You have to be taken aback with the growth, potential and downright speed of business, especially anything touching digital media.
Let’s talk about Microsoft acquiring Massive, the new in-game advertising network. But before we do that, let’s put this into context.
About 18 months ago, when I was still an executive at AskMen, we were approached by IGN to be acquired. Those talks went on for a while, over 6 months, to be precise. As I got to study IGN Entertainment, I got the picture that they had a few gems in addition to their ever popular media properties, which included but was not limited to IGN.com, GameSpy.com, etc. In addition to those properties, the company was a leader in digital distribution of content, and was a pioneer of in-game advertising.
The former (digital distribution) was all about offering gamers the opportunity to seamlessly download video games onto their hard drives. This could be extended to allow consumers to download music, films, books and much more. When IGN filed to go public, it knew that some would be acquirers would properly recognize the value of this business unit, even though they knew that this was exactly the kind of feature that larger media companies would salivate over as they wondered about their digital future.
The latter (in-game advertising) was essentially about placing ads in games. So say you are playing Tomb Raider and you live in Philadelphia and Bon Jovi will be in town this summer, you put two and two together and get an ad for Bon Jovi on the scoreboard. Not rocket science but certainly the kind of thing that made IGN a much sought after asset by many.
Connecting the dots in this story… that was 18 months ago. IGN was a great fit for AskMen not just because of the synergies in the media properties, but because IGN seemed so progressive in digital distribution and in-game advertising.
When IGN was trying to choose between going public and selling, the dilemma, I would presume, was: we make (these are arbitrary numbers folks, even though it’s all in the prospectus) $50M in ad sales through the media properties, that’s growing at 30% a year. We make $10M in digital distribution, that’s growing at 75%; we make $5M in (in-game advertising), that’s growing at 100%… sounds great right?
But, the thinking must have been: “if we sell now, we essentially get get so-so multiples on the high income business and high multiples in the low income businesses. If we stay independent, we’re worth $500 million on IPO day (when you considered their comparables, this was more than reasonable) but over time, we could grow to be worth $1 billion, and who knows, maybe even more.”
When IGN sold for $650 million at about 40 times EBITDA, many people thought it was pricey, especially since the company’s management was originally asking for $1 billion or so. The thing that was odd was that the pieces separately were worth more than $650 million mainly because in-game advertising and digital distribution were so highly thought of.
All to say (we’re getting there…), today the Wall Street Journal (though the link here is to ABC News cause WSJ is a paid site) is reporting that Microsoft, who has been playing catchup in the video game console business to SONY’s Playstation - has / is / will be acquiring in-game advertising network Massive for, get this, $200 to $400 million.
Massive is 2 years old folks! Of course, in-game advertising is set to grow, big time: in an interview with Reuters in December, Massive Chief Executive Mitchell Davis said forecasts from a variety of industry sources call for real-time game advertising revenue to grow into a $3 billion-plus global market by 2010.
As I said, let’s try to get back on track and connect the dots. Over a year ago, before AskMen was offiically sold to IGN, when I was still at AskMen, I spoke to some folks at Massive and knew that we were about to be folded in a company that was “the leader” in this kind of thing, right?
Today, two year old Massive sold for $200-$400 million, not too shabby at all.
So, if Massive could fetch that much and IGN “only” fetched $650 million and seemed to have had much more under the hood, methinks some people at IGN must be kicking themselves now.
Of course, then again, I am sure that all is well in the Kingdom of Rupert and the folks in Brisbane don’t regret a thing.
More importantly, what does this mean for Microsoft?
It would be fantastic. First off, even though surely on a multiple or DCF basis, this deal will be expensive at either the $200 or $400 million range, as most deals in digital media have shown (MySpace @ $580 million, which also included Intermix; IGN @ $650 million), the growth in digital media is so ferocious that for a larger company with millions - lest billions - in the coffers, it would be more expensive not to make such deals.
(Did I just say that?)
Yes, I did. Same way that I was telling my cohorts at AskMen that the price tag from IGN was ridiculously low, and the same way that if anyone would have bothered to listen, the IGN price tag from News Corp. was low. But that’s another issue.
So, by acquiring Massive - and having had the luxury of launching the XBOX 360 a full year ahead of the Sony PS3 - Microsoft is narrowing the gap in both advertising and video games.
What is more important is that if it is true that video game sales are low, then a lot of players in the space will be looking to make revenue in other ways, such as in-game ads. This is why MSFT is both hedging itself AND doubling up on the industry.
In fact, I do not know what is going on in Redmond, but this week, MSN hired former Ask.com executive Steve Berkowitz. This means that search will be central to MSN’s strategy going forward. That’s a good thing, cause MSN’s search is pretty good. Hoping that Google does not strike me down for saying this (they have a sense of humor in Mountain View, right?), Google is pretty slow at indexing new content, they index it right away, I’m sure, but their PageRank technology means that new content that is not linked to will not creep up onto the first results page for months. MSN seems to be more concerned with returning new content created online on its first pages, ensuring that as searchers find out about this, they will use it and not Google to see what is new online.
It will be interesting to see what other acquisitions come out of Redmond. Between Viacom, News Corp., Yahoo!, Microsoft, and of course Google, there’s never been a better time to be an entrepreneur.
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