Editor’s note: As the capital markets heat up and the economy continues to rebound, the deal flow is starting to open up again. We’ve already given you our top ten IPO candidates for 2010. In this guest post, Kelly Porter, an M&A expert at Woodside Capital Partners, proposes ten digital media deals he’d like to see. None of the companies mentioned in this editorial are clients of Woodside Capital Partners.
Digital media M&A activity is expected to pick up in 2010—big acquirers have significant cash on their balance sheets, share prices are up, and many good acquisition candidates are on the landscape. With this in mind, I’ve put together the following list of 10 interesting Digital Media M&A deals for 2010. Some are longshots, some are slam dunks; all would create compelling new opportunities and possibilities. It’s a list that was compiled in recent weeks over coffee with some of the brightest and most connected folks in the valley. Without further ado, here are the deals we envisioned:
1. Google acquires Roku
YouTube arguably holds the highest potential of Google’s (NASDAQ:GOOG) major growth initiatives, capturing about 38% of video viewing on the web and serving more than 1 billion streams daily. However, the average YouTube user watches about five hours of TV daily versus only 15 minutes of YouTube. Moreover, consumers face a firehose of difficult-to-find viewing options on the YouTube site, with some 20 hours of content uploaded to YouTube every minute. Most important, Google is having trouble monetizing all that video content and YouTube is bleeding significant red ink. Roku would address all these issues plus extend the YouTube brand – via Roku’s set-top box. The Roku box currently streams content from sites like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) VOD to a consumer’s television. Google could rebrand and supercharge the box with lots of cool new search features, interactivity, gaming, PVR functionality, a tier of Google-branded channels featuring popular YouTube content, plus add several tiers of channels from major studios, broadcast networks and cable networks. A freemium model could be deployed, with subscribers getting most content for free, and paying extra for premium tiers. Google could grow a potentially huge new revenue stream, plus the service would be a formidable competitor to the rumored Apple (NASDAQ:AAPL) broadband TV service (Apple is reportedly talking to Disney (NYSE:DIS) and CBS about supplying content for the service). Some might say that Microsoft already tried this with WebTV; however WebTV never had the massive cross-promotion engines of YouTube and Google behind it.
2. Cisco acquires LinkedIn
Cisco’s (NASDAQ:CSCO) pursuit of enterprise communications is important, and LinkedIn would be a natural and powerful extension of this strategy. LinkedIn is growing like wildfire, having nearly doubled its user base in the past two years and launched hot partnerships with companies like Microsoft (NASDAQ:MSFT), RIM (RIMM) and Twitter. Cisco’s acquisitions of WebEx, Tandberg, Jabber and PostPath would be augmented by LinkedIn’s 53 million members globally, and some very cool and unique new applications could be created using the combined capabilities of LinkedIn and Cisco’s various divisions. LinkedIn’s estimated 2010 revenues are just over $200M and the company’s last fundraising came in 2008, with a valuation of approximately $1 billion. For Cisco, with a $138 billion market cap and $35 billion in cash and short-term equivalents, acquiring LinkedIn for a big premium to the company’s most recent valuation (which is what it would take to acquire LinkedIn) would use a relatively small amount of that cash and would create a meaningful strategic extension for Cisco in the social networking domain.
3. Fox Interactive Media / MySpace acquires Pandora
As many music services struggle, Pandora has reportedly skyrocketed to 40 million registered users and is adding 600,000 new users per week. Pandora has become a bona fide internet behemoth, accounting for a reported 44% of internet radio listening, with half of that listening coming on mobile devices. One of MySpace’s great strengths is the social network’s music presence. In recent months, FIM/MySpace acquired imeem and iLike, but those acquisitions pale in comparison to a potential Pandora acquisition. A MySpace-Pandora combination would create formidable scale which would span multiple segments of the music industry—from coffee shop singer/songwriters to arena rock bands—and provide benefits to music consumers that are not available elsewhere. Pandora would also breathe new life into the MySpace brand, which has been lagging in the wake of Facebook.
4. Twitter acquires Twithawk, TweetMeme, bizz.ly, Skout and TwitJump
Some believe Twitter should sell to a larger company, but they are missing the greater opportunity. Twitter enjoys massive potential as a standalone company. It is reminiscent of Yahoo! (NASDAQ:YHOO) in 1995—a single compelling product, lots of traffic, growth potential and buzz, and poised to dominate several markets—in this case, the markets surrounding all things realtime. These five acquisitions—although all young companies themselves—would extend Twitter in significant ways: business marketing (Twithawk); realtime news discovery and sharing (TweetMeme); realtime promotion, publishing and sharing (bizz.ly); realtime dating/connecting (Skout); and Twitter management tools (TwitJump). Twitter could organically grow these new capabilities from within, but acquiring them through M&A would be faster and would also bring new talent into the company. Most important, these markets would bring new revenues to Twitter, extend its network effects, and broaden its footprint—ultimately positioning the company more favorably for a public offering.
5. Netflix acquires Flixster
Flixster—the movie-info sharing site with about 50 million unique users and a robust social networking core—is a near-perfect strategic fit for Netflix, providing both a marketing benefit as well as a critical social networking component. Netflix, with about 12 million subscribers (up about 28% from a year ago) is spending an attention-getting $27 per subscriber in acquisition costs. Flixster would help bring these subscriber acquisition costs down through its web presence, connection to Facebook and MySpace, and strength on the iPhone, where Flixster is the #1 movie app. Netflix’s future growth lies in adding new subscribers as well as increasing revenue from existing subscribers, and the company’s 17,000-title instant streaming service is a critical strategic component for its future; Flixster would be a core component in growing all of Netflix’s revenue streams. Rumors are recently afloat that Fox Interactive Media / MySpace is eyeing an acquisition of Flixster, but that deal is apparently not imminent. While there is indeed good strategic fit between Fox and Flixster, a Netflix-Flixster deal feels like an even better one.
6. Ticketmaster acquires Eventbrite
Eventbrite would be an excellent addition to the Ticketmaster portfolio, providing Ticketmaster with a new consumer market and Eventbrite with a deep-pocketed corporate parent that offers unparalleled distribution and marketing opportunities. Eventbrite enables an online presence for marketing and ticket sales for fairs, festivals, fundraisers and other events, rocketing from fledgling start-up in 2006 to projected 2009 sales of over $100 million, 3 million monthly uniques and 10,000 new monthly events. Ticketmaster’s savvy CEO Irving Azoff has shown great adeptness in growing revenues from $1.0 billion to nearly $1.5 billion in just the past four years, along with building substantial increases in the company’s free cash flow. Azoff would bring world-class managerial knowhow to Eventbrite’s high-volume, low-margin business. Ticketmaster has had its hands full seeking approval of the Live Nation merger; assuming that merger succeeds in early 2010, Eventbrite would be a solid next step in the company’s strategic growth.
7. DirecTV acquires Blip.tv
Comcast’s TV Everywhere online initiative—which features about 12,000 titles from about 30 major content providers—was a shot across DirecTV’s (DTV) bow and pointed to the need for DirecTV to launch a successful online distribution initiative. Blip.tv offers DirecTV an immediate and valuable distribution channel for online broadcast, plus access to thousands of other programming assets from independent producers (which possibly could be used to program one or more unique channels on the DirecTV satellite TV service). Blip.tv currently manages 50,000+ shows and 3 million+ episodes. Views of Blip.tv programming have reportedly more than doubled in the past year, exceeding 85 million views during December 2009. The company has also attracted an impressive roster of advertisers including AT&T, Best Buy, Nikon, Chevy, Scion, Canon and Samsung. Blip.tv’s offering would need to be modified to distribute programming from major TV networks on DirecTV’s behalf (in order to limit distribution of those programs to DirecTV viewers), but that would likely not be a difficult modification to undertake. This would extend the audience reach for both companies.
8. Bing/Microsoft acquires Bit.ly
Bit.ly’s utility as a URL-shortener is far eclipsed by the strategic value the company brings to search: in November bit.ly shortened some 2 billion URL’s on Twitter, Facebook, email, instant messages and blogs, which means that the company has one of the best windows into realtime search across the internet. Twitter is often mentioned as the most likely acquirer of bit.ly, but an acquisition by Bing is even more compelling given the importance of realtime search to big search engines. Bing has gained impressive market share in the overall search market, but lags in realtime search. Bit.ly has grown out of nowhere in just the past two years to be one of the dominant companies in the social web. Given the growing importance of bit.ly, it would not be surprising to see a heated bidding war between Facebook, Twitter, Google and Microsoft. A key mitigating factor is that Google and Facebook have recently rolled-out URL shorteners of their own.
9. Bing/Microsoft Acquires Foursquare
Called “Next Year’s Twitter”, Foursquare is a fantastically addictive and cool mobile startup that enables a person to share his location with a group of friends. Each time the person checks in from a particular location he or she earns a badge, and the person that checks in most from a particular location becomes the location’s “Mayor.” It’s this addictive game quality that has Foursquare growing exponentially, a la Twitter. This is a natural add-on to Bing Maps, and would further extend Microsoft into the social web with a mobile extension carrying significant ad sales and promotional opportunities. Given that Foursquare is one of the most exciting private companies on the digital mediascape, the company would command a big premium. Google is another natural acquirer of Foursquare, but a Google-Foursquare tie-up is less likely because of events surrounding the acquisition of Dodgeball, and the team subsequently fleeing Google to create Foursquare. Twitter could also acquire Foursquare.
10. LinkedIn acquires Yammer
Yammer is Twitter for the enterprise and has grown rapidly since its September 2008 launch, attracting 50,000 enterprise members so far. Yammer would be an ideal extension of LinkedIn’s reach into the enterprise and would provide new revenue to LinkedIn via its freemium model (companies pay $3 to $5 a head when they upgrade to a premium account). Given Yammer’s market traction and compelling model, it is likely that other enterprise-related suitors like Salesforce.com and Oracle would also step-up in a bidding process for Yammer.