This document provides an overview and summary of digital content history and the changing landscape. It discusses: 1) How digital content consumption has evolved from 2005 to focus more on social media, engagement and new forms of entertainment. 2) Common themes in large digital content deals from 2005-2010, including a focus on monetizing user generated content and experimentation with new models. 3) Key factors that have contributed to the rise of billion dollar digital content businesses like social engagement and business model innovation. 4) Emerging digital content models that integrate commerce, curation and community. 5) Advice for digital content sellers and traditional media buyers to focus on loyalty, engagement, distribution and innovation

1. December 2, 2010
New York, NY

2. Agenda
I. A Look Back at Digital Content History
II. Where We Are Today – How the Landscape Is Changing
III. Advice for the Audience
IV. Quick Gridley Plug
2

3. I. A Look Back at Digital
Content History
3

4. The Web Back in the Day…
4

5. …Was Not Much Different Than Consuming…
5

6. …Offline Content
6

7. Google Might be an Exception
7

8. Snapshot of the Web in 2005
73.4 MM U.S. online Users spend 14 hours
users per week online
76% of U.S. households 48.0 MM U.S. households with
have a mobile phone broadband & broadband
Source: JP Morgan, Barclays, Nielsen penetration
8

9. Portals Were Newspapers, Commerce Players
Were Malls, and Exclusive Content Was Exclusive
Most Visited Web sites in Jan. 2005 (by uniques)
1. 6.
First
commerce
2. 7. movers
Portals, text
based media
3. 8.
4. 9. Exclusive
content
5. 10.
Source: ZDNet
9

10. Browsing and Consuming Behavior, No Change
Since the 1950’s…
Browse Consume
10

11. But Consumers Are Changing, Leading to
Accelerating Subscription Declines…
US Newspaper Circulation Volume (MM)
Post WWII boom,
circulation increased
15% from 1950-1970
Subscribers go online,
circulation decreased
5% from 1995-2002
Huge shift in
consumption,
16% decrease
from 2004-2009
Source: Newspaper Association of America
11

12. …Across All Major Traditional Mediums
% of Consumers Spending Less Time in Medium Due to Time Spent Online
Radio – 19%
Magazine – 30% Newspaper – 30%
Television – 33%
Source: Arbitron/Edison Media Research Internet and Multimedia, 2006
12

13. Wide Gap in Valuation in 2005…
Offline Content Providers Online Content Providers
Source: CapIQ,
Represents LTM revenue multiples
13

14. ...Sustained Over a Three Year Period
Indexed to 100
Stock Performance Over Time
Source: CapIQ
Digital includes: ACOM, ADAM, AOL, DIET, EDGR, HOLL, HSTM, KNOT, TSCM, WBMD, WEBM, YHOO
Traditional includes: ALOY, CBS, DIS, GCI, LINT.A, MDP, MNI, NWSA, NYT, SNI, TWX, VIA.B, WPO
14

15. AOL Time Warner: The Concept Was Interesting,
but Was an Unnatural Act
• Different growth philosophies,
different cultures, different economic
models…
• Still the largest merger in American
history; now called the worst
transaction in history
• As of the AOL spin-off, the combined
value of the separated companies was
1/7th what it was at the merger
Source: NY Times
15

16. 2005 Was the First Year We Started to See M&A
Experimentation with New Content Models
($ in millions)
2005 2006 2007 2008 2009 2010
(NBC) (Yahoo!)
(Penthouse) (AOL) (Electronic Arts)
(Canvas Technology) $619 $100
$500 $860 $391
$756
(DeNA)
(News Corp.)
$400
(Google) (CBS)
$618 $1,539 $1,870
(Disney)
(Electronic Arts) (Comcast)
$763
$730 $125
(Hellman & Friedman)
$2,408 (Google)
UGC Gaming $179
Source: CapIQ, greater than $100MM transactions
16

17. News Corp. Saw Value in Monetizing UGC
Notable Company Facts
• Launched less than two years prior to acquisition
Acquired in • “A few million dollars of annual profits”
July 2005 by
News Corp. for
$580MM
Deal Rationale
• Reach – doubles News Corp.’s web reach to 45
million uniques
• Presence in new demographic
• Strong monetization components – scale, interest
driven consumption
• Great category to build a “Media” portal
Source: CapIQ
17

18. Google Also Saw Value in Monetizing UGC
Notable Company Facts
• Started 18 months prior to acquisition
• YouTube had 65 employees at the time of
Acquired in acquisition
October 2006
by Google for
$1.65BN Deal Rationale
• Platform to create a new media platform
• Ability to build new advertising models for video
• Strong social components
• Cultural fit
Source: CapIQ
18

19. CBS Stayed a Bit Closer to Home, Buying
“Premium” Online Content
Notable Company Facts
• Business worth $12BN in 1999
• Acquired numerous companies from 2000-2004,
including MySimon ($700MM), ZiffDavis ($1.6BN) and
WebShots ($70MM)
Acquired in May
2008 by CBS for Deal Rationale
$1.8BN • Reach – CBS became a 10 top web properties with deal
• Valuable assets across software (download.com), food
(chow.com), gaming (gamespot.com), shopping
(mysimon.com), music (MP3.com), Video content
(TV.com), and others
• Most properties have seen large contraction since
acquisition
Source: CapIQ
19

20. NBC Also Stayed a Bit Closer to Home, Buying
“Premium” Online Content
Notable Company Facts
• Company was near bankruptcy two years after its
1999 IPO
• 41st most visited web site on the internet in the U.S.
in 2006
Acquired in
• #1 women community site and #4 overall
May 2008 by
community site on the web
NBC for
$600MM • Was thought to have been acquired at a “premium”
multiple
Deal Rationale
• Complimentary demographic – reaches their core
audience online
• Established online scale for NBC
• iVillage has grown from 14MM (pre acquisition) to
over 34MM unique visitors
Source: CapIQ, company filings
20

21. M&A Has Been the Primary Liquidity Opportunity
for Digital Content
Top 5 Digital Content Only a Few $1BN+ Independent Digital
Deals in Past Five Years Content Business in the Market
1. $1.9BN $21.1BN
2. $1.5BN $3.0BN
3. $963MM $2.6BN
4. $860MM $1.3BN
5. $756MM
“Strategic” M&A IPO (Mkt. Cap at IPO)
Source: CapIQ
21

22. Multi-Billion Dollar Media Deals Were Primarily
Acquisitions of Offline Businesses
M&A IPO
• IPO Date: 11/19/09
• Date: 12/3/09 • IPO Market Cap: $187MM
• Value: $22.9BN
• Date: 5/1/07
• IPO Date: 10/31/07
• Value: $5.8BN
• IPO Market Cap: $3.1BN
• Date: 11/6/06
• Value: $24.3BN • IPO Date: 11/10/05
• IPO Market Cap: $6.3BN
• Date: 3/12/06
• Value: $6.7BN • IPO Date: 9/28/05
• IPO Market Cap: $963MM
• Date: 1/24/06 • IPO Date: 5/10/05
• Value: $7.6BN • IPO Market Cap: $2.4BN
Source: CapIQ
22

23. Historical Key Deal Themes
• Healthy level of experimentation mostly from traditional media
buyers
– Many traditional media companies bought technology companies
and turned them into media businesses
• Category leadership was #1 priority
– If you bought a vertical leader, the view was that you owned the
category – May have worked offline, but not online
• Valuation discovery period for UGC
– Little appreciation for opportunities to build and monetize UGC
23

24. II. Where We Are Today – How
the Landscape Is Changing
24

25. Consumer Behavior Shift
Social is onramp to content and
products
Depth and breadth of high quality
content
New forms of entertainment
competing for consumer time
PC feels a little old
Source: JP Morgan, Nielsen
25

26. Anyone Can Become a Content Company
26

27. Digital Environment is a “Little” Fragmented
Brand Driven
27

28. Offline vs. Online Content Valuation Snapshot
Offline Content Providers Online Content Providers
Source: CapIQ
28

29. Nowadays, Scalable Digital Content Companies
Command Premiums in the Market
Indexed to 100 Stock Performance Over Time
Source: CapIQ
Premium Digital includes: ACOM, WBMD, YHOO
Other Digital includes: ADAM, AOL, DIET, EDGR, HOLL, HSTM, KNOT, TSCM, WEBM
Traditional includes: ALOY, CBS, DIS, GCI, LINT.A, MDP, MNI, NWSA, NYT, SNI, TWX, VIA.B, WPO
29

30. Buyers Much More Focused on Smaller Digital
Content Assets in Today’s Environment
Digital M&A: Content Digital M&A: Non-Content
2005 - 2006 2007 - 2008 2009 - 2010
Total Digital Deals 37 48 41
Digital Content Deals 12 15 8
% of Digital Deals over $500MM that are “Content” related
50% 38% 7%
Source: CapIQ
30

31. Part of the Problem
VS.
Brand Buying Audience Buying
31

32. Fragmentation on the Demand Side Doesn’t Help
32

33. Content Consumption Model is Quite a Bit
Different Today
Drivers of Influence Content Enlightenment Acknowledgment
The Network
Converse
Science Play
Opine Tweet Tag
Curation Watch
Review “Like” Check-in
Incentives Read
Rank
Location
Revenue Acclaim Loyalty Intelligence
33

34. Billion Dollar Businesses Are Created by
Engagement and Business Model Innovation
Users (MM)
Founded Jul. 06 Founded Jul. 07 Founded Nov. 08
175.0
* No. of daily active users
Curated Information Entertainment Shopping
Source: NYTimes Source: Zynga Source: Groupon
34

35. Common Themes Across Valuable Content
Franchises
Creation of New
Business Model The Network
Virally Driven in Recent Past Dictates Value
  
  
  
 

35

36. Emerging Digital Content Models
• Local + demo targeted + commerce
• Email drives high engagement
• Acquired JackPaul Holdings, Inc., an online retailer for
apparel, shoes, and accessories, on May 13, 2010
• High quality UGC content +real-time + community
• Professional Q&A community, further lowers constraints
for professionals to share domain knowledge
• Received $11MM in funding from Benchmark Capital in
March 2010, valuing the company at ~$86MM
• Crowdsourced + global perspective at local level
• Submission, acceptance and placement of content all
technology driven
• Raised $3MM in a round of funding led by VantagePoint
Source: TechCrunch, CapIQ Venture Partners in January 2010
36

37. Three Pillars of Content Value
Optimal Value
Integrated marketing
Distribution
Scarcity
37

38. Technology Driving More Monetization Channels
Commerce
Advertising Syndication
Content
Economics
Game
Subscription Mechanics
Paid Links
38

39. How Integrated Will Content Be With Commerce?
Discoverable (SEO)  Higher
Engagement
Viral
 Greater Content
Stickiness
Tailored
Engaged  Higher
Consumer Yield
39

40. Opportunities to Reinvent Digital Content
Static One to many Drivers of change More personalized Richer
• Lower barriers to buy,
consumer, share
• Flexible, cost-effective
applications
• Rapid deployment of
new technologies
• Ability to create new Location aware Interactive
Established economic precedent experiences
New Distribution Channels = New Revenue Models
40

41. We Are Already Seeing This in Mobile…
’08E Rev. Mix for Top 50 Global Internet Companies ’08E Rev. Mix for Global Mobile Internet
30% - Users Pay for Instant Access 76% - Users Pay for Instant Access
Digital
Content Digital Content
(Music, (Wallpaper, Ringtone,
Video...) 5% Games, Music…) 54%
Source: Morgan Stanley
41

42. …and eReaders
“Amazon customers buy 3.3 times as many books after buying a
Kindle, a figure that has accelerated in the past year as prices for
the device fell” – WSJ, Aug. 2010
US eReader Consumers (MM)
Color available
Animation, $99 price point
more wireless
devices
Full-frame video
More brands available
appear
More content $199 price point
available
Source: Forrester Research, May 2009; Wall Street Journal, August 2010
42

43. Good or Bad?
43

44. Scarcity of High Value Content
Demand Media creates ~1.5MM pieces of
content per year
5 bullets, no comments, mostly ads 5 pages, >50 comments, rich media, few ads
Source: WIRED, eHow
44

45. Key Ingredients of a Valuable Content Enterprise
Engagement
Science
Mechanics
Multi-Level
Monetization
Distribution
Innovation
Quality
45

46. III. Advice for the Audience
46

47. To the Sellers
• Billion dollar businesses are created in today’s environment
– But it is more about true value vs. perceived value
• Loyalty at scale is a powerful barrier
– If you have it, keep it at all costs
– If you don't have it, creating it is not only about the content
• If you aren't risking the business frequently, you won't get there
• The buyer universe for digital content will continue to expand
47

48. To the Traditional Media Buyers
• Acquiring teams is as much or more important than the asset
– “Synergies" is not just a financial concept
• Early stage today can quickly become scalable and profitable
tomorrow
– Staying close to early stage companies should be a strategic
priority
• Fight for good assets
– Paying a bit more won't matter if you execute on your strategy
48

49. To the Tech Buyers
• The lines between a content company and a tech company will blur
over time
• Creative talent is as scarce an asset as engineering today
• There are billion dollar content driven businesses being built today
• You can be the favored buyers because you understand
technology growth drivers
49

50. To the Investors
• Innovation in digital content is happening across content
development and delivery chains
• Quality vs. Quantity - quality content is worth paying for
• Social, local, scalable, and real-time will drive content value over
the next five years
50

51. Predictions
• Content economics environment will get much better over the next
three years
– New channels will open new revenue models
– New mechanics will be applied to drive more revenue from existing
channels
• Larger distinction and value attributed to “quality” content
– Both UGC and professionally created
• More value will accrete to multi-faceted revenue models vs.
traditional advertising and/or subscriptions
51

52. IV. Quick Gridley Plug
52

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55. Gridley Conference Content Panelists, Presenters,
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55

56. Linda Gridley
Gridley & Company LLC
linda.gridley@gridleyco.com
212.400.9720 tel
Twitter: @gridleyco
www.gridleyco.com
56