Not all content is king on Wall Street
Recent deals like the Facebook financing, the Demand Media IPO and the Huffington Post sale show that investors put far more value on companies aggregating cheap or free content than on dedicating generous resources to original, high-quality journalism.
There are several reasons for this, as discussed in a moment. First, let’s look at the huge difference between the value of a digital superstar spending absolutely nothing on content and a struggling legacy media company still employing a small army of reasonably well paid professional journalists.
The companies are Facebook, which needs no further introduction, and McClatchy, the largest publicly held pure-play newspaper publisher in the land.
Although there are many ways to value a company, one of the quickest and easiest is to divide the value of its stock by its sales. So, that is what we’ll do.
Facebook, which had an estimated $2 billion in sales in 2010, was valued at $50 billion earlier this year in a private financing, or fully 25 times its sales. By contrast, McClatchy, whose sales were almost $1.4 billion in 2010, had a market capitalization at the close of trading yesterday of just $372.1 million, or a mere 0.30x of its revenues.
In other words, Facebook, which is filled with a growing abundance of often-trivial user-generated content, is considered by its investors to be 83 times more valuable than McClatchy, which employs hundreds, if not thousands, of journalists. (McClatchy, which suffered a traumatic series of layoffs and furloughs since 2007 as its sales fell 39%, declined to say precisely how many scribes remain on its payroll. But the publisher still employs way more content producers than Facebook, which employs none.)
The divergent market momentum of the two companies explains the sharp disparity in their valuations.
Users and traffic have been growing so rapidly at Facebook in the last couple of years that the site now surpasses all others in the amount of time users linger at it. Facebook accounted for 12.3% of the time spent online in the U.S. in 2010 vs. 7.2 % in the prior year, according to a study released yesterday by ComScore, the audience-measuring service.
More visitors spending more time at Facebook create a perfect environment for the targeted keyword advertising the company sells on its pages. Best of all, Facebook’s ads are sold through a do-it-yourself system, meaning that the company spends no money on producing content or selling ads. This is a recipe for highly efficient growth and profitability, so long as Facebook doesn’t someday fall out of consumer favor like the formerly high-flying MySpace.
While Facebook has been dazzling the media world, McClatchy’s world has been rocked by the secular collapse of the newspaper industry.
After peaking at $2.3 billion in 2007, McClatchy’s revenues fell to $1.4 billion in 2010. Its net profit last year slid a vertiginous 33.4% from the prior year to 43 cents a share. McClatchy also is burdened by nearly $1.8 billion of the debt it incurred to purchase of the Knight Ridder newspaper chain in 2006, the year the wheels started coming off the once-indomitable newspaper business. The high debt burden contributes to the low esteem in which the company is held on Wall Street.
As you can see from the table below, the mismatch between the valuations of Facebook and McClatchy is evident among several other media players, too.
Old media companies – the ones who continue to invest in content – are valued at no greater than 1.5x revenues, because financiers consider their future business prospects to be unclear (or, worse) in the digital age.
New media companies, on the other hand, are regarded as potentially capable of the dramatic growth epitomized by Facebook.
Google, which brilliantly scrapes and organizes everything on the web but decided against creating content of its own, is valued at 6.70 times its sales. Were Google not as large and mature as it is today, it probably would carry an even higher valuation.
The valuation of Demand Media, which began trading publicly last month, is almost identical to Google’s. Demand Media generally pays freelancers $10 per article to write stories of little journalistic import that are designed, instead, to build traffic and fetch advertising dollars on sites like eHow and Cracked.
Huffington Post was valued at a steep 10.33 times sales when AOL purchased the company this week. Although HuffPo publishes some original articles by a few properly compensated writers, its ad-based business model relies heavily on contributions from some 6,000 unpaid bloggers and the aggressive aggregation of articles cribbed from other prominent websites, including many who still spend money on journalism.
Creative and prosperous as the digital publishers may be, they aren’t doing much to afflict the comfortable and comfort the afflicted. But investors, at the moment, seem to love them more than the publishers who do.