2016 IPO Prospects: BuzzFeed Feeds On Native Advertising

| About: Buzzfeed (BUZZ)

Summary

While social sites may be gaining importance as news sources, the news industry is yet to develop an organized method to track performance of digital-only media sources.

BuzzFeed is one such content discovery platform that has managed to successfully leverage social media tools to deliver a highly valued business.

The company has been talking of going public, but hasn't given out many details yet.

Over the past few years social media has become an increasingly influential source of gathering news online. According to a PewResearchCenter survey conducted in 2014, nearly half of their Web-using adult users relied on social media sites like Facebook to get news updates. But while social sites may be gaining importance as news sources, the industry is yet to develop an organized method to track performance of digital-only media sources. Thus detailed performance metrics of many of the digital news sources are not known. But that hasn't stopped valuations within the industry to grow. New York-based BuzzFeed (Private:BUZZ) is one such content discovery platform that has managed to successfully leverage social media tools to deliver a highly valued business.

BuzzFeed's Offerings

The idea behind BuzzFeed came about in 2001 when co-founder Jonah Peretti shared an email conversation between him and Nike regarding a personalized shoe that went viral. After graduating from MIT in 2005, Jonah worked at a non-profit studio eyeBeam before setting up the Internet media company Huffington Post with Arianna Huffington. Jonah's entrepreneurial spirit was not yet satisfied and a year later he joined hands with John Johnson and Ken Lerer to set up Contagious Media LLC. Through Contagious Media, Jonah was figuring out the best way to leverage the viral nature of Internet news. By November 2006, Contagious had released the first version of BuzzFeed. The initial version of BuzzFeed was more serious and "straight-laced" than what readers are used to seeing on BuzzFeed today. During the next two years of operations, BuzzFeed focused on improving their content and editorial team and developing their technology platform along with it.

Today, BuzzFeed has a following of over 200 million users worldwide. It relies on an intelligent analytical tool that is able to detect trending stories on the Web and connect people with this content on a near real-time basis. Its platform provides readers with access to breaking news, original content, videos and images across the social web. BuzzFeed has created several verticals of information sharing including BuzzFeed Video for short-form video content, News for news content, BuzzTeam for social focused content, and Life for lifestyle content.

More importantly, over the past few years, sites like BuzzFeed have fuelled the growth of controversial native advertising. An emarketer report estimates spend on native advertising to grow from $3.1 billion in 2014 to $5 billion by 2017. Another report estimates the market to grow to $7 billion by 2017 and to $10 billion by 2020. The content of native advertisements tie into the content of the news article where they are published, making it difficult for the reader to demarcate between the advertisement and the article. Media gurus have been critical of native advertising as it removes the gap between editorial and business operations. In fact, some have even called it the "bastardization of journalism."

BuzzFeed's Financials

But despite its criticism, branded content or native advertising is helping companies like BuzzFeed grow rapidly. Like other digital media companies, BuzzFeed earns revenues from advertising. BuzzFeed does not disclose detailed financials, but according to a recent report, BuzzFeed's revenues have been growing rapidly. Revenues have grown from $4 million in 2011 to $64 million by 2013. For the first six months of 2014, revenues had come in at $46 million. It also has seen significant improvement in profits during this period. It ended 2011 with a net loss of $3.3 million and 2013 with a net loss of $7 million. It has been profitable since August 2013 and for the first six months of 2014 recorded a net profit of $2.7 million.

Analysts estimate that BuzzFeed earns nearly 75% of its revenues from branded content advertising. Native advertising has been a lucrative business opportunity for the imploding media businesses. According to a report by Shareaholic, nearly 70% of people want to learn about a product through content rather than through traditional advertising. Native ads were found to be viewed 53% more often than banner ads, and a media rich native ad saw its viewership increase by up to 60%. Additionally, surveys have revealed that nearly 32% of viewers would more likely share a native ad than a traditional banner ad. Given such impressive statistics, it's no wonder that native advertising is witnessing a growing share within advertising.

Besides native advertising, BuzzFeed also has become a force to reckon with for media content powerhouses. A 2014 New York Times Innovation Report highlighted how despite the impressive journalism that a brand like New York Times delivered, the company was still losing ground to the likes of BuzzFeed. The report names BuzzFeed as one of its primary competitors and confirms how BuzzFeed's ability to leverage social media options such as Facebook to engage audience has been critical in the decline of the readership of publications like the New York Times.

Increasing traffic and improving financials have helped increase the valuation of the company. BuzzFeed has been venture funded so far with $296.3 million from investors including Andreessen Horowitz, NBC Universal, Lerer Ventures, RRE Ventures, Kass Lazerow, Michael Lazerow, New Enterprise Associates, SoftBank Capital, Hearst Ventures, John Johnson, Founder Collective and Ron Conway. Its last round of funding was held in August 2015 when it raised $200 million in a private equity round from NBC Universal at a valuation of $1.5 billion. That is a 50% increase over the $1 billion price tag Disney had put on the company in early 2014. The company has been talking of going public, but hasn't given out many details yet.

Disclosure: None.