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Thinking Small On The Web


By Jon Fine For good or ill, the best way for big media companies desperate to dapple themselves with digital pixie dust is to make one big attention-grabbing deal. The paragon remains News Corp.'s (NWS) purchase of MySpace parent Intermix Media for $580 million in the summer of '05, which glossed over Rupert Murdoch's prior online miscues and goosed the stock price.

Or E.W. Scripps Co.'s (SSP) deal for e-tailing search site Shopzilla for $525 million--as a percentage of revenue, a much bigger deal than Murdoch-MySpace--which looked great until Shopzilla slumped. As the company formerly known as AOL Time Warner (TWX) shows, there are downsides to this approach: Buying about.com for $410 million in early 2005 has, rightly or wrongly, netted the New York Times Co. (NYT) as much laughter as love.

This record leaves companies more comfortable playing small-ball: no big bets, but rather tinier, sort-of-targeted deals. "Most [big companies] are saying they want to buy online media properties," says Reed Phillips, a managing partner at media dealmaker DeSilva & Phillips. But "very few will really roll the dice on a large transaction" or even pony up the price required for any winning bid. Even as long-standing businesses are under attack, there's still an overweening temptation to play it safe.

Then there's Hearst Corp., neither a shrinking violet nor a wild-eyed extremist in this arena. In 2007, Hearst announced four decent-sized digital deals, in the tens of millions, not hundreds of millions: teen social-networking site eCrush, gaming and entertainment site UGO, shopping site Kaboodle, and, most recently, health site RealAge.com. We are about to see whether a company that has prospered for decades by being fundamentally conservative can thrive by doing the same in this digital age.

THE PRIVATELY HELD HEARST is run for a family trust, so it's useful to see its executives as money managers of a family's assets. Only instead of real estate or stocks, the assets under management are media properties--newspapers, magazines, TV stations, syndicated entertainment. Long-term, Hearst has been enormously successful. Last year's revenues were around $7.5 billion, a record high, and net income topped $900 million. It has made many major recent buys, including one that brought it the San Francisco Chronicle--oopsie on that, given the paper's travails--albeit nothing digital before this year. (Hearst has long invested in scores of large and small digital companies--it held a minority stake in just-sold Sling Media--and it bid unsuccessfully for IGN Entertainment, the online gaming concern that News Corp. snapped up for $650 million.) "We were looking," says Hearst Interactive Media President Kenneth Bronfin, whose tenure in digital at Hearst dates back to when the company sold CD-ROMs. "Just being very selective."

Taken individually, all of Hearst's deals make sense. They either bring the company a big chunk of a new demographic, like UGO's young men, or suck out tons of data from its existing audiences, like RealAge, which calculates the "real age" of users who answer a detailed health questionnaire. Bronfin's stated strategy of using RealAge and UGO as platforms for future buys makes sense, too. What makes less sense is the notion that any of this gets a company built on past generations' media assets, many of which defy easy translation into digital, to where it needs to be quickly enough. Bronfin admits "these four [deals] alone absolutely aren't enough" and says more will follow. Nothing appears imminent, though, save for a major homegrown launch early next year, likely focusing on health.

Here's the question: Is digitization happening so slowly that companies can afford to ink smallish deals and build what they can on their own? Caution, it's true, has served Hearst well in the past. But I'm not at all convinced that caution is what's called for this time. And the crazy thing is that Hearst is on an absolute tear compared with most of its peers.

For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia


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