The Spotrunner saga remains allegations, for now, but this does raise two main points:
1- Investors are suffering from such Google envy if they really think that everything in the burgeoning advertising ecosystem can be reduced to an algorithm-driven marketplace. That will never happen with TV.
2- There needs to be a market for founders to slowly cash out shares… though if what WPP alleges is true, I don’t think the Spotrunners founders should have benefited from. I mean, revenues of $10M on $111M of funding? Come on.
Spotrunner launched on January 11 2006, WatchMojo.com launched January 23 2006.
The similarities end there.
Unlike Spotrunner, we never raised $110M in funding… which means we also didn’t [allegedly] get a chance to scam a bunch of investors, not that we would have, of course. It’s a shame to see a company like WPP invest in a startup, only to get ripped off. Talk about biting the hand that feeds.
This is straight out of a soap opera. Check out the Madoff-esque list of investors, read the comments on Business Insider, Paid Content, Venture Beat for more juicy details and allegations, and read the legalese below.
According to AdAge, via Paid Content, Spot Runner is being sued by WPP. Spotrunner is a self-serve TV ad platform.
The company’s investors include:
Since launching three years ago, Spot Runner has raised $111 million from number of investors, including UK media group Daily Mail (LSE: DMGT) and General Trust, Spanish-speaking media giant Grupo Televisa, hedge fund Legg Mason Capital Management, French luxury group Groupe Arnault/LVMH, who were the most recent. Original backers include Allen & Company, Battery Ventures, Capital Research and Management, CBS, Index Ventures, The Interpublic Group, Tudor Investment Corporation as well as WPP.
Adding insult to injury, Spot Runner has had 3 rounds of layoffs.
How does that $111M in funding break down? According to Crunch Base:
- Series A = $10M invested in January 2006
Battery Ventures
Comerica Bank
Index Ventures
- Series B = $40M invested in October 2006
Allen & Company
Battery Ventures
Capital Research and Management
CBS
Index Ventures
Tudor Investments
WPP
Lachlan Murdoch
Vivi Nevo
Interpublic Group
- Series C = $51M in May 2008
Daily Mail and General Trust
Grupo Televisa
Groupe Arnault/LVMH
Legg Mason
That list of investors is almost Madoff-esque, no?
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.
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.
Apparently, Sir Martin Sorrell is about to announce a new acquisition, soon. According to the NYPost:
WPP already owns a small stake in Spot Runner - around 3 percent - making it the front-runner, and there has been talk in recent weeks that Sorrell would like to buy it outright.
The Los Angeles-based start-up firm, founded by tech veterans Nick Grouf and David Waxman, lists Battery Ventures and Index Ventures as its lead venture-capital backers. Others include Allen & Co. and Tudor Investment.
“It is a business-to-business model that is perfect for a traditional ad agency,” said one industry exec familiar with WPP’s investments.
A WPP spokesman didn’t return messages seeking comment. A spokesman for Spot Runner said the company doesn’t comment on rumor or speculation.
WPP was one of several media and ad companies, along with Interpublic Group and CBS Corp., that invested in Spot Runner during a $40 million fund-raising round last October.
At the time, its backers valued the company at $300 million, meaning that a potential buyer would have to pony up even more to buy out the company.
Interestingly, Spotrunner could, in my opinion, command quite a premium to a company like YouTube/Google, that could certainly offer its battalion of small and medium-sized business advertisers (the first ones to use Ad Sense, before large marketers poured in) to use Spotrunner. How much would that be worth to Google/YouTube? Quite a bit. It’s quite obvious that S&M-sized business would have less objections to UGC than traditional marketers would… yet, because WPP was in early for a 3% stake, they might go long now and buy it all.
Is that bad? Of course not, it just is. But you have to ask yourself if that 3% stake by WPP is reducing or increasing the interest level of other would-be buyers such as Google who fear that WPP might have pre-emptive rights baked in to their ownership clause.
PLAY
