DG's decision to sell its linear TV ad delivery business to video ad management company Extreme Reach for $485 million (with a possible $40 million equity investment in ER by DG) reflects a view that the real opportunity in video convergence comes from the digital side, not the traditional one.
It's a pretty big gamble. After all, no one thinks that the $75 billion TV ad market will lose share to what the IAB currently estimates is the $4 billion online video space any time soon. But there's no denying that's where the growth is. Beyond that, by selling its TV assets to ER, DG is also acknowledging that there's no sustainable business in being the middleman delivering ads to broadcasters and cable MSOs.
That TV business is worth about $220 million in annual revenues to DG right now, CEO Neil Nguyen and EVP Andy Ellenthal noted. Which leaves the more immediate question: can digital alone bring DG back to being a $400 million company?
"Our online revenues grew 20% in Q2 and they've been growing by double digits since we bought MediaMind in 2011," Ngyuen said. "That's been organic. And we expect those growth rates to continue for the next few years."
Although the TV assets brought in half of DG's revenues last year, Nguyen and Ellenthal say that business would hold it back over a period of years. So jettisoning it accomplished two things in their view: one, it gets them out of the "plumbing" business, as ad delivery is not a differentiator in programmatic.
Secondly, the sale will immediately allow it to get rid of the heavy debt load the company carried the last few years – at the end of Q2, the company owed almost $400 million – that it had used to build the online offerings, which include MediaMind for $414 million, which was followed quickly by the $66 million purchase of rich media firm Eye wonder from Limelight Networks, and semantic ad technology provider Peer39 last year for $15.5 million. Unicast, another rich media firm, was also bought by DG as it sought to build its digital presence.
"As we put together these various assets over the last few years, we clearly believed that owning the plumbing system and the TV asset was a strategic position for us to have," Nguyen said. "But as we began to integrate those businesses, we saw that there was a lot of opportunity to approach a multiscreen strategy without owning the TV asset and the plumbing system for linear TV delivery."
DG also wants to make clear that although it's out of the direct TV ad business, it's still able to position itself for the emerging online/TV video convergence. To capture that opportunity, DG will concentrate on providing IP analytics to clients, a service that's largely separate from actual ad delivery.
"We see our business as being about delivering ads to consumers, not to publishers or to, as in the case with TV, stations," Ellenthal said.
The focus on the expanding online video marketplace makes sense. But the challenges also seem obvious, as the space is increasingly crowded by various video ad networks and programmatic marketplace operators.
"When we look at companies like Tremor Video and YuMe, our metrics are right up there and we're one of the bigger online video ad servers in the world. That's important because, compared to our digital competitors, we're just getting started. And unlike a lot of our competitors – we're already profitable."
Nguyen and Ellenthal expect to quickly expand into mobile and social over the next year and capture the growth in video that's starting to develop in those two areas. Aside from building plans and its current profitable state, Ellenthal also pointed to DG's ability to work with other video ad platforms and providers to extend its analytics and campaign tools. "Aside from not being in the plumbing business any more thanks to the sale to ER, we're not selling or buying media either, which allows for many kinds of partnerships and collaborations throughout the digital market," he said.
The sale to Extreme Reach won't close until early next year, so DG will concentrate on completing the integration of its digital businesses before making its next steps. The individual brands it acquired are being retired, said Ellenthal, who arrived at DG as CEO of Peer39.
While video is certainly hot right now, DG was also close to a deal with Extreme Reach last year that was estimated at $550 million, though Nguyen dismissed those reports, saying, "Don't believe everything you read."
He added that if there was a deal to be had last year, he would have taken it and DG's board would have taken it. Still when asked why this deal happened now, he pointed to Extreme Reach's $50 million funding from Spectrum Equity in May.
"When it was clear that ER had the backing to complete the deal, they were able to convince our board that this was worth doing," Nguyen said. "It was that simple."