Monday brought news of three transactions in the broad fields of content, communications, and technology -- each worth about $1 billion. Cerberus bought a majority stake in AT&T's Yellow Pages business, Microsoft bought a bunch of patents from AOL, and Facebook purchased Instagram. Since we live in Dickensian times, it's only proper to note that these deals represent the ghosts of social media past, present, and future. The transactions, the players behind them, the prices paid, and the valuations attached to them, shed light on the dynamism of the U.S. economy in general, and, in particular, in its media and communications industries.
The Ghost of Social Media Past. In the Cerberus-AT&T deal, a bunch of 50- and 60-year old guys bought a century-old, cash-flow producing business from a 135-year-old social media pioneer.
After the telegraph, the telephone was perhaps the original social network. Its rapid spread allowed anybody to communicate with anybody else. The early phone directories were a lot like today's web. They aggregated and indexed content that others created for free. They were advertising-dependent vehicles that offered a cheap and easy way for consumers and businesses to connect. One of the original examples of "push" content — or spam, depending on your perspective — directories continue to show up on people's doorsteps, unpaid for and unasked for.
Even as the age of the landline is winding down, the directory business remains a profitable one. It's an established business with a large number of embedded advertisers and users. Once a plumber lists one year, he's likely to keep doing so — if only to reach the dwindling core of users who don't search for service providers on the web. As AT&T notes, its 1,200 "Real Yellow Pages print directory titles reach about 150 million homes and businesses in 22 states." And while it has branched out into online services, the Yellow Pages remain primarily a print business. But this is an enterprise without all that much of a future. When was the last time you used the Yellow Pages? Do you think your kids ever will?
As such, the Yellow Pages don't have much attraction to forward-looking media and content companies. But they have plenty of appeal to buyers who worry less about the long-term prospects of businesses and more about their ability to generate cash in the short-term — i.e. private equity firms like Cerberus. Does anybody think the financial wizards on whose watch GMAC and Chrysler plunged disastrously into bankruptcy can reinvigorate the Yellow Pages business? But AT&T's yellow pages business is a highly profitable business. In 2011, it had revenue of $3.3 billion and EBITDA (earnings before interest, taxes, depreciation and amortization) of about $ 1 billion. The price paid values the company at less than twice EBITDA, which mean investors don't think there's much room for growth. Given the price it paid, Cerberus can easily channel cash flows from the directories to their investors for the next few years.
The Ghost of Social Media Present. Microsoft purchasing AOL's patents for $1.056 billion in cash represents a deal in which a 37-year-old company bought a clutch of assets from a 21-year-old social media pioneer.
Just as AT&T democratized the late 19th century information superhighway, AOL democratized the late 20th information superhighway. It sold dial-up service, and offered people the means and ability to connect through e-mail, chat rooms, and instant messaging. The first photos I ever "shared" with "friends" were ones I sent as attachments to a mass-mail culled from my AOL email list in the late 1990s. Like the phone directory business, AOL is a profitable firm with a declining business that the next generation is unlikely to embrace. AOL still gets a large chunk of its revenues from people who pay for email access that it gives away for free. But the modern content/technology industries eat their young quickly. As recently as ten years ago, both AOL and Microsoft represented the future of their respective industries. Today, they're both struggling to hold on to their status.
The deal is something of a hybrid. It's backward-looking, in the sense that AOL is monetizing assets created in the past that it lacks the confidence or resources to develop on its own. From the buyer's perspective, it is both a defensive and an aggressive purchase. Microsoft, which is sitting on the mounting cash pile from its legacy businesses, is choosing to put a small amount of cash to work rather than return it to investors. (The deal was in cash, not in Microsoft's long-stagnant stock, which trades at the same level it did in 1998.) Microsoft may do something with those all those patents. But for established players in the technology world, patents are frequently wielded as shields rather than swords — as defensive tools meant to protect existing positions. For both firms, this deal is a recognition that they are well into middle age.
The Ghost of Social Media Future. By contrast, Facebook's acquisition of Instagram for about $1 billion in cash and shares, is a bolt of youthful exuberance. A social media pioneer company founded eight years ago is paying a hefty price for a social media pioneer founded 552 days ago. In this instance, the target doesn't have revenues, let alone cash flow.
The transaction epitomizes the forces that propelled AT&T, AOL and Microsoft to the lofty heights they once occupied. Since the telegraph kicked off the first communications craze in the 1840s, U.S. investors, companies, and consumers have been drawn in by the promise of hypergrowth. By allowing people to connect, and to share and access content easily and cheaply, Facebook and Instagram are following in the footsteps of the forebears that they now overshadow.
Some analysts have painted this deal as a defensive move on the part of Facebook. But there's very little that is backward looking about it. Facebook built up a huge audience and then set about ways to turn them into revenues and profits. It believes it can do the same at some point in the future with Instagram. Even the terms of the transaction are forward-looking. The Facebook-Instagram hook-up is the only deal of the three that involves shares of stock, which represent a claim on future earnings and a leap of faith. Instagram's owners were willing to accept Facebook's stock, which doesn't trade yet, as currency.
For social media companies new and old, it's the best of times and the worst of times.
Daniel Gross is economics editor at Yahoo! Finance
Follow him no Twitter @grossdm; email him at firstname.lastname@example.org
His next book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May and is available for pre-order.
- social media
- Yellow Pages