The second wave

With internet firms back in favour as acquisition targets, offline publishers are putting up big money to safeguard their revenues and push on.

Last week's news that Friends Reunited is in early-stage talks about a buyout is symptomatic of the renewed health of the dotcom world. Five years after bust followed boom, the industry is once again riding high on a second wave of investment.

A string of high-profile acquisitions began in the US about 18 months ago, as both new and established media owners sought to secure a competitive edge in the reinvigorated digital space. The New York Times paid £220m for information service About.com, media mogul Barry Diller put up £1bn to purchase search engine Ask Jeeves, The Washington Post bought online magazine Slate.com and Wall Street Journal owner Dow Jones snapped up financial news site MarketWatch for £285m.

Closer to home, Daily Mail and General Trust (DMGT) and Trinity Mirror have both bought recruitment websites, while UK business-to-business publisher Incisive has just acquired online media network Clickz from Jupitermedia.

Google, eBay, AOL and Yahoo! are also undertaking aggressive dotcom acquisition drives, but for the ultimate example of how the internet is reshaping media, one need only look at the £1.1bn set aside by Rupert Murdoch to transform News Corp.

In April, Murdoch told the American Society of Newspaper Editors that 'many of us (in the print business) have been unaccountably complacent. In the face of this (online) revolution, we've been slow to react. Unless we awaken to these changes, we will be relegated to the status of also-rans.'

Murdoch has subsequently gone on a dotcom buying spree. His attempt to combat the impact of user-generated content, or blogging, has seen him lay out £315m for Intermix, parent of social networking site MySpace. In a bid to compete with search engines Google and Yahoo!, meanwhile, he has held talks about buying Blinkx, an audio-video search company. Other potential targets are internet phone-call provider Skype, gaming site ign.com and Grokster, the peer-to-peer network which allows users to distribute music and video.

Explaining News Corp's shifting emphasis last month, Murdoch insisted there was 'no greater priority for the company than to meaningfully and profitably expand its internet presence and to position ourselves for the broadband explosion'.

Divergent paths

Of course, News Corp, along with numerous other companies, pounced on new media last time as well. So is there a chance it will blow up in their faces again? Ashley Friedlein, chief executive of analyst e-consultancy, thinks it unlikely. 'Media owners of all sizes are investing in the internet space because that is where the audience is going,' he says. 'People are spending more time online and making more transactions. It is the only medium they can realistically use at work. This is not like the dotcom bubble when market prices were hyped against potential. This time, online is eating into existing media businesses.'

The internet already accounts for almost 20% of all media consumption in the UK, more in the case of broadband homes. And while TV and print are stuck with single-digit rates of ad growth, the global online ad market will rise about 50% this year to £7bn. In the UK, it is poised to overtake radio's revenue.

The way companies use online differs according to their business needs.

For B2C firms, dotcom acquisition tends to be viewed as a way of securing community-based sites that can act as the hub of an advertising or direct marketing opportunity. But for those in the regional and B2B sectors, the more urgent priority is to protect classified revenues.

In the UK, online is a major threat to newspaper recruitment, with revenues of about £100m - 7% of the total market. That figure is expected to break through £200m by 2008. DMGT's response in 2004 was to pay £35m for Jobsite, a web recruitment business that attracted 1.6m unique visits a month at time of purchase. Last month, DMGT's new media arm, ANM, took the strategy a stage further by acquiring Top-Consultant.com and officerecruit.co.uk.

Trinity Mirror, meanwhile, has acquired Financial Jobs Online, owner of financial recruitment website GAAPweb.com, in a deal valued at £10.5m.

Evidence that this is not just a recruitment issue is an £11m deal that sees Trinity Mirror move into the online property services market with the acquisition of smartnewhomes.com, a portal for newly built homes.

E-consultancy's Friedlein says these deals typify what many companies are looking for in dotcoms. 'The emphasis is on profitable online companies that complement existing activities. If they can also bring in executives with specialist IT skills, that represents an added bonus.'

The resurgence of the dotcom market does not necessarily mean established media players have to buy online businesses. In the wake of the GAAPweb deal, Trinity Mirror chief executive Sly Bailey made it clear that buying businesses is only one way to move forward. 'Digital is a key driver of our growth and recruitment is an important pillar of our revenues, but our strategy is a mix of organic and acquisition opportunities, which this year has seen 17 media launches and two acquisitions,' she said.

Complementary medium

Association of Online Publishers director Alexandra White says a lot of her members are looking at digital media as an opportunity for brand extension as opposed to brand acquisition. 'The priority for many is to combine the strength of their existing media brands with the functionality of the web,' she explains. 'It is about providing their users with access to content in a range of formats that suits their lifestyle.'

Dotcom acquisition can also be tantamount to overkill from a functionality perspective. While it might make sense for a global company such as News Corp to have its own search engine, most media owners are better off employing partners to perform backroom functions. In the sports sector, the majority of rights owners - clubs and federations - sub-contract crucial areas such as statistics gathering and e-commerce to specialists because of economies of scale and expertise. About 60% of the UK's football clubs use Ticket-master subsidiary Synchro Systems to provide ticketing, for example.

While many dotcom deals relate to central activities, it is possible to use acquisitions as a basis for expansion into new areas. Travel group Sabre's £580m purchase of lastminute.com not only brings together the lastminute brand with Travelocity, creating a powerful position in travel retail, but also allows it to take advantage of lastminute's recent expansion into areas such as restaurant reservations and food delivery.

Publisher-retail mix

There is no sign yet, however, of media brands looking to dotcom acquisitions as a vehicle to become retailers. 'The big issue is that with the possible exception of Sky, media companies do not possess the customer management skills necessary to be retailers,' says Friedlein. 'I can see more constant sales, but not mainstream retail. Their best approach is to form a partnership or do a white-label deal. That way they exploit the strength of their brand without the risk.'

This point is underlined by Jeremy Tapp, joint managing director of online publisher Magicalia (see case study, page 30). 'Traditional publishers don't launch shops on the high street to rival their advertisers - they wouldn't dream of it. The arrival of the internet seemed to confuse the issue, but it doesn't change the fact that publishing and retail are distinct skills.'

Magicalia has been successful in bringing editorial communities closer to retailers by building e-commerce platforms that integrate fully with its websites. 'About three years ago we realised that a lot of medium-sized retailers we were sending traffic to didn't have very good websites.

So we helped them build sites that could boost transactions,' says Tapp.

'Now our editorial staff write reviews, news and advice articles. Around this, our community of readers add forums, photo galleries, event discussions and structured equipment reviews. Our retail partners then integrate their stock lists within our sites.'

Quite apart from not being retailers themselves, there are not actually many obvious opportunities for media owners to buy these sites, according to Michael Dwyer. He has just raised £6m to fund the UK launch of pigsback.com, an empathy marketing website that offers brands connections with consumers through promotional incentives such as discounts and competitions. 'There is cash in the market to invest in dotcoms, but the good sites are few and far between,' he says. 'Buyers have to be very careful about the claims dotcoms make about the size of their audience and the relationship they have with them.'

Not surprisingly, those sites that look strong have already been snapped up. Last year, Yahoo! splashed out £312m on Kelkoo, a French company that runs online shopping-comparison sites in nine countries. Prior to that, it spent more than £215m on acquiring recruitment site Hotjobs.

It is also dangerous to assume that any skills developed in the offline world will integrate neatly online, warns Dwyer. This is certain to be an issue for News Corp as it attempts to marry a media monolith with the ethos at MySpace. But even for new media brands such as Yahoo!, there can be a culture clash. Following its March acquisition of Flickr, where consumers can store and share digital photography, 400 Flickr users planned to close their accounts in protest against closer integration.

Magicalia's approach underlines the challenge facing big media owners.

'Our role is to provide high-quality editorial to stimulate debate and draw readers in,' says Tapp. 'But we realise that there are lots of people out there who know their subject better than we do. Our job is to empower our readers to get down to the business of helping each other out with advice, organising meetings, writing for the site, and so on. Unless you genuinely believe your readers have more to offer than you do, building loyalty online will be elusive.'

TARGET 1 - VIDEO ISLAND ENTERTAINMENT

Launched in September 2003, Video Island offers unlimited DVD rental for a monthly subscription via its ScreenSelect.co.uk brand. Consumers order movies online, receive them through the mail and can keep them indefinitely. Video Island also operates white-label services for Tesco, ITV and easyGroup. A popular service, it has strong backing from venture capitalists. With 45,000 titles shipped every day, it has captured a 3.4% share of total UK DVD rentals and expects further growth on the back of word of mouth from its 100,000 reportedly satisfied subscribers.

TARGET 2 - MAGICALIA ONLINE PUBLISHING

Founded six years ago, Magicalia claims to be the UK's biggest dedicated online publisher. It owns 10 ad-funded community sites that bring together audiences passionate about anything from golf to parenting, such as latest launch thinkbaby.co.uk. Revenues are primarily derived from ads and sales lead-generation - though it also builds e-commerce websites for SMEs and advises companies such as NatMags on their online strategy. One strength is that it can target niches such as female cyclists with magazines that might not be economically viable in the offline world.

TARGET 3 - FIGLEAVES CLOTHING

UK dotcom Figleaves sells lingerie, men's underwear, hosiery and swimwear. In just five years, it has grown to become a top 20 UK internet retailer. With backing from US private equity firm Benchmark Capital, it plans to expand in the US, Europe and Asia. The company has set up a global headquarters in the US and brought in former head of Amazon UK Robin Terrell to spearhead growth in Europe. The goal is to grow sales to £100m in the next four years, before floating on Nasdaq. Key strengths are its product range, excellent customer service and a management with plentiful retail experience.

TARGET 4 - SPORTING INDEX GAMING

The sports and gaming sector is littered with failed dotcoms. But one business which has prospered is spread-betting site Sporting Index, now thought to be worth about £100m. Sporting Index differs from other betting firms because a large chunk of its business is generated during matches (42%), as punters attempt to second-guess developments. The company claims to have 70% of the spread-betting market in the UK, and is seeking to expand internationally, with backing from Duke Street Capital. Europe, Australia and South Africa are opportunities, although the US is the big prize.

TARGET 5 - USWITCH.COM UTILITIES

In late-2003, uSwitch.com acquired information-by-postcode site UpMyStreet.com, which attracts 864,000 users a month. Both are postcode-based and provide impartial information, the former on the best gas, electric and home phone deals, the latter on local services and communities. Key developments this year include a revamp of UpMyStreet to aid navigation. Growth potential lies in three areas: new sectors - personal finance was added to uSwitch in 2004; a mobile presence; and the syndication of content to other websites. AOL and Halifax are current partners.

TARGET 6 - LATEROOMS.COM LEISURE

Lastminute.com grabs the headlines in the travel sector, but Manchester dotcom Laterooms.com has also built a strong business based on late deals on discount hotel rooms. Formed in 1999, Laterooms has a database of 500,000 discount hotel rooms both in the UK and internationally. In the year to December 2004, bookings were worth £40m. Bought by private equity firm ECI Partners in late-2004, it is planning further expansion in Europe and the development of sister products such as LateLet.com and MiniBreaks.com. Laterooms also plans to hike its marketing spend to build awareness.

ONLINE SPEND SECTOR SHARE

- Finance was the biggest spender online in 2004, accounting for £151.6m of the total revenue take, according to trade body the Internet Advertising Bureau.

- Automotive has also grown strongly, and now accounts for 11% of online revenues.

- Online ad expenditure topped £653.3m in 2004, a year-on-year rise of 60%.

- Ad revenues are now four times bigger than at the height of the dotcom boom.

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