Going Public: The Impact of IPOs on Digital Content Companies

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Article ImageMaybe it's the cachet that comes with increased media attention. Often it's the quick opportunity to reward eager venture capitalists and other money seeders. Likely it's the promise of liquidity and a quick infusion of cash. But whatever the reason, the allure of going public is hard to ignore for a privately held digital content company that has its sights set on bigger, better things.

As they say, however, be careful what you wish for: Dreams of an auspicious debut on the stock market can quickly be dashed, and pressures to perform up to investors' expectations and conform to SEC regulations can be immense. Just ask Facebook and Groupon, which, along with other internet-based businesses that provide electronic content--including Yelp, Zynga, Pandora, and OpenTable--have gone the IPO route in the past 2 years, with mostly disappointing results.

Facebook's initial public offering in May made one of the biggest splashes ever for a tech company, with a peak market capitalization of more than $104 billion. But in less than a month, the stock shed more than 25% of its value and in 3 months decreased to half its IPO value. Groupon has fared even worse since going public in November 2011, with its stock plunging 88% from its IPO price of $20.

Other digital media companies, on the other hand, have enjoyed greater success since becoming publicly traded. LinkedIn Corp.'s stock shot up from $45 to $100-plus on Day 1 back in May 2011, and it lingers higher than $100 as of this writing. And software firms such as ExactTarget and Eloqua, respectively, experienced a $150 million debut on the New York Stock Exchange in March and a $92 million IPO in August, yielding mostly positive returns since.

Since Facebook's fall from grace on Wall Street over the past year, however, there's been a relative freeze on tech companies-digital publishers and electronic content providers included-making the jump from private to public. And that's probably for the best, say the experts, considering how difficult it can be for players in this specialized niche to succeed in a climate where so much is anticipated of a publicly owned enterprise.

Cautionary IPO Tales

It was almost inevitable that Facebook would underperform post-IPO, says Dan Olds, principal analyst with Gabriel Consulting Group, Inc. in Beaverton, Ore. The stock was initially valued toward the higher end of its price range, at $25 to $35 per share, and the final IPO price was yet higher at $38 per share. To make matters worse, Facebook increased the size of the offering by 25% just a couple of days before the IPO.

"At just about the same time, General Motors announced it was abandoning paid advertising on Facebook, which prompted a lot of discussion-mostly negative-about Facebook's business model," Olds says.

Indeed, the likelihood of Facebook continuing to dominate the online social media landscape at a time when users are fickle and can suddenly switch to a new platform-as they did when they moved from Myspace to Facebook years ago-is a major concern, says Joe Pulizzi, founder of the Content Marketing Institute in Cleveland. "The digital space is moving incredibly fast, and consumers are not loyal today, nor do they have to be," Pulizzi says.

Alex Wilhelm, San Francisco-based business and political editor for The Next Web, says Facebook and Groupon launched their IPOs with unrealistic growth expectations from investors. "We've seen a lot of companies like these go through a hyper-growth stage and then go public as they're maturing. Public investors expect them to continue these massive growth rates, but they just don't happen," says Wilhelm. "The question becomes, how do these firms transition into mature public companies that generate and grow profits?"

And therein lies the challenge for digital content companies (DCCs), which arguably face a steeper uphill climb in their quest to go public than other types of businesses.

A Different Business Paradigm

"A (DCC) is different from a product company like John Deere," says Pulizzi. "With digital content, there is always an alternative, whether that be informational or entertainment. Does the audience really need you? Probably not."

Pulizzi believes that when a DCC goes public, it take the wrong kinds of risk for revenue and profit. "Take Facebook," he says. "Their sponsored posts are getting incredibly annoying to some customers. I'm sure they're doing this to drive revenue at a faster rate, which makes for not the best user experience."

Indeed, with DCCs, the problem is often that the revenue is disconnected from the product, says Rob Enderle, principal analyst with the Enderle Group in San Jose, Calif. "The product they make doesn't necessarily generate the revenue. It's often ad-based," Enderle says. "The end result is that the typical revenue models may not hold. You could build a better product and still go under or have a really lousy product and do just fine-it may depend on advertisers."

Being a publicly owned DCC can also create priorities that may stifle innovation and creativity, says T. Hale Boggs, partner and head of the digital media practice at law firm Manatt, Phelps & Phillips, LLP in New York City.

"As with any company that goes public, a digital media company's quarterly earnings and analysts' reports become the key measures of the company's performance following the IPO," Boggs says.

Enderle says DCCs in too big a rush to go public can also experience employee distraction, "where you have a lot of employees whom your product is dependent upon who really don't want to work anymore, or who suddenly decide it's retirement time. Your company can go from living off a very thin budget to thinking, hey, we have all this money to burn. You can create cash run rates that your revenue can never catch up to."

The bottom line? "If you give someone a ton of cash that they're not prepared to deal with, they can do the company a lot of damage," says Enderle. "It even happened to Microsoft. One of the regrets Bill Gates had was giving his employees so much money so soon, which cost him a lot of his core people."

(Stock Market Image courtesy of 401(K) 2013 on Flickr.)

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