Digital Thoughts – Part 1 – A, B, C, D, eUniverse
Less than a week after announcing that it had settled its spyware related trespassing lawsuit with Elliot Spitzer, Intermix Media again made headlines. This time, though, the headlines involved Intermix gaining a substantial amount of money as opposed to having to pay it. In what can be called another case of a traditional media company snapping up an Internet player, or even one company’s attempt to build a new Internet empire, the recent sale of Intermix to News Corp for roughly $580 million dollars should certainly be called amazing. And, while Intermix Media reaches tens of millions of users per month, most people believe the sale revolved around Intermix’s majority stake in social networking site MySpace.com. In this week’s Digital Thoughts, we look at a tale of two companies, in a special two part issue. In Part 1, we look at the incredible story of Intermix, while in Part 2 we cover the current phenomenon, MySpace.
The story of Intermix is one worthy of its close to Hollywood location, a fascinating story both financially and operationally. Founded in April 1999 by UCLA buddies Brad Greenspan and Brett Brewer, they raised $7 million to buy the music retailer CD Universe, and then went public by "reverse merging" into the shell of a defunct company. Being a music etailer did not last long. Selling CDs online makes little profit and leaves no ability for easy growth. Thus, about a year after they purchased CD Universe, the two sold it back to the original owner. What they kept were the network of sites they purchased to drive traffic to CD Universe. This network of approximately 300 sites formed the foundation for Entertainment Universe, aka eUniverse.
Brad Greenspan summarized the early eUniverse business model during an October 2001 interview with TheStreet.com by saying, “The business plan from day one wasn’t to be a CD retailer, it was to get public and get access to currency and use it to acquire content and community sites. We felt if we could acquire the right one’s, large, loyal audience, we would figure out high-margin items to sell to that audience. We started incubating what’s now the eUniverse network on the side as we were running the CD Universe business and finally got it to a level where it was generating advertising revenue and direct marketing revenue.” To that end, eUniverse succeeded, although it took them almost two years to have their first profitable quarter.
Like many, eUniverse lost money during the dot-com boom but had refined their business model enough, thanks in part to an emphasis on direct marketing advertisers they succeeded during the dot-com collapse. Before turning things around, they certainly struggled. The company lost $17 million on $4 million dollars for their fiscal year that ended in March 2001. Earlier, in January of that same year, they survived a failed attempted acquisition of L90, a company that saw two of its executive suddenly depart along with an SEC investigation into one of them. eUniverse’s fortunes turned a corner in July 2001 as they took in $17 million from an online investment branch of Sony. Interestingly, the deal required they spend $9 million of it though to purchase newsletter publisher Infobeat from the same investment group.
After breaking even for the first time in Q3 of the 2001 calendar year and then again in Q4, eUniverse went from a company doing $4 million in revenues annually to one that earned $33 million in revenues in 2002 with $5.7 million in profit. In the following year, 2003, they saw revenues jump to $65.7 million. All was not rosy in the empire, though, a glint in the armor showing as revenues declined 13% to $57.3 million for their fiscal year 2004. In October of 2003, Brad Greenspan, who at the time was the co-founder, largest shareholder, CEO and Chairman was replaced as CEO. He held on to a board seat until mid December, when he resigned from that position as well, albeit with reservations. His feelings of ill-will towards where the new management was taking the company played itself out in a nasty public battle in which Greenspan urged shareholders to take an alternate direction from that desired by the company’s board.
In its defense, the board of directors sent out letters to shareholders detailing the history of the company under Greenspan’s tenure. In their letters, the board noted that under Greenspan, the company discovered the need to restate the first three quarters’ earnings of their fiscal year 2003. eUniverse also became the subject of an informal inquiry by the U.S. Securities and Exchange Commission. And, as a result of the restatement, they had their stock halted from trading, a stop that lasted for almost four months and ultimately lead to their being delisted from NASDAQ. Stockholders sued the company in various class action and derivative lawsuits, all of which directly related to the company needing to raise additional capital to survive. Best of all for bystanders, all of the drama unfolded through publicly available filings, documents that normally put an average person to sleep.
Up until this point, the story of eUniverse, which did receive its necessary funding to stay afloat and who became Intermix in July of 2004, does not sound like a tale of a company that would sell for more money than About.com, Advertising.com, LowerMyBills.com, Interactive Search Holding, Webclients, and even what Microsoft was offering for Claira. While mildly profitable, nothing suggests a valuation greater than content site Neopets who has a similar user base in size but sold for less than a third of the price at $160 million. The answer to the valuation comes with the second part of today’s Digital Thoughts, the rise of MySpace.
