Disney nabs BAMTech in $1.6bn play for streaming services

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.

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Advertisers continue to fly from Twitter

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.

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

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.

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Could Snap crack open location tech M&A? 

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.

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Snap’s debut through a TV lens

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.

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Inmar nabs Collective Bias to connect online influencers with in-store sales

Contact: Scott Denne

In a bid to bring hard metrics into the world of influencer marketing, Inmar, a digital promotions and analytics vendor, has acquired Collective Bias. The deal brings together two of the most potent trends in advertising – the appetite among marketers to link spending to purchases and the growing use of long-tail content as a marketing channel.

Collective Bias operates a network of social media content creators that it can leverage for branded content creation and distribution. The company already provides marketers with engagement metrics and under Inmar’s ownership will be able to extend that to actual sales. Inmar was founded in the 1980s as a coupon processor and has since expanded into digital coupons and other retail analytics that will enable it to draw a direct line between engagement with a Collective Bias campaign and consumer purchases.

Making the link between online ads and offline sales has become a substantial driver of acquisitions. That was the rationale behind such big-ticket deals as Oracle’s purchase of Datalogix, Nielsen’s pickup of eXelate and Neustar’s reach for MarketShare Partners. And as we discussed in a recent report, that trend will likely continue. Today’s transaction demonstrates that Inmar and other players in the payments ecosystem recognize the opportunity to use their data to fill this gap.

M&A activity around influencer marketing has seen a recent spurt. Both Facebook and Google, the two largest channels for distributing this content, made tuck-ins (CrowdTangle and FameBit, respectively) to improve their capabilities in this segment. Last summer, Monotype Imaging paid $130m for Olapic, a maker of software for managing branded, user-generated content. Given that deal and the size of Collective Bias (145 employees), today’s transaction may also have reached into nine figures.

GCA advised Collective Bias on its sale.

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AT&T pays $85.4bn for Time Warner amid strong demand for original content

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

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Verizon strikes $4.8bn deal for Yahoo’s core biz

Contact: Scott Denne

Verizon moves to augment its media business with the $4.8bn purchase of Yahoo’s central assets. The deal, which wraps up years of speculation about Yahoo’s future in the new media landscape, will see its core business and operations head to Verizon to be integrated with AOL, while its investments and other assets will stay behind in a company that will be renamed and restructured as a publicly traded, registered investment entity.

Aside from licensing revenue from some of the noncore patents that Yahoo will keep, nearly all of its $4.9bn in trailing revenue will head over to Verizon. The transaction values the target’s assets at about 1x trailing revenue, compared with the 1.6x that Verizon paid for AOL last year. The discrepancy in value reflects the depth of the comparative technology portfolios. Both vendors spent heavily on ad network businesses in the back half of the past decade and early years of this one. More recently, AOL turned its investments toward programmatic, attribution and other advanced advertising technology capabilities. Yahoo doubled down on content while its ad network technologies aged.

This move is all about scaling Verizon’s media footprint. Both Yahoo and AOL have roots in the Web portal space. And both are selling to Verizon for similar prices. But Yahoo’s media assets are substantially larger. AOL generates roughly $1bn from its owned media properties – Yahoo pulls in 3.5x that amount. Owning Yahoo’s media properties will enable Verizon to offer greater reach to advertisers and therefore land bigger deals and at better margins than the ad network revenue that made up almost half of AOL’s topline. Also, having a larger audience for its owned properties will provide AOL’s ad-tech business with more data that it can use to improve its audience targeting.

Telecom services is a saturated market with few net-new customers. Most growth comes from winning business away from competitors. With this acquisition (and AOL before it), Verizon plans to leverage its investments in mobile bandwidth and distribution – its existing mobile and TV customers – to find growth in the digital media sector. According to 451 Research’s Market Monitor, digital advertising revenue in North America will increase 12% this year to $40.6bn, compared with just 4% growth for mobile carrier services.

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Facebook’s success in mobile media can’t be left to F8

Contact: Scott Denne

As Facebook opens its annual F8 developer conference today, it’s worth noting that while the company is clearly ascendant in mobile, it’s not dominant in digital media, where it is very much the challenger to Google. Facebook’s growth is impressive. Revenue spiked 44% to $18bn (80% of that in mobile) in 2015, a number it reported just after its 11th birthday: Google passed the $20bn mark in nine years and today is nearly quadruple that size. In the next phase of growth, where Facebook is positioning itself as a mobile media vendor, not just a social media vendor, Facebook faces a distinct set of challenges than Google was up against when it grew from its base in search to owning the Web.

Once Google sewed up the search market, it faced scant competition as it soaked up much of the digital advertising landscape and was the clear winner in the first phase of digital media. The same isn’t true of Facebook. It finds itself facing an incumbent in Google and its future lies in the outcome of a comparatively fluid media market. Now that it’s emerged as the dominant social media platform, the company is taking a subtler approach as it seeks to win the next phase of digital media. In addition to facing a strong incumbent, Facebook is saddled with higher expectations – its stock trades at 16x trailing revenue, while Google was valued between 5-6x at the same moment in its own history.

Facebook plans to own the next phase of digital media by offering measurement, metrics and distribution to enable advertisers and publishers to transition into mobile. The best indication of the difference in strategy is that while Facebook was widely expected to launch a media-buying platform along the lines of Google’s DoubleClick Bid Manager, its recent relaunch of Atlas instead focused on measurement and attribution. And most importantly, it focused on measurement of people and demographics, the lingua franca of today’s television business, not cookies and intent – the currency of display advertising. While Google made a mint dismantling the print media market, Facebook is pursuing a potentially more lucrative opportunity in capturing the shift of TV budgets to digital and hoping to do so wherever those dollars land – in-apps, in online videos, on its network or in any new format that could emerge from mobile.

Facebook’s bet is that once advertisers see that mobile works, more will shift to that medium and the company will be the largest beneficiary. It’s well positioned to do that. Nearly one billion people per month engage with the social network across multiple devices, making Facebook better positioned than anyone to link different devices into a common digital currency. The challenge in that strategy is that Facebook must not only be the dominant social network (to power its measurement capabilities), it must also remain the dominant mobile media provider – the money’s in selling the media, not the measurement.

That’s a more difficult and unpredictable path than the one it (or Google) faced in building out a browser-based business. Innovation and change is no longer limited to what can be done at a desk and on a PC. The mobile medium is still nascent. The next phase of digital media will play out across many types of devices (phones, TVs, watches and more to come), and many of those devices are part of consumers’ lives in a way that a TV set or PC never was. All of this makes the future of mobile media challenging to predict. Facebook’s need to own the unpredictable explains its wildly valued – though reasonable – purchases of Instagram, WhatsApp and Oculus VR and will be justification when the company bets on the next new media. Over the next two days, we’ll be watching to see what Facebook thinks that might be.

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Amid Super Bowl fever, the sports business needs to take its medicine

Contact: Scott Denne

Super Bowl ad prices continue to rise each year, and that masks the symptoms of the sporting world’s concussion. Sports had previously blocked television audiences from completely heading to the sidelines in favor of video on demand, video games and other forms of media; no longer is that the case. Yet networks continue to increase investments in sports – the NFL just sold a package of Thursday Night Football games next fall for $450m, up from $300m last season. This comes during an exodus of subscribers from the sports-industry’s flagship network, ESPN. And as networks, teams and leagues look for ways to stanch the losses, we expect to see increasing investment in technologies that enable them to keep those audiences.

Time may not be on their side (always good news for bankers). Our surveys suggest acceleration in linear TV’s declining audiences. Only 35% of respondents to one of our 2015 consumer surveys reported seeing a TV ad in the previous week. In a separate survey, 8.4% said they had altogether canceled their traditional TV service, while another 16.7% said they are ‘somewhat’ or ‘very’ likely to cancel within the next six months – the highest level to date on both figures.

Increasing fan engagement was the logic behind the heavy investments into daily fantasy sports. The two leading companies in that space – FanDuel and DraftKings – raised more than $700m combined, much of it from networks, sports leagues and team owners. Although those bets don’t look set to pay off, the lure of free cash isn’t the only way to keep fans interested. We recommend the sports industry’s heavy hitters start acquiring and investing in areas that are beginning to change how fans interact with sports.

The first is the technology and talent that power mobile apps. Buying and developing apps gives teams, leagues and networks a direct link to their fans today. Broadcast signals and ticket stubs don’t generate data. Apps do, and having such data will ultimately make their audiences more valuable, and help them find ways to grow and keep them. The second area is in emerging categories of virtual and augmented reality. Madison Square Garden Company, owners of the New York Knicks and Rangers, has already made two venture investments in virtual reality – NextVR (along with Comcast) and Jaunt (alongside Disney). A ringside seat to the growth of these technologies would help sports grow within the next generation of media, rather than succumbing to it, as might happen within the current one.

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