"Legitimacy is based on three things:
(1) The people who are asked to obey authority have to feel like they have a voice - if they speak up, they will be heard;
(2) The law has to be predictable;
(3) The authority has to be fair. It can’t treat one group differently from another.”
“Find a job you love and you will never have to work a day in your life.” - Confucius
To my mind, Mark Knopfler and Dire Straits were just paraphrasing Confucius. :)
Last week I sat on a career panel for recent JD/MBA grads from sixteen schools. It was a great night and I was thankful to be included. After the panel, one of the attendees asked me for my favorite career books and I was lucky to have these four at the ready. Each has been my on my favorites list for a while and all are useful no matter what role I’m playing - manager, employee, or friend. Read them!
Dream Big - Mike Steib’s Career Manifesto:
The single best career planning work that I’ve ever read. Mike’s “Manifesto” is a seven-step plan for career success that is a wonderful framework for everyone. My favorite part is the section that Mike calls “Personal Goals.” I call it “Dream Big about Everything.” The Manifesto encourages big, wide-ranging dreams about all aspects of your life and then dares you to make a career plan based on that dream. It’s wonderful work and I read it at least four times a year.
Build a Network and Use It - Reid Hoffman’s The Startup of You:
Once you have those dreams, you can begin to build an entrepreneurial life. Reid Hoffman’s “Startup” teaches you how. I love Hoffman’s strong instructions to build genuine networks writing, “if you study the life of any notable person, you’ll find that the main character operates within a web of support.” When coaching people, I find that many are reluctant to network out of some fear of either offending the other person or out of offending me, their manager. Hoffman’s book is the first thing I offer when I hear this frustration. No one explains the importance of external help better.
Mastery, Autonomy, and Purpose - Daniel Pink’s Drive:
I believe that we each work for mastery, autonomy and purpose and that’s the central thesis of Daniel Pink’s Drive. Tonight, I received an IM from a friend who recently started a new job in finance. He is loving what he is doing so much that wants to work 24/7 (thankfully, he’s not). Specifically, he relishes the opportunity to (1) pick up skills from his new peers, (2) work on self-directed investment projects and (3) contribute to a firm and a mission that he really believes in. He’s paraphrasing Daniel Pink without even realizing it.
For a great synopsis - watch Pink’s Ted Talk here:
The Career Covenant - Michael Feiner’s The Feiner Points of Leadership:
Feiner’s “High Performance Leadership” was one of my favorite classes at Columbia Business School. He lectured with the stern voice of a drill sergeant, but his message was kind, generous and even loving. My favorite lesson of Feiner’s was his teaching on the “Career Covenant” - a lifetime pass from manager to employee. Essentially, Feiner believes that a great manager/subordinate relationship - one where each partner delivers for each other - need not end when the job ends. Feiner believes that with the Career Covenant that each person gets a lifetime pass to the other. In my experience, on both sides, the best professional relationships have a lifetime horizon that encourages each party to do their best for the long haul. I first learned that concept through Feiner’s book. It’s a great one.
"There’s something happening here, what it is ain’t exactly clear." - Stephen Stills in Buffalo Springfield’s For What It’s Worth.
There’s a media business. It earned $695mm in gross revenue at 30% gross margins with 75% top-line growth in 2012. It is a market leader with a brand that is recognizable to savvy consumers and leading-edge brand advertisers who associate it with quality. The space in which it plays is expected to grow at a 13% CAGR globally between today and 2017.
And it could be yours for the low, low price of … $800mm?! 1.15x gross revenues?! 4.1x net revenue?! Sign me up!
If only it were that simple.
I was delighted to hear last week that the Hulu bids are in and there are some exciting strategic (DIRECTV, Time Warner Cable, Yahoo) and financial/operational (Chernin, Guggenheim, KKR, WME/Silverlake) bids for a business that is near and dear to my heart both as a rabid consumer of SNL clips and as a former NBC-er who worked in the very, very, very early days of the Hulu transition (I left NBC for Google in June of 2007) before Jason Kilar and team stepped in and turned what was then ClownCo into the beautiful product that Hulu is today.
As a fan and a believer, I’m surprised by the low numbers attached to the bids. When the current partners (NBC, Fox and DisneyABC) purchased Providence Equity Partners’s stake back in 2012, Hulu was valued at $2B. Today, the two public bids have Hulu valued at $500mm (Chernin) and $600-$800mm (Yahoo). What gives?
The low bids reflect the uncertain future for Hulu and for what it will be like under new ownership. Three uncertainties exist (1) what future content will exist on the platform; (2) the future of Hulu’s ad sales, specifically in relation to its current owners and (3) the threat retransmission fees pose to the Hulu.com (as opposed to the Hulu Plus) business model.
First, I want to understand Hulu’s revenues and costs. (Unless otherwise noted, all data comes from Jason Kilar’s excellent December 2012 letter posted on Hulu’s blog).
The revenue part of the Hulu business is pretty simple. In 2012, Hulu did $695 million in revenue from three distinct segments: (1) Hulu.com, Hulu’s ad-supported PC-only destination site and syndication network (Yahoo, MSN, AOL etc.); (2) Hulu Plus, Hulu’s subscription multi-platform (TV, Phone, Desktop) site and; (3) Hulu Japan, Hulu’s subscription-only Japanese site.
Of these three, Hulu Plus has the easiest revenue to understand. At the end of 2012, Hulu Plus had 3 million subscribers each paying $7.99/month for the service = est. $288mm in 2012 revenue.
Hulu Japan is similarly straightforward, but there is no public information about its subscriber number. It launched in Q3 2011, charges ~$10/month and 15 months later (December 2012), it has tripled in subs. Hulu Plus (an analogue) started at 250K subscribers in its first quarter. I’ll assume that Hulu Japan’s launch subscriber number was similar to that of Hulu Plus and scale it down to a Japan-sized population. Then, I’ll triple it for the growth through 2012. That gives Hulu Japan 100K subs at launch and 300K at the end of 2012, each paying $10/month = est. $36mm in 2012 revenue.
That leaves $371mm in ad revenue for Hulu.com. Quick sanity check: it is safe to assume that Hulu is attracting premium video CPMs (~$40) and from personal experience (those SNL clips), it tends to show ads on about 50% of its streams for an RPM of $20. Generating $371mm on a $20 RPM requires Hulu to deliver 18.6 billion views annually. Sounds like a lot, but when we consider that in January of 2012, YouTube was delivering 4 billion views a DAY, it also sounds achievable.
Kilar’s letter says that Hulu spent over $500mm on content in 2012. That investment likely takes the form of advertising rev share back to its partners and licensing fees for original programs like Battleground. It’s roughly 72% of the total revenue. That matches what early reports said about Hulu’s arrangement with its content providers, calling for it to send back at least 70% to its premium partners.
That still leaves a chunky $195mm for Hulu to pay its staff, its real estate and its streaming costs. Hulu’s cost structure (outside of content costs) is incredibly opaque and although it was once profitable the overall business is currently in the red. Still, I don’t think Hulu’s current unprofitability is the reason these bids are coming in low. Rather, I think it lies in the uncertain answer to these three questions:
(1) WHAT CONTENT WILL BE AVAILABLE?
Ryan Lawler wrote a great post over at TechCrunch about the uncertainty over what content will be available and for how long. It’s a real concern and well articulated.
(2) HOW MUCH AD SALES SUPPORT WILL “NEW HULU” GET?
A significant chunk of ad sales revenue on Hulu has always come from the current owners. Hulu has its own strong ad sales team, but its relationship with NBC, Fox and ABC enables it to effectively outsource a significant part of sales to three of the most experienced video ad sales teams in the world. It is unclear if that tight relationship will continue with new ownership. There are two concerns here. First, aligning incentives across sales forces with the same ownership is always tricky. It’s going to be even harder with cross-ownership. Second, great detail from Brian Steinberg over at Variety on how NBC, Fox and ABC are now taking as much as 90% of that ad inventory and taking “lead” on it. If this leadership position includes setting value for the ads, a bundling concern arises. If Hulu inventory is effectively bundled with television and other online video inventory and the new owners do not negotiate a price-setting mechanism that recognize full and fair value Hulu inventory, it could rapidly deplete the value of the Hulu.com ad units.
(3) WILL RETRANS DEPLETE HULU.COM OF CONTENT?
Since Hulu’s founding in 2006, NBC, Fox and ABC have opened a second revenue stream by collecting retransmission (“retrans”) fees from cable, satellite and telco, both through their own owned and operated stations (“O&O’s”) and through their affiliates around the country.
Retrans creates a problem for Hulu. In 2006, the broadcast window (the current season) of Saturday Night Live was entirely ad-supported on-air and online. SNL’s distributors (NBC nationally and its stations (e.g. WNBC/KNTV) locally) were free to make as much money as they could during the broadcast window by selling the show to advertisers. They did this through first-run and in-season repeats on-air and by digitally playing the content on NBC.com and Hulu.
In 2013, things have changed. Now that cable subscribers (me) are paying MVPDs (FiOS) who then pay stations (WNBC/KNTV) who kick something back to the network (NBC) to fund the programming (Saturday Night Live), all of a sudden there is less of a willingness to just let the content be monetized on the internet for free. The MVPDs can rightfully ask the stations - “Why are we paying you fees for what viewers can get for free online?”
Fast Company’s Nicole Laporte wrote a great article on Hulu and Jason Kilar last year discussing how this issue came to a head in a 2009 board meeting in an animated discussion between Kilar News Corp President Chase Carey. It’s great reading and sounds like wonderful media theater. It also sounds like retrans fees and the resultant availability of the content for “free” has become the most important battleground in a potential Hulu sale. If that 2009 meeting was a shadow of what’s happening today, it occurs to me that the “free” over-the-web ad-supported business that is Hulu.com (as opposed to Hulu Plus) may not exist for much longer.
It is my belief that even if Hulu.com goes away and all that is left is Hulu Plus, Hulu still can be a great business. Even with all the restrictions, a savvy buyer can make strong returns with Hulu if it is run efficiently and effectively by a strong leadership team. The Hulu Plus business is a $288mm revenue business and growing (100% growth between 2011 and 2012).
This is definitely an odd auction with a strange variation of the principal-agent problem. The current owners of Hulu are not only looking for a high bid, but they are also looking for an accomodating partner. A partner that will pay top-dollar for the content, that won’t complain when ads are given away for free to keep on-air advertisers happy and that will be willing to keep much of the content behind the Hulu Plus paywall to keep the MVPDs happy.
Some critics will call that buyer a stooge. I believe that if that buyer is savvy in its negotiations, while keeping these threats in mind, and if it staffs Hulu with a management team (or keeps the current one) that understands these issues core to Hulu’s prosperity, it will own a strong and unique web property that will be well positioned to take advantage of the impending incredible growth in online video. If well negotiated and well managed, there is no reason why Hulu can’t deliver outsized returns for years to come.
In the coming days, I’m going to do some thinking about each of the bidders and what their potential angle and value add could be. If there is enough material for a post, I’ll make one. If you have any thoughts - reach out on Twitter (@saroff_nyc) - I’d love to hear what others are thinking about this.
On Yahoo & Tumblr: “We have vision, delusion and hallucination and I want to know which one this is.”
“We have vision, delusion and hallucination and I want to know which one this is.” - quote anonymously attributed to Yahoo COO Henrique de Castro while an exec at Google.
Wow. Since Yahoo CFO Ken Goldman spoke about the need for Yahoo to be “cool” again at a JP Morgan conference earlier this week, it’s tempting to look at this through the gossipy lens of Silicon Valley meeting Silicon Alley.
Shareholders are invested in Yahoo for returns, not for cool. Yahoo employees have a big chunk of their net worth tied to their stock. It may be sexy for Yahoo to buy Tumblr but will it have a positive return? I believe the answer is no and that Yahoo CEO Marissa Mayer, HDC and Goldman should slowly but surely walk away from the deal.
The power of math and corporate finance can build a good investment case for Yahoo/Tumblr. Yahoo is a $28B media business with cash to spend ($3B on its balance sheet) and a substantial focus on display advertising. Tumblr represents a ton of page views ripe for display monetization. It’s a bulk play - Tumblr adds mass.
The opportunity cost of a $1.1B Tumblr purchase is $108mm/year. ($1.1B multiplied by Yahoo’s 9.8% WACC). Basic corporate finance asks if Yahoo is better off buying Tumblr or deploying that cash in some other way?
According to Quantcast, Tumblr gets about 60B US page views/year. If we assume no growth and no international, those pageviews will spin off $108mm/year if a net $1.79 RPM (revenue per thousand pageviews) is achieved.
There are data points that can make that $1.79 hurdle rate much lower and strongly favor the acquisition. I imagine the Yahoo board will see some version of these tomorrow night:
*International doubles Tumblr’s size. The international page views reduce the RPM hurdle rate to $.89.
*The WACC of 9.8% feels high. If we instead use the risk free rate of 4.5%, then the US-only RPM hurdle rate drops to $.81, the international-included RPM hurdle rate drops to $.41.
*HDC is a smart and experienced display advertising executive who knows how to turn pages into dollars. (N.B. - I worked in HDC’s org at Google for many years and although he draws media attention for his unintentional comedy and his pay package - his skills as an executive are undeniable and underestimated.)
*Tumblr is likely to keep growing. It is the blogging platform of choice for the immediate future and the more monetizable pages its bloggers create, the lower the RPM hurdle rate.
You can use the math to get the hurdle rate low enough to make the acquisition seem like a no-brainer, but I believe that there are many strategic challenges unique to Tumblr that make this acquisition a risky one. If I were Yahoo, I would not buy Tumblr for $1.1B.
*Tumblr CEO David Karp is correct in his resistance to the use of traditional display on Tumblr. Karp will have a new boss on Tuesday morning, but it appears as though he will remain in charge at Tumblr. As the product visionary behind Tumblr, Karp has been very public about his resistance to display ads on the platform. I agree with him. One of the reasons that I love Tumblr both as a blogger and a reader is about how it feels. I can post a lobster roll, my godson and wistful thoughts on my career and they all “work” on my tumblr. Traditional display disrupts that aesthetic. Tumblr isn’t built for display and I’m not sure if the product can be changed to accommodate display and still maintain its Tumblr-ness.
*If traditional display is not used on Tumblr, then new forms of native advertising have to grow at incredibly rapid rates. That’s hard. Karp sees Tumblr as having great potential for new forms of advertising such as Tumblr sponsorship programs like Tumblr Radar and Tumblr Spotlight. These “native” advertising formats are beautiful and fit with Tumblr, but it is unclear how much demand is out there for them. Selling these kinds of units earned Tumblr $13mm of revenue in 2012. Generating $108mm/year of net revenue with special native advertising units (both existing and to be developed) is a different and more difficult challenge than just making Tumblr a shelfspace for display.
*Tumblr doesn’t own many of its page views, the bloggers do. Tumblr is a blogging platform and a content management system first, a destination site second. For Yahoo to place ads on tumblr.com is easy, for it to place them on johnsaroff.com is hard. To facilitate advertising on johnsaroff.com Yahoo will need to get my permission, put an ad unit on my page, cut me in on a rev share and then convince an advertiser that johnsaroff.com is worth something. It’s a challenge similar to what YouTube has done with user-uploaded videos over the past several years to great effect. But, it requires product vision, engineering talent, business development work and account management skills that took Google/YouTube years to grow with many fits and starts. These skills may not be in either the Yahoo or Tumblr organizations right now and will likely take time to develop.
*Many tumblrs are unhospitable to advertising. I’ll leave it to Sam Biddle over at Valleywag to talk about how many of Tumblr’s pageviews are not appropriate for ads.
*It is unclear if Tumblr has a sustainable competitive advantage. Channeling the lessons of my strategic management of media professor Bruce Greenwald and his books on competition and media, none of this makes sense if Tumblr doesn’t have a sustainable competitive advantage and barriers for new entrants to enter its market. Just because Tumblr is wonderful and the preeminent blogging platform today doesn’t mean it will be tomorrow. Over the course of the last ten years Blogger and Wordpress have held the position that Tumblr holds now. I believe that the space in which Tumblr operates has very low barriers to entry, making Tumblr very susceptible to new entrants. This makes the growth rate very hard to predict with any degree of certainty.
This is a tough call. Assuming the deal goes through, only the future will show whether the rationale and the projections that back it up are vision, delusion or hallucination. Like most things, the math behind the rationale and the projections will probably end up somewhere in the middle.
To me, the strategic concerns overwhelm the math. Team Yahoo can make this acquisition easily, but it makes the next one harder, from all of a cash, investor and culture perspective. Instead of Tumblr, I propose that Yahoo focus its cash not on bulk of pageviews, but on acquisitions and R&D that erect barriers to entry (Buffett’s famous moat) around its already robust display business. Those likely take the form of deep investments in the product and engineering corps and strategic acquisitions of adtech businesses. Those maneuvers will be less sexy, but they have the potential to reinvigorate Yahoo for the next twenty years. It is hard to see how, with all of the strategic risks inherent in the deal, acquiring Tumblr builds the moat for Yahoo that I believe it needs.
For West is where we all plan to go some day. It is where you go when the land gives out and the old-field pines encroach. It is where you go when you get the letter saying: Flee, all is discovered. It is where you go when you look down at the blade in your hand and see the blood on it. It is where you go when you are told that you are a bubble on the tide of empire. It is where you go when you hear that that’s gold in them-that hills. It is where you go to grow up with the country. It is where you go to spend your old age. Or it is just where you go.
—All The King’s Men by Robert Penn Warren
You’re looking for three things, generally, in a person,” says Buffett. “Intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two
When I was thirty, I was living my dream. I’d already accomplished most of what I’d set out to achieve professionally: leading scorer in the NBA, leading rebounder, leading blocker, Most Valuable Player, All-Star. But success can be as blin…
Amazing advice from the greatest college basketball player of all time. Absolutely incredible.