GE is set to launch a $250M fund to invest in digital media and technology. GE owns NBC Universal, which in the past few years has invested in digital assets, namely the $600M purchase of iVillage. More recently, NBC invested in NBBC and joined ranks with News Corp. to take on YouTube. GE being a technology and services company now, NBC Universal is GE’s sole fully-owned and integrated media asset. But with this fund launching, it’s clear that media is back in vogue.
To realize why, one needs to look at the score on the [big] board.
Online advertising has proven to be the greatest disrupting factor in technology. Of course, there’s nothing shocking in that statement, right? Google - a so-called technology company - generated $10B in revenues and netted $3B in profits by selling “these little classified ads.”
It has done so well in online advertising, in fact, that:
- Yahoo! now calls itself a media company by way of not competing with GOOG.
- Microsoft is trying to change its business model to avoid suffering the same fate that Yahoo! did (being surpassed by GOOG).
I bought and sold MSFT stock when the market over-estimated its demise and sold the stock when it over-estimated its comeback. I have owned YHOO stock since April 2003. I have never owned GOOG stock. Mainly I have always found it to be expensive. All three are great companies, none of them are going to disappear. All three will be stronger in the future, though their stock market capitalization might change drastically in either direction. Why? Because value has as much to do with how much the markey will pay for every dollar of revenue and income as it will with how much revenue and income each company generates.
The Great Disruptor: Advertising, Content or Technology?
The reason why online advertising has proven to be such a disrupting factor, frankly, has little to do with technology or media per se, it is because the growth rates of web adoption and broadband penetration have been ferocious. More people migrate to the web (which was the fastest growing media delivery platform in history until wireless surpassed it) than there is content to serve them.
The 1994-2000 was largely about investing in the technology and infrastructure to surf the Web.
The years from 2000-03 were a cleansing period.
Then 2003-07 marked the explosion of content, in all shapes and forms.
In all fairness, technology and content are joined at the hip, one enables the other.
Today, sure, there’s a lot of content online, but little of it is of the quality that offline advertisers have come to expect from offline media. And that’s a major problem. We want offline advertisers to migrate online, but then all we have to offer them are MySpace pages, articles with typos and videos made from a teenager in his basement.
That just won’t cut it. But don’t get me wrong, marketers have seen the writing on the wall, they know online is where the action is at, but despite what some people might think, they still control billions of ad dollars, so they hold the key.
Arbitrage Spells Profit
Of course, speaking of marketers, most of them spend anywhere from 5 to 10% of their advertising budgets online, yet we human beings now spend on average 25% of our time connected to the web, educating and entertaining ourselves, conducting commerce and communicating with one another.
Because of this lack of equilibrium between time spent online and marketing dollars spent online, it makes sense to create compelling content and put it online.
Free Content Has Proved to be Profitable, What About Free Technology
This is also why, by extension, some would argue, that it makes sense to take technology, make it free, and put it online. It echoes the notion that free is a tactic, and not a business model, granted, but does it ring true for a company with almost $50B in revenue, as is the case with MSFT?
Well, I’d say no, frankly, because the same way that the absolute dollars in online advertising were not large enough to merit print, radio and TV media firms from shifting operations faster online, it does not make sense for MSFT to take its core technology products and make them free for the Web. Well, it makes sense, but only if it makes sense to buy dog food, tack on shipping and handling and sell it for a loss to consumers who could get the same product cheaper from the local mall. If that business model makes sense to you, then hire a sock to tell the world that you’re now making your software for free and serving ads alongside it.
The Next Wave of Euphoria: Content
In my very humble and extremely biased view, online advertising is a great disruptor of technology, but not in the sense that a software company should make its software free and sell advertising around it. Google made a killing via search ads because paid clicks served based on keywords alongside organic search results was an effective way of advertising. That does not, in any shape, form or fashion, mean that serving text ads alongside a word document, excel spreadsheet, or powerpoint presentation makes sense. Don’t get me wrong, it can be a very compelling offering, much like text ads alongside email are, but it will never be enough to make up for the billions that MSFT will lose by dropping paid software for free software.
Google was able to create a $150B enterprise in online advertising because it started from scratch.
MSFT will not be able to do that by emulating Google, it will have to see how it can profit from online advertising in its own way, in a way that does not run counter to what it does. Software as a service is great, but that does not mean it should be free, supported by ads alone.
Video Content: the Brass Ring?
In 2000, I worked in search. From 2000 to 2005, I worked in online content, in text format.
Since 2006, I launched Mojo Supreme with its myriad of properties in search, video, etc., but 80% of our resources go into video content via WatchMojo.com.
Like anything else, you will have players competing in video that focus on content, others in technology, and some in distribution. It’s possible for some to be in more than one category.
The next wave of deals - be it business or corporate development - will come from technology companies seeking to acquire content companies, namely video ones, but to a lesser extent, text-based ones as well because the multiples on advertising/content/media are higher than technology. But what is key, is that these revenues are incremental to their core products and revenue streams (unlike old media that generates new media revenue at the expense of old media revenue).
But the reason why this trend will amplify is two-fold: the technology companies that are already in the media business (like Google) will want to keep 100% of the revenue once new websites to partner up will dry up. Google makes money on both Google.com and its publishing network. It is sitting on $11B in cash, $8B if the DCLK deal closes, and from a capital allocation perspective, it is best served by buying up content assets, running its own ads on them, and keeping 100% of the revenue. Remember, the old adage that “technology and content don’t mix is outdated.” One is an enabler for the other.
MSFT will get back into content.
It has way too much money on its balance sheet. It has bought back shares, paid out dividends, but nothing moves the stock. The only thing will be a manifestation that it will generate substantial top line growth from online advertising.
It’s the Multiples, Stupid
Google went from $0 to $10B in revenue via online advertising. The only way MSFT will get there is to jump on the next wave of online advertising, namely display/banner ads and ultimately, video ads. MSFT is worth $281B, with $26B in cash. Say it takes half and buys up $13B in content businesses, the multiple it trades at (currently P/S of 6 and P/E of 25) will start to creep up. After all, digital media companies are trading at P/S of 10 and more with P/E of 40 and more (forget the 30 times P/S that GOOG paid for DCLK).
Long term, if MSFT (or GE) want to move their stock, they will need growth, and the growth lies in digital content and media, and technology that will enable these.
A Game of Musical Chairs
Why? Today we are seeing YHOO and GOOG fighting for partnerships (ie. distribution) of their ad network, fighting for traditional ad dollars.
Viacom? They signed with YHOO.
News Corp.? They’re in bed with GOOG.
TWX? Oddly, AOL is with owned 5% by GOOG, but on CNN and SI, you see the search is powered by YHOO.
All to say, if you go through the list, over time, in the perpetual search for growth, the Viacom’s, News Corp.’s and Time Warner’s will seek to end the relationships with YHOO or GOOG, while YHOO or GOOG will seek to partner with more and more media sites.
Of course, if we pursue that logic (that companies, publicly traded ones at least) are always looking for growth, then it can be argued that there will be no more old media companies to sign up, and new media companies will be the ones that will be up for the taking.
We see this to this day. But when a company like Weblogs Inc. gets bought out by Time Warner’s AOL, at what point does GOOG or YHOO need to get in and compete with Time Warner.
When News Corp. bought MySpace, Google balked, partially it did not buy content, yet a few months later it went out and paid $900M in an ad deal without owning any equity.
That’s why Google paid $1.65B for YouTube, because it could see eventually being in the same position it found itself with News Corp.’s FIM’s MySpace.
When Google bought DCLK, it did so to get in on display / banner ads, though that was odd, because saying that DCLK (who exited the media business) was tight with ad agencies and advertisers is akin to saying that MSFT has great relationships with ad agencies because they use Powerpoint on client pitches. DCLK was more about keeping it out of MSFT’s hands than it was about leveraging in-house. The IR and PR spin is one thing, but dissecting two companies line of businesses is another.
So, when you connect the dots, you see that in the quest for growth, MSFT will repeat history. After all, tonight GE launched a digital media fund, very reminiscent of the late 1990s.
The same way that MSFT launched Slate.com (and then sold it to the Washington Post Company), MSFT will re-enter the content business sooner or later. MSFT’s senior management might say “nope, not gonna do it,” but never say never, and remember, history repeats itself. And once MSFT gets into the swing of things and starts buying media businesses, then Google will follow, as will Yahoo!, etc.
What’s really odd about Yahoo! is that some people consider Yahoo! a media company that produces content. Yahoo! does no such thing. Yahoo! licenses content. So long as the licensing deals are immaterial, it will be able to do so at low cost. But, connecting the dots once again, the content producers will see how valuable content is (as they build up their own distribution and more buyers bid up the value of their content) and ask for more money, at some point, the cost of acquiring the content-producing companies will be lesser than the present value of licensing deals.
While MSFT cries foul over GOOG’s DCLK deal (we told you, Google is the MSFT of the 21st century, much like MSFT was the Standard Oil of the 20th century), it should instead look at making DCLK’s contracts with content owners a moot point.
How can it do that? By producing a better DCLK? Don’t bother.
It can use its $26B cash hoard to buy up a lot of the valuable content producers. Do not forget, the cost of producing content can go down quite a bit thanks to the new tools made available, but the value of content is on the rise, partially because of all of the time we spend online and the speed at which advertisers are shifting marketing budgets online.
The Paradox of Content in the 21st Century
Cost and scarcity have a direct, linear relationship. The more scarce a good, the higher its cost. And because the cost of producing content can go down if you know what you are doing, then the profits from it will increase over time.
Good content is scarce these days. The best content belongs to the old media firms, but due to cannibalization, this type of content will be slow to go online, and any old media executive that will put it all online is basically being suicidal… the worst content (from the perspective of advertisers) is user-generated content. The sweet spot is in between, where we operate. You can argue that I am biased, but it’s the opposite. I got into this line of business because I believe in it.
Google bought content at the bottom via YouTube, it’s scratching its head to see how it can monetize it. I doubt the top of the content pyramid will sell to technology companies, even if they could afford it or let their egos allow it. Ultimately, it’s the content in the middle tier that will rise in value. And, if MSFT was really serious about winning in this space, it would draft a list of must-have properties and put their legal team to work on winning over some hearts and minds.
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