Worst
May Be Over
For Media Companies
Investing in Media May
Turn
Profitable Next Year, Possibly Sooner
by Richard Lodge
Since
the demise of the dot.com craze, media companies have gotten
hit pretty hard and their share prices have softened with the
weakness in the advertising sector. But, with next year's elections,
the Olympics and, potentially, a positive turn in the economy,
the advertising sector may soon shine brightly again for investors.
Merrill Lynch analyst Lauren Rich Fine recently told clients
that some media companies might outperform the S&P 500 for
the next six to nine months. She wrote in mid-July, "We
think 2002 estimates are likely still low, suggesting that valuations
are not as high as they appear. The relative attraction of the
group relative to other cyclicals likely remains attractive."
Fine anticipates positive earnings per share growth in Q4, and
as early as in Q3 for some companies.
It's the same boat
for advertising agencies that have suffered from the media slowdown,
but there are signs such sluggish activity may also have bottomed.
ABN Amro's David Doft sounds optimistic about share prices for
advertising agencies, saying, "We feel very fortunate in
the timing. The stocks have pulled back a lot so we get to evaluate
them with a clean slate and that creates opportunity." He
noted that some had been "sufficiently punished by the market"
and that some share prices had been overcompensated by the slowdown.
"We wouldn't be surprised if within the next five years, 40 percent of all advertising revenue is derived from cross-platform deals."
David Miller, Media Analyst
Sutro & Co
A Lehman Brothers media analyst lowered his forecast to 4.5 percent growth in the sector for 2002, but Sutro & Co. media analyst David Miller believes the worst may be over. More significantly, Miller recently said in an interview that the "wave of the future" was cross-platform deals. He remarked, "We wouldn't be surprised if within the next five years, 40 percent of all advertising revenue is derived from cross-platform deals."
Cross Platforms
Become
The New Solution
That
may be one strong hope lifting the sector in 2002 and beyond.
Cross-platform advertising is fancy, new name for multi-media.
(If it involves the Internet, it's got to have a new name.).
Cross-platforming takes one major type of media and merges it
with another the most likely merger candidates would be television
with the Internet. The advertising recipient (you) gets simultaneously
involved with both the show television and the Internet. Advertisers
can then pitch you on both media at the same time. Because it's
interactive, you will supposedly enjoy it.
You have probably already enjoyed the BMW film ads on television. Cross-platforming the mundane television commercial with the directorial skills of a John Frankenheimer (Ronin), Ang Lee (Crouching Tiger, Hidden Dragon), Guy Ritchie (Snatch) becomes a pleasurable hybrid creation. At once, there is a new type of Internet film (digital film) created with the unheard running times of five to ten minutes. Television audiences who can't stand 30-second commercials lavish praise on those lasting ten to thirty times longer. While not practical for television, digital film if BMW's standards are maintained could become the next craze.
Again, Uncommon Media is piggybacking
the long-term success of the WWF
and the post World War II
pop phenomenon of professional wrestling.
That's going to be a hard act to follow.
Who
would benefit from cross-platform advertising on television?
Immediately coming
to mind are AOL Time Warner (NYSE AOL), Viacom (NYSE VIA), and
Disney (NYSE: DIS). Microsoft (Nasdaq MSFT), however, will insist
on becoming a major player in this arena with the release of
its interactive television platform. In mid July, AOL announced
it would incorporate DVR technology from TiVo (Nasdaq TIVO) in
its next-generation set-top box. Unfortunately, no one in the
industry can name a date as to when high-speed Internet (broadband)
access will merge with cable television. There may be sufficient
tests in various metro areas to warrant interest, but it is unlikely
that next year will be the major launch year. It may, however,
evolve into a minor launch in selected markets in the latter
half of 2002. Just as 3G (third generation) wireless faces delays
and obstacles, blending Internet with cable television may take
a while longer than expected. It always seems to take twice as
much time as initially expected and only half the job gets done.
WWF and Uncommon Media Group
That
doesn't mean other cross-platform ventures are absent a solid
launch date. One particular alliance, between World Wrestling
Federation Entertainment (NYSE WWF) and Uncommon Media Group
(OTC Bulletin Board: UMDA) may become a test study for other
media. This group is taking the BMW films-business-art model
seriously. In this partnership WWF has extended its editorial
and advertising content from its two monthly publications, "WWF
Magazine" and "Raw", to virtual pages with CD-ROM.
The union between these two companies may be more difficult for
others to emulate. It may be a matter of being at the right place
at the right time, more for Uncommon Media Group because as a
small, unknown company, it could hit the jackpot with this deal.
On the face of it,
comparing the WWF Uncommon Media Group alliance may be unfair
for future cross-platforming. WWF enjoys more than seven million
subscribers with a two-to-four passaround rate. Their fanatical
fan base generally scores #1 in the ratings for pay-per-views.
Nearly anyone who hasn't lived in a cave for the past four decades
has heard of professional wrestling. Branding, a loyal repeat
audience and strong consumer attributes make this a strong proposition
for advertisers. The reach compares well against network television
with some 40 million influenced weekly through WWF's website,
pay-per-views, and magazines. Not shabby by any stretch of the
imagination.
The plan is that Uncommon
Media Group provide CDs with both WWF monthly magazines. In those
CDs advertisers reach beyond the printed page into the consumer's
computer to provide entertaining and informative ad copy that
sells to the target audience. In an interview with UMDA Chairman
and CEO Lawrence Gallo, he said, "We're nearly sold out
of the first package." Yes, that would make sense, particularly
for a new venture and the mass appeal of the professional wrestling
fan. UMDA's job is a tad easier, considering that WWF is supplying
the advertisers and they eagerly want to be associated with what
may become a collectable CD.
This became intriguing
and we asked for further details. In this partnership Uncommon
Media Group piggybacks the WWF audience and advertising client
base. While no details have been published in a news release,
Gallo assured us, "This is a true revenue sharing partnership."
Advertisers pay UMDA to be included in the WWF magazine CDs.
Teaming
Up With
An Established Brand
& Community
In
a July 9th news release announcing the partnership, WWF president
and COO Stuart Snyder said, "This program will allow our
fans to interact with the World Wrestling Federation on many
levels including our new media ventures, new consumer product
launches, and new music and video tracks from our SmackDown!
Records label. We also view this as an opportunity to reach potential
new fans by partnering with Uncommon Media to provide content
on CD-ROMs being distributed through targeted publications other
than our own."
There are a few concerns
that made us skeptical about this venture. To begin with, it
sounds like an echo of the New Media strain bouncing throughout
cyberspace as late as last autumn. With revenue declines from
AOL and Yahoo (Nasdaq YHOO), New Media is still hobbling. So
we asked. Gallo responded, "We've reverse engineered it
and gone to established brands and communities." He correctly
pointed out that most dot.com's bled through their venture capital
funds trying to establish their community virtually all failed.
Again, Uncommon Media is piggybacking the long-term success of
the WWF and the post World War II pop phenomenon of professional
wrestling. That's going to be a hard act to follow.
Gallo doesn't think
so. His company spent the first 18 months, on their dime, establishing
the necessary relationships to launch the interactive cross-platform
service for advertising clients. Uncommon Media Group established
a $10 million equity commitment with Fusion Capital Fund II,
LLC, a Chicago-based institutional investor. Under the terms
of the agreement, Fusion Capital will buy up to $10 million of
Uncommon Media Group shares over a forty-month period. He said,
"This will enable us to fulfill our entire business plan,
ex-acquisitions, for the first year and a half, maybe two years."
His company currently runs a burn rate of $200,000 monthly. Gallo
explained, "We will be generating revenues, probably in
October, and profitable in the first quarter of next year."
What does Gallo expect
Uncommon Media is likely to produce, after its November launch
with the WWF magazines? He said that revenue projections were
"conservatively $35 to 45 million" and that "he
didn't see anything wrong with EPS of $0.25." He jokingly
mentioned, "I grew up at Lehman Brothers and revenue and
earnings were the driving force of any successful deal."
Nice to know, after having suffered astronomical P/Es and no-plans-to-earn-money
pitches a few years ago.
More Cross-Platform
Deals & Acquisitions
Which
brings us to another line of questioning. All that from the WWF?
Not quite. There's more to the story. Said Gallo, "We are
expanding as we speak. You can look forward to a lot of new press
releases over the summer. We are in serious discussions with
two large music publications, the launch of a new teen magazine,
film studios and two major theme parks."
And then there are
the acquisitions. On July 2nd, Uncommon Media Group announced
a Letter of Intent to acquire TMC Media Inc, which Gallo says
is a profitable company. Gallo mentioned that the acquisition
might be completed in August and has his sights set on another
acquisition before year-end. One hidden asset, noted by Gallo,
is that TMC Media is said to own about $4 million in IP (Internet
Protocol) code, which is patented, including flash technology.
TMC Media should be
a good match for Uncommon Media and aid in delivering cross-platforming
on the WWF alliance and in future promotions. In the past, TMC
has worked with IBM, Sony, Sharp , American Express, Squibb,
Bristol-Myers, AT&T, Lucent, Roche Laboratories. More recent
clients include Levenger, Alliente, Universal Studios and Office
Depot.
It should not be considered
unusual that one of the initial cross-platforming launches comes
from a small 12-person company (with the upcoming acquisition
the number of employees should double to 24). At one time, Microsoft
consisted of less than ten employees and Apple Computers (Nasdaq
AAPL) was two computer nerds working out of a garage. Gallo summed
up his corporate philosophy in a few well-chosen words, "Stick
to earnings and revenues. Don't overextend yourself. Associate
yourself with the best people." His long-term plan is to
apply to Nasdaq Small Cap. Until then, he said, "We're gearing
up for a really successful fourth quarter."
More Information
To
find out more about cross-platforming, or crossover media as
Uncommon Media Group (OTC Bulletin Board UMDA) defines the subject,
you should contact the company at (212) 596-1494 or visit the
company's Web site http://www.uncommonmedia.com/main.asp
Disclaimer: The writer
discloses he holds positions in AOL, MSFT, WWF, and UMDA.
