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Time Warner's (TWX) AOL wanted to expand its reach from casual video game players to the rapidly growing hardcore gaming market. But instead of creating a sub-channel from scratch, on Aug. 16 AOL's Games division purchased GameDaily, a site that claims to reach around 4.5 million hardcore gamers a month and whose 13 employees put out a newsletter that reaches an estimated 15,000 industry professionals. (GameDaily is a content partner of BusinessWeek.com's Innovation and Design channel.)
It was the company's fourth acquisition of 2006 and marked a major push into a new market. "Building a brand takes a long, long time," says Ralph Rivera, vice-president and general manager of AOL Games. "You could hire people and crank out the same content, but even with AOL's distribution infrastructure, it wouldn't necessarily distinguish itself in the marketplace. That's why we looked outside to acquire content, brand, and audience," he says.
Today, more and more large companies such as AOL and InterActive (IACI) are buying small Web sites to bolster their Web presence, or expand into new content offerings. They're eager for the loyal audiences, traffic, and brands that small sites—often with only 10 to 30 staffers—have created in specific niche markets.
PRANK ADVERTISING. "There are two levels of purchase going on right now," says Allen Weiner, research director at Gartner, a firm that tracks technology companies. "Established Web companies are entering new categories to expand content spread and functionality, and traditional companies are vying for platforms for viral distribution. Both are going after acquisitions; they're just looking at different things," says Weiner.
It's doubtful that IAC would ever be able to come up with a site with the following and traffic of its own recent pickup, Collegehumor.com. The seven-year-old site, in which IAC purchased a 51% stake for an undisclosed sum on Aug. 14, gets about six million unique visitors per month. Videos of mostly college kids doing pranks attracts an audience ranging from high school students to the occasional 30-something.
That's the kind of audience that advertisers dream of. And so far, the site is only earning an estimated one quarter of its advertising revenue potential, says Josh Abramson, its president and cofounder. Collegehumor.com had 20 employees and revenues between $5 and $10 million prior to its acquisition.
MAJOR PAYOFF? That undercapitalization could pay off big for both IAC and Collegehumor. Not to mention that IAC, which also owns Ticketmaster and Match.com, can cross-promote products from its other businesses among the Collegehumor crowd. With a beefed-up sales team, the IAC-backed site should attract a whole spectrum of advertisers.
Advertisers, traditional media companies, and established Web companies are increasingly looking online to reach a targeted demographic and get concrete measurement metrics. That's why Internet advertising grew by 30% in 2005, to $12.5 billion, according to a study by the Interactive Advertising Bureau and PricewaterhouseCoopers. And that's why it's predicted to continue to grow at a similar clip in 2006 and beyond.
"Consumers are looking for specialized content—stuff that speaks to their passion," says Martin Green, senior vice-president of CNET Networks (CNET), a San Francisco-based media company. To reach these audiences, CNET just bought two different food-related entities, a paper magazine called Chow and an unrelated Web site called Chowhound.com. It plans to merge the two into Chow.com, a new food Web site being rolled out this month.
VIRAL COMPETITION. CNET is not stopping there. On July 24, it bought UrbanBaby, a small community and media site, with about 15 employees, aimed at new moms. "We think that, over time, a multi-brand strategy—building platforms with the look and feel specific to that passion—is the only way you can create something credible enough for the most informed, passionate people in the segment," says Green.
Although major followings can develop around gaming, food, and parenting sites, it's user-created video that's been attracting the most attention recently. With so many players considering entrance into the video market, MTV has been working overtime to gain the upper hand (see BusinessWeek.com, 8/22/06, "Move Over, MTV").
On Aug. 10, MTV Networks purchased the 100-employee gaming site and online video outlet, Atom Entertainment, for $200 million (see BusinessWeek.com, 8/11/06, "I Want My GTV?"). It has also acquired small gaming sites Xfire and GameTrailers, along with indie film site IFILM in the last year and half.
CONSOLIDATION COMING. As analysts speculate about the hefty price tag the Web's hottest streaming video site, Youtube.com, will command, one of its competitors has already been picked up. On Aug. 23, Sony's (SNE) entertainment unit bought Grouper, a user-generated video site with 27 employees, for $65 million. With Grouper's sale, rumors now abound of other sites being on the block (see BusinessWeek.com, 8/24/06, "Online Video Tasty Takeover Targets").
Once a couple more players are snapped up, a consolidation in online video sites may be inevitable. That may leave those who have major media backing with a competitive advantage. "At some point, there's going to be forced consolidation, and consumers will go to one of five sites to get their Internet video fix. In a year or two, when much of Internet video marketplace shakes out, we want to be at the top," says David Samuel, co-president of Grouper Networks. "We felt that partnering with Sony was the way to win."
SELLER'S MARKET. Many small media companies that were snatched up had their pick of who to sell to. "We certainly felt in control in the past year, in terms of the opportunities to take the brand and the site to the next level. This past year has been fantastic, as the market has certainly come around to the affinity markets," says John Maloney, co-founder of UrbanBaby.
It all adds up to an environment where valuations are starting to skyrocket, putting smaller players, whether they're attracting users by hosting a buzzing community of young mothers, or by posting video of college kids crashing down stairs in a shopping cart, in the enviable position of being in control at the bargaining table. "There is definitely some froth in the market," says CNET's Green.
Gangemi is a reporter for BusinessWeek.com in New York
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