Erick Schonfeld reports today that Federated Media, a network which sells ad space on a network of blogs, is raising $50 million at an eye-popping valuation of $200 million. That’s a hell of a lot of money: it’s nine times 2007 revenues, and earnings have only been positive since September, so it’s hard to even imagine what the valuation is as a multiple of earnings.
How can ad-selling networks like Federated Media be worth so much money, when they have precious little in the way of earnings and absolutely nothing in the way of actual content? It’s not obvious, but this certainly seems to be a good business right now: Federated Media rival Blogads was the driver behind Ken Layne taking over Wonkette from Gawker Media, while Glam Media, which is an ad-selling network at heart, is valued at $500 million.
Something here doesn’t compute. When an ad-sales team is selling inventory across hundreds of different sites, it will never be able to command the kind of CPMs that a small and dedicated site-specific sales person could generate. Now there is certainly no shortage of blogs with readership far too low to be able to afford a site-specific sales person at an annual salary well into six figures. But I’m told that Glam Media is approaching large blogs with offers of guaranteed revenue in the seven-figure range, at implied CPMs of well over $10 paying well over $10 per thousand pageviews. That’s probably more than Gawker makes, across its network of sites, even with its dedicated sales team.
Now Glam Media is something of a special case: it loves to boast of enormous pageview numbers, as though it were Glam Media itself and not its partners who were generating all that traffic. But Federated Media never pretends to be a website: Schonfeld quotes its publisher Chas Edwards as saying that its partners can and will walk away at any time if Federated doesn’t "deliver value".
Naturally, this puts a huge amount of leverage in the hands of the publishers, who have Federated Media and Glam Media and Blogads and even Google all competing to see who can sell the publisher’s inventory at the highest possible rate. In such a competitive space, it’s hard to see how margins could be high enough to justify the kind of multiples being seen in the latest Federated Media equity round.
What’s more, the Federated Media equity is being provided by venture capitalists, who are going to want an exit down the road. If they are happy buying in at a $200 million valuation, that means they see Federated Media potentially being worth well over $1 billion at some point in the next few years. I’m as much of a fan of BoingBoing and TechCrunch as the next guy, but they have every incentive to maximize their own take of their ad revenues. How can what’s left over ever be worth billions? And if it is, what does that imply about the valuations of the underlying blogs? Remember that Wonkette was just more or less given away: it just doesn’t make sense that the property itself is worth nothing while the right to siphon off some minority percentage of its ad revenue is worth millions.
Schonfeld says that the $50 million from the latest Federated Media round will be invested to "help existing media partners expand to new sites" – which implies that Federated Media will finally become more of an investor in blogs, rather than merely the company that blogs turn to when they want to outsource their ad sales. So maybe this is an investment in content after all. Certainly Federated Media is as well-placed as anybody to get in on the content-aggregation game. But its core business right now is ad sales, and that’s looking increasingly commoditized.