Category: media

Assembling the deliverable

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Comcast’s digital content delivery software subsidiary ThePlatform made its first acquisition this week, picking up tiny social networking startup Chirp Interactive. Founded just one year ago, the San Francisco-based company has developed an interactive screen saver that collects updates from websites like Facebook and Flickr. Structured as an asset acquisition, ThePlatform will use the VC-backed company’s technology and select employees to build similar social features into its own content distribution and management system.

Comcast bought ThePlatform in 2006, early in its efforts to build a viable online video distribution business, and operates the business as an independent entity. Since 2006, it’s been reported that the cable giant has shelled out nearly half a billion dollars on five online deals since the beginning of 2006, including its purchases of movie review and ticketing website Fandango in April 2007 and social networking site Plaxo in May 2008. Comcast’s VC arm, Comcast Interactive Capital, has also been banking heavily on online startup. One recipient of Comcast’s capital is tiny video and advertising distribution company Revver, which incidentally was picked up by LiveUniverse in February.

Going forward, we ask where Comcast and its VC arm will be setting their sights. Well, mobile content distribution, of course. In fact, Comcast participated in a $12.6m seed-round funding of Boston-based mobile WiMax startup Cartiza earlier this month. It also joined Google, Time Warner and other industry behemoths in a $3.2bn round in WiMax company Clearwire in April. After building up a healthy reserve of content, a video and advertising distribution platform and increasing social networking capabilities, the need to converge these platforms on mobile devices is clear, and Comcast is making the moves to do just this.

Selected Comcast acquisitions

Date announced Target Target description Deal value
May 14, 2008 Plaxo Online address book synchronization $160m*
April 11, 2007 Fandango Online movie tickets & reviews $192m*
June 28, 2006 ThePlatform Digital media publishing & delivery $90m*

Source: The 451 M&A KnowledgeBase *Reported values

Should Ask prepare to get Answers?

Ask.com – a subsidiary of IAC/InterActiveCorp – closed its acquisition of Lexico Publishing Group last week. The 16-person company, which includes Dictionary.com, Reference.com and Thesaurus.com, reportedly went for $100m in cash, representing a multiple that we estimate at 10 times its trailing twelve-months revenue, or more than $6 per monthly unique visitor. This acquisition comes after a tumultuous ride for the profitable Lexico. The company was almost acquired by Answers Corp (Answers.com) in 2007, but after Answers failed to drum up proper financing, the deal turned sour. It was officially terminated in February, presenting an opening for Ask.com to swoop in. Besides being a happy ending for Lexico, which has been chasing an exit for a while, this fits well with Ask.com’s restructuring strategy of returning to its roots as an answer facilitator after its short but decidedly failed attempt to out-Google Google in the search engine department. Ask.com has openly said that more acquisitions are forthcoming. So who might the company buy next?

Among others, we see Answers.com itself as a potential acquisition target. Despite a growing base of about 20 million loyal users, the provider has had a tough time monetizing its page views and has been bleeding cash for more than a year now. Incorporating Answers.com’s user base and content could solidify Ask.com as the leader in the answer-search business. And with Amazon and Yahoo moving in on Ask.com’s turf, it is necessary for the company to continue to grow its market share. Indeed, we’ve heard industry rumors that Ask.com had made overtures to its rival well before the failed Lexico deal. And interestingly, Redpoint Ventures recently pumped $6m (with an option for another $7m) into Answers.com. That is the same Redpoint Ventures that helped fund Ask.com during its early days and that still has a stake in the IAC division. Ask.com’s former CEO Jim Lanzone also happens to be an entrepreneur-in-residence at Redpoint.

Surely the struggling company could be had for much less than the revenue multiple accorded to Lexico, which reported a healthy EBITDA of about $3m for calendar 2006, the last data made public. While the revenue multiple and price-per-user metrics of the Lexico deal would suggest a $100m-plus valuation for Answers, the company, which reported an operating loss of about $3.7m in the first quarter of this year, is clearly going to be valued at a steep discount. It’s currently trading at a 52-week low, with a market cap of just above $23m, or just a bit more than two times trailing revenue and a little over a dollar per user. With more than three times the number of employees as Lexico, Answers clearly has a much more labor-intensive model than its peer. That may change, though. Answers.com’s fast-growing new WikiAnswers.com service offers a lower-cost community-based answer site and is expected to exceed the more labor-intensive Answers.com service in revenue by the second half of 2008.

At a minimum, we estimate that Ask.com would have to shell out somewhere in the neighborhood of $30m, or roughly $3.80 per share, for the company – a 30% premium to the current price. It’s certainly not a question of whether IAC can afford the deal – it currently has a little more than $1.2bn in cash and a market cap of $4.7bn – but how much it could leverage the deal by cutting costs, monetizing the user base and expanding the WikiAnswers business. Indeed, for Answers.com, an acquisition by Ask.com may be just what the company and its desperate shareholders have been looking for.

On a final note, Ask.com’s new strategy of no longer trying to beat Google at its own game is in stark contrast to that of Microsoft, whose recent investments and acquisitions put it on a head-on collision course with Google. However, Microsoft’s recent acquisition of Powerset at least gives it technology that is capable (within Wikipedia, at least – it is yet to be tested publicly on a large corpus) of providing answers to both questions and keyword queries and could end up being a major challenge to the Q&A format Ask.com favors. That is, of course, if it doesn’t get lost in the mix if Microsoft should buy Yahoo’s search business.

The ‘new’ Old Media

-by Brenon Daly, Yulitza Peraza

With investment bank Allen & Co opening its annual conference on July 9 in Sun Valley, Idaho, we thought we’d take a look at what sort of shopping the traditional media companies, which make up most of the confab’s attendees, have been doing recently. The short answer: They’ve been busy. And a lot of the buying has been Old Media picking up New Media. (We’ve noted in the past how Allen & Co has re-tooled its business to meet the change in deal flow.)

In the first half of this year, traditional media companies have spent more on Internet content companies than during any other comparable period. Just Tuesday, for instance, Gannett picked up the chunk of ShopLocal that it didn’t already own. Additionally, NBC took a majority stake in Web content and broadcast sports provider World Championship Sports Network for an undisclosed sum last month. (This acquisition, the network’s fourth since 2006, comes just in time to help bolster its upcoming coverage of the Olympic Games in Beijing.) Also, CBS paid $1.8bn in May for CNET, one of the original online information sites. Altogether, since 2002, Old Media has put more than $13bn toward online purchases.

If anything, we expect the pace to pick up in the second half of 2008, as media companies continue to expand their digital offerings. The shopping spree, however, is a bit late because the model has been broken for a long time. It used to be that traditional media companies could run fatly profitable by simply trading their information and entertainment for your dollars, whether the payment came through subscription or advertising. That exchange worked as long as the information and entertainment could be kept closely controlled. In other words, it worked until the Internet came along.

Acquisitions of content companies by media outlets

Period Deal Volume Deal Value
Jan-June 2002 9 $424,000
Jan-June 2003 7 $106m
Jan-June 2004 3 $87m
Jan-June 2005 10 $1.11bn
Jan-June 2006 26 $1.18bn
Jan-June 2007 32 $2.07bn
Jan-June 2008 38 $2.18bn

Source: The 451 M&A KnowledgeBase

Tapping online TV ad revenues

After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.

Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.

One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.

Selected Google online advertising deals

Date announced Target Deal value Company description
April 13, 2007 DoubleClick $3.1bn Online advertising and marketing services
April 23, 2003 Applied Semantics $281m Online advertising and analytics platform

Source: The 451 M&A KnowledgeBase

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

SanDisk amps up its music player offerings

With its $6.5m tuck-in acquisition of MusicGremlin last week, SanDisk is bulking up its digital music player business. MusicGremlin, with just eight employees and about $5m in revenue, will obviously not have a material effect on SanDisk’s business. Nonetheless, the importance is not so much the size or scope of the company, but more the technology it has developed during its four years in operation. Specifically, MusicGremlin gives SanDisk the ability to effectively stream music wirelessly to its products. We have learned that SanDisk was very eager to acquire the startup, with the large company initiating talks and sealing a deal within a few weeks. Given SanDisk’s recent effort to build its product offerings through strategic acquisitions, what other acquisitions might the company be considering?

From our perspective, SanDisk needs to do some shopping. It currently ranks a distant second place to Apple in the digital music player market, but also faces stiff competition from the likes of Microsoft, Sony and Panasonic. Perhaps the biggest hole in SanDisk’s offerings is the lack of an in-house music and video content provider, like Apple has with its iTunes and Microsoft has with its Zune Marketplace. To date, SanDisk has relied exclusively on partnerships, but learned the downside of that strategy the hard way in February, when Yahoo suddenly shuttered its Music Unlimited service. The disappearance of the service, which was the very foundation of SanDisk’s Sansa Connect player, left users understandably sour.

As to where SanDisk might look for a music service, two names come to mind: Rhapsody (owned by RealNetworks) and Napster. Despite taking in about $150m and $130m last year, respectively, both are consistently running at a loss. Clearly they could be had for a steal. More importantly, they are both proven and established music services with mobile offerings that would make integrating MusicGremlin’s technology an easy task. Using Napster as a comparable, we believe either company can be had for just under $100m, representing a 40% premium over Napster’s current price on Nasdaq. With $1.22bn in cash and a market cap of $5.2bn, SanDisk could certainly afford a few deals to shore up its defenses for the inevitable battle of the titans.

Blank printing presses

Brenon Daly

Gutted by the arrival of Internet, newspaper companies have nonetheless printed very few transactions that could help them survive in the Media 2.0 era. One reason for the blank M&A pages: The currencies available to them are disappearing, according to Tim Connors, a partner at U.S. Venture Partners. Speaking on a panel at the recent IBF VC Investing Conference in San Francisco, Connors said the virtually uninterrupted slide in shares of many media company have taken a few would-be acquirers out of the market.

Indeed, we can only imagine it’s probably inconceivable for any of the newspaper companies to be shopping, at least not for an equity deal. Regional newspaper company McGannett shares are currently trading at their lowest level ever; USA Today-owner Gannett stock has sunk to a 14-year low and shares in the venerable New York Times are changing hands at levels not seen since mid-1996.

At the IBF conference, Connors noted USVP recently had an exit to an old media company. Portfolio company Adify, which runs advertising networks for some 120 vertically focused Web sites, got snapped up by Cox Enterprises for $300m. (Adify was in the midst of raising a third round of funding when Cox took them out. JP Morgan banked the deal after one of their analysts initially suggesting the two companies might strike a commercial relationship.) Incidentally, Cox paid its $300m bill for Adify in cash. 

Will Yahoo shareholders be Amp’ed?

Brenon Daly

Now that Yahoo has passed on Microsoft’s bid, it’s up to Jerry Yang to show the company’s testy shareholders that soldiering on makes more sense than selling out. That’s going to be a tough job. A handful of shareholders have already sued the Internet company over its decision not to talk with Microsoft, and the disenchantment is likely to spread if the stock returns to the level it was before the unsolicited bid came in. (A quick fact: From the time Yang retook control of Yahoo last June through the day before Microsoft unveiled its bid, Yahoo stock lost nearly one-third of its value on his watch.)

So how is Yahoo going to get its shareholders back above water? One key to the plan is the ‘buy and build’ initiative it has started with AMP. Yahoo’s new online advertising management platform is built on a pair of deals that cost the company nearly $1bn in 2007. A year ago, Yahoo spent $680m to pick up online ad exchange network Right Media Inc, and then followed that up last September with a $300m play for behavior-based marketing vendor BlueLithium.

AMP is slated to come out in the third quarter of this year, although a few publishers are currently test-driving it. The stakes for Yahoo are huge. By its own assessment, the US online ad market will hit $50bn in four years. Securing a chunk of that ad spending will go some distance in silencing shareholder grousing about Yang & Co’s decision to stiff-arm Microsoft. Of course, that’s only if AMP delivers and doesn’t become another Panama-style disappointment at Yahoo. If that turns out to be the case, Yang would be lucky to find a buyer for his company, even at a discount. 

Yahoo’s recent display ad networking deals

Announced Target Deal value
Sept. 4, 2007 BlueLithium $300m
April 30, 2007 Right Media $680m

Source: The 451 M&A KnowledgeBase