Old Media Place Pricey Bets on Web Assets: Firms pay dearly to gain ad revenues, and face operating challenges in making deals pay off

NBC Universal’s recent iVillage buy exemplifies how traditional media companies are again in the hunt for Web properties. Driving their interest is the migration of ad revenue to online venues. “When you hear numbers like $1 billion in ad spending that is migrating to the Web, traditional media companies have to react,” says Nat Burgess, an Executive Vice President at Corum Group, a Bellevue, Wash.-based investment bank that specializes in software and IT deals. The iVillage deal follows other “eyeball grabs,” to use the industry’s terminology, in the past year, such as News Corp.’s $770 million purchase of MySpace.com, New York Times Co.’s $410 million About.com buy, and Dow Jones & Co.’s $463 million buyout of online MarketWatch.com. “Media barons are finally waking up to this broad, long-term shift toward interactive media,” says Bill Burnham, a Cupertino, Calif.-based venture capitalist. Market entry is not cheap Even while online properties aren’t being gobbled up by the huge media companies, there is still consolidation going on among the websites themselves. This was seen in the June hookup of The Knot and rival WeddingChannel.com. Burgess says that any Web property that is quickly growing its user base will become a target. However, potential buyers face higher multiples as they chase these properties, whose valuations have jumped from as little as one or two times revenue to as much as six times revenue. And that is one part of the puzzle for traditional media players, according to Burnham, since the price of entry into the sector is no longer cheap. MySpace.com is by some measures the second-busiest site on the Web, second only to Yahoo Inc., according to a study by Internet audience measurement service comScore Media Metrix. While there are a number of competitors trying to do similar things, the quadrupling of MySpace’s base to almost 80 million users gives News Corp. a significant advantage. “The sheer scale of MySpace.com creates barriers to entry,” Burgess notes. With the rash of online acquisitions, however, comes a new problem for the traditional media companies: It’s tricky to determine how to redeploy content created by professionals for broadcast or print media on websites. One distinguishing factor of the MySpace acquisition is that it and other networking sites rely on customer-created content. “One of the differences between the Web now and during the Bubble is that companies thought they had to make content, but now content has become commoditized,” states Burgess. He points out that a new challenge for traditional media companies is how to motivate users to create content that contributes to the growth of the site. In the iVillage deal, NBC Universal will be integrating a property that includes both professionally created and consumer-originated material. An additional concern is how to integrate advertising with consumer-generated content. Another way of looking at this problem, notes Burgess, is to consider how old media companies should react to consumers’ ability to edit out advertising. He suggests that they try to perfect other techniques, such as new forms of product placement, to make sure the surge in viewers is monetized. While traditional media companies are trying to figure out what strategy to employ as they integrate their post-Bubble Web acquisitions, it’s increasingly clear that a coherent strategy for online outlets is vital. “Madison Avenue and the existing media establishments have realized that online media is not only here to stay but has become the main platform for innovation for the future,” Burnham says. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com