Business Breakdowns
· Blake Saunders
[00:00:00] S1: I think the biggest change that happened in media, just in general is the Internet. Even though it made distribution free, people's perception of what they were building and how to create value in the last 25 plus years has been to build it quickly and then sell it. I think before that, newspapers and things were owned by families for multiple generations and they were really stable and great businesses. TV there's a lot of media companies today that still have family ownership, Condé Nast and Hearst. So that's a big change. And the reason why it's changed and it's not the best is the lens has shifted from businesses that maybe don't take that much money to start and are very cash flow, generative and stable. Newspapers, they had basically a monopoly and the federal government actually regulated what you could own. This was a rule that went away, but you couldn't own TV, radio, newspapers in the same market because they were worried about a monopoly. The problem is Google and Facebook now came into these markets and effectively took a lot of the advertisers because they just were able to get customers easier. Starting 20 plus years ago, you saw people that were raising money to build media businesses that may not ever be profitable with the pure goal to get it big enough to then sell it to another media company. Where we find ourselves today is we're in a spot where it's really tough. Every company is struggling. I think people that have subscription and direct contact with their consumers are doing okay, but anyone that's relying on organic search traffic to drive advertising revenue, anything is really tough because the degradation you're seeing in consumer engagement is really high. And this is also on the TV side, too. In the US, a fully distributed cable network used to have 110 million households. This was seven or eight years ago, so it's not that long ago. Today it's 55 million. And the reason why that matters for TV and cable is that each of those households that are subscribing are paying a fee to Comcast or one of the other distributors. And part of that fee is then making its way to ESPN or whatever cable network. If you half that, you've effectively halved your revenue. And they have other places to get revenue from, advertising.
· Blake Saunders, Matt Reustle
But these businesses are changing rapidly, and most of the value is accruing in the hands of a few people. Google, Facebook, Amazon. [00:00:00] S0: It's incredible, the breadth out there where there's literally no barriers to entry now for anyone in the media space. I did want to put the lens back on you in terms of going through your career working for institutions. You've made this change recently, which I want to get into. Can you talk about why you left your firm recently and whether any of these developments had anything to do with you taking a different strategy personally?
· Blake Saunders
[00:00:00] S1: I was at a small firm called Methuselah Advisors for 15 and a half years. I think 14 and a half years. And then I spun out a couple of weeks ago, started my own platform. Being at a small firm, you're always your go to market. When you talk to clients, yes, it's about your partners, but it's also they're hiring you. When you're at a larger bulge bracket, you have a multitude of services to sell into a client across the board. So debt capital markets, equity capital markets. So you're able to provide more services. I started at Citigroup for a year and then joined the smaller platform effectively for 15 years. I was just selling air, literally ideas. I just see the world changing a lot in terms of how firms will be structured, what clients want, and sort of the services we can deliver. I wrote this unique LinkedIn post and I titled it Conscious Uncoupling. When you're in a partnership for 15 years, it's a conversation. It's not I'm sending an email or I'm sending a PDF with a signature on it. It was a conversation, and I think it just made a lot of sense. I want to build something that can sustain these changes that are happening. Across the landscape, there's going to be less deals. In media, the way to take businesses to market is changing dramatically. Typically the best sell side process, so when a banker sells a business is getting an asset that you can market. You can basically have someone young on your team, send it out to 30 people and get five or 10 or 15 bids back. And then you decide and then you take whoever you want to a second stage and pick the ultimate winner of an auction process. But that's changed. And in order to sell media companies or media adjacent businesses, it's much more hands on, much more custom processes. So that's what we're building. It's different.
· Matt Reustle, Blake Saunders
[00:00:00] S0: I think there's a lot of strategic insights from the media that you know very well. And not to blow smoke, but you're incredibly well plugged in in terms of the new developments. But I also think there's a parallel to what's happened in media and seeing individuals go out on their own versus working under institutions and for a variety of different reasons. So it's interesting when these things come together. One of the things that I wanted to get your insights on was I get a lot of exposure to the theoretical sellers, those that are building media businesses from the ground up. And these tend to be smaller size. But even some of the medium size, I don't have nearly as much insight in terms of the buyers and how do you frame buyers in the medium market. We could take this so many different ways. But do you have a framework for thinking about who are natural buyers in this market? And you can elaborate on that however you like. [00:00:00] S1: It's super dynamic with some of my clients or people that I'm trying to pitch. I make this basic statement, which is if you're thinking about hiring a banker, because a lot of times most of what you do in banking is you just copy and paste what you did six months ago because you're doing a bunch of busy work. [00:00:00] S0: Don't give away the secrets.
· Blake Saunders
[00:00:00] S1: Yeah. If you're thinking about hiring someone that's copying and pasting a presentation from even two or three months ago, it's probably changed. The demands and the desires of larger media companies and where they want to invest is changing rapidly. Perfect example is Substack. I think you'll start to see more and more M&A around Substack. You saw Bloomberg a couple days ago announced that they're going to turn on Substacks. CNN said they're going to lean more into newsletters a couple months ago. There's a reason why this happens. A lot of large media companies have been trained to be slow movers. When the platform started to get bigger, they would offer unique things. Facebook turned on Facebook video and they did all these partnerships with larger media companies and they were like, build video teams, create video for Facebook and we'll help you with the monetization. The monetization never happened and Facebook shut that down after a year. And then they let everyone else suffer and clean up the mess of, okay, what do we do with this team of five or ten that we just hired? A lot of media companies have been slow movers to adapt to change, but as soon as their competitors start to make moves, then there's a fast follow. That's what I expect to see. It seems like more of them are getting wise to some of these new mediums. The biggest one that I'm sensing now is YouTube. Think about the late night shows and don't think about it in the context of them all getting canceled. But prior to that, they used to use YouTube as a place for shoulder or adjacent content. So say Jimmy Kimmel did a fun lip sync or something like that, he would clip it up and put it on YouTube. And so they always thought of the YouTube as a second run place to continue to cultivate their audience to get them back to TV. And what you're starting to see with the larger traditional media companies and it's just happening now is them realize, oh wow, we should think of YouTube as a first run spot. So let's actually make content for that. And the reason is because the brands and agencies are finally willing to buy direct on YouTube and buy it like they do TV. So I think Hot Ones, this show that the business sold at a pretty good multiple because they sell it like TV. TV sells adjacency. Yes, they sell reach, but they also sell adjacency.
· Blake Saunders
So when large brands want to buy advertising, they want to make sure that the content aligns with the person that they're going after. And everybody has done a lot of studies around this. Even premium content that has the wrong negative connotations, even if it's a premium show that everyone loves, it could actually harm a brand by having the interstitial of a commercial in it. And so brands care about adjacency. And a show like Hot Ones can effectively go buy their inventory from YouTube and resell it to brands. And that's what they do. They go to Procter & Gamble or Coca-Cola and they say, hey, we're going to have these two actors on this week. Will you come in and buy this week? And this is your reach and this is who you're going to be next to. And that's been really profitable for that business. Larger media companies are starting to spin up digital ad sellers and think about the YouTube ecosystem in a much different way. This is the backdrop to say digital media done right will continue to be more valuable. Yes, it's going to be hard to sell a creator led YouTube channel. Totally get that. But I think Hot Ones is a good example of a business that yes, there's a host on it, but I think what people forget is there's been hosts on most TV shows. There's actors that are specific to those shows. Seinfeld has a lot of value and we sometimes forget this key man risk that exists in most content. Even with Hot Ones, there was a little bit of salacious gossip around the host and people forgot about that in two seconds.