The Bubble May Soon Burst for Digital Content Company Valuations
Last month, AdMedia Partners released the results of its survey indicating that digital media content companies are in a bubble that will soon burst, perhaps in 2009. The survey results confirm a general hunch I’ve had for some time about valuations and prospects for digital content plays. The survey of 1,600 senior executives at major media companies found that 80% of those surveyed thought their company would be involved in some kind of M&A deal in 2008, and 62% felt valuations for online media companies are inflated. Another interesting conclusion is that digital media M&A in 2008 will be driven mainly by strategic buyers, not the financial or hedge fund buyers that have been driving deals the last few years. Not surprisingly, then, 7 in 10 respondents thought prospective sellers should act now before the valuation bubble bursts. The survey report has a lot of valuable and interesting information, but for me it really helped further my thinking about the difference in valuations and prospects between digital media content companies digital media infrastructure companies.
Digital media companies usually come in two flavors: content or infrastructure. For years, we’ve been hearing the mantra that ‘content is king.” True enough, without content, what’s is the point of the infrastructure? But its the digital media infrastructure that allows content to be delivered to consumers easily, reliably and efficiently. Over the past few years, I’ve noticed that digital media infrastructure companies, those facilitating the encoding, transcoding, storage, delivery and distribution of digital media, are being acquired at higher valuations and purchase prices, and with more post-deal success that content deals.
Content-plays, however, have their own cycle and content start-ups need to time their launch, development and exit extremely carefully. One day its professionally produced or broadcast-quality content that rules, and the next day its all about user-generated content. In the beginning, there was a focus on semi-professional content and short films, led by Internet short-film pioneer, Atom Films, founded by Mika Salmi. As well, RocketVox, the company I co-founded with Kelly Smith, focused on professionally produced special interest video content. Not long thereafter, the focus on online video content shifted to amateur user-generated content, perfectly exploited by YouTube and Grouper. Google’s record-breaking $1.65B acquisition of YouTube in 2006 seemed to suggest user-gen content was King. yet, within a year of that deal, the focus once again shifted to professionally produced content.
There is perhaps no better example of this than Sony’s $65 million acquisition of Grouper in 2006, a peer-to-peer website focused on user-generated content and a competitor of YouTube. Sony justified its acquisition of Grouper by pointing to the popularity of user-generated content and that much of that content was created on Sony’s camcorders which they hoped to sell more of. Less than a year later, Sony abruptly renamed the company Crackle, and shifted its business to focus on more professionally created content and business model that seems to be an online version of Spielberg’s reality TV show, On the Lot. Crackle’s arrival followed Viacom’s March 2007 copyright infringement lawsuit against YouTube, and also seemed to coincide with growing dissatisfaction with the poor quality of most online video content. Sony’s move may soon be considered to have been a shrewd one. YouTube certainly had all the momentum in the user-gen space, so it made a lot of sense for the number two player in the space to reinvent itself and abandon the ad-selling business model. It makes even more sense if Crackle’s online filmmaking contest business generates box office success for Sony, something user-gen content can’t do. Of course, it is also reasonable to suggest that Sony grossly overpaid for Grouper, buying it for a peer-to-peer community and then dumping it in less than a year. At any rate, the lesson of Crackle is that content companies need to pay close attention to their competition and changes in marketplace appetites for content. It may not be long before user-gen content makes a come-back.
Revver is another example of the current state of content plays. Once a competitor of YouTube, Revver was acquired in February 2008 by LiveUniverse for next to nothing. The details of the transaction are not public, but speculation is LiveUniverse paid between $300-$500K and assumed $1 million in debt.
Digital Media infrastructure companies, however, seem not be subject to such cycles and are steadily being acquired and financed at noteworthy valuations. The deals speak for themselves:
January 2008 - IBM acquires XIV for $300-350 million.
January 2008 - Yahoo acquires Maven Networks for $160M.
February 2008 - Panther Express secures $15.75 million in second-round financing.
November 2007 - Divx acquires Main Concept for $22 million
December 2006 - Akamai buys Nine Systems for $160 million
June 2006 - Comcast acquires thePlatform ($80 million to $100 million)
There is a comment on Techcrunch’s page regarding the IBM-XIV deal stating that XIV raised only $3M in private financing before selling to IBM for $350M. I cannot substantiate that comment, but if true it does speak volumes about XIV and its management, as well as prospects for infrastructure plays.
Undoubtedly, many content companies are succeeding in the marketplace and let’s not forget the Admedia Partners survey suggests 2008 could be a record year for digital media content M&A. But will those deals be at significant valuations or will strategic buyers be snapping up bargains? If I were starting up a digital media company today, I’d be focusing on infrastructure. If I were running a content company today, I’d be looking at my exit opportunities now and focusing on interested buyers that happen to be infrastructure companies. Come to think of it, RocketVox was a content play that was acquired by a strategic infrastructure company, thePlatform!
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