January 21, 2020

Buying Media Companies for Audience… or Vice Versa

A couple weeks ago, Peter Kafka at Recode reported that Penn National Gaming was looking to acquire Barstool Sports. He wrote:

The deal would tie Barstool, a well-known company with a passionate audience, to a casino company you may have never heard of, which is part of the logic of the tie-up: Industry observers expect Penn National, which operates properties like the Hollywood Casino in Bangor, Maine, and the Greektown Casino-Hotel in Detroit, to adopt the Barstool brand for at least some of its operations.

The rationale for the acquisition is straight forward. Penn National, which no one knows about, expects to see additional competition for new customers as online gambling is legalized across the United States. Especially with gambling, customer acquisition costs are high, so finding an organic way to gain customers is a smart play.

Enter Barstool Sports. Say what you will about the founder, Dave Portnoy, but CEO Erika Nardini has done a strong job growing this business with some people suggesting it’s already pushing $100 million in revenue.

Kafka explains:

Barstool already has a Barstool Bets site, which publishes sports-betting stories and videos, and runs free sports-betting games; the company also has deals to direct its users to betting operations like MGM Resorts.

So, what we have is a product company (Penn National) now looking for a way to bring tens of millions of potential customers to those products and realizing that a media company (Barstool) already has those prospective customers. It’s a smart play.

There’s no denying that the rise in direct-to-consumer businesses has seen a serious jump in customer acquisition costs. Early DTC brands built their entire business on the back of Facebook’s incredible ad targeting. Today, you can’t even open Instagram without seeing a dozen different products being marketed.

Unfortunately, the ease in which these brands launch has resulted in a lot of competition to get customers. In this Modern Retail report:

The online retail adage of 2019 has certainly become “CAC is rising.” It’s more expensive now to run ads on Facebook, Instagram and Google than in recent memory. Meanwhile, a bunch of businesses rely on these channels for growth.

There are plenty of media brands that are stuck in this middle ground where they have a decent sized audience, but don’t have the scale they need to really push to the upper levels of media business. I’ve compared these to the middle of a barbell. They’re not niche enough, but they’re also not large enough.

But if they have a loyal audience, that might be enough. For larger DTC brands, could they start looking to acquire these media brands that might, in turn, help push customer acquisition costs down?

I think it’s possible. However, I believe that the publisher, for the first time ever, is in the driver seat. This time, publishers might be buyers.

How would that work?

As publishers start to spend more of their time learning about their audience, they’re going to start learning about what their needs are. For example, a parenting website probably has parents trying to figure out what baby food is best.

In the past, the parenting website would simply advertise various baby foods. It’s not in a publisher’s DNA to create food. However, by purchasing one of these DTC baby food companies, the publisher doesn’t have to worry about creating the product. Instead, they are able to focus on building the audience and have a separate company that is focused on building the product.

Ironically, we saw this happen in the gambling world. In May 2019, Bloomberg reported that Fox had purchased 4.99% of The Stars Group for $236 million. Bloomberg reported:

The companies will jointly launch Fox Bet later this year, offering two products designed to stake a claim in the growing world of online betting. One will be free to play, offering customers cash and prizes for predicting the outcome of sports games. The other will offer the chance to place real money wagers in states with regulated online betting.

Additionally, Fox Sports within the next 10 years will have the right to acquire up to 50% of Stars Group’s U.S. business. Domestic sports betting, online casinos and poker could become a $9 billion revenue market by 2025 when wagers, sponsorship and advertising are all tallied up, Fox Sports CEO Eric Shanks in an interview.

Fox has the audience. As opposed to Barstool, which might get purchased, Fox decided to buy the product that its audience wants.

Purchasing is obviously not a necessity, but I see a lot of publishers trying to emulate what Complex and Buzzfeed built with their commerce initiatives and fall flat on their face. It’s just not in their DNA.

It’s not as simple as buying a brand and selling goods. Acquisitions are hard and most of them, ultimately, fail. But if the primary thing these DTC brands want is a less expensive audience, how does that give DTC leverage over the publisher?

It should be a fun 2020 to watch all of this unfold.