I should probably hold back and be polite and diplomatic and say that I am surprised that Firebrand fizzled out today.
Firebrand, a television and online service that since October has been presenting commercials as content, is being shut down as its major investors decided to stop providing more money.
A spokesman for NBC Universal, Cory Shields, said on Tuesday afternoon, “we are not putting any additional capital into the company.”
But that’s the problem: no one had the balls to tell NBC Universal et al. that this was a plain dumb idea.
What’s wrong with people? Why don’t people have the courage or backbone (and decency since we’re actually wasting money) to say “time out, this is not a good idea…”
So everyone patted themselves on the back until today, when a spokesperson said “we would not flush any more money down the toilet on this junker”.
Speaking of toilets - and bringing brands to life on the Web - there’s a smart way to do it, and a dumb way to do it. Firebrand was at the extreme of the spectrum at the dumb end of things. I am biased (shocking) but I will say this, online, the key is (ironically to borrow a term from GE, parent of NBC Universal) to bring brands to life.
One example? Here’s a more clever way to bring a brand to life. Is this a paid placement or integration? You tell me.
Comedy Skit: 2000 and 1 Flushes Thief
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Such a thing can go viral and the brand won’t exactly be offended or what not. But literally putting a TV ad online and expecting that to go viral? Man, why not just flush money down the toilet.
Oh, wait, you did.
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WatchMojo NewsletterOver the next few weeks, I will be launching a new blog to talk about company news, announcements and what not. But in the meantime, I have to share… the following three skits are pretty funny. When I launched WatchMojo.com, a big component of the site was to be comedy. We never put as much resources into the scripted comedy as we did on the infotainment side of the site, but that has changed and you will see more and more skits, sketches and what not.
Here are three of the latest skits. A lot of companies are raising millions to produce a skit every quarter. We’re looking at pumping out 10 skits per month, sprinkled across the 100s of total clips we publish each month. Anyway, enjoy the following three comedy sketches:
- Have a Very Jewish Christmas (the line at 0.18 is the funniest line I’ve ever heard).
Comedy Skit: Have a Very Jewish Christmas!
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- 2000 Flushes - funny and irreverent concept.
Comedy Skit: 2000 and 1 Flushes Thief
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- Cosmo Flakes - I had nothing to do with this one, but I have never laughed so hard in my life.
Comedy Skit: Cereal Astronaut
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Enjoy.
When MSFT launched an unsolicited $44.6B acquisition bid for Yahoo!, it was clear that 2008 might set a record for global M&A, with digital media leading the way.
However, I think what you are seeing now with regards to deals in the $50-200M range is a sign of things to come. Yesterday Compete.com was acquired for TNS for $75M, with earn-outs creating an opportunity to double the payoff.
Today Pluck gets bought out by Demand Media, for about $75M. Demand Media is founded by the Intermix executive who sold MySpace to Fox Interactive Media, Richard Rosenblatt. Rosenblatt has been ahead of the curve many times and with $320M raised in funding, it was a matter of time before he took out his checkbook to make another acquisition. Previous acquisitions include eHow and ExpertVillage.
Anyway, I do not think these are exceptions: this year, brace yourself for micro-web deals. Big media companies won’t want to drop $500M and more because the opportunity cost of buying these assets - and the time to integrate these - is far too great. Media companies are investing aggressively online and moving towards a digital and interactive world. In previous years, companies sought to make big acquisitions for exposure to the Internet, hoping that such moves would shelter their offline assets from cannibalization. Today such theories are seen as lunacy and companies understand that small deals (well, assuming $75M is small) will be easier to leverage across their massive asset base and not break the bank.
Of course, it takes two to tango. What you are also seeing is less patience from backers of companies that cannot get over than $100-250M market value barrier. If you have spent $10-50M in financing and you cannot envision how you will return a $250M to $1B payoff to investors, there’s a chance the companies will end up selling… Pluck and Compete are two examples of that, I suspect.
Scripps is one of my favorite media companies.
Admittedly, Scripps is one of the many sources of inspiration when I came up with WatchMojo.com’s programming and editorial strategy (re: HGTV, Food Network, DIY Network, Fine Living). Other influences are Discovery Networks (Travel and History Channel), Viacom (VH1, MTV), etc., so admittedly, it’s varied.
However, trying to wrap my head around their strategic plan for the entire company is not an easy thing to do.
What is Scripps?
The E. W. Scripps Company, through its subsidiaries, operates as a media company that provides content and advertising services via the Internet. It operates through four segments: Scripps Networks, Newspapers, Broadcast Television, and Interactive Media. The Scripps Networks segment operates national television networks, including HGTV, Food Network, DIY Network, Fine Living, and Great American Country. The segment also provides video-on-demand and broadband services. The Newspapers segment operates daily and community newspapers in the United States. It also owns and operates Scripps Media Center, as well as operates Internet sites, offering users information, comprehensive news, advertising, e-commerce, and other services. The Broadcast Television segment operates ABC-affiliated stations. The Interactive Media segment offers online comparison shopping services. It operates a comparison shopping service that helps consumers find products offered for sale on the Web by online retailers, as well as operates an online comparison service that helps consumers compare prices and purchase various essential home services. The company also offers BizRate, which is a consumer feedback network that collects consumer reviews of stores and products. The E. W. Scripps Company also offers other services, including syndication and licensing of news features and comics. The company was founded in 1878 and is based in Cincinnati, Ohio.
Like most media companies, Scripps is facing a threat of cannibalization.
Consumers and advertisers are flocking to the Web, but the core business of Scripps - along with all traditional media firms - remains offline.
It’s a harrowing experience. One that keeps executives awake at night and creates anxiety and envy. Occasionally, they’ll make $500M decisions that puts them in a corner.
Anyway, interestingly, Scripps is in the process of spinning off its slower growing and mature businesses from its higher growth web business. But when you dive into their 10-K, you see a lot of interesting tidbits that shed light on how confused some traditional media companies can become in these digital days.
Tale of the Tape
Scripps is worth $6.8B in market capitalization.
For 2007, the company’s total revenues were $2.5B with net income of almost $400M. This translates to a P/E of 18 and a P/S of 2.75.
It makes sense, in some ways, to spin off the new media assets, granted… but you have to wonder about the broader repercussions and realities for old media.
From the 10-K, via Paid Content:
“Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005.”
It should be noted that these are advertising sales only. Indeed, Scripps Interactive also consists of Shopzilla and uSwitch. In fact, in 2005, Scripps paid a whopping $525M for Shopzilla, then named Bizrate. At the time of purchase, in 2005, when Scripps bought Shopzilla:
Founded in 1996, Shopzilla, formerly BizRate, is a privately held company that is expected to generate $30 million to $33 million in EBITDA profit, also excluding investment results and unusual items, on revenue of $130 million to $140 million for the full year 2005.
As such, with a price tag of $525M (in cash, no less), at a $135M in revenues, this converted to a 3.9x P/S ratio.
As of Q3, 2007:
Shopzilla and uSwitch, which together make up Scripps’ Interactive Media division, generate upwards of $54M per quarter, driven largely by CPC and CPA-style referral fee revenues.
For what CPC, CPA and CPM mean, along with other standard online ad terminology, click here.
If you project the $200M or so that the referral business generates, at the same 3.9x P/S ratio, the unit should command a whopping $800M in a sale. Scripps is adamant that Shopzilla is not for sale, but that’s not what the rumor mill suggests.
I should disclose now that Shopzilla was an advertiser of our sites in 2007. We do not have any inside information on this matter, however.
Advertising Has Inherited the World
But advertising is everything these days. Free, ad-supported content is what drives value these days… and much of what Scripps is doing is all about unleashing shareholder value. So let’s focus on that.
Doing the math and focusing only on “Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005,” then that’s growth of 100% in 2 years but effective annual growth of 54% from 2005 to 2006 but only 17% from 2006 to 2007 .
What about 2008, you ask?The 10-K continues:
“Interactive media segment profit is expected to be $13 million in the first quarter”
Multiplying that by 4, you get $52M. From 2007 to 2008, this would be growth of 30%… not bad. What happened in 2007 to kickstart growth from a paltry 17% to 30%?
Acquisitions, that’s what.
“In July 2007, we reached agreements to acquire the Web sites Recipezaar.com and Pickle.com for total cash consideration of approximately $30 million.”
Scripps can file this under “Advice You Didn’t Ask For”, particularly since I’m biased, but I am not sure Scripps is wise to be buying UGC sites, frankly. Don’t take it from me: CNET regretted acquiring Webshots; from my vantage point, Scripps will regret buying UGC sites, too. What these sites need is not more low-quality inventory… they need to pull a AOL/Webshots and find a way to create low cost, high quality video content.
What this means for the spin-off?
Regardless of what I, a mere mortal, thinks of such acquisitions, the fact remains: the company spent $30M from Scripps’ cash hoard to load up on interactive. That of in itself is wise.
Scripps balance sheet shows $58.95M of cash but nearly $600M in debt. At even 5% interest charge (presume Scripps $2B in sales guarantee it a low interest rate or cost of debt), that is an annual $30M interest expense. In other words, in 2007, it paid $30M in annual carrying fees to spend $30M in acquisitions to kickstart its interactive growth. That makes sense, I guess: invest today for tomorrow’s growth.
That’s also why, I presume, they want to spin off the new media company: more capital for more acquisitions, and to pay off debt (I am guessing about the latter, I have no idea what management’s actual use of funds and strategy is).
Benchmarks
The Web’s online ad markets are growing at 25% per annum, but with quality content you expect Scripps to outgrow the market.
Moreover, while the growth rates are nothing to sneeze at… in absolute markets, they’re puny when the offline unit does $2.45B in annual sales.
You cannot, after all, simply shift your offline content online and expect the same revenues. TV ads in the US were a $75B market in 2007 while web video was a $750M market. Web video and online media in general cannibalizes traditional media and TV in particular cannibalize offline revenues… Scripps is a textbook example of a victim of this phenomenon.
What about the Stock?
Of course, it’s all about the share price and market cap… so maybe the financial engineering makes sense. Does it?
Double the P/S and P/E for the online segments (since they are higher growth segments, this basically means that investors would bid twice as much for the growth), a $40M revenue in 2007 x 5.5 P/S ratio project a $220M company. Of course, that is just the online advertising contribution, the referral fees generate over $216M per year (if we simply take that Q3 2007 amount of $54M and multiply it by four).
But multiples on referral fees are in the gutters relative to multiples on ad revenue…
With the obsession over advertising these days, you have to presume that P/S for referral-based businesses is down. But since the Web does indeed command a premium to offline media, we’ll eliminate any discount or premium and simply say that today Scripps would be able to get the same multiple, 3.9x.
But the problem with this rationale is that with $200+M in revenues, that would project nearly $800M in value. I don’t think anyone would pay nearly $1B for Shopzilla.
In fact, given the herd mentality of investors and buyers in general, I doubt they’ll get $525M for Shopzilla because buyers would prefer to spend such an amount on sexier things: video, social networking, video games, etc. As such, if you work backwards and agree that a price is what the market will pay for something, it’s hard to imagine Shopzilla getting $500M on the market, so this means a P/S of about 2.5x.
So what would all of Scripps Interactive be worth?
Regardless, if you combine the businesses comprising interactive:
+ online advertising = $40M in 2007 revenues at 5.5x P/S = $220M
+ referral fees = $216M in 2007 revenues at 3x P/S = $648M
You see that the interactive business should be an almost $1B company.
If Scripps is indeed worth $6.8B… then the rationale is that you can carve out a faster growing segment, sell a portion to investors, raise money, pay down some of the debt, and then make acquisitions at a lower cost of capital.
Of course, this entails that they buy the right assets and the right people. Will they? Time will tell. But considering Scripps bought - then sought to sell - Shopzilla for $525M… you have to understand why the company is going to tread carefully.
We say gender should not matter, but that is idealism. In fact, it does.
In our Top 10 Predictions for 2008, I said:
8- Facebook Brings in a New CEO
Mark Zuckerberg voluntarily steps aside to become Chief Community Officer, Facebook brings in an outsider to run the company as CEO. The biggest surprise is that the candidate won’t be from Google, but Microsoft or Yahoo!, and will be female.
We were wrong about the CEO part, but when Facebook #2 Owen Van Natta resigned and the position became open, the chips fell in place.
We were right about the female part: Google’s Cheryl Sandberg just got hired as COO of Facebook. One more executive leaves Google, for Facebook no less. With 16,000 employees, is Google really all that different than Yahoo!?
Check out our other 9 predictions for 2008 here.
In 4 years, video game advertising will be as big as online video advertising will be this year.
Huh?
Via Paid Content, video game advertising will grow to be a $1B segment by 2012, yet in 2008 alone, online video ads will cross $1B in the US, with $7.1B projected by 2012.
So in 4 years, web video advertising will be 7.1x larger than video game advertising.
Makes you wonder if the big media companies - Viacom, IAC, of note - are focusing in the right areas by investing in video games these days.
I raised a few eyebrows (trust me, I have a few) when Om Malik launched the Earth2Tech blog, though in all fairness, the topic is certainly in vogue.
But today, when I found out that Malik’s latest blog network was launching Ostatic - a blog to cover Open Source projects - it took all of 4 seconds to realize this was actually going to serve a major niche… until I realized, OS is certainly no longer niche.
Across Mojo Supreme, we’re knee deep in OS:
- blogs: all on Wordpress.
- CMS: Typo3
- video player: blip.tv, which itself is built on an open source flash player.
Our entire infrastructure is built on the LAMP (Linux, Apache, MySQL and PHP), too.
According to Tech Crunch:
GigaOm (Om Malik’s blog network) just launched a new open source software focused blog called Ostatic. The goal, Malik said today in an interview, is to track news around the world’s 150,000+ open source projects.
Malik quotes IDC, saying that 71% of the worlds developers have used open source software, and that 50% of organizations have some open source software in production. This is, of course, big business - MySQL was recently acquired by Sun for $1 billion, for example.
The Ostatic blog is really just a wrapper for additional services. The site will also have a directory with key information on each project, including alternatives and links to documentation, forums, mailings lists and the source code itself. Initial data in the director has been added from outsourced writers in India. Going forward, projects can send updates and new content to the site, or add it themselves.
The directory portion of Ostatic is competitive with a number of existing services, including SourceForge, which tracks 170,000 or so projects.
To see where Tech Crunch and Giga Om fit in the landscape of the 8 leading Tech-Oriented Blog Networks, click here.
And for many more OS blogs:
TheOpenForce, Tecosystems, CBR Open Source Weblog, rand($thoughts), Mitchell’s Blog, Law & Life: Silicon Valley, and The Open Road.
