Sometimes VCs say the funniest things:
From SAI:
SAI: What has to happen in the next year or so for Web video to start producing profitable businesses?
Lee: Infrastructure, consumer behaviour and advertisers all have to catch up. Once they do, the economics will be more understandable, and more repeatable. Advertisers will learn what to buy and what not to buy. We are in the third or fourth inning of this thing. If in 5 years video advertising isn’t $3 billion business, I would be pretty surprised.
Canaan Partners‘ Warren Lee, who led the VC firm’s investments in Tremor Media, Motionbox and Associated Content, after previously leading video investments for Comcast Interactive Capital.
Maybe I am off, but Forrester pegged online video ads to be a $7.1B by 2012 - so 4 years from now. If online video ads is a $3B business five years from now, or 2013, we’re in trouble people. The video space has raised $6B after all in the past 2 years… and tack on YouTube’s $1.65B exit and a few smaller deals, that means $8B has gone into chasing the big elephant.
What’s wrong with this picture people? Here’s my biased thought:
SAI: You’ve mentioned your company’s bias toward infrastructure and services over consumer-facing video and content investments. Are there sectors you see reaching profitability first?
Lee: Certain categories will have a shorter time to profitability. Companies like ThePlatform, FeedRoom, Brightcove and Maven Networks, which sell software to businesses and get paid a license fee. I suspect these kinds of companies will be profitable first.
Online advertising isn’t as solid as it should be right now (total online ads in the US represented a $25B industry in 2007) yet videos only clocked in $750M in that year. This year, that figure goes to $1.35B, according to eMarketer… but as I’ve outlined, I think most of that money is being generated by traditional media companies, not any of these new media players… at least not in meaningful ways.
The problem is simple: traditional media will see a cannibalization of total revenues as they get more aggressive with shifting content libraries online, so they won’t be doing that with as much ferociousness and velocity as advertisers would like to see. What’s worst: as Canaan admits in the Q&A, they had a bias against content… so long term, there won’t be enough high quality video content to get advertisers excited about online video opportunities… which in turn means everyone loses, including companies like Brightcove et al. For this reason, I highly doubt Brightcove can see profitability at the end of the tunnel. Brightcove’s clients, in theory, would gladly pay license fees, but if and only if advertising revenue was greater. Right now, it’s just not. That is why companies like Blip.tv are doing great (disclaimer: Blip is a partner of ours).
This all seems simple enough to me… but I’m not a VC, I’m a mortal executive, and in my humble opinion, this miscalculation will lead to the downfall and fatal blow of many of these VC-funded companies who ride the wave of UGC-driven growth in bandwidth but won’t see a corresponding spike in online video advertising revenues to make the growth sustainable.
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.
Compete.com’s 2007 year in review report concludes clearly that YouTube is gathering a lot of momentum as the #1 [note: WatchMojo.com is a content provider to YouTube, who is a distribution partner of ours].
When YouTube sold to Google and did not offer itself to Rupert Murdoch’s News Corp. empire, apparently, the media mogul was miffed. The reason was not only because he felt that MySpace had helped build YouTube’s traffic, but because video is the killer app, and invariably, not Facebook, but YouTube poses a risk to MySpace’s supremacy. Indeed, MySpace continues to destroy Facebook in total traffic, but YouTube is edging closer and closer to MySpace.
This is just one reason why we selected YouTube as the most explosive web startup of all time. I think MySpace’s MySpace TV can do a lot better with a few strategic and tactical moves and with News Corp.’s resources and MySpace’s reach, they will be just fine [note: WatchMojo.com has eight channels on MySpace TV as they too are a distribution partner].
Google Envy
Anyway, if one thing is sure in the video landscape, it is that Google’s tremendous growth and jaw-dropping profits have given all aspiring entrepreneurs, financiers and startups “Google-envy”: The envy to become the platform to whatever market it is that they go after.
In online video file sharing social networks, as Compete.com suggests, there is already a runaway #1, and that is YouTube. But all laggards have fought hard in the past months for #2.
In online video ad networks, the market is a bit less developed, but not by much. You are no longer seeing early round (Series A or B) investments in online video file sharing social networks but you are seeing a few early stage investment here or there (such as Overlay.tv raising CDN$4.6M earlier this week).
But, we feel that Overlay.tv’s Series A was an exception, as most video ad networks are well into their later rounds: Video Egg is at its Series D. Brightroll, Scancout and Yume have all raised well over $10M in funding.
With 2008 being the year that online video advertising crosses the psychologically-important-but-otherwise-a-footnote $1B mark in the US, it is not surprise that online video ad networks are doubling up ammo and gearing up for warfare in the months to come.
Gunning out of the gates in 2008,
- Tremor Networks raised $11M in a Series B.
- and today, Broadband Enterprises raised $10M from Velocity, Jon Miller and Ross Levinston’s new fund.
Tremor and Broadband are direct competitors. Despite that, both are leaders. So for Levinsohn and Miller to crash the online ad network party, it makes much more sense to back an established player like Broadband than to start from scratch. That is pretty smart and this was a rumor that we had heard in 2007 as well.
Is the Market Big Enough to Return Shareholders Profits?
Will the market and demand for these online video networks be big enough? Yes and no.
Online ad networks that focused on display/banners did phenomenally well in 2007 (aQuantive, 24/7 RealMedia, Doubleclick, Right Media, Blue Lithium) but many of these companies raised relatively little funding (Blue Lithium) or were in their second incarnation as a going concern (Doubleclick, 24/7 RealMedia). Some companies like Tribal Fusion (a remaining privately held asset) might have never raised a penny in VC money (I could be mistaken on this, but if my read on the situation is right, I do not think they are VC-backed).
The bottom line is the expectation and time horizon for returns will be quite different for most of the video ad networks that are getting funded sooner and deeper than their brethren in the display/banner space.
I do not see too many, if any, new companies in this space getting funded. There are way too many competitors, way too many platforms, and not all that much differentiation to launch a new player now. In a few years, there might be (keep in mind Right Media launched in 2003, for example).
I know a few people at Tremor, Brightroll, Broadband Enterprises etc., and wish them all the best… but I think the switching costs are close to nil and ultimately most publishers tend to get greedy over time and will want to own the advertiser-relationship themselves. Of course, I could be wrong.
As a side note, I must say it is extremely odd (in a good way) when you are reading something (in this case Venture Beat’s piece on Broadband’s funding) and see a paragraph like this:
– It syndicates programs from more than 400 video producers (like the popular Cube Fabolous, above) to 2,000 affiliated partners. WatchMojo’s Ashkan Karbasfrooshan, for example, has been approached by the company (mentioned in its write-up of online video, here);
Must say pretty cool.
Brightcove, who has raised $80M, is going to be using Tremor Media Networks as ad sales partner. You’d think that $80M would buy you an in-house sales team and position you to develop your own network, right?
Brightcove Network content sold by Tremor Media will be incorporated into Tremor’s network channels and sold on a category, targeted, or custom channel basis, and not as individual publishers. Brightcove will continue to sell strategic offerings to brand advertisers and agencies directly.
Don’t get me wrong, these are arguably best of breed sites, but something is odd about the state of video advertising and content. Brightcove is a myriad of services and features, mainly the Brightcove Platform and the Brightcove Network. The former is for larger publishers and the latter is for smaller sites, blogs etc. I’d guesstimate that this deal with Tremor is mainly for the Brightcove Network, but this is really just making the pie smaller for content producers, who now have to divvy up ad revenue with Tremor and Brightcove.
In fact, Tremor can basically hit up video content producers itself, or in fact, smaller producers can sign up to Tremor. By now going through Brightcove, we’re just cutting the pie in more pieces and not really working on the real issues. What are the real issues?
Separately, Tremor and Brightcove have announced plans to begin addressing issues facing the digital video advertising industry–including measurement, standards and best practices. As a first step toward this goal, all ads sold under the new agreement will be 15 seconds or less in duration. Other areas of focus will include frequency and rotation management of ad creative.
This is key. In fact, the more pressing issue I find is standardization, or a lack thereof, of anything from file formats, to size, encoding specs etc. And that’s just the content, let alone the ads. Video on the Web would be far greater in terms of content and advertising if there were more streamlined standards.
At WatchMojo.com, we’re growing our core flagship destination and signing many syndication deals, I’d guesstimate that as an online-only video producer, we have one of the largest reaches online, when you tally how many places our content is on and how many views these get… but we’d be doing many more deals and bringing more high-quality, “torso” content to sites needing and looking for content if the standards for the content itself were common, and they’re not.
That’s what we need to look at, before looking at the ads… but that’s just me.
PLAY
