M&A Focus: Internet Publishing and Broadcasting Industry

shutterstock_188839694The Internet Publishing and Broadcasting industry has attracted a myriad of new entrants due to exponential growth in internet traffic volume and the increasing number of mobile internet connections. With its low barriers to entry but extremely high barriers to success, this industry has allowed independent content producers to enter the cluttered digital space. Startup companies, however, face fierce competition as they struggle to attract and maintain internet traffic and increase revenue through advertising. Companies desiring to compete with the industry’s major players must provide a better alternative to existing content, or focus on a niche market not already served. This requires new entrants to invest in substantial intellectual property, technology and highly skilled labor. To support this need for new talent and technologies, major players and some startups are acquiring companies, not for their product, but for users, intellectual property and talented engineers. The trend has been dubbed “acqui-hiring,” a portmanteau of “acquiring” and “hiring.”

M&A drivers

While some players allow newly acquired companies to continue operating independently, others have been purchasing cross-platform and mobile startups in order tograph access new users or niche audiences, located domestically or overseas. The acquirer’s motives may be to purchase a company it fears will disrupt its dominance in the market, to increase its presence in new markets or to help capitalize on changing trends. If the acquirer allows the company to function autonomously, it is with the hope that new developers and engineers will generate original and viable sources of revenue. Major players have also acquired smaller startups to obtain patents or intellectual property assets. Often kept confidential so as to not alert competitors to new product developments, patent acquisitions allow the acquirer to purchase and use the intellectual property developed by the other company to expand their own offerings and advertising expenditure Mobile internet connections avoid patent infringement claims. For example, in 2012, Facebook bought the rights to 650 patents from Microsoft (which bought them from AOL) for $550.0 million, including internet technologies such as email, instant messaging and video conferencing. Large firms have been involved in acquisition activity to gain access to highly skilled, creative experts. In order to advance their own business, major players often shut down the company they acquired and integrate the employees into their own departments. Consumers’ unquenchable thirst for mobile gadgets and smartphone apps is further driving this trend. As demand for data increases, major companies are fighting irrelevance and trying to become leaders in the mobile space. The continuing struggle to deliver effective internet advertising, the primary method of generating revenue for internet publishers, is further encouraging the acquisition of talented employees that can successfully target consumers.

Potential risks

The Internet Publishing and Broadcasting industry is expected to have a low risk level in 2014 as it continues in the growth stage of its life cycle. After assessing risks associated with the structure, future growth and economic forces affecting the industry, IBISWorld calculated a risk score of 3.55 out of 9.00, with 9.00 representing the highest risk. The growing number of internet advertising campaigns and increased use of mobile devices provide ample growth potential for the industry. The low barriers to entry, however, present a structural risk whereby new players can easily enter the market, forcing all players to incur expenses to differentiate services and keep prices low to entice demand. Additionally, the unpredictable digital technology market can render a company that fails to transition along with shifting preferences irrelevant. For example, new platforms or apps may be incompatible with older versions, while aging services may need to be updated to more customer-friendly and efficient versions. The risk of missing a market trend or attempting to integrate incompatible technologies can produce significant risks to entities and lead to financial loss.

Recent M&A activity

The growing number of internet advertising campaigns and increased use of mobile devices has led to a surge in merger and acquisition activity to obtain users, patents and talent. For example, Yahoo’s 2013 acquisition of blogging network Tumblr for $1.1 billion gave it a young and highly active user base, as well as a new platform for asfdadvertising, while Facebook’s 2014 acquisition of cross- platform messaging app WhatsApp for $19.0 billion expanded the company’s user base into Europe and other emerging markets. Moreover, Yahoo’s 2013 acquisition of news-reading app Summly allowed it to incorporate Summly’s algorithm into its future mobile products while adding three talented employees to their team. In the same year, Google purchased Nest, a home automation company, and Boston Dynamics, an engineering company that designed mobile research robots for the US Defense Department, giving it access to new intellectual property and technology to create autonomous hardware products. Additionally, in the past few years, talent acquisitions have outnumbered user and patent acquisitions. For instance, Yahoo acquired Stamped, a startup focused on mobile products, and OnTheAir, a live video conversation platform, integrating the two teams into its mobile- engineering office. Furthermore, the acquired startups GhostBird, Rondee, Loki, MileWise and Ptch, among others, have been discontinued, with the staff joining Yahoo’s team. Also involved in M&A activity is Facebook, which acquired Storylane, Threadsy and Lightbox for their staff, and Twitter, which acquired Hotspot.io, RestEngine and Cabana.

Future trends

Although the industry is facing heavy consolidation, the constant inflow of new startup companies is outpacing this trend, while the number of internet publishers and broadcasters is expected to continue increasing rapidly. Mobile platforms are presenting another way for content publishers to sell advertising space, and as the number of global mobile internet connections surpasses fixed internet connections over the next five years, advertisers are expected to target the market more fiercely. Companies currently seeking to increase and diversify their user base and acquire fresh talent are expected to invest in advertising expenditures and acquisitions. Although small and independent publishers will continue to enter the crowded industry, they may shift their innovations to align themselves with potential acquirers and major companies with the purpose of being acquired.

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