I spent a lot of time traveling over the past couple of days. As a result, I probably read about 10-25 articles on the proposed XM/Sirius merger. Tonight, I read some more. Let me say this: can we please instead take a step back and realize the disastrous and costly mess satellite radio was, is and will be if we maintain this pace.
Niche product
First off, satellite radio is a niche product intended for a very small percentage of consumers. The simple reality nowadays is that the user wants to be in charge of programming in a non-linear fashion. Satellite radio’s programming is linear, it is non-linear in the sense that you get 130 or 170 channels, but so what?
Content is King, But Not at Any Cost
Both XM and Sirius have gone out and lured a lot of talent for a lot of money. Frankly, if the merger goes through, then the bidding war goes away. That means that the money won’t be that good. And since the audiences are lame, then the vanity-seeking talent will head back to terrestrial radio.
Terrestrial Radio Sucks, Sure… but Satellite Radio is Lame Too
The problem facing radio is that 99% of people who have access to radio have access to terrestrial radio and that sucks. Just because satellite radio is in theory a tad better does not mean that people will rush to get it next time they buy a car. When you buy a car, you have to pick and choose your options and while a satellite radio box and a monthly payment might not cost prohibitive, in today’s media landscape, there are far better bells and whistles to spend your money on (sunroof, etc.)
Irrational Exuberance
Investors are suckers. That’s what I think. Investors have bid up these assets despite the high levels of debt, massive, staggering losses and abysmal user subscription figures. $6B in losses for 14M people. Hmm… what does that remind me of?
Oh yes…
Remember Priceline.com? Pets.com?
The first day Priceline.com went public, its market cap was greater than the cumulative market cap of all of the players in the transportation industry (at least that’s what I read in John Cassidy’s Dot Con). The point is, that was crazy. At the time, the uncertainty of the world wide web led us to think that growth rates will be so high, and the market was so vast, that the mere upside was worth valuing so richly. We expected - somewhat sheepishly - for Pets.com to become larger than brick and mortar stores… did we forget the insanity of thinking that Walmart would be bought out by Amazon.com or that AOL.com would buy Time Warner. Oh, wait. That happened. What was that? Oh yeah, investors are suckers.
Distribition is not Price Elastic
The point is that much the same way that content is not worth any price, distribution is not worth any price either. Google today is worth $150B on $10B in sales because we assume that consumers will forever bid any thing on keywords no matter what the return is.
Guess what, yes, Google might one day be Worth More than MSFT by 2010 and could very easily be the World’s First Trillion Dollar Company, but there is a strong likelihood that over time, less consumers are willing to pay anything for any keyword. That’s right, if something does not make economic sense, there is nothing that can change that.
Niche product, did we mention that?
Which brings us back to point 1: satellite radio is something the big radio (or media) companies need to have as an offering. Satellite radio is not a standalone company. Trust me, the wrong decision is to merge these companies. The better decision is to fold XM into a (for example) News Corp. and a Sirius into a CBS (would that not be ironic). Doesn’t Rupert Murdoch own Direct TV, which is basically TV via satellite. Would turning off the video off those satellites and transmitting audio only not be a better way to go? Come on people, work with me… CBS owns Infinity Radio… just get them to buy the other one. Oh, I am aware: Clear Channel owns a chunk of XM Radio, so maybe they can buy XM.
I can probably think of more ideal fits if I actually spend any time on this, but apparently, the fellas running XM and Sirius seem to think that two wrong will make a right, and trust me, that ain’t right.
Monopoly, Advertising… Oil Industry
So now, with a Republican administration looking to further set America back in its last two years in office, the powers that be at XM and Sirius realize that they have a better shot of merging than they would in two years when Democrats will (barring, well, what Democrats tend to do, i.e. implode and self-destruct) take office. But guess what, a few years ago the oil industry was in shambles, and the powers that be allowed Exxon and Mobil to merge, thinking that a lack of a merger would make it impossible for either to “operate.”
The problem with satellite radio is that the companies spend 40-50% on advertising. The reason they spend that percentage on advertising is because, sit down Mr. Karmazin and “the other guy”, no one really wants your product.
Well, consumers actually need, consume pay for oil. Satellite radio. No, that ain’t happening. I have listened to Sirius once when I rented a car in SF and last night on a Jetblue flight I briefly listened to XM. I sincerely doubt ever being a paid client, as have 5,986,000,000 other human beings. Actually, there are almost 6.5B people, so the number of people who do not use, need or pay for satellite radio is 6,486,000,000 people… which, when you think about it, is the cumulative losses of these two loss-guzzling charities trying to pass as companies.
Added Later As Per Reader/Commentor Request: At the time of writing, I do not own any stock, derivatives etc. in either XM or Sirius. In fact, I do not own any stock or derivatives in any of the companies mentioned (News Corp., CBS, etc.), though I did briefly work in News Corp.’s FIM unit after they bought the company that bought my company. As a general rule, if not stated, I don’t own any of the companies I write about, if I do, I would mention.
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WatchMojo NewsletterConfession time: Rupert Murdoch was my one-time boss and Maxim was once my biggest competitor.
Somehow I feel like they have something in common. I can’t speak for Mr. Murdoch but I did beat Maxim at its own game (men’s publishing) when I took them on.
Maxim’s owner Felix Dennis is contemplating selling his stable of magazines and has hired venerable investment banking firm Allen & Co. to find a buyer.
Earlier this week, I wrote something outlining some of the likely buyers. Right before pressing Publish, I removed the last candidate I had: News Corp. Naturally I had a couple of emails from folks asking me why no love was shown for News Corp.
So here goes.
News Corp. just did a deal with Roo giving them 5% + 5% upside in exchange for a business relationship. In other words, no money changed hands. But what was interesting is that it was News Corp. - and not its online division Fox Interactive Media (FIM) - that did the deal with Roo. Roo, it should be stated, is an aggregator and distributor of online video. That’s right: online. Despite that little detail, the brass at News Corp. did not think it would be necessary to loop in FIM.
This is particularly interesting in the Maxim/Blender/Stuff context for the following reason:
FIM plunked down $650M for IGN, the supposed leading men’s network in the 18-24 and 18-34 segment online. IGN does well with advertisers. But next to MySpace - its over half-a-billion-plus M&A baby - it has flatlined. As such, for FIM to go out there and spend an additional few hundreds of dollars on another men’s property suggests that they shot a blank with IGN. In other words, if you are already so strong in the men’s demographic, why double up and waste resources?
Of course, this is coming from someone like me who views content as one, no matter of whether it is digital or not, in other words, to me, Maxim’s print content and IGN’s digital content are one and the same: it’s text content, just happens that one is in print and the other is in digital.
What is different is the perception and appreciation the stock market has for one versus the other.
I am glad you raise that point. Digital content/media is fetching anywhere from 15 to 40 timed EBITDA. IGN got FIM to pay 40 times EBITDA in 2006. In 2005, the average multiple in digital media M&A was 15.9. IGN was a solid asset so it could get that as it also had Viacom knocking on its doors.
Print? Not so fast.
Let’s examine some historical data, source being an old article dating to 1999:
In general, cashflow multiples for magazines had declined from the 10x to 12x multiples of the late 1980s to multiples of between 6x and 8x cashflow. That meant that a business with cashflow of $10 million that might have been worth $100 million to $120 million in the late 1980s was now valued at only $60 million to $80 million.
Magazine owners and investment bankers were suddenly awakened by the announcement that Dutch media conglomerate VNU was acquiring BPI, publishers of Billboard, Hollywood Reporter and a number of other business-to-business magazines. It was disclosed that the purchase price was $220 million–which translates into a 14x to 15x multiple of the prior year’s cashflow.
But the downward trend of M&A mutliples has continued to fall. This year, Time just unloaded a myriad of publications including Popular Science for $100 million less than it was hoping to sell them for to Swedish-based publisher Bonnier magazine. Paid Content pegs the deal at $210-240M, which means a 10.9 multiple.
Buy low, manage high…
Rupert Murdoch is one savvy investor. I am not sure how well he would get along with Felix Dennis. But Mr. Murdoch - I can tell from my limited experiences with him - ultimately looks at the bottom line to make a business decision. In other words, if he sense that he will lose something - say for example money, time, a deal or a legal fight - he will throw in the towel. I’m just guessing of course.
And buying print now (a under-appreciated asset) is a good move, but doing so implies that the deal is a non-FIM deal. Allen & Co. - I would assume - will try to position this in the context of the digital upside. That’s why - one would assume - they get paid the big fees. I’m just guessing of course.
The real hidden, untapped value of Maxim, Stuff and Blender lie in their digital side, especially when you consider that Myspace, despite all of its hype only generates $25M per month in revenue.
News Corp. generates nearly $20B in revenue, almost half of top global media company Time Warner, so even if Felix’s mags generate $250-500M it is almost immaterial. It is what they bring to FIM’s digital ambition that is interesting.
When I competed against Maxim online, I knew that as noble as our efforts were, the day Maxim wanted to go all out on the Web, we’d be dead. In the end, it was Maxim’s decision to begin to focus on digital opportunities that drove the founders of my old company to cash out. Over time, Maxim was too strong for any one player to fight. Dennis wants to sell Maxim, and Maxim is one of the major brands in the world today. He should be able to command top dollar, and that means shifting the focus from print to digital. Mr. Dennis missed the opportunity to do so in 2000 when he and his editor Keith Blanchard threw in the towel on the Web, hopefully he has learned his lesson this time around.
You brought up MySpace. I am glad you did. While MySpace is a mainstream social networking site, at its core, it is a promotional tool for media and entertainment in the sense that it was musicians and artists (largely unknown ones) who used it as a promotional and publishing platform that led to the viral explosion thereof.
But MySpace has seen that platform be hijacked by the double-edged sword of user generated content. Think about it: if MySpace could tap into Blender, Stuff and Maxim’s amazing content then the 1+1 would really be much more than 2.
And therein lies the challenge: for News Corp. to really unleash value here, they should approach the deal as a print acquisition (lower multiples) but then manage it largely as a digital one (higher multiples, more upside etc).
What is Dennis’ assets worth? On Day 1, there was a $250M figure thrown out. Then suddenly other media spinsters began to hurl out a $500-750M price tag. At $250M, it’s a great asset to acquire for any company; at $500-750M, it’s an integration nightmare for News Corp. Don’t forget that FIM impresario Ross Levinsohn is long gone. The word on the street is that News Corp.’s major online buys are behind it.
How Much is Maxim/Blender/Stuff Worth?
What does this all mean?
The multiples will range much closer to 10.9 than IGN’s 40 since the lion’s share of Maxim, Stuff and Blender’s revenues come from print and not online. Profit margins in print magazine circles tend to range from 10-30%. Maxim’s lavish parties notwithstanding, I’d guesstimate their margins to be 20%.
No doubt Maxim/Blender/Stuff magazines make a lot of money. And of course, the company has a dizzying product assortment meaning that they make a lot more money at the top level. I am purely speculating, but say the total sales are $250 million, with a 20% margin, that is $50M in profit, project that over a 12.5 multiple (10.9 is so beneath Allen & Co. and Felix Dennis, after all) and you are at a valuation of $625 million. And, let’s face it, finding a private equity firm to pay more than 12.5 times won’t be hard, after all, those parties are something that any self-respecting banker would love to attend.
Incidentally, that is a price between what News Corp. paid for IGN and MySpace parent Intermix.
Between all of the free advice we’re doling out to News Corp., Felix Dennis, Allen & Co., you’d almost think we were on their payroll and we owed them one
Did I just call studies and researchers misguided? That’s pretty ballsy and arrogant isn’t it? Well, please hear me out.
Back in 1994-2000, there were so many reports, studies and forecasts about the size of paid content, in other words, money that consumers would pay to read premium content. Premium content was content from offline magazines, newspapers, etc.
That did not happen. Because broadband penetration soared to well over 50%, content flourished, a community was created and commerce pursued. In the process, people began to spend some 25% of their time online. Yet as of last year, advertisers don’t spend even 10% of their marketing budgets online, this is a major opportunity for FREE, ad-supported content. Companies like Time Warner exemplified the missed opportunity of not unleashing their content online for free: CNN Pipeline (video) was paid, then free. AOL.com was paid, then free. Why is that?
Because consistently between 1994 and 2003, free sites whooped paid sites’ derriere.
In other words, all of those studies about how much subscription for paid text-based content would be enormous proved to be wrong in that they misjudged the quantity and quality of text-based content that could be found online for free.
Specifically because of this miscalculation, newspaper and magazine companies suffered big time.
Today we see history repeating itself and promises of paid video content leading to a booming market for paid video content:
Annual consumer spending on Internet downloads of movies and TV shows will top $4 billion in 2011, up from just $111 million last year, according to a study released Wednesday by Adams Media Research.
“The Internet is going to revolutionize the distribution of video,” says Adams Media Research President Tom Adams.
The growth will be fueled by the introduction of hardware devices such as Apple TV, a $299 box that converts videos downloaded from the Internet into signals that can be played on high-definition television sets.
Apple Inc. is selling those boxes on its Web site and says they will be shipped later this month.
Adams Media Research is betting that video downloads will ramp up gradually as Apple TV and similar devices win acceptance among consumers.
The market researcher forecasts that sales of video downloads will total $472 million in 2007, $1.2 billion in 2008, $2 billion in 2009, $3.1 billion in 2010, then hit $4.1 billion in 2011.
It also predicts that advertiser spending on Internet video streams to PCs and TVs will approach $1.7 billion by 2011.
Read more.
Not gonna do it, not gonna happen.
Right now you can watch practically anything online for free, though it might be pirated. While the quality of TV networks’ content is high, they will be shy and slow in putting it online, as we have shown in our landscape of video in this graph:
Obviously, we are looking at the model in a free content context. But because there will be plenty of decent content available for free and pirated high quality content available, few consumers will actually pay for video content. Don’t get me wrong, many will, but nowhere near as what we expect.
This is why thus far, print companies are doing better than TV companies in terms of video online. The former view it was a new business opportunity while the latter views it as cannibalizing. The networks are holding out in trying to generate subscription sales, and in doing so, consumer will adapt their behavior and find free content and the advertising will follow the users.
Once again, history repeats itself and those who fail to learn from it will be doomed.
By 2015 the mobile content market could be worth well in excess of $1 trillion, with voice comprising only a 10% share of the market - if the industry gets it right. Currently mobile operators are still not opening up their networks for mobile content; one of the main reasons being that the current mobile technologies are not well-suited for the delivery of what the market calls ‘rich experience’ content (multimedia, video, etc). So for now mobile data traffic will continue to comprise mostly SMS, followed by ringtones and a small proportion of everything else. The focus of the mobile operators will also remain on protecting their lucrative voice business for the time being.
Key highlights:
Read more.
