Whether to Build or Buy, That Is the Question

Old Media Debates How to Add Digital Assets

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NEW YORK (AdAge.com) -- Should traditional media companies build or to buy digital media properties? Viacom's first priority is to build, according to its chief financial officer, Michael Dolan.
Michael Dolan believes the return on digital products developed in-house is 'phenomenal.'
Michael Dolan believes the return on digital products developed in-house is 'phenomenal.'

But that approach was in debate at this week's Convergence 2.0 Summit, organized by The Deal. Others who spoke after Mr. Dolan were quick to note how much faster entrepreneurs can move in establishing new ventures, and that they should be looking to buy.

Cash flow priorities
"There's so much money available, and looking for the deals that the day of a surprise ... is gone," Mr. Dolan said. He said his company's free cash flow priority is to feed internal projects first, acquire second and return to shareholders third. The return on good internal products "is phenomenal," he said.

He cited MTV Networks' broadband product as an example of how the company built instead of bought. Overdrive was built with an investment of $5 million over eight months by a group of young people in the company, he said, adding that the "market value of that in today's marketplace is huge and it was done on a shoestring."

Still, MTV has made a string of acquisitions in the past year, starting with online video site iFilm.com, followed by Neopets.com and social gaming site Xfire.com. Recently it collaborated with Microsoft to build a digital music subscription service called Urge. Mr. Dolan said Viacom is "terrified" of corporate doing deals, and every acquisition must be sponsored by a division within the company. He said there is a huge premium placed on bringing acquisitions into the operating units.

Mr. Dolan said of the recent Xfire acquisition that Mike Cassidy, Xfire's CEO, sat in on a meeting with MTV's top sales executives, and asked, "How do I get into the upfront?"

Taking part in sales talks
"He'd hired his first salesperson 30 days before and now is sitting in the room with the most powerful salespeople in cable ... to make sure that he was at the top of the list," he said, adding that Xfire was a key part of a MTV's early multiplatform renewal deal with media agency OMD.

The litmus test as to whether you're spending prudently, Mr. Dolan said, is if you have lost deals.

"It's disappointing but oddly and ironically enough a good sign that you're willing to step away from deals that don't meet our hurdles," he said.

On a panel later in the day, Scott Kurnit, a venture capitalist and founder of About.com (now part of The New York Times Co.), disagreed with the build first, buy second philosophy.

"Big media shouldn't build but should buy," he said. "They can't compete with entrepreneurs who will do it at two times the speed."

Scrappy companies build fast
Neal Goldman, CEO of Inform.com, said the "speed with which young scrappy companies can build" is leading to a wealth of acquisitions in the $25 million to $50 million range.

The entrepreneurs and investors on the panel are largely looking at companies that offer new forms of advertising in the online, on-demand and mobile spaces.

"Ads are back and you can build business around them," Mr. Goldman said.

Dennis A. Miller, general partner at Spark Capital, said his company has seen 729 companies in seven months and has done seven deals. "Anything that smells of what's on the cover of Newsweek [we avoid] because that means it's well accepted from pop culture and you should have been there a year ago," he said.
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