, anyway. However, if someone came along and took CBS out at $20B, I think a lot of shareholders would buy that (or I guess, sell for that).
It then allows CBS to d) clean house if they so choose to (and will have to). Kate Couric becomes moot in the grand scheme of things… but most importantly, it will allow CBS to roll up a number of smaller web properties, content producers and tech applications to bolster its overall portfolio. In 4 years - when video advertising will be $7.1B in the US (up from $1B) and all online advertising will be nearly $100B in annual expenditure - it can then be go public again…
This might very well be the best course of action. The question remains: does private equity have the stomach for a $20B debt purchase? With $16B in annual revenues… I think so.
All righty, that was a great use of 40 minutes of my time. Back to work.
2007 marked a euphoric climate for valuations and fundings in the digital space.
- Facebook kicked off the festivities with a $240M investment on a $15B valuation [our coverage].
- Slide finished off 2007 with an insane $50M investment on a $500M pre-money valuation [our coverage].
When Google tumbled from $747 to $430, I presumed that valuations for digital assets would follow suit (not that they should, but valuations are tricky, it’s a function of demand and supply for a given deal, admittedly, but the landscape and climate affects it, too).
But, they haven’t. It’s also not like we are seeing a flight to quality.
Yes, Federated Media has great sites and authors in its roster, but it’s a company with abysmal margins, paying out 50% off the top to partner sites. Federated Media is looking at raising $30M on a $200M valuation. This after supposedly turning down a $100M buyout offer. Is Federated Media worth $100M?
Then Meebo comes out raising $25-30M at a $200-250M valuation, too. Meebo streamlines IM, I see the value, granted… but would a company really pay $500M to acquire it? Maybe. Don’t know.
Then today, Slide competitor RockYou hints at raising money at a $400M range, as well. We know about the challenges and obstacles to monetizing social media… and even those who fueled the social media boom are unsure of the merits today.
I know that digital provides a sanctuary in a slowing economy… but I am nonetheless surprised at some of the torrid valuations these days.
PLAY
