"The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs." - Jeff Bezos, August 5, 2013, Washington Post
Amazon.com, Inc. (NASDAQ: AMZN) Founder & CEO Jeff Bezos shocked the financial markets earlier this month when he announced the acquisition of The Washington Post Company (NYSE: WPO) for $250 million in cash. After making billions as the founder of Amazon.com, Mr. Bezos is presumably hoping to leverage his online expertise to transform one of the oldest players in the newspaper business that has been a powerful force in shaping politics and policy.
By his own admission, the newspaper industry faces enormous headwinds caused by the advent of the Internet. These headwinds remain largely unsolved, with the Washington Post reporting newspaper publishing revenues that fell 1% to $138.4 million and an operating loss of $14.8 million during the second quarter of 2013, including a 4% drop in print advertising revenue. These trends led to the sale of The Herald in March of 2013 and continue to cause concern.
Turning Around the Business
Mr. Bezos is likely hoping that he can turn around the online side of the business, leveraging the Washington Post's brand name and the power of online advertising. In his open letter, he noted, "We will need to invent, which means we will need to experiment … I’m excited and optimistic about the opportunity for invention." These comments suggest that the firm will aggressively try new techniques to monetize its online content and ultimately unlock value.
Fortunately for him, the online advertising business is still pretty booming. According to IAB figures, online advertising jumped 15.6% year over year to $9.6 billion during the first quarter of 2013 even as the business matures. These growth rates are driven by the fact that online advertising is more measurable and effective than traditional forms of advertising, since the interaction between viewer and advertisement can be directly measured.
Interestingly, the Washington Post's online revenues from WashingtonPost.com and Slate actually increased 15% to $29.8 million during the second quarter, while other online newspaper revenues increased 12% and display ad revenues increased 25%. These dynamics suggest that the company's existing online advertising efforts are paying off; but the real value lies in more effectively monetizing its page views and boosting its CPM rate.
The WashingtonPost.com itself reaches a higher percentage of local online adults than any other local newspaper website in the top 10 Designated Media Areas (DMAs), with more than 1.3 million adults in the Washington DMA each month and 17.5 million monthly unique visitors around the world. Syndicating its content across other platforms could greatly expand this reach to several million more viewers around the world and could open up the door to additional revenue streams.
Online Publishing Heats Up
Mr. Bezos' confidence in unlocking the value of the Washington Post's content has left many investors looking for other undervalued online publishers. While other newspapers like The New York Times Company (NYSE: NYT) and Gannett Co. Inc. (NYSE: GCI) are possibilities, investors may want to consider lesser known online publishers like CrowdGather Inc. (OTCQB: CRWG), a micro-cap operator of online forums and social media properties.
CrowdGather is interesting for a couple of different reasons that investors may want to carefully consider. First, its forums generated an average of 155 million monthly page views and 12.4 million monthly unique visitors during Q4 2013, with more than 75 million discussions and 1.5 billion individual replies, making it a much larger publisher than its market capitalization would suggest and comparable in unique visitors to WashingtonPost.com.
Second, Zack's Research found that these forum visitors are 3.5x more likely to recommend a particular purchase; 3.5x more likely to share links about a new product; 2x as likely to share discussions offline and in-person based on information read online; and 4x more likely to post online ratings and reviews of products that are found and discussed in online forums. These attributes make them more valuable to advertisers and could pave the way towards above-market CPM rates.
And third, CrowdGather’s stock trades with a price-book ratio of just 0.2x, compared to 4.3x for its industry, and a price-sales ratio of just 1.8x, compared to 6.1x for its industry. These figures suggest that investors can acquire the stock for less than the value of its net assets. Moreover, insiders like CEO Sanjay Sabnani have bought stock at much higher levels, while institutional investors like John Hancock Fund have acquired more than 10% of its shares.
Key Takeaway Points
Jeff Bezos' interest in the Washington Post’s newspaper business signals a renewed interest in online publishing. With Internet advertising continuing to break new highs, the underlying trend appears to be skewed towards online growth, but many publishers have yet to figure out how to effectively monetize content. The success of Mr. Bezos remains to be seen, but the financial markets will certainly be watching the Internet entrepreneur with great anticipation.
CrowdGather is unique in that it has a very large audience - approaching the size of WashingtonPost.com - that is extremely valuable to advertisers. While online forums are difficult to monetize, the company’s management has developed an innovative platform designed to efficiently boost CPM rates. And for investors, the stock itself trades at a significant discount to its peers with insiders and institutional holders already having built positions at higher levels.
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