Category: digital entertainment

Streaming deals keep flowing

Stephanie Turner

by Scott Denne, Jessica Montgomery, Michael Nocerino

As the media and telecom giant carves out its position in a transforming television landscape, Comcast acquires XUMO, a streaming video services provider. It’s the latest in a cascade of deals as Comcast and its peers adjust to an ongoing shift in consumer viewing habits. While Netflix, Amazon, Disney and other companies that can throw billions into content creation and distribution have largely locked down the subscription-supported streaming video market, ad-supported video remains up for grabs.

Comcast’s reach for XUMO loosely resembles Viacom’s acquisition of Pluto TV. Both targets provide a streaming video service that hosts multiple video channels, supported by advertising. But where Pluto primarily goes to market via a consumer app, XUMO partners with TV OEMs to preinstall the software into their smart TVs in exchange for a share of the ad revenue generated by the service.

XUMO’s existing relationships with LG and other OEMs give Comcast a valuable distribution channel and, eventually, XUMO’s software could offer a replacement for Flex, the streaming video hardware Comcast hands out to its internet customers. Although terms of the deal weren’t disclosed, those considerations likely lifted XUMO’s valuation ahead of the multiple on Viacom’s year-ago pickup of Pluto (subscribers to 451 Research’s M&A KnowledgeBase can view our estimate of terms of that deal here).

Viacom and Comcast aren’t the only ones inking deals for streaming video content and service providers. Last year saw Altice nab Cheddar in a $200m transaction that followed T-Mobile’s $325m purchase of Layer3 TV and AMC Networks’ acquisition of RLJ Entertainment, a deal that valued the target at $517m, or 5.5x trailing revenue. More acquisitions of ad-supported streaming services could be on the way. 451 Research has confirmed media reports that Fox is considering a purchase of Tubi and Comcast’s NBCUniversal has explored buying Walmart’s Vudu.

The addressable market for ad-supported services could expand significantly as ownership of smart TVs surges – and our surveys show that to be the case. According to 451 Research’s VoCUL consumer population representative survey, usage of smart TVs to stream video rose by nearly half in the six months between the second and fourth quarters of 2019, with 22% of people saying they use those devices in the most recent survey. (The fourth-quarter data will be published shortly, the second-quarter data can be found here.) A larger market could lead to buyers for additional services, such as Philo, Plex or sports-focused FuboTV.

Telos Advisors advised XUMO on its sale to Comcast.

Figure 1: Changes in video-streaming devices

Source: 451 Research’s VoCUL: Connected Consumer

Viacom orbits around online video and ad targeting with Pluto TV purchase

Mark Fontecchio

by Mark Fontecchio, Scott Denne

With the $340m pickup of Pluto TV, Viacom broadcasts its desire to provide more online video and gain insights about the viewers who watch it. The target offers an ad-supported streaming service with more than 100 channels and claims over 12 million monthly active users. That media content and viewership data could help Viacom as it pushes into streaming video in search of higher ad rates through granular audience targeting.

The $13bn media giant dipped into streaming video M&A with the $17m acquisition of AwesomenessTV in July. Today’s larger deal signals Viacom’s appetite for more digital-first and digital-native content. Price isn’t the only dramatic difference between today’s transaction and that earlier buy. With Pluto TV, Viacom gets a fully backed streaming service that hosts both scheduled content and on-demand videos on a variety of channels, rather than a single channel or studio. Reaching for Pluto also gives Viacom access to millions of users, many of them younger viewers who don’t consume much traditional television. That amount of proprietary audience and viewership data can be immensely valuable, as the company recently cited increased ad rates due to improved ad targeting.

Surveys show that more people are signing up for online video services, often at the expense of traditional TV. According to 451 Research’s Voice of the Connected User Landscape, roughly one-fifth of consumers have either dropped traditional cable and satellite TV providers or have never subscribed to them in the first place. The same survey found that 57% of consumers now pay for at least one online video service.

According to 451 Research’s M&A KnowledgeBase, media firms have infrequently acquired software and internet businesses, having only printed about 20 deals in each of the past two years. Still, we anticipate that more broadcasters and studios will expand their acquisitions of video services or underlying technology as they seek ways to generate a direct link to their audiences to offset declining TV viewership and massive investments in original, niche content from Amazon and Netflix.

Broken promise

Mark Fontecchio

by Scott Denne

Verizon’s struggles to extract value from its massive investments in digital media became official this week as the company announced that it would write down much of the value of its AOL and Yahoo acquisitions. Given the amount of value it’s lost across those two deals, there’s little doubt now that Verizon will never emerge as a prolific acquirer of digital media vendors, despite owning two businesses that were once among the most active.

In 2015 and 2016, Verizon paid a combined $9.2bn to acquire AOL and Yahoo to transform its telecom network – and the consumer data flowing through it – into a challenger to Facebook and Google. The anticipated benefits have failed to materialize. In the third quarter, Oath (Verizon’s name for the combined AOL and Yahoo business) saw its topline shrink by 7% to $1.8bn, putting the company well short of its 2020 annual revenue target of $10bn. As gains in mobile and video advertising have failed to compensate for declines in desktop and search, Verizon wrote down $4.6bn of the $4.8bn goodwill it carried on the combined transactions.

For would-be sellers of digital media firms, it could mean a major buyer is out of the market. Before joining the telco, AOL and Yahoo were among the most active acquirers of digital media – in the two years before Verizon bought AOL, the two companies spent a combined $2.8bn on 53 tech purchases.

Verizon’s Oath wasn’t nearly as active. According to 451 Research’s M&A KnowledgeBase, Verizon only acquired one company to add to Oath in the past two years, picking up full ownership of Yahoo’s Australian venture. The write-down makes it likely that trend will continue now that Verizon has officially owned up to its overpayment.

Spotify sounds out the street

Scott Denne

Contact: Scott Denne

Despite Wall Street’s demonstrated distaste for pricey consumer tech offerings, Spotify intends to go public in the riskiest possible way. The streaming music service has unveiled its registration documents to begin trading its shares directly on the NYSE, bypassing an initial public offering. Spotify posts growth that makes it the envy of many consumer internet businesses, yet its low-margin business model limits its ability to staunch its losses.

The Sweden-based company’s top line jumped 39% last year to €4.1bn ($5bn), although its net loss more than doubled to €1.2bn. Renegotiating of its licensing agreements improved Spotify’s gross margin in 2017, but it still sits at just 21%. Given that it’s facing off against deep-pocketed tech vendors, including Apple and Amazon, it will be challenging for Spotify to negotiate lower rates and as it stands, the company has already had to lower the price of its service to bolster user growth.

Matching its private market valuation will be tough. New consumer tech debuts haven’t received a warm welcome on Wall Street. Snap trades just ahead of its IPO price a year after its debut, while Blue Apron has been decimated amid customer declines. Eschewing a traditional IPO to set a price could make its stock more volatile than it has been in the private markets – in private trades this year, Spotify’s market cap has swung between $15.9bn and $23.5bn.

It’s tough to find a perfect comp that aligns with Spotify. In some ways, it looks like Netflix. Both provide streaming entertainment and post enviable growth. Netflix, however, offers exclusive content to its subscribers, whereas Spotify has largely the same music that its competitors do. Moreover, Netflix, which is twice the size, has a higher gross margin and generated more than $500m in profit last year. Those differences will make it difficult for Spotify to fetch anything close to the 11x trailing revenue where Netflix trades. Still, its growth rate and low churn will likely keep it well above the 0.8x where Pandora trades. When Spotify enters the NYSE, we anticipate that it will be priced on the low end of its private market valuation, around 3x trailing revenue.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Tech’s impact on M&A happening outside the tech market 

Scott Denne

Contact: Scott Denne

The internet’s borders are expanding into retail, broadcasting, automotive and other legacy verticals as power over that network consolidates around a handful of companies. Such a revolution should spark a conflagration of tech M&A, but it hasn’t. Acquisitions of consumer tech companies hit a three-year low, and the biggest prints driven by those changes, including Disney’s $52.4bn purchase of Twenty-First Century Fox assets earlier this week, are happening outside of tech.

Consumer tech M&A has shed a streak of three consecutive record-breaking years for the simple reason that there are few tech targets large enough to help retailers, publishers, telecom companies and broadcasters fend off Amazon, Apple, Facebook, Google and Netflix. According to 451 Research’s M&A KnowledgeBase, consumer-facing internet and mobile companies have together fetched just $27bn this year, less than half the total acquisition value of any of the last three years and a dramatic fall from the $84bn spent on such companies in 2016.

Among the group of tech companies listed above, only Google has inked a $1bn-plus tech acquisition in the last three years, showing that they aren’t spending on M&A to safeguard their coveted posts. Although outside tech, Amazon spent $13.7bn on Whole Foods, for a brick-and-mortar presence for its burgeoning grocery business. Similarly, companies from legacy markets aren’t spending heavily on consumer tech companies because there are few assets that could have an immediate impact in their fight against the tech giants. Some are buying on technical infrastructure to launch new products, as Disney did with its $1.5bn BAMTech acquisition. In retail, Target and Williams-Sonoma have made similar tech infrastructure moves this month, with their respective buys of Shipt ($550m) and Outward ($112m). Additionally, we’ve seen a wave of AI acquisitions among automakers.

Yet, there isn’t a sizeable contender in most consumer tech markets. There isn’t a consumer-tech company that could give a broadcaster scale that approaches Netflix or transform a retailer into a credible threat to Amazon. That’s not to say a lack of attractive tech companies drove Disney to its purchase of Fox or provided the rationale for AT&T’s $85bn bid for Time Warner.

In making the acquisition, Disney gets more of what it knows best and gains scale in what is becoming the battleground for the next round of video distribution – original content. (Although not a tech target, and therefore not included in 451 Research’s M&A KnowledgeBase, it’s worth noting that as part of the deal, Disney becomes the majority owner of Hulu, a Netflix and Amazon streaming competitor.) Content is increasingly becoming the catalyst for the streaming subscriptions that threaten traditional broadcasting and cable. In a third-quarter survey by 451 Research’s VoCUL, 28.4% of Netflix subscribers told us ‘original content’ is what they most frequently consume on the service. That’s a jump of almost seven percentage points from the same survey at the start of 2017.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Disney nabs BAMTech in $1.6bn play for streaming services

Scott Denne

Contact: Scott Denne

At the dawn of the internet, Bill Gates famously said, “Content is king.” For most of the 20 years since then, that sentiment seemed like a sick joke to content makers in print and music who saw their markets eviscerated by Google, Apple and other tech vendors. Now Walt Disney is paying $1.6bn to find out if the adage is finally coming true.

Facing fleeing customers from its cable networks and having handed over online distribution of its films to Netflix, Disney is aiming to take back direct control of its content by building out its own streaming services through its ownership of BAMTech. Disney will spend $1.6bn to purchase 42% of BAMTech, adding to the 33% stake it previously bought in the video-streaming services spinoff of Major League Baseball.

Its desire to own – rather than just be a customer of – BAMTech shows that Disney sees value not only in building its own streaming services but also in enabling other studios to do the same. In that respect, its strategy aligns with those of the major tech companies, most of which have made a push for original content through expensive licensing deals and original content production.

With the pending launch of its own streaming services (it plans to unveil one for sports and one for its entertainment library), Disney hopes to build a direct distribution channel that will generate more value for its content – both in terms of fees and of having direct data about its customers and their viewing preferences – than what the combination of Netflix, MSOs and advertisers are able to pay. Disney watched as the economics of print and music flowed to digital distribution channels. But in buying BAMTech, Disney is making a bet that quality content will reign supreme in video.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Advertisers continue to fly from Twitter

Scott Denne

Contact: Scott Denne

Earnings calls this week from Google, Facebook and Twitter highlight how far the latter has fallen behind those two giants. While advertisers flocked to Google and Facebook, they fled from Twitter. Although its results were dismal, the onetime contender for Facebook’s social media crown seems to have correctly identified its differentiator and is building – slowly – a strategy to capitalize on that.

Twitter’s top line dropped 5% to $574m in the second quarter, a decline that would have been more dramatic without a rise in its data-licensing business. An 8% slide in its revenue from advertisers mixed with a 12% jump in daily active users points to the shrinking price of Twitter’s ad impressions. Facebook, by comparison, experienced a 25% boost in its revenue per user on its way to a 45% increase in revenue in Q2.

In an attempt to get sales growing once again, Twitter’s management has focused on the appetite of its audience for real-time information and embraced video partnerships in verticals with a similar focus – music, sports and news. Yet its drooping ad rates attest to the slow burn of such efforts: declining ad rates amid an environment of rising prices for digital video inventory.

To raise its ad sales, Twitter could pursue a media rollup in verticals that match its strengths. The $4bn it has in the bank, along with a stock that still trades near 5x TTM revenue, gives it the flexibility to pursue a series of modest-sized targets as well as larger digital media properties. For example, music video site VEVO would complement its existing streaming partnership with Live Nation and get Twitter one of the most trafficked video sites on the internet.

Twitter’s platform will never have the scale and reach of Facebook, whose monthly audience is six times larger and increasing at a higher rate. But it can expand its reach into the audiences it has by leveraging its real-time strength and extending them off its platform. As a social media company, Twitter’s a runt. But as a digital media company its open, conversational platform gives it a way to engage audiences in ways that aren’t available to other digital media firms.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Internet Brands pays healthy premium for WebMD in otherwise ailing internet M&A market

Scott Denne

Contact: Scott Denne

Private equity firms seem to be the only ones browsing for big consumer internet deals these days. Today’s acquisition of WebMD by Internet Brands marks the third billion-dollar purchase of a consumer internet company this year. The acquirers in those other deals, like KKR-owned Internet Brands, are also backed by PE firms.

Internet Brands’ $2.8bn acquisition of WebMD fits in the strategy, although not scope, of its past acquisitions. Since its days as Carsdirect, the company has rolled up 63 internet businesses across automotive, fashion and healthcare. Although the deal sizes of those were largely undisclosed, sites like dentalplans.com and racingjunk.com didn’t have the scale or notoriety of WebMD, and were certainly smaller deals – even Internet Brands itself was reported to have traded to KKR at just over $1bn in 2014.

In landing its biggest prize, Internet Brands paid a healthy valuation. At $66.50 per share, the deal prices the target company’s stock at a record level for the current iteration of WebMD (since its founding in the heyday of the dot-com bubble, WebMD has been through a couple of reorganizations, but has been trading on the Nasdaq since 2005). The acquisition values it at 3.9x trailing revenue, two turns above what Everyday Health – a competing health site that’s about one-third the size – took in its sale to j2 in 2016.

And while WebMD fetched a premium compared with its closest competitor, when compared with the broader market, it falls just shy of the 4.3x median multiple for similarly sized consumer internet deals across the last decade. As private equity firms account for an outsized amount of the consumer internet M&A market, premium valuations become harder to find. According to 451 Research’s M&A KnowledgeBase, $2 of every $3 spent on M&A in this category this year has involved a PE firm or PE-backed buyer, yet none of the $1bn-plus consumer internet deals this year – Bankrate, Chewy and WebMD – printed above 4x.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Could Snap crack open location tech M&A? 

Scott Denne

Contact: Scott Denne

Snap has picked out a battleground in its attempt to become the next internet giant. In less than a month, the social media upstart has acquired two location technology companies – ad attribution vendor Placed and location-based social app provider Zenly. Those moves into a nascent space could lead other firms to give location tech a closer look.

A valuation of 39x trailing revenue has saddled Snap with hefty expectations and in bolstering its location-based marketing tools, it’s shown how it is planning to meet those expectations. Many of Snap’s features are intimately tied to location – geo-filters and stories, for example – and its larger competitors have only made limited moves toward location-based marketing. That could change, and as it does, acquisitions could follow. Notably, Facebook regularly counters Snap’s announcements with similar products of its own.

Even companies that lack such a direct rivalry with Snap may be enticed into the space as marketers become more aware of the possible applications of location tech following Snap’s deals. Adobe, AOL, Oracle, Google and dozens of smaller vendors expect to expand by serving legacy marketers with large budgets and sales that are tied to a physical location, whether movie theaters, retailers or auto dealerships. Also, Amazon’s dramatic bet on the convergence of physical and digital retail – its pending $13bn purchase of Whole Foods – could put location tech on its shopping list.

Outside of a handful of large GPS and mapping transactions, mobile location technology M&A has been sparse. Location tech encompasses multiple overlapping capabilities, most of which are lacking among the biggest marketing and media firms. Some startups, such as Snap’s Placed, sell the infrastructure to collect, cleanse and deploy location data for targeted marketing and attribution (e.g., NinthDecimal, Placecast, PlaceIQ and Reveal Mobile). App providers like Snap’s Zenly have a legitimate need to collect location data and could bolster the scale of an organization’s location data assets – Foursquare, for example, plays in this segment as well as the former one. Then there are those such as MomentFeed, Placeable and Yext that enable national brands and retailers to manage local presence.

Just as data generated by web servers became the heart of digital marketing, consumer location could fill the same role for the convergence of physical and digital marketing. But the applications for this data are poorly understood today. Major retailers spent years investing in beacon deployments although few have developed a strategy to get a return, while advertisers continuously test how to make use of location data, whether through targeting places and people or measuring results. Despite the growing pains, the attention on this corner of the tech ecosystem from a widely watched company like Snap could make location the place to be.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Snap’s debut through a TV lens

Scott Denne 
Contact:  SCOTT DENNE

Wall Street investors seem to think social media will be a winner-take-all game. Our view is that just as there were many TV shows vying for audiences in the last era of media, there will be many new-media ‘shows’ such as Twitter, Spotify and Tinder where audiences divide their time. Snap, the maker of the popular Snapchat app, priced its offering Wednesday night at $17 per share and jumped more than 50% by Thursday afternoon, giving it a market cap of $29bn, or 72x trailing revenue. Snap is a show that’s valued as a network.

The company builds social media apps focused on the smartphone camera. It was founded around the idea of sending photos to individuals that would vanish and has since built out other capabilities such as filters and lenses to augment the pictures and stories to share with larger groups. Those features have made it popular with 18-34 year olds in North America, a demographic that’s highly coveted by advertisers and increasingly hard to reach as they spend less time on TV than older audiences. That demographic, mixed with ad offerings such as sponsored lenses and other nontraditional, interactive products, has led to scorching revenue growth.

Snap only began to generate sales from its ad offerings in mid-2015 and annual revenue grew almost 7x to $404m in 2016 (its losses are even larger thanks to hefty IT infrastructure costs). Early signs suggest that revenue will continue to grow rapidly – at least in the short term. High-ranking advertising executives have publicly lauded the company and the results that it generates for their clients. And Snap had an ARPU of just $2 last quarter for its 68 million North American users. By comparison, Facebook generates about $20. Yet Facebook trades at just 12x revenue, meaning that Snap’s newest investors have priced the company as if it has already closed that gap. Facebook took more than four years to grow its North American ARPU by that amount.

The key nuance for us is that where Facebook offers a broad identity platform that touches most of the US Internet population, Snap is limited to a single (albeit valuable) demographic. Facebook has a platform that can (and does) bolt on other social networks (or shows, to stick with the analogy). And Facebook is protected by a network effect that Snap doesn’t benefit from.

Snap’s pitch that it could be an Internet powerhouse is built on the assumption of continued growth of revenue and audience through new product development (both new ad offerings and new consumer products). Its total daily average users grew just 3% over the fourth quarter to 158 million. Compare that with its quarterly growth rate of 14% a year ago and it looks like Snap is running out of steam. By contrast, Facebook put up 9% quarterly user growth leading up to its own IPO (off an audience that was then three times as large as Snap’s current count).

A broken promise to be the third leg of the Google-Facebook digital media stool led Twitter’s stock to shed two-thirds of its value since its 2013 IPO once it became obvious that its audience size had plateaued. Snap could be setting itself up for the same trap. Twitter currently trades at 3.5x trailing revenue. Snap’s coveted demographic and unique ad formats give it better growth potential than Twitter, even if audience expansion does indeed stall. Yet Snap’s current valuation forces it to chase an audience with Facebook-like scale and the window for it to be a solid but not dominant media company has now disappeared.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.