Is Federated Media worth $300 million?

Blog ad-sales network Federated Media is not for sale, says its founder John Battelle, although he does concede that “any startup has its price”. And what would that price be? According to a MergerMarket interview with Federated COO Jason Weisberger picked up by TechCrunch, 8 to 10 times gross revenue, which in turn is likely to be $30 million in 2007. Let’s say $270 million.

Weisberger also throws out the figure of 25 times Ebitda; if that was also $290 million, then that would put Federated’s Ebitda in 2007 at about $11.5 million.

These are big numbers for a company which owns no IP of its own and essentially just sells ads for other people. On the other hand, Federated does seem to be doing very well, and now employs well over 30 full-time staffers, it would seem.

The sums actually add up. Federated takes 40% of revenues: if it pulls in $30 million in 2007, that would be $12 million. Let’s say payroll and other overhead is $3 million: that still leaves Ebitda of $9 million. Plus, it’s growing fast: it had 365 million monthly pageviews in January, up from 200 million in September.

Let’s conservatively say that FM averages 450 million pageviews a month in 2007: that’s 5.4 billion pageviews for the year. And let’s say they manage to charge $10 CPM to their high-end advertisers. Revenue of $30 million for the year would imply 3 billion impressions, or less than one impression per pageview, on average. That’s definitely doable. Even at $5 CPM they need to sell only 1.1 impressions per pageview, which I’m sure is much, much lower than their total inventory. And it’s worth noting that their rack rates for BoingBoing, say, to pick a blog pretty much at random, range from $7 all the way up to $20, while GigaOm’s rates are as high as $35.

So could Federated Media really be worth $300 million? There certainly seems to be no shortage of blogs out there which could be brought under the Federated Media umbrella, and I’m quite sure that advertisers aren’t going to stop their migration from TV and print to the web any time soon. It’s not unrealistic to see Federated Media serving 20 billion pageviews per year, 2 impressions per pageview, at $10 CPM, which would add up to total revenue of $400 million, of which FM would keep $160 million. Profits could approach $100 million per year at that point, which would make a $300 million purchase price seem eminently reasonable.

Of course, just because it could get there doesn’t mean it will get there. Any of FM’s authors can leave at any time for a richer deal from a rival network — although there’s no sign that any of them are particularly discontented at the moment. If I were serious about monetizing, I’d first try to get my traffic numbers up a bit and then I think I’d try to sell myself to FM. Let’s say I started at 5,000 pageviews per day, 2 impressions per pageview, $10 CPM — that would work out at $26,000 per year in total, of which I would receive $15,600. Not megabucks, by any stretch of the imagination, but this is the Long Tail of internet content, and FM would seem to be very well placed to sell it. And there are thousands of baby blogs like mine out there. FM can make minibucks off a lot of them, and then be in there from day one when, inevitably, a few of them really take off. And there are economies of scale for authors in the network, too: while I doubt all that many advertisers would want to advertise on specifically, they might well be interested if I was bundled in with, say, Marginal Revolution. (Which is actually with BlogAds at the moment.)

And although FM doesn’t have any real IP of its own, that also means that it doesn’t need to create compelling content, either — something which is becoming increasingly expensive, these days, in terms of staffing costs and getting websites successfully off the ground. Many try, few succeed.

Nick Denton reckons that FM is going to be bought by AOL, which would make quite a lot of sense: AOL’s ad-sales team is strong, but FM has blog-specific expertise which would help sell Engadget and the other AOL blogs. What’s more, buying FM would mean that AOL could bundle Engadget with all manner of other similar blogs . And it would also mean that rather than simply shuttering blogs which don’t get a million pageviews per month, it could spin them off to their authors, who could make a decent living under the FM umbrella. 100,000 pageviews per month could mean income for the author of $300,000 per year.

So how much would AOL be willing to spend for FM? On that front, I have no idea. But I reckon Battelle would want at least nine figures.

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