The one-time high-flying digital media giants – VICE Media, Buzzfeed, VOX Media, Group Nine etc. – have all continued to grow their income statements but failed to dazzle the capital markets.

Throughout the 16-year history of WatchMojo, I have had a ton of strategic conversations – some more serious than others. Interest for a given company depends on micro factors such as profitability, product assortment, market shares, but a company’s ultimate valuation starts off with macro conditions: interest rates, economic growth, etc. In my industry – digital media – the zenith was no doubt 2016.

The peak of digital media industry: 2016

By then, Vice Media’s Shane Smith – referred to by more than one person as the PT Barnum of our racket – had commandeered interest from Disney, WPP, FOX before pulling in the mother of all hauls: TPG’s massive investment at a $5.7 billion valuation. Smith, whom I have met a few times and admire for nearly single-handedly making content interesting to investors, was the quintessential salesman/showman, the latest in a long list of storyteller entrepreneurs I have studied over the years.

While studying finance in college and considering a career as analyst covering media companies, I learned early on that media companies like Viacom, Disney etc. were valued on EBITDA, or earnings before interest, taxes, depreciation and amortization. When life had different plans and I caught the entrepreneurial bug and launched WatchMojo, I purposely hatched a business model which would become profitable, and by 2012 – our sixth year of operations – we broke-even. Ever since, in formal and informal conversations, WatchMojo’s valuation is based largely on that metric: EBITDA, although as a private company, we command a lower one than publicly traded firms do, due to a “liquidity discount.” For purposes of illustration, here are a list of P/E multiples of large cap media companies:

  • ViacomCBS: 7X
  • FOX: 16X
  • Comcast: 16X
  • Discovery: 20X
  • Ziff Davis: 24X
  • Warner Music Group: 50X
  • Disney: 88X

As the leading bellwether digital media companies, the privately-held digital media natives such as Vice Media, VOX, Buzzfeed, etc. could have commanded something in the 8-20X range depending on growth rates, scale, and so on depending on their publicly-traded brethren, but as none of these formidable companies fuelled by venture capital and private equity had any profits to speak of, valuations were formed on the basis of revenue. During the zenith era of 2016, they fetched up to 7X revenues, as per the following source:

Of course, 2017 was unrecognizable relative to 2016. Mic soiled itself, selling for $5 million; Mashable crashed, going from a paper valuation of $200 million to a “fire sale” of $50 million to bargain-seeking Ziff Davis (owners of IGN Entertainment)… and suddenly, investor appetite for media companies fell quicker than the name Adolf in post-war Germany.

While NBC Universal helped inflate that bubble with its $400 million investments in Buzzfeed and $200 million check for VOX, TPG’s massive investment in to Vice was the last call before the hangover. Vice would soon learn that you don’t mess with Texas, as TPG’s massive $450 million investment came with a supposed 3X liquidation preference that would somewhat cushion TPG against downside risk if the $5.7 billion valuation would prove too rich. And, too rich it would prove to be, since Disney ended up writing off its entire investment when it had joined Vice’s cap table at a previous round that valued the one-time Montreal print company at $4 billion. Vice, it has been told, actually turned down an acquisition offer by Disney, as did Buzzfeed, before Kevin Mayer et al. decided to set their sights on unleashing Disney’s in-house IP out of the bottle by going direct to consumer. Indeed, it was specifically because traditional rights holders sat on the sidelines early on, that WatchMojo was able to capitalize on that vacuum.

Media Malaise, Investor Fatigue?

As I wrote recently, us media founders are curious types. Whereas technology entrepreneurs have their eyes on the exit sign chasing the latest shiny technology, media founders have to be carried out of the door: Rupert Murdoch, Sumner Redstone, Pierre Péladeau, etc. all ran their companies well into their elder years. The reason is complicated, but simple: content may be king, but without distribution, you are nothing, so once we build that megaphone, why leave to reinvent the wheel?

Partly as a result of that time horizon, historically media companies did not attract as much venture capital than their technology peers, because investors wanted their money back within a 5-7 year time horizon (the other reason was that content doesn’t scale the same way, but that’s a different story).

But as distribution platforms grew in power, to differentiate, they needed content.

Some bought content (i.e. Amazon acquiring MGM).

Some underwrote it (i.e. Apple and Hello Sunshine’s The Morning Show).

Most licensed it: Youtube pays out half of its $30 billion annual haul to content creators (disclaimer: WatchMojo is a large partner on YouTube, as well as Snap, Facebook, etc).

In fact, whereas early on media companies sat out of the digital dance, now there was a race to reinvent themselves as direct-to-consumer models. That pyramid had in fact been replaced by converging spheres… which explains why Disney commands a multiple premium at 88X EBITDA.

As the lure of big tech writing large checks proved enticing, private equity opened up the warchest and spent freely. When in 2018 I caught up with a partner at General Atlantic (incidentally, an investor in both Buzzfeed and VOX), the partner observed:

“We like to invest and come in at 3X revenue, then hold for 5 years, and then get out at 6X sales.” This, in 2018, was years after General Atlantic’s investment in VOX and Buzzfeed, and nearly five years later, only Buzzfeed has had a liquidity event, a SPAC which saw them go public below the $1.5 billion valuation that NBC Universal invested at… which effectively forced Buzzfeed founder Jonah Peretti to promise his de facto first born child to Brian Roberts at Comcast (hum, that’s a joke, he just had to agree to give up some shares. No children were harmed in the writing of this article).

As the saying goes: the stock market goes up via escalator but comes down via elevator. But until now, we have almost seen a disconnect between a) private valuations and public ones, and b) financing valuations and publicly traded share prices. Over time, these tend to converge, but depending on the underlying global macro-economic landscape, there may also forever be a lag and discrepancy. Either way, one by one, the lofty valuations tumbled as the digital media behemoths failed to deliver a path to profitability.

Disney wasn’t the only one to write down its investment in Vice. Back in 2019, Sugar Media and Group Nine merged in an all-stock deal valuing Sugar Media at $300 million and Group Nine at $600 million. The all-stock deal pegged the value of the combined company at $900 million, with Group Nine owning 66% and Sugar owning a third. As with all stock deals, on paper, the valuations were of greater relative importance than absolute, a bit like that adage about trading two $500,000 cats for one $1,000,000 dog (what some echoed when Vice acquired Refinery29 in a $400 million acquisition. There was no $400 million transfer of funds). Indeed, then the deal was announced, WSJ noted:

“Vice Media’s valuation has become a point of contention even among its own investors. Earlier this year, Disney decided the value of its investment in the company was effectively nothing, meaning it did not expect a return on its investment. In a filing this year, Disney said it had taken a $353 million write-down on its stake in the company.”

Fast forward to more recently, Group Nine (including Sugar Media) merged with VOX Media – again, in an all-stock deal – with VOX owning 75% of this new amalgamation and Group Nine owning 25%.

If you are tracking things, Sugar Media now owned 33% x 25%, or 8.25%. While it was once valued at $300 million (on paper), its most recent actual value was was 8.25% x VOX’s most recent value of $672 million, according to filings, or $55 million. While that amount is a mere 18% of what it agreed to value itself a mere 2 years ago, I would argue that this is a reminder that valuations that matter are really only those in cash sales, and not financing rounds or all-stock mergers.

Was Sugar Media better off? Well, it depends.

On the one hand, one is only as strong as its options, and it’s unclear what Sugar Media’s options were before that 2019 merger with Group Nine. The $300 million valuation was more relative than absolute, the idea was it negotiated owning 1/3 of the merged entity it was to consummate with Group Nine.

On the other, as someone – whom like Brian Sugar – founded and operated a business with his spouse, I can appreciate that eventually, that reality adds a certain dynamic and success may mean finding a home for your proverbial baby. As the saying goes: if you want to go fast, go alone; if you want to go far, go together… and it is indeed to own a small piece of a larger going concern than a big piece of a smaller asset, especially in a bigger game of musical chairs. My friend and Complex’s founder Rich Antoniello and I would often discuss the industry and describe this racket as a game of musical chairs. Deciding he had enough, he sold Complex to Verizon and Hearst in 2016 for a reported $250-300 million, before Buzzfeed acquired it in 2021 for $300 million, with one third paid in Buzzfeed shares, before its SPAC. I guess the overlords at Verizon/Hearst wanted some “schmuck insurance” in case Complex’s value would continue to soar post-transaction. Buzzfeed is forecasting massive revenue growth post-merger, which remains to be seen. From its own slideshow and a couple of sources:

“Buzzfeed revealed that its business generated revenues of $321 million last year, while Complex made $100 million.

It expects sales to grow from $421 million in 2020 too $1.06 billion in 2024. The company projected its adjusted EBITDA to rise from $17 million in 2020 to $265 million by 2024. According to the presentation, BuzzFeed earned $4 million in 2020, contrasting with a loss of $29 million in 2019. In 2021, Buzzfeed projected revenues of $521 million (including $119 million from Complex). It expects group revenues to reach $654 million in 2022, $833 million in 2023 and $1.1 billion in 2024.”

(disclaimer: I own a bunch of shares in Buzzfeed, though maybe not as much as the “f—ton” that Bustle Digital Group CEO Bryan Goldberg owns. More on Bryan in a bit.

Critics could also argue that, as per the WSJ:

“Group Nine’s worth has slumped to $225 million, less than half the $585 million it touted in 2016 when it got a $100 million investment from Discovery. Likewise, VOX — which was valued at $1 billion in its last funding round in 2015 — was valued at approximately $672 million, according to sources close to the deal.  Add up the latest figures and you get roughly $896 million — short of the $1 billion “unicorn” status that each company had hoped to achieve on its own.”

I never knock the person in the arena. I have met Group Nine founder Ben Lerer and exchanged emails over the years, I can only imagine that given his track record and success as an investor, he was more interested in finding a home and future growth vehicle for his company, than haggling over relative ownership stakes. I actually empathize: having invested in a myriad of startups myself, I love helping the next generation of entrepreneurs solve problems, but realize I prefer to run a business, albeit I am blessed with a strong operating team that manages the day-to-day. But, by staying independent, it’s almost like Groundhog Day where you are repeating the same thing, day-in, day-out.

A Bumpy Road Ahead

“In this current market environment, the deal between Group Nine and Vox is like two drunks leaning together to stand up,” a source said.” I would love to know who that source was.

Of course, with Buzzfeed now valued at $559 million, it’s unlikely for VOX to want to wade into IPO territory. From CNBC’s omni present Alex Sherman:

“The key level for BuzzFeed will be $15 per share, said Bustle Digital Group CEO Bryan Goldberg. At $15 per share, BuzzFeed’s market capitalization would be about $2.25 billion. That approaches a trading multiple of four times revenue. 4x revenue should be the default. But it may take six to eight months to get there. Confidence in BuzzFeed’s future prospects may grease the wheels for consolidation. BuzzFeed will need outsider faith in its equity to use it as viable currency for acquisitions. If BuzzFeed can hold steady at a 4x revenue multiple, sellers will feel they’re getting a just price.”

While 4X sales is far less than what the digital media cohort commanded in 2016, it’s a step in the right direction, which currently trades at an anemic 1-2X.

* VOX Media being private does not disclose its revenues, but according to two people familiar with the financial details, it forecasts $700 million in revenues in 2022, so we’re estimating the TTM sales to be approx. $650 million.

Arena Group, led by former FOX executive Ross Levinsohn and owner of TheStreet and Sports Illustrated just began trading on the NYSE, with a market capitalization of $102 million off of trailing twelve month revenues of $170 million! That looks awfully cheap (disclaimer: I own a few shares). It’s not just Arena Group or Buzzfeed, the smaller Enthusiast Gaming company which is a pretty solid way to get exposure to the eSports and gaming universe is trading at $424 million off of $152 million in sales, a more respectable but historically discounted 2-3X revenues (disclaimer: I own shares in the Toronto-based company).

Of course, what is weighing down these valuations is not just the compressing multiple backdrop, but mainly, unprofitable models. In fact, considering the path to profits for many are through cost savings, a realistic end game for VOX could be a… a merger with Buzzfeed. Mind you, VOX Chief Executive Jim Bankoff said the new company would be “considerably larger than the sum of the parts” and could generate profit of $100 million off $700 million in revenues, according to two people familiar with the financial details. The key word there is “could,” as “all these companies are in trouble and challenged,” according to LightShed Partners analyst and chief troublemaker Rich Greenfield: “Digital media publishing is getting harder by the day.”

In some ways it is, as ad-supported businesses need to generate all of that revenue again each year. But as big tech’s power comes under scrutiny, in other ways, the golden era for publishers with owned content, strong brands and global reach may be ahead. In fact, in other ways, it’s also easier than ever, as global distribution platforms give content creators unparalleled reach while absorbing two key headaches of traditional media building: the distribution and the monetization. What no one (other than me, I suppose) is saying is that with all due respect, all of these companies were built on not only a Web 1.0 playbook, but a 20th century media playbook. This is not a knock, Conde Nast, Time Inc. etc. were all amazing businesses, but it would appear that none really foresaw where the global, macro landscape would be in the 2020s. Hollywood, as we know it is over (but not for the reason you think so), and the CRO – and all that entails – is dead!

Maybe Distributed Model Isn’t Bad, after all?

Indeed, Ladbible built a business on these boundary-less platforms, and has rocketed to an impressive market cap on far lower revenue, thanks to its profitable P&L

“Manchester-headquartered LBG Media, whose titles also include UNILAD, has said its revenue for 2021 are anticipated to be at least £54 million, up from the £30.2 million it achieved during 2020. The group completed a £360 million float on AIM in December 2021.”

As of this writing, the company’s market cap stands at a healthy $423 million off of $75 million in revenues (£54 million), or 5.6X sales.

Gobble or Be Gobbled

Having been profitable since 2012, we can command healthy EBITDA multiples but I concede that we lack the huge revenues (i.e. greater than $100 million) that these companies generate – almost by choice and design. It’s as if media companies can’t have their cake (scaled revenues) and eat it too (profitable models). This may be because what is sustainable is not scalable overnight, and what is scalable quickly isn’t necessarily sustainable. It’s nice to be the MVP on the Twins, Athletics or Expos, but eventually, if you want to play in Yankee or Dodgers Stadium, you have to compromise on some of the terms. Historically we have had no shortage of interested suitors, but accepting stock – be it illiquid private or pricey public – wasn’t all that enticing. But as an investor, looking at these depressed multiples, you have to give things a second look.

But when said and done, when considering all-stock offers, the popular adage is not buyer beware, but in fact, seller beware.

Warren Buffett was known to say that you want to be fearful when others are greedy, and greedy when others are fearful. My guess is that while these companies come with risks, investors piling in now will stand to benefit over time as multiples regain their historical ranges.