The second wave

A string of high-profile acquisitions began in the US about 18 months
ago, as both new and established media owners sought to secure a
competitive edge in the reinvigorated digital space. The New York Times
paid £220m for information service About.com, media mogul Barry
Diller put up £1bn to purchase search engine Ask Jeeves, The
Washington Post bought online magazine Slate.com and Wall Street Journal
owner Dow Jones snapped up financial news site MarketWatch for £285m.

Closer to home, Daily Mail and General Trust (DMGT) and Trinity Mirror
have both bought recruitment websites, while UK business-to-business
publisher Incisive has just acquired online media network Clickz from
Jupitermedia.

Google, eBay, AOL and Yahoo! are also undertaking aggressive dotcom
acquisition drives, but for the ultimate example of how the internet is
reshaping media, one need only look at the £1.1bn set aside by
Rupert Murdoch to transform News Corp.

In April, Murdoch told the American Society of Newspaper Editors that
'many of us (in the print business) have been unaccountably complacent.
In the face of this (online) revolution, we've been slow to react.
Unless we awaken to these changes, we will be relegated to the status of
also-rans.'

Murdoch has subsequently gone on a dotcom buying spree. His attempt to
combat the impact of user-generated content, or blogging, has seen him
lay out £315m for Intermix, parent of social networking site
MySpace. In a bid to compete with search engines Google and Yahoo!,
meanwhile, he has held talks about buying Blinkx, an audio-video search
company. Other potential targets are internet phone-call provider Skype,
gaming site ign.com and Grokster, the peer-to-peer network which allows
users to distribute music and video.

Explaining News Corp's shifting emphasis last month, Murdoch insisted
there was 'no greater priority for the company than to meaningfully and
profitably expand its internet presence and to position ourselves for
the broadband explosion'.

Divergent paths

Of course, News Corp, along with numerous other companies, pounced on
new media last time as well. So is there a chance it will blow up in
their faces again? Ashley Friedlein, chief executive of analyst
e-consultancy, thinks it unlikely. 'Media owners of all sizes are
investing in the internet space because that is where the audience is
going,' he says. 'People are spending more time online and making more
transactions. It is the only medium they can realistically use at work.
This is not like the dotcom bubble when market prices were hyped against
potential. This time, online is eating into existing media
businesses.'

The internet already accounts for almost 20% of all media consumption in
the UK, more in the case of broadband homes. And while TV and print are
stuck with single-digit rates of ad growth, the global online ad market
will rise about 50% this year to £7bn. In the UK, it is poised to
overtake radio's revenue.

The way companies use online differs according to their business
needs.

For B2C firms, dotcom acquisition tends to be viewed as a way of
securing community-based sites that can act as the hub of an advertising
or direct marketing opportunity. But for those in the regional and B2B
sectors, the more urgent priority is to protect classified revenues.

In the UK, online is a major threat to newspaper recruitment, with
revenues of about £100m - 7% of the total market. That figure is
expected to break through £200m by 2008. DMGT's response in 2004
was to pay £35m for Jobsite, a web recruitment business that
attracted 1.6m unique visits a month at time of purchase. Last month,
DMGT's new media arm, ANM, took the strategy a stage further by
acquiring Top-Consultant.com and officerecruit.co.uk.

Trinity Mirror, meanwhile, has acquired Financial Jobs Online, owner of
financial recruitment website GAAPweb.com, in a deal valued at £10.5m.

Evidence that this is not just a recruitment issue is an £11m deal
that sees Trinity Mirror move into the online property services market
with the acquisition of smartnewhomes.com, a portal for newly built
homes.

E-consultancy's Friedlein says these deals typify what many companies
are looking for in dotcoms. 'The emphasis is on profitable online
companies that complement existing activities. If they can also bring in
executives with specialist IT skills, that represents an added
bonus.'

The resurgence of the dotcom market does not necessarily mean
established media players have to buy online businesses. In the wake of
the GAAPweb deal, Trinity Mirror chief executive Sly Bailey made it
clear that buying businesses is only one way to move forward. 'Digital
is a key driver of our growth and recruitment is an important pillar of
our revenues, but our strategy is a mix of organic and acquisition
opportunities, which this year has seen 17 media launches and two
acquisitions,' she said.

Complementary medium

Association of Online Publishers director Alexandra White says a lot of
her members are looking at digital media as an opportunity for brand
extension as opposed to brand acquisition. 'The priority for many is to
combine the strength of their existing media brands with the
functionality of the web,' she explains. 'It is about providing their
users with access to content in a range of formats that suits their
lifestyle.'

Dotcom acquisition can also be tantamount to overkill from a
functionality perspective. While it might make sense for a global
company such as News Corp to have its own search engine, most media
owners are better off employing partners to perform backroom functions.
In the sports sector, the majority of rights owners - clubs and
federations - sub-contract crucial areas such as statistics gathering
and e-commerce to specialists because of economies of scale and
expertise. About 60% of the UK's football clubs use Ticket-master
subsidiary Synchro Systems to provide ticketing, for example.

While many dotcom deals relate to central activities, it is possible to
use acquisitions as a basis for expansion into new areas. Travel group
Sabre's £580m purchase of lastminute.com not only brings together
the lastminute brand with Travelocity, creating a powerful position in
travel retail, but also allows it to take advantage of lastminute's
recent expansion into areas such as restaurant reservations and food
delivery.

Publisher-retail mix

There is no sign yet, however, of media brands looking to dotcom
acquisitions as a vehicle to become retailers. 'The big issue is that
with the possible exception of Sky, media companies do not possess the
customer management skills necessary to be retailers,' says Friedlein.
'I can see more constant sales, but not mainstream retail. Their best
approach is to form a partnership or do a white-label deal. That way
they exploit the strength of their brand without the risk.'

This point is underlined by Jeremy Tapp, joint managing director of
online publisher Magicalia (see case study, page 30). 'Traditional
publishers don't launch shops on the high street to rival their
advertisers - they wouldn't dream of it. The arrival of the internet
seemed to confuse the issue, but it doesn't change the fact that
publishing and retail are distinct skills.'

Magicalia has been successful in bringing editorial communities closer
to retailers by building e-commerce platforms that integrate fully with
its websites. 'About three years ago we realised that a lot of
medium-sized retailers we were sending traffic to didn't have very good
websites.

So we helped them build sites that could boost transactions,' says
Tapp.

'Now our editorial staff write reviews, news and advice articles. Around
this, our community of readers add forums, photo galleries, event
discussions and structured equipment reviews. Our retail partners then
integrate their stock lists within our sites.'

Quite apart from not being retailers themselves, there are not actually
many obvious opportunities for media owners to buy these sites,
according to Michael Dwyer. He has just raised £6m to fund the UK
launch of pigsback.com, an empathy marketing website that offers brands
connections with consumers through promotional incentives such as
discounts and competitions. 'There is cash in the market to invest in
dotcoms, but the good sites are few and far between,' he says. 'Buyers
have to be very careful about the claims dotcoms make about the size of
their audience and the relationship they have with them.'

Not surprisingly, those sites that look strong have already been snapped
up. Last year, Yahoo! splashed out £312m on Kelkoo, a French
company that runs online shopping-comparison sites in nine countries.
Prior to that, it spent more than £215m on acquiring recruitment
site Hotjobs.

It is also dangerous to assume that any skills developed in the offline
world will integrate neatly online, warns Dwyer. This is certain to be
an issue for News Corp as it attempts to marry a media monolith with the
ethos at MySpace. But even for new media brands such as Yahoo!, there
can be a culture clash. Following its March acquisition of Flickr, where
consumers can store and share digital photography, 400 Flickr users
planned to close their accounts in protest against closer
integration.

Magicalia's approach underlines the challenge facing big media
owners.

'Our role is to provide high-quality editorial to stimulate debate and
draw readers in,' says Tapp. 'But we realise that there are lots of
people out there who know their subject better than we do. Our job is to
empower our readers to get down to the business of helping each other
out with advice, organising meetings, writing for the site, and so on.
Unless you genuinely believe your readers have more to offer than you
do, building loyalty online will be elusive.'

TARGET 1 - VIDEO ISLAND ENTERTAINMENT

Launched in September 2003, Video Island offers unlimited DVD rental for
a monthly subscription via its ScreenSelect.co.uk brand. Consumers order
movies online, receive them through the mail and can keep them
indefinitely. Video Island also operates white-label services for Tesco,
ITV and easyGroup. A popular service, it has strong backing from venture
capitalists. With 45,000 titles shipped every day, it has captured a
3.4% share of total UK DVD rentals and expects further growth on the
back of word of mouth from its 100,000 reportedly satisfied
subscribers.

TARGET 2 - MAGICALIA ONLINE PUBLISHING

Founded six years ago, Magicalia claims to be the UK's biggest dedicated
online publisher. It owns 10 ad-funded community sites that bring
together audiences passionate about anything from golf to parenting,
such as latest launch thinkbaby.co.uk. Revenues are primarily derived
from ads and sales lead-generation - though it also builds e-commerce
websites for SMEs and advises companies such as NatMags on their online
strategy. One strength is that it can target niches such as female
cyclists with magazines that might not be economically viable in the
offline world.

TARGET 3 - FIGLEAVES CLOTHING

UK dotcom Figleaves sells lingerie, men's underwear, hosiery and
swimwear. In just five years, it has grown to become a top 20 UK
internet retailer. With backing from US private equity firm Benchmark
Capital, it plans to expand in the US, Europe and Asia. The company has
set up a global headquarters in the US and brought in former head of
Amazon UK Robin Terrell to spearhead growth in Europe. The goal is to
grow sales to £100m in the next four years, before floating on
Nasdaq. Key strengths are its product range, excellent customer service
and a management with plentiful retail experience.

TARGET 4 - SPORTING INDEX GAMING

The sports and gaming sector is littered with failed dotcoms. But one
business which has prospered is spread-betting site Sporting Index, now
thought to be worth about £100m. Sporting Index differs from other
betting firms because a large chunk of its business is generated during
matches (42%), as punters attempt to second-guess developments. The
company claims to have 70% of the spread-betting market in the UK, and
is seeking to expand internationally, with backing from Duke Street
Capital. Europe, Australia and South Africa are opportunities, although
the US is the big prize.

TARGET 5 - USWITCH.COM UTILITIES

In late-2003, uSwitch.com acquired information-by-postcode site
UpMyStreet.com, which attracts 864,000 users a month. Both are
postcode-based and provide impartial information, the former on the best
gas, electric and home phone deals, the latter on local services and
communities. Key developments this year include a revamp of UpMyStreet
to aid navigation. Growth potential lies in three areas: new sectors -
personal finance was added to uSwitch in 2004; a mobile presence; and
the syndication of content to other websites. AOL and Halifax are
current partners.

TARGET 6 - LATEROOMS.COM LEISURE

Lastminute.com grabs the headlines in the travel sector, but Manchester
dotcom Laterooms.com has also built a strong business based on late
deals on discount hotel rooms. Formed in 1999, Laterooms has a database
of 500,000 discount hotel rooms both in the UK and internationally. In
the year to December 2004, bookings were worth £40m. Bought by
private equity firm ECI Partners in late-2004, it is planning further
expansion in Europe and the development of sister products such as
LateLet.com and MiniBreaks.com. Laterooms also plans to hike its
marketing spend to build awareness.

ONLINE SPEND SECTOR SHARE

- Finance was the biggest spender online in 2004, accounting for £151.6m of the total revenue take, according to trade body the Internet
Advertising Bureau.

- Automotive has also grown strongly, and now accounts for 11% of online
revenues.

- Online ad expenditure topped £653.3m in 2004, a year-on-year
rise of 60%.

- Ad revenues are now four times bigger than at the height of the dotcom
boom.