Crossover Dreams
ALL IT A HOLDOVER from his musical career, but Ron Altbach knows how to grab a listener’s attention. The attendees at a recent investment breakfast were primed for yet another boring talk on multiples when Altbach, the CEO of Cross Media Marketing Inc., veered from the script.
“You might only know us because of a recent FTC complaint alleging overwhelming deception and fraud,” he said. “As you can see, I’m a pretty fraudulent guy.”
Granted, he doesn’t look like a fraud — in his conservative suit, in fact, Altbach resembles an investment banker nearing early retirement. But the comment was an eye-opener for the DMers in the audience, most of whom knew little about the firm.
But they soon learned what investment analysts already know: that Altbach, a former sideman with the Beach Boys, has created one of the fastest-growing direct marketing businesses in the country. And he has done it by acquiring companies that, for the most part, nobody else was interested in: a magazine subscription agency with an FTC consent decree to its credit; a mail order operation with a graying audience; and an online membership firm with $24 million in cash and $70 million worth of technology, but no sales to speak of.
And despite annoyances like the FTC lawsuit and the fact that the stock is hovering around $10, down from a high of $13, Cross Media seems well on the way toward its goal of becoming a $500 million media giant in 2004. The firm doubled its revenue to over $100 million in 2001, and it expects to more than double it again this year. And last year, it reported net income of $8.8 million — not bad for a outfit that was started only 2-1/2 years ago.
The audience was impressed. Fellow panelist Glenn Kauffman, whose firm, American Securities Capital Partners, owns at least one DM company, joked, “I’m going to talk to Ron about buying his.”
But that may turn out not to be a joke.
We are sitting in the New York headquarters of Cross Media. It is on the 19th story of a modern building, overlooking the New York Public Library. Perhaps reflecting the interests of its CEO, copies of the Daily Deal and Rolling Stone are strewn around the waiting area.
Altbach is joined in the conference room by Steve Gerber, senior vice president, marketing, whose presence also attests to the dual nature of this company. Altbach is a baby boomer. Gerber is a DM-savvy thirty-something who worked for Hotsocket. At one point in the interview, Altbach excuses himself and says, “Since Steve is the direct marketer, and I’m just here as an appendage, I have a lawyer calling I must take care of.”
They start by describing their firm’s far-reaching media grasp. Cross Media is the largest Sunday advertiser in the United States, reaching 62-million homes per week. Each month, it sends 200 million individualized e-mails, handles 300,000 credit card transactions, and rents six million names for calling and mailing.
But these details, which seem to shift from month to month, are less important than the master plan. Altbach hopes to integrate the various elements, brand them as Cross Media, bring value to consumers, and become “an important part of the American direct marketing landscape.” Central to that goal is the firm’s crown jewel: its 25 million-name database (actually, several databases, which it is now trying to integrate), which will enable it to cross-sell.
Altbach alludes to the art and science of direct marketing. But he admits, “I wish I had the science part of it down a little more when I was an artist.” And that is a tale in itself.
Altbach, a doctor’s son, grew up in Buffalo, NY, and showed musical ability early on. He graduated from Cornell, then studied piano in Paris with the world-renowned teacher Nadia Boulanger. “The people who went through her classes all came out tortured, beaten and greatly enriched by the experience,” Altbach says.
To the chagrin of his parents, though, Altbach went into rock and roll. He and some Cornell buddies formed a group called King Harvest, and in 1973 scored a top-20 hit with “Dancing in the Moonlight.” (“We were a one-hit wonder,” he jokes.) After that, he played keyboards with the Beach Boys for five years, and in 1978 produced the group’s “M.I.U.” Album (described by group leader Brian Wilson as “a total flop”).
A photo of Altbach onstage shows him with a full head of hair and a mustache, the very picture of a ’70’s rocker. But he grew tired of touring, and as it happened, there was a businessman inside fighting to get out. In 1980, he started a record production company, and that evolved into a publicly traded movie production firm: Mediacom Industries, Inc. It made films like “Blueberry Hill” and “Nights in White Satin” for a small amount of money and “sold them for a little bit more,” Altbach says. A.J. Cervantes, who now handles corporate communications for Cross Media, was CEO.
But the bottom fell out of the indie movie business. And in 1993, Altbach moved to New York and started his next career: as an investment banker. He joined Rosecliff, a merchant bank specializing in leveraged buyouts, and learned the business from its founder, the late Peter Joseph. But that palled, too, and he decided to if he was going to pursue opportunistic investing, he should limit it to one field.
That had to do with the nature of the investment candidates. “In the end there are two or three firms out of 10 that are really spectacular, and there are two or three that don’t work at all.” At the latter, moreover, “there’s not much consideration about the employees, or the products, and I found that to be slightly not suited to my character.”
But why direct marketing? He saw a vacuum: Too many firms were looking at their customers as transactions and not as long-term assets. And smaller firms — those with under $100 million in sales — ”were not really utilizing technology to the extent they could have,” he says.
Altbach admits that he did not have a shred of DM experience to back this up. But he had friends like David Pecker, then CEO of Hachette Filipacchi, who explained the magazine subscription business to him, and Mark Byron, the CEO of Mosaic, the parent of Paradigm Direct, an early inspiration for Cross Media. He also spoke to Earl Greenburg and Joel Margulies of Transactional Marketing Partners.
Altbach formed a public company named Symposium late in 1999, and early in 2000 acquired the assets of Direct Sales International, an Atlanta-based magazine subscription agency, for $28 million. How did he pay for it? “It was mostly funded with debt,” he says. “That’s what I knew how to do from my merchant banking days.”
And what did he buy for that money? DSI, which sold subscriptions by phone, had $53 million in revenue, and profit of $8 million. But it lacked “management depth,” according to Altbach. Not that Altbach had it: He started out with no employees because “I don’t believe in building a big infrastructure until there’s a need to do so.” Soon, though, he was joined by COO Richard Kaufman, another baby boomer, and by young DMers like Gerber and Andy Nelson, senior vice president of sales, who came over from the infomercial business.
Altbach changed the name of the firm to Cross Media, and the team started trying to leverage DSI. The Atlanta call center and independent agents now handle two million calls a month, half inbound and half outbound, and the firm expects to sell between 6 million and 8 million magazine subscriptions this year.
Leads are generated by outside companies through various means, and the subscriptions are sold by Cross Media during so-called verification calls. The typical customer buys a package of magazines — i.e., the women’s package, the sports package, the entertainment package — for prices ranging from $400 to $600.
Cross Media is an important source of high-quality subs, according to circulation consultant Dan Capell. “They’re one of the four or five biggest, a major player,” he says.
“We produce a fully paid subscriber,” Gerber adds.
But DSI execs had long ago concluded that a 15-minute phone call with a willing customer shouldn’t be wasted only on verifications. So the firm has offered people who become subscribers “the opportunity to become a Member Works customer as well,” Altbach says. This upselling produces 60,000 trial memberships per month, and contributes with the firm’s other continuity programs toward generating $15 million in revenue this year.
With that acquisition under his belt, Altbach concentrated on his next move. He had to pull back on at least one announced purchase — that of NSI in 2000 — because conditions just weren’t right. Then he simplified the “complicated capital structure that I created,” and investment analysts started getting regular announcements about new deals. And those who dialed in heard terms like “immediately accretive,” and “no long-term debt.”
Harry Chevan, of Gruppo Levey & Co., notes that Cross Media specializes in picking up good companies that nobody else is much interested in. And Altbach agrees. But there was one exception: Lifeminders, which Cross Media acquired for $68 million last year; the firm went through 60 suitors, according to Altbach. Just what is Lifeminders? As board member Jonathan Bulkeley put it in 2000, “You give them your e-mail address and tell them your interests, and they send you e-mails with customized advertising — just for you.”
Of course, even Altbach admits that Lifeminders never amounted to much. But Cross Media got technology, 20 million member names (half of which were inactive), and $24 million in cash, which it used to finance its next purchase. It also picked up the firm’s technology and product management teams, including some people who had been let go in a downsizing before the sale.
But what do you do with a company that is, in essence, a failed dot-com? Cross Media, having gained access to its second channel, launched a major overhaul in March. It spent roughly $500,000 on online advertising, which helped in pulling in 400,000 new members by mid-June, and is expected to hit up to 3.5 million by the end of the year.
Moreover, it took the original 22 categories and distilled them down to three: Travel, health and home: All three feature triple opt-in newsletters. Soon it will add personal finance and entertainment.
“We’ve taken Lifeminders, which was really a media company, and turned it into a database marketing company,” Gerber says.
Toward that end, Cross Media started Intelligent Mailbox, a daily news service that consists of two products. The first is a celebrity gossip newsletter called the Daily Dish, which is produced in partnership with the National Enquirer. Another is a trivia newsletter. Between them, they go to 15-million people a month — mostly to inactives and people who have requested them. Nelson says the firm is also working on an online data capture service for marketers.
Altbach points out that it is still too early to determine the success of the relaunch, but does say that “the interactivity metrics have gone up.”
That was the start of a very busy nine months. Early this year, Cross Media acquired National Syndications Inc., a firm with $55 million in annual sales, for $19 million. This put it into the collectibles business, and into its third channel: direct response space. And this spring, it purchased JWE Enterprises, a rival magazine subscription agent with a strong team of trainers and call-center managers, for $10 million. Nelson admits there was some mild culture clash at the first joint meetings of the units. “When we first came together, everyone’s terminology was so different that we wondered if anyone knew what everyone was saying,” he laughs.
But all was not well in the Cross Media empire. On April 9, assistant Cathleen Bell entered Altbach’s office and told him his attorney was on the phone. It was bad news: the Federal Trade Commission filed a lawsuit against the firm, also naming Altbach and DSI founder Richard L. Prochnow as defendants.
There wasn’t much time to digest the information — the FTC wanted a temporary restraining order, and there was a court date in Atlanta the next day — so the firm went into crisis management mode. Kaufman flew to Atlanta to prepare the lawyers. Altbach stayed in New York to hold a conference call with investors, and to rally the troops. He admits that he was shaken.
“I’ve been involved in civil litigation, but I’ve never had the Justice Department call and say we’re suing you personally, and the company,” Altbach says. “Obviously it’s traumatic.”
Cross Media managed to get out a fast press release that day and scoop the FTC on its own story, and the court failed to issue a temporary restraining order. But the stock price fell on news of the lawsuit, and the charges were serious ones.
For one thing, the FTC alleged that the firm’s postal mailers invite consumers to enter sweepstakes “and do not disclose that the purpose is to sell magazines.” In addition, Cross Media fails to disclose the total cost of each magazine, the down payment required, the number of all subsequent payments, and the right to cancel within three business days, the FTC adds.
(Altbach notes that the company sends no postal mail for its magazine subscriptions — that’s done by independent agents.)
The FTC also accused the firm of billing consumers for magazines they did not order, or in amounts they did not agree to pay, and of failing to honoring cancellation requests.
How does Altbach plead?
“We think all of the FTC allegations are completely without merit,” he says. “If they had taken the time to speak with us, to come in and do an investigation as opposed to coming and smashing us in the teeth with a hammer, it would have been a better process.”
What would they have found? That “we obey the law, that we have always obeyed the law, and we don’t deceive anybody,” he says.
Case in point: Out of 18 consumer complaints cited by the FTC, two were by non-customers and one was from a woman who had been injured in an auto accident, and wanted to cancel her subscriptions. Cross Media offered to refund her money, but “apparently she had trouble getting through a couple of times, so she complained to the Better Business Bureau,” Altbach says.
In any event, all of the firm’s verification calls go into great detail about the sale. “We talk to you about what you want to buy, how much you’re paying for it, and what your credit card is,” Altbach says. Moreover, the calls are taped. If someone threatens to call his lawyer because he never ordered the magazines, “We say, ‘That’s fine, you can call your lawyer, but we just want to play you your own voice telling us what you bought,’” he adds.
But what about the other charges in the filing, like the one about Cross Media’s agreements with “one or more third parties” to sell memberships in buying services?
The FTC alleges that Cross Media has failed to disclose that it will provide the consumer’s name and credit card number to the third party for billing, and that consumers have had their cards charged without authorization.
Altbach argues that such practices run counter to his company’s mission.
“We’ve attempted to build relationships with consumers,” he says. “So we clearly don’t want people buying from us if they don’t know what it is, and they’re going to be unhappy.” He adds that the company’s charge-back level is under 1%.
But fallout from the case resulted in a 10% to 15% sales dip in May in the magazine area. “Our sales structure, I would say, trembled,” Altbach says. “Our people tend to be low-wage people working on phones. And when they hear in newspapers and TV that they’re working for a deceptive company — that’s not a good thing for their confidence.”
In May, the company held a sales meeting to explain things and motivate the troops. Sales had recovered by mid June. “The guys at JWE are helping us with this. The results are back to normal.” And Cross Media is working with the FTC to clarify what it wants, and settle the case. Fortunately, “they’re not insisting on any kind of dramatic or draconian action right now, or asking us to change business practices in ways that we hadn’t already changed them before the action,” Altbach says.
Meanwhile, Cross Media has stopped working with Member Works, and is now offering customers a discount buying service with Qwest, Altbach reports. Was it because Member Works has had several regulatory actions against it?
“It’s just a business process,” he answers. “Companies fall out of bed with each other.” (Despite the breakup, the ongoing memberships produced with Member Works will still produce “a significantly monthly distribution,” and will until they expire, according to Andy Nelson.)
Assuming that it straightens out the FTC mess, most analysts expect Cross Media to succeed. “At this point, they haven’t dropped the ball on anything,” says Michael Petsky, president of Petsky-Prunier, which sponsored the investment breakfast. Altbach is “capable of putting a lot of agendas in motion, then picking up one that’s live.”
“They’ve done really well,” agrees Tim Stobaugh, an analyst with Dallas-based Stonegate Securities Inc. “It seems like they paid reasonable multiples for the companies and that the overall strategy is good.”
The key to Altbach’s multichannel dream may lie in firms like NSI, that have both channel and product expertise. Although an initial attempt to buy NSI fell through in 2000, the sides stayed in touch, and “one day we got a phone call — one of those great phone calls” says NSI founder Bud Pironti.
NSI’s office is only 12 blocks away from Cross Media’s, but it might as well be on another planet. It is located in a angular building between Broadway, Fifth Avenue and 27th Street. Walk down the halls on a given floor, and you will see showrooms featuring everything from fabric to four-poster beds.
Entering the NSI office, one sees a multicolor poster featuring stock mail order phrases, like “Free,” “Order now while supplies last,” “Limited edition,” and “As seen on TV,” etc. Pironti is just about Altbach’s age, and like him thin on top, but there the similarities end. Pironti, who took his MBA at New York’s Pace College, started his career at Parade magazine, selling specialized advertising booklets. Later, he created a mail order division to fill remnant space in the Sunday supplement.
In 1985, Pironti and a partner bought the division from Parade for a few hundred thousand dollars, and contracted to fill the leftover space. “NSI secures advertising rates substantially below those offered to other advertisers by agreeing to purchase all advertising space unsold at press time under short notice,” Pironti explains in a written description.
Counting additional contracts from USA Weekend and American Profile, that amounts to roughly $10 million worth of space per year — “a pretty healthy obligation,” one that inspires weekly fear, according to Pironti.
To fill those pages, which vary in size from fractionals to fulls, Pironti offers products under the Publishers Choice banner. His all-time winners include a multipurpose wrench, “Victor Borge’s Greatest Hits” and a replica of Lady Diana’s engagement ring.
And that’s quite a job — on a given Sunday, he may be offering 20 or 30 different items, throughout hundreds of Sunday papers, and he conducts 200 product tests a year. The cycle? “You get 50% of all your phone orders by Tuesday, and one third of all your mail orders by Friday.”
NSI has developed some products itself, but most come from outside sources. For example, Pironti approached TV advertisers about bringing their products to print, and had a long successful run with them.
But that source started drying out a few years ago. “These guys are moving towards retail as an end-all, and the shelf-life that we have to work with is unfortunately getting smaller,” Pironti says. So the firm has diversified into continuities, and into consulting for firms like Publishers Clearing House. It also did bank-card inserts for a time.
Only half of NSI’s revenue now comes from space sales, the other half from continuities. And it has moved beyond space: It now owns a call center in Jacksonville, FL, and mails 5 million catalogs a year. But its audience — middle Americans, age 55-plus — is graying. And Pironti felt he needed a parent like Cross Media to grow.
Pironti now heads Cross Media’s direct marketing division, which means he’s in charge of all cross-selling and aftermarketing to customers. NSI’s call center rings up 20,000 to 30,000 telemarketing hours a month, cross-selling collectibles to Cross Media’s magazine subscribers. A more limited amount of selling is being done in reverse.
These cross-sales are “five or six times more efficient than our normal sales,” Atlbach says. And he expects them to contribute $15 million in lifetime value over the next 12 months. And that may be only the start, for Cross Media has started offering collectibles and magazine subs to Lifeminders subscribers via e-mail. The beauty of it is that there is little duplication between the files (most Cross Media customers are middle-market marrieds with kids). And it also sells other third-party services — like telecommunications — to customers.
By rough estimate, up to 60% of Cross Media’s revenue is generated through telemarketing, 30% via print and the balance through online media, but that ratio is likely to change. For one thing, the company will spend $50,000 on a fall TV test to offer NSI-type collectibles. Gerber sees an “eight-figure business opportunity” in DR TV.
One thing is for sure: whatever it’s current shape, the company will be different by the end of the year. At deadline, it was working on another acquisition that would give it channel expertise and product expertise, and Altbach also hopes to acquire a database management or list firm. “At some point, companies have to be bigger, especially in the public world,” he says. “We need to get to half a billion in dollars in sales. And how you do that generally is through mergers.”
How would he describe the perfect acquisition? It would be a firm with revenue from $50 to $100 million, and pretax profits of $5 million to $15 million. “It could be an entertainment company or a marketing company with specific focus on one to one sales and marketing,” Altbach says.
In time, Cross Media itself might well be acquired. “I think that sometime relatively soon, within the next two years, we’ll do something big in combination with another business so that we’ll be a substantial company.”
And what would Altbach do in such a scenario? “Luckily, I’m old enough to not be too worried about my personal future,” he says. “If we continue to build the company at the pace we are, I would think that at some point there’ll be a director, somebody with real sophistication in one-to-one marketing, who will be the CEO of the company.”
But don’t worry. Altbach, who just got a $17,000 royalty check for “Lady Linda,” a British hit he wrote with Beach Boy Alan Jardine, has something to fall back on.
