Looking Beyond Traditional Media
Blogs have gained mainstream appeal. Dealmakers, judging by recent activity, are just now starting to take notice
April 22, 2008
With traditional media in a tailspin over the last few years, its online counterpart, the blog, has steadily flourished. And at the same time newspapers and television stations are trading hands as part of the upheaval caused by new media, the M&A market is just starting to develop for blogs.
Buzznet, a music-focused social network, made two blog acquisitions earlier this month, buying the top two alternative rock blogs, Stereogum and later Idolator from Gawker Media. Gawker Media, meanwhile, which currently oversees 12 blog sites, last week sold two other titles besides Idolator — D.C. political blog Wonkette and urban travel blog Gridskipper. (Wonkette was sold to its managing editor, while Gridskipper went to Curbed, a network of real estate sites.)
Noticeably absent among the buyers are the big media companies, which so far have largely shunned acquisitions of blogs. Many media giants instead fumble with attempts at capturing the same audience and advertisers. Witness The New York Posts’ attempts at cutting into the “TMZ demographic” with its since shuttered PageSix.com. The newspaper again rolled out a new blog effort earlier this month with PopWrap, a site Gawker called out as an “inevitable Gawker clone.”
It’s likely most media companies share the view expressed by The New York Times. During their conference call last week, the company said it was actively looking for digital acquisitions but was having trouble finding targets that would meaningfully shift the needle in terms of cash flow. The newspaper giant reported a loss for its first quarter, hurt by a charge and a steep fall in advertising, and now faces job cuts. The story is familiar throughout most of the print media universe.
But while blogs have proven they can navigate the online world much more skillfully than print, even the most established models face too many questions that haven’t fully been answered. Blogs, after all, are still in their infancy.
“There is some broader interest [in blogs],” says Seth Alpert, managing director at AdMedia Partners. “But there is some uncertainty around it. Whether these kinds of sites can be successfully turned into large commercial enterprises, similar to traditional publishing, is getting sorted out.”
The most attractive benefit blogs offer is the combination of significant eyeballs with very low overhead. Most blogs are niche-focused as well — their closest traditional counterpart would probably be the magazine as opposed to the newspaper. That might also speak to why certain magazines, such as New York Magazine and Radar, have proven more successful at launching their own blog offerings. The niche component also aids in selling ads, which is why Barry Graubart, author of the tech media blog Content Matters, believes investment in the space should be a no-brainer.
“If you’re a media company you have to take it seriously now,” Graubart says. “There are a handful of sites that are clearly ahead of traditional media properties, getting information on the newest phone, newest device, whatever it may be. They’re reaching good demographics. Rolling up a handful together, you get significant page views [and] they’re attractive from an advertising perspective.”
He contends that the larger media companies could gain a lot of immediate page views through blogs rather than through more traditional targets, considering the deal size for many of blogs sites remains relatively cheap, in the $5 million to $15 million range.
The larger blog networks, if sold, are likely to fetch much more. Basing their valuations on such metrics as advertising revenue, page views, income from related businesses and a number of other measures, financial blog 24/7 Wall St. last month ranked the 25 most valuable blogs. Gawker Media, which claims about 30 million monthly unique visitors, took the top spot, valued at $150 million.
“Gawker is an $11 million business that is still growing quickly,” 24/7 Wall Street founder Douglas McIntyre wrote. “The company does not appear to be staff-heavy, so it is imaginable that the margins on the business are 50 percent. Would the business be worth 15x revenue or 30x operating profits? Could be.”
Apple-focused blog MacRumors is ranked second, at $85 million. Ariana Huffington’s The Huffington Post comes in at third, at $70 million, while PerezHilton, a celebrity gossip site, and TechCrunch, a Web 2.0-centric blog, round out the top five with valuations of $48 million and $36 million, respectively.
“Most are exposed and open in terms of their financial model, recruiting and paying their staff,” said Graubart, although he added: “I expect you’ll see a lot more deals. The arguments against it don’t really hold up.”
The arguments against it, however, are indeed many, and stem largely from the uncertainly that surrounds a business model still in its infancy. Alpert argues that blogs, in particular blog networks, may have trouble generating reader loyalty, a factor that may give pause to advertisers.
“It doesn’t truly own the audience,” Alpert says. “There’s not a lot of proof that you could generate substantial advertising revenue through a blog network. Most of those companies are fairly small.”
Although blogs like The Huffington Post operate as small newsrooms with a staff of rotating writers, many are tied to a singular voice and talent. This underscores the other most common argument against blog investments, that many of these sites are too closely tied to their authors.
“You’d have to see blogging sites offer more of a broader, online magazine approach, if you will,” says Russell Crafton, a partner at boutique bank Redwood Capital, discussing an approach that might comfort possible investors. “Something like daily postings, news, thoughts, ideas, can get tons of traffic, but it’s not really a sustainable business model beyond that individual,” he adds. “There’s a limited amount of time that people spend on a site like that.”
Even larger, mainstream sites deal with these issues. As pointed out recently on Footnoted.org, a recent filing from TheStreet.com indicated that “[Jim] Cramer shall have no obligation whatsoever to write for any such products,” if there was ever a change in control at the company. While Cramer’s loss would surely be felt at TheStreet.com, the company has the infrastructure to carry on. That’s not a luxury afforded to PerezHilton.com.
Outside of blogs, Crafton said acquirers are naturally leaning toward websites that attract an audience willing to spend. Sites that focus on big ticket items such as automotive, appliances or weddings, is an attractive demographic, as the audiences are often looking to make a significant purchase. He said he’s seen a number of deals at substantial valuations for these types of sites. The Knot, for instance, paid roughly $61.7 million for rival WeddingChannel.com.
“Prominent examples of these recent [blog] deals are clearly the exceptions,” says AdMedia’s Alpert. “The overall business is not mature enough. It needs to get to a level of legitimacy measured by audience size or revenue and profit, preferably both, in order for a lot more M&A to take place.”
Graubart, meanwhile, believes some deals will happen this year, but over the next couple years, as blogs continue to gain mainstream appeal, more transactions will take place, with traditional media possibly leading the way. “It’s a little early, [but] that will start to happen,” he says.
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