I attended an interesting Social Media Week panel titled Valuing New Media Companies vs. Old(er) Media Companies yesterday; my takeaways:
1) It is a real challenge for Old(er) Media companies to successfully integrate and fully benefit from new media acquisitions.
2) Old(er) Media companies are not often rewarded for homegrown New Media innovation.
3) Old(er) Media companies are usually only rewarded for meaningfully growing their traditional lines of business.
The panelists (including MESA’s own Mark Patricof) did a good job dissecting AOL’s recent $315 million acquisition of the Huffington Post and what the conversation got me thinking about again is just how challenging it is for any type of established media company to successfully acquire, integrate, nurture and grow any type of digital media start-up. While there are a few rare exceptions, in almost every case, the established media company remains much too interested in protecting existing sources of revenue that, while dwindling, may still represent hundreds of millions, if not billions of dollars.
The panel spent a lot of time comparing AOL’s recent acquisition to the now infamous AOL/Time Warner mega-merger that took place 11 years ago last month. In retrospect, Time Warner’s existing content and distribution businesses put it at odds with and effectively doomed its pairing with AOL from the first day of the landmark merger/acquisition. Not that anyone really got it at the time. I, like just about everyone else, believed that the pairing represented a bold and impossibly exciting combination whereby Time Warner with 13 million cable subscribers would leverage AOL’s vast digital media expertise and user base (20 million paying subscribers at the time of the merger) to remake itself into the prototype media company for the 21st century. But one need not turn back the clock to 2000 to find examples of such ill-fated pairings–the landscape is littered with old media/new media combinations that simply never came to fruition despite the ballyhoo and high hopes that attended the press release trumpeting the deal–News Corp./MySpace anyone?
So is AOL’s acquisition of Huffington Post different? Maybe, but probably not. While it is hard to view AOL as an established old media player even when compared to the incredibly condensed life cycles of today’s internet start-ups, it was pretty clear from both the panel and the audience that the acquisition is viewed as a “bet the farm” move on the part of AOL as it seeks to redefine itself and to justify its new focus on content. Unlike most of its Old(er) media brethren, AOL is less beholden to protecting existing revenue streams; given that AOL’s advertising revenue tumbled a troubling 29% in its most recent quarter, there is increasingly less existing revenue to protect. With that in mind and what little is known of HuffPo’s profitability (breakeven or slightly profitable last year with estimates of $10 million of profit on $50 million of projected revenue this year), the general consensus is that there is probably no way (even in the best possible scenarios) that AOL didn’t overpay (in cash no less). And the stock market is not rewarding them for their recent acquisition(s). AOL has shed $315 million off its market capitalisation in the last five trading days—exactly the amount it was willing to pay for HuffPo.
It was also clear from the panel that while Old(er) media companies have a tough time benefiting from acquired innovation, they are seldom recognised or rewarded for their own homegrown media innovation in the same way digital media start-ups are. While most industry pundits are more than comfortable putting a $50 billion valuation on a still private Facebook (http://www.mesaglobal.com/blog/32-facebook-valuation-tops-50-billion.html), this same thinking filters down to far less attractive vehicles. Look no further than Demand Media’s recent IPO which values the much debated “content farm” at a staggering $1.53 billion, just $100,000 shy of the market cap of that old media dinosaur the New York Times Company which has somehow managed to publish the paper of record continuously since 1851 while at the same time building the most popular American online newspaper website, receiving more than 30 million unique visitors per month.
It seems that what investors most often want from Old(er) media companies is growth in their historical, non-digital businesses. Better-than-expected results in Walt Disney’s theme parks, TV networks and movie studios allowed it to record a 54% increase in profits on 10% higher revenue in its first fiscal quarter. That was enough to propel the stock yesterday to close at a new 52 week high.
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