The Global Media Weekly for executives and entrepreneurs

Is Dotdash choking on Meredith?

In 2018, Meredith Corp – the Des Moines, Iowa, magazine publisher – breathlessly announced its $2.8bn acquisition of the legendary Time Inc. It made the family-controlled company the largest magazines group in the US with 40 magazines, 50 websites and also its 17 local TV stations.

Meredith was euphoric: “It follows a fiscal 2017 in which we posted the highest revenues, profit and earnings per share in our 115-year history. When you combine our strong local television business – which has grown operating profit 15% annually over the last five years – with the trusted, premium multiplatform content creation of Meredith and Time Inc, it creates a powerful media company serving consumers and advertisers alike.”

They chose not to ponder the apparent contradictions of the deal: Meredith’s focus on Better Homes & Gardens and “service” magazines had been a key reason why it had out-performed Time Inc for the previous decade. Monthly magazines (like those from Meredith) had been winning while weeklies (like Time Inc) were in seemingly inexorable decline. These were two quite different companies, and the gossipy People magazine – the least Meredith-like brand of all – accounted for the majority of all Time Inc profit. While Meredith planned to divest most of Time Inc’s best-known brands including Time, Fortune, Sports Illustrated, and Money, it would keep People. Nobody was talking much about the cultural differences between Meredith, in the US midwest, and Time Inc based 1,000 miles away in New York.

The sharp cost differences were not the only reason why Meredith had consistently upstaged Time Inc’s performance but they certainly helped. The impressive team that had helped the out-of-towners capture the Manhattan magazine aristocracy couldn’t believe their luck. Meredith CEO Tom Harty described it as “a transformative transaction” which would give the enlarged company almost $700m in digital advertising revenue. But the Meredith bosses could not disguise their contempt for much of what Time Inc seemed to represent. Chairman Steve Lacey said: “You have to realize that the vast majority of all media companies’ consumers have a life beyond the Hudson River. The consumer we sell our product to has a very different life than what goes on on Manhattan Island.”

Once signed, the deal quickly went sour.

Everything took longer: the integration, the planned divestments and the promised rationalisation. To complete the perfect storm, Meredith finally owned up to getting its revenue and cost projections totally wrong. Abortive class actions by aggrieved Meredith shareholders alleged that the company did insufficient due diligence and failed to disclose the real level of Time Inc’s reduced profitability after it took control.

Its share price collapsed and – less than three years after the Time Inc deal, having sold-off its TV stations – Meredith itself was acquired for $2.7bn by digital newbie Dotdash. The 10-year-old lifestyle subsidiary of Barry Diller’s IAC was fresh from reporting 17 consecutive quarters of double-digit revenue growth from its digital lifestyle brands.

In combination with Meredith, it would become a powerhouse (of course). In the previous 12 months, the two companies had generated total advertising revenue of more than $1bn. By 2023, Dotdash Meredith would have EBITDA of $450m. Dotdash CEO Neil Vogel had previously contrasted his company’s digital smarts with the supposedly lesser skills of magazine publishers. But any scepticism was deflected by the deal-making track record of IAC, whose CEO Joey Levin said: “We’ve often found opportunities in the digital transfromation of businesses and industries: travel, ticketing, dating, home services and now publishing. Meredith is already seeing record digital growth and we think Dotdash can help accelerate that growth.”

The price was 7x the $358m EBITDA forecast for 2021. And there were plenty of other reassurances for IAC shareholders in a company with strong brands and a typically long tail of magazines which – three years previously – had been valued at more than $5bn. Meredith’s two largest magazines – People and Better Homes & Gardens – accounted for at least two-thirds of the profit and even more of the value. So, even for Dotdash – a digital publisher which had derided magazine publishers – the “sum-of-the-parts” arithmetic was reassuring.

But, within a few months, there were signs of indigestion. Dotdash executives became frustrated at how long the integration of Meredith was taking, not least in moving the magazine company onto the Dotdash technology. Unsuprising comments about “the importance of culture” were accompanied by reported comments that Dotdash, as a digitally native company, “would rather you move fast and break stuff, and ask for forgiveness later. That’s a different culture than a traditional publishing company.”

The parent company IAC (long known as InterActive Corp) is a high-performing media-tech-entertainment group founded and chaired by Diller. He was managing Rupert Murdoch’s 20th Century Fox in the 1980s and started the Fox television network. He founded IAC in 1995 and has produced a long series of success stories characterised by “patient, strategic capital allocation” and an unrivalled track record for taking offline businesses into the digital marketplace. In the past 25 years, IAC has variously managed, controlled, or invested in Tinder, Ticketmaster, Expedia, Match, Daily Beast, Newsweek, Interval International, Vimeo, Hotels.com, TripAdvisor, LiveNation, Hotwire, Lending Tree, Excite, Ask, and the Home Shopping Network. Nobody does it better. IAC is a $4bn listed business with a fluid portfolio of companies, currently including Angi Home Services, Care.com – and Dotdash Meredith.

Dotdash (formerly About. com) was itself acquired from the New York Times for $300m in 2012. It’s been an all-digital company whose collection of websites (including Verywell, Investopedia, The Balance, The Spruce, Simply Recipes, Serious Eats, Byrdie, Brides, MyDomaine, Lifewire, TripSavvy, Liquor.com and Treehugger) attract more than 100m monthly users. When it surprisingly agreed to acquire Meredith, the only question was whether Dotdash’s enviable growth path as a digital publisher (revenue doubled in four years) would be accelerated or obstructed by inheriting thousands of employees engaged in the production of print magazines.

It is easy to explain the strategy of, say, Hearst or Future in diversifying from magazines into digital. But the idea of coming into magazines from the other direction seems less credible.

But times change and IAC investors were last year treated to a presentation that underlined how Dotdash and Meredith would become “A Premium Content Powerhouse” across some of the most valuable consumer verticals. Let’s not pick through the differences between print and digital for almost everything including content, systems, people, and monetisation. But Meredith was getting almost twice as much digital advertising and Dotdash twice as much e-commerce. Put those two together, and you get…a lot more revenue. Of course.

But traditional media is familiar with the difficulty of sustaining innovative product development when it is dwarfed by the people, profit and power of everything else. It’s at least one reason why print-centric businesses find it so difficult to escape their past and go full-pelt for digital.

Why did Dotdash acquire Meredith?

Flashback a year and the Dotdash CEO, a former investment banker, was busy telling investors why his company was growing so fast. He told a conference that his company was the modern version of magazine groups (like the old Meredith) once called “service publishers making content that helps people do things”. The task was to create content that was valuable “not browsy”. He summarised the Dotdash objectives as to create

  • Great content
  • Fast sites
  • Fewest, most respectful ads

Vogel was underlining his view that too much digital media (including the online versions of print magazines) had sacrificed trust in order to maximise monetisation – with cookies, paid-content, and popups. He was also subtly making the point that digital success comes from relatively small volumes of perfectly targeted “problem solving” content – by contrast with inevitably more discursive print magazines.

Making the point that he and his senior team were all recruited from outside the publishing industry, he criticised magazines for being “browsy” while “Dotdash does not care about time spent” but about the audience getting the information they want to make “critical life decisions”. He was blunt about why Dotdash was winning the battle for audiences in “service journalism” from the magazines which had once been so dominant: “We’re a lot different to a traditional media company”.

He had also said “We don’t do sports, politics or news”.

Meredith itself might have said that before seeking to acquire Time Inc. It then realised that – although it could sell-off Time, Fortune, Sports Illustrated and Money magazines – it could not hope to get anything other than a dilutive price for the mighty People.

It is tempting to suggest that Meredith sidestepped its exclusive focus on food, family and lifestyle media to take on the celebrity-packed People magazine, so it could buy Time Inc for what seemed like a bargain price. Has Dotdash done the same in buying Meredith?

Part of the answer is not hard to find. The almost-secret heart of the Meredith story had long been brand licensing. At a time when magazines everywhere were fighting hard to bolster revenues with ‘brand extensions’, it became a world-beater, generating royalties through multiple long-term licensing agreements with retailers, manufacturers and service providers in the US. It began 25 years ago when the world’s largest retailer Walmart started to sell Better Homes & Gardens-branded products in its home-ware and garden centres. It’s a business that continues to thrive. Walmart stocks no fewer than 3,000 BHG products in more than 4,000 stores and online, in the US, Mexico and China. It is an amazing relationship that will generate more an estimated $130m of licensing profit – almost doubled in the last four years and reinforced by deals in real estate, food, and retail. It’s been the envy of magazine rivals the world over.

The cold facts are that Meredith effectively paid $2.8bn (about halved with the divestment proceeds) for only about $100m more annual profit than had been expected from its pre-existing portfolio; and Dotdash’s own deal was under-pinned by the estimated $100m of licensing-fuelled profit from Better Homes & Gardens.

It’s too easy to find fault with the risks of such asset-stripping acquisition strategies but IAC’s latest financials contain the first warnings that even this most experienced of deal-makers might just have got it wrong.

Second quarter 2022 revenue was 18% down on the 2021 combination of Dotdash and Meredith numbers. Even digital advertising was 7% down. IAC CEO Joey Levin told shareholders that Dotdash Meredith’s goal of 15%-20% growth in digital revenue for 2022 was “unlikely.” The performance was better than the prior quarter, when the company lost $56.2m. Compared with those first three months, Dotdash Meredith’s digital business moved from a slight loss to a slight profit, while the company’s print business lost less money than previously. The company has so far spent more than $150m on restructuring and severance payments, and also ($70m in 2022) to the under-funded pension scheme in the UK (separate from a UK magazine business itself) which has been passed successively from IPC Media to Time Inc, Meredith and now Dotdash/IAC. Messy stuff.

In an email to staff, Vogel admitted the post-acquisition integration and transition to Dotdash systems was taking longer than expected and would not be complete until about now: “Our migrations have taken longer than we initially thought to ensure we did them properly. It’s the internet, that’s how it goes sometimes, no matter how hard you try. What matters is that you try.” The Dotdash Meredith CEO also told employees that revenue had dropped in July for the second consecutive month. It will be interesting to see how confident he feels when the third quarter figures are published next month – and whether he will admit to indigestion from the Meredith deal.

Perhaps the clues to the level of post-acquisition disappointment are in the presentation of the Dotdash Meredith results. Why else would their trumpeted $1bn of Dotdash Meredith “digital” revenue now include some $130m of annual licensing revenue (principally those branded products in Walmart) which are not digital at all? If this very high margin revenue were included into print, investors might look differently at the stats which – for the second quarter, for example – would show that print accounts for an un-sexy 60% of the revenue. Arguably, Dotdash Meredith’s other guilty secret is that more than 40% of the 174m American consumers reached by the company come not from its much-vaunted practical, problem solving, evergreen content – but from People magazine.

What seems clear is that the $450m of EBITDA Dotdash Meredith had forecast for 2023 will not be achieved. For all the obvious differences between the former Meredith and Dotdash, both companies have displayed the same chutzpah in acquiring large magazine portfolios most of which they did not want, seemingly reassured by “sum of the parts” calculations.

Meredith had wanted Real Simple, Food & Wine, InStyle and not too much else. Dotdash wanted those brands and especially Better Homes & Gardens. But that’s where the similarity ends. Meredith could never admit it didn’t want People – the kind of magazine brand they had spent a lifetime avoiding – because they had virtually no choice but to pretend it had become a core business.

But, perhaps, Dotdash Meredith will come clean.

IAC didn’t become one of America’s most successful digital investors by glossing over strategic mistakes. That’s why we might expect Dotdash Meredith to divest, demerge or spin-off People magazine. What is probably – still – the most profitable magazine in the US sells 3m copies weekly. It might be worth at least $1.5bn (1x revenue) perhaps to the TV networks or video streaming companies Barry Diller knows so well.

If Dotdash could pull off such a deal, it would have paid a net $1bn or so for Better Homes & Gardens and the associated lifestyle, food and homes brands, including more than $100m of profit from licensing. A difficult, messy deal would become a good one. If it hasn’t already started to become that anyway.

IAC