The $525 million sale of digital ad management provider DG's TV ad distribution business to rival Extreme Reach is not just about freeing the Irvine, TX-based company from heavy debt incurred by acquisitions designed to build its online capabilities. It's also about taking better advantage of TV-digital convergence by staking out a position solely on the interactive side.
DG CEO Neil Nguyen repeatedly said as much on an analyst call this morning, following the sale announcement. But DG has major challenges ahead as it waits for its sprawling array of digital businesses to pick up lost revenue from TV ad operations in the interim. Plus, with a wide range of clear online video players already much better positioned in the area of video convergence and online ad workflow, DG has its work cut out as it migrates to being a "New Online Company" after the deal closes in the first quarter of 2014.
"I'm confident this is the best way forward for both the online and TV businesses to reach their full potential, though clearly, this was a difficult decision," Nguyen said.
To be sure, TV operations comprise half of DG's revenues and that loss could be devastating, at least in the short run. While online has grown to 50% of DG's revenues from just 8% three years ago, it was debt-fueled acquisitions that got it to that point.
In particular, while DG did possess some strength in the digital marketplace, it wasn't until the July 2011 $414 million acquisition of ad tech firm MediaMind, which added a number of sales offices and expanded its global reach, that boosted its online presence. That deal, along with the purchase of Enliven Marketing Technologies five years ago, has also contributed heavily to DG's heavy debt load. It's not clear that DG, hamstrung by those debts, has advanced those businesses, or that of other digital holdings such as EyeWonder, Unicast and Peer39.
Nguyen cited those three businesses in particular as the foundation of the new company DG will become.
"It's important to recognize that with this announcement, we are not abandoning this belief and the role we expect to play within the convergence of media and emerging TV-related video channels," Nguyen said. "We are even more committed to video distribution across all media channels and believe that ultimately, linear programming content will be delivered over IP. This coming change will allow us to continue to leverage our remaining assets in much the same way we work with clients in online display today."
Of course, it can't escape notice that DG could have done a slightly better deal with video ad services rival Extreme Reach last year, but it decided to reject it at the time. Extreme Reach was started by executives of DG's earlier incarnation and has strictly focused on the TV market. And Extreme Reach CEO John Roland has a different view of how convergence ad dollars will flow between TV and online from DG's Nguyen.
As Roland told us a few months ago, he doesn't expect TV ad budgets to move online in any significant way. If he's right, the addition of DG's TV assets will make Extreme Reach stronger and could weaken DG as it competes against a multitude of others also waiting for the great migration of TV ad budgets to shift to digital.