New York Dealmaking: Big Media Companies Buy Digital Startups in Bid to Stay Competitive

Conglomerates prepare for the brave new world of cord-cutting, mobile and streaming

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Big entertainment and media deals such as AT&T’s acquisition of Time Warner and Comcast’s purchase of DreamWorks Animation are the ones that steal the headlines, but many smaller pacts are equally significant and, in some ways, more critical to the survival of the giant legacy conglomerates.

These less-visible deals involve the snapping up of small- and medium-sized companies as the major players look to beef up their savvy in such non-legacy areas as digital media and streaming, to nab bright execs at promising startups, to get an insider’s view of the fast-moving digital business, and to minimize the danger of being left behind in a world of disruption.

“They’re trying to get ahead of the curve and there’s pressure to get into new technologies,” says veteran media analyst Hal Vogel, CEO of Vogel Capital Management. “It’s important to take risks and experiment.”

For example, a key motive for Verizon’s acquisition last year of tech startup Vessel was to bring aboard executive talent. “In specific instances, we may do a small transaction just to get the people,” says Verizon senior VP-corporate development John Doherty. He also chairs Verizon Ventures.

In other instances, dealmaking aims to corral business capabilities that plug gaps for the big buyers. For example, research companies that track consumers and foster fan engagement are being gobbled up by music labels and other big music outfits to build in-house analytic smarts.

Also, traditional TV and movie companies, awed by Netflix’s understanding of its audience program preferences gleaned from census-level streaming data, scout for analytics skills. One example: in January, broadcast station groups Capitol Broadcasting, Fox Television Stations and Tribune Media all invested in audience analytics outfit Share Rocket.

One characteristic frequently sought in digital acquisitions of all stripes is scalability, where a company’s core capabilities can quickly and cheaply expand across cyberspace. That can drive fat profits in digital.

But this can also expose cultural differences between older companies and the new breed. Even small onliners fetch rich prices in today’s digital media frenzy, which is tough to swallow for potential buyers that are large traditional media companies with more down-to-earth valuation metrics.

A quirk of the digital space is that startups often rake in investment dough from multiple corporate giants that are arch competitors in the broader media landscape. Such fractional ownerships uniting strange bedfellows are shrugged off as the way things are done in the topsy-turvy digital world.

“We approach everything with an open mind,” says Viacom senior VP of corporate development Alex Berkett. “There is some amount of familiarity with our competitors. Sometimes we are in partnerships around the world or other commercial activities with them.”

Allison Goldberg, senior VP and group managing director at Time Warner Investments, says that another criterion driving deals is whether the digital small fry have the potential to engage in business ventures with the parent company. Such alliances can supercharge the small digital enterprise, making digital-media investments pay off quickly.

“Around 70% of our portfolio companies have ended up with partnerships with Time Warner operating divisions,” Goldberg says.

In other instances, the traditional media giant gets a quick benefit, too. Millennial-focused BuzzFeed set up a content stream at NBC Television’s Rio Olympics distributed via messaging app Snapchat, generating 2 billion Snaps/interactions heavy with an audience under age 25. (NBCU is an investor in both BuzzFeed and Snapchat’s parent.)

“We had to partner because of [BuzzFeed’s] expertise producing for the Snap platform,” says Maggie Suniewick, president of NBCUniversal Digital Enterprises.

To navigate cyberspace, many big-media giants have small in-house specialist teams beating the bushes in the digital jungle. The approach is usually to make modest financial bets across numerous digital companies. That portfolio strategy — spreading risk around — results from the expectation that many digital investments won’t pan out.
The same traditional media giants typically have separate executive teams for big-ticket transactions that require a different skill set for far fewer but much bigger deals, including those outside of the digital realm.

Some of traditional media’s forays into digital visibly paid off. DreamWorks Animation showed Wall Street its digital-deal savvy by selling a 25% stake in AwesomenessTV for $81.2 million in 2014. A year earlier, DWA had bought the teen-focused multichannel network for a base price of just $33 million, not including a substantial earnout bonus. DWA is now part of NBCUniversal.

But the path toward capitalizing on the digital revolution is also littered with missed opportunities. Netflix, with a stock market capitalization topping $75 billion, and Facebook, with a staggering $500 billion, both bloomed while traditional media stood mostly on the sidelines. Today, those digital media leaders tower over traditional media on Wall Street.

But setbacks aside, digital investment and acquisitions are likely to continue because cyberspace growth eclipses traditional media.

“Most of legacy media has no place on mobile phones,” says Rich Greenfield, media and technology analyst at BTIG. “They are not players in mobile and there’s only one-way in. And that’s spending real dollars.”