Faced with threat of seeing their dominance usurped by the Internet explosion, the world’s largest media firms have reacted predictably.
They’re throwing money at the problem.
Hoping to be on the receiving end of that largesse are a handful of L.A.-based Internet start-ups that fit the profile of firms the giant conglomerates are buying up to preserve their status in the evolving media landscape.
“I don’t know who it’s going to be,” said one Internet executive, “but I do know that it will be a lot of money. Just look at MySpace.”
He was referring to last year’s $580 million deal for the social networking site that has become something of a Holy Grail for emerging Internet companies. News Corp. paid $580 million for the two-year-old start-up. At the time of the purchase, Chief Executive Officer Rupert Murdoch was asked if spending that much on a two-year Internet company gave him pause, he replied, “You bet!”
He needn’t have worried. Today, the value of MySpace.com is conservatively estimated at more than $2 billion and growing. And the market is clearly booming. Online advertising revenue is closing in on $10 billion a year and investors have poured $156 million into Internet video start-ups in the first half of 2006, according to Dow Jones VentureOne, a venture capital research firm.
News Corp.’s rivals reacted with a raft of Internet-angled acquisitions ranging from Walt Disney Co.’s alliance with Apple Inc. via its $7 billion acquisition of Pixar to NBC’s recent link with the wildly popular viral video distributor YouTube.com.
Executives at the L.A. firms that would seem to fit the bill for media giants hoping to find their niche in the new media world are reluctant to talk about potential deals. They cite concerns of jeopardizing not only a deal with a buyout or merger partner, but their current, smaller alliances with other firms.
Nonetheless, there are some firms that are logically considered takeover targets.
Among them:
– Buzznet.com seeks to “create community experiences” on the Internet using blogs, audio, video and photos. The site was founded in 2003 and has been exchanging popular ideas and information through multimedia for about three million users per month.
– Break.com posts users’ videos and bills itself as an online entertainment channel. Its executives say it addresses things “from a guy’s guy perspective.” The site has 900,000 to one million viewers every day and is among the 300 most popular Web destinations in the world.
– JibJab.com of Santa Monica made a name for itself in 2004 with a biting spoof of the 2004 presidential race, with the candidates singing a version of “This Land is Your Land.” The cartoon was viewed 80 million times and led to a distribution deal with Yahoo Inc. and a Budweiser commercial.
-ManiaTV.com offers live programming and offers viewers the ability to “create their own channels.” Programming includes comedian Tom Green’s new live show, Dr. Drew’s call-in talk show and love line and updates of the Gay Games.
-LiveDigital.com is another multimedia platform that posts videos, blogs, photos, contacts and email. Oversee.net launched the site in March.
-Revver.com posts videos and sells ads tagged onto the end of each clip. Revver pays a minimal amount for these videos, then splits revenue with the creators.
Sales aren’t focus
Executives at these firms said they weren’t waiting for a suitor to come calling with bags of cash. The heads of these firms say they’re focusing primarily on building a working business model and viewership.
“Our belief is that the next big wave of acquisitions is going to come about with a company that has solid business fundamentals, plus an audience base,” says Peter Clemente, an executive with ManiaTV.com.
Several of the firms’ leaders say that they believe what will separate the firms that achieve real success from the rest is the ability to turn a profit independently.
“We’re obviously strong believers in the Internet as a distributor of video,” says Keith Richman, chief executive officer for Break.com. He said that part of Break.com’s attractiveness to users comes from the $250 they get paid for each and every video that they post.
“Increasingly, there will be new ways to monetize this material,” Richman says. “It may be a possible revenue share with the creator of the videos. Most sites don’t pay. And there are only a couple that do revenue sharing.”
Not even those in the eye of the takeover storm can predict where the market will take them.
“What we are seeing now is the early stages of a revolution,” said Lawrence Ng, chief executive officer of Oversee.net. “The market for this kind of service is huge and has been defined as 100 million potential users,”
Ng would like to see an offer made for LiveDigital.com, but he isn’t depending on it. “We are excited about this space and the growth of user-generated content on the Internet,” Ng says.
Anthony Batt, who founded Buzznet.com with Marc Brown three years ago, said his firm has cut a number of limited deals in the past year. He points to partnerships with Atlantic Records, the Coachella Music Festival, Red Bull, Sony Computer Entertainment America’s Playstation, Master Foods, E.W. Scripps and Knight Ridder. His most recent was the Oxygen Network to promote the TV show “Campus Ladies.” But the Big One remains out there.
“We’re definitely interested in continuing to talk with large media companies about the possibility of acquisition, Batt said. But placing a value or a sale price on a firm based largely on potential can be tricky, even for a company’s owner.
“It’s all based on advertising and the eyeballs,” Batt said.
Buzznet.com could sell for anywhere between $30 million and $250 million, Batt theorized. But in the meantime, he’s focusing on what he called the more relevant number: the 20 percent growth in the number of hits his site is drawing.
How high?
A few months after the Myspace.com sale, another college-targeted site named Facebook.com was offered more than $750 million and turned it down. Industry sources said the owners of the Palo Alto-based firm were holding out for more than a billion dollars.
Can start-up firms be too greedy?
“I don’t think greed has anything to do with it,” says United Talent Agency’s Brent Weinstein, who runs his firm’s new media division and specializes in forging alliances between Internet firms and traditional media outlets.
“We live in a capitalistic society and people are free to sell their asset for whatever it’s worth,” Weinstein said. “If you were talking about a professional athlete, is it greedy for Shaquille O’Neill to sign a $120 million contract? If the market establishes the value, I don’t think it’s a matter of greed.”
