Valuing Conglomerates, Online Companies and Social Media: A Modest Assessment of United Online
Conglomerates form. Conglomerates break up. Conglomerates confound. And yet they continue to be part of our investing landscape and compel us with their stories and promise.
Promise of what? Diversification, growth or “synergy” - which variably includes scales of economy and redundancy elimination, diversification, and growth through new products or businesses. No matter the reason, each should lead to higher or more stable earnings, or a more marketable company.
These investments, be they through internal growth, purchase or merger should be in stable or growing industries, or with the dream of an evolution into stable or growing industries.
ADP has been very successful in careful, complementary AND synergistic acquisitions. Berkshire Hathaway and GE have also been successful in spite of their largess. Many others are quite disappointing including the former AOL Time Warner, Interactive Corp (IACI) and the multitude and ever changing and incomprehensible Liberty Media blobs (For a laugh, read the Liberty Media Wiki Page entry and try to figure out who owns what – and it has six tickers to boot!). Extensive B-School analysis has been done on the urge to merge / conglomerize / diversify; conclusions are inconclusive on the benefits.
As ideas, conglomerates, no matter how they are formed, have been defended on a number of grounds, but reality shows they seldom work as well nor for as long, if at all, as imagined. In fact, conglomerates risk falling behind their focused competitors.
With that as preface, I have been staring at the United Online conglomerate for a few months now and can’t decide how I feel about it. Over its ten years of life, it has achieved a high of around $110 and a low of around $1.25, so I am sure it has disappointed more than a few shareholders. Given its current price around $6.30, it is certainly a long way from its top.
What is United Online? It consists of:
MySite – A plain vanilla web host
Classmates – Online school social networking
NamesDatabase – A generic social networking database
FTD (Florists' Transworld Delivery) – United States National referral florist
Interflora – UK National referral florist
StayFriends – German, Austrian, Swedish, and Swiss social networking site
Netzero – Internet access service
Juno – Internet access service
MemoryLane – Nostalgia content provider
MyPoints – Loyalty marketing program web site
Trombi – French social networking company (#8 as of December according
Online conglomerates like United Online provide a good case on some of the specifics of why conglomerates, and online conglomerates in particular, often don’t work:
> Fake synergies – Instead of focusing on the greater market in the real world, conglomerates often focus on the inter-relationships of their own entities e.g. running ads for your services on your other services to demonstrate that both entities are profitable and/or effective
> Fake diversity – Bets on industries that look different but might not be e.g. three of United Online’s primary properties have social media associations
> Late to game – Often, companies merge or buy properties near the top of a market, as did United Online when it merged NetZero and Juno
> Poor innovation quality / Non-Existent innovation – Companies with large, disparate assortments to keep track of often do not do a good job creating, evolving or expanding products. For years I thought the long suffering old line Internet service providers would innovate to compensate for the loss of business to cable companies. Perhaps a mobile solution? Multi-access solutions for road warriors allowing access in hotels and highway rest stops? Large scale powerline broadband internet alternative? Nay, no branded, national innovative broadband offerings, while smartphones, Clearwire, iPads and the phone companies take up that mantle. Apparently, this is a common problem, and not just among multi-faceted companies since the cable companies have squandered their lead to mobile broadband with their hard won broadband internet lead.
> Lack of focus – How many conglomerate units are not top competitors in their markets or worse, competitors in shrinking markets. Again, it generally takes obsessive, single minded focus to achieve the top in a business.
> Management limits – Many, if not most of the problems above can be attributed to management inability. Single companies require management to understand and control extent (geographic, business type and style), industry variety, market nature and every other complexity that accompanies a single company in a single market. These problems are compounded in conglomerates.
How is United Online handling its conglomerate status? Is this a durable empire or a house of cards?
As alluded to earlier, the dial-up access segment is declining quarterly, not surprisingly, with a sharp drop last quarter which may or may not signify anything.
FTD is lumpy because of seasonality, but only up by about 1% a quarter over the past eight.
Content & Media; which includes Classmates, Memory Lane, and MyPoints units; has been lumpy but has dropped almost 20% (17.4%) over eight quarters.
Total company revenues, accounting for intersegment eliminations, have dropped 8.4% over eight quarters.
The writing on the wall tells me that dial-up will be gone in a few years, leaving Flowers and Content & Media. We can probably winnow that down a little further.
Once upon a time, there were GreenStamps. And they were good. Then came the Entertainment Book. And it was better.
Then the business world realized how much mass scale loyalty (read: laziness, inertia, convenience) was worth. Thus were spawned credit card points programs and airline points programs. While my order of events and inventions may be off, you get the point(s).
Then online loyalty marketing came along, and it was even better. And competition appeared. Competition in the loyalty marketing program segment has been significant for a while now, with Ebates, Upromise and FatWallet in the fray alongside MyPoints.
Fast forward to today. Not that many of you receive a physical newspaper, but I do and around eight months ago, the cover of mine began to be labeled prominently with “$12 for $25” dollar deals daily. Even if you don’t get a physical newspaper, you may be graced with these because of your online registrations for dozens of sites. I certainly have.
Add to this the variants spawned and evolved from the Daily Candy variety of daily deal, which now includes Woot (now by Amazon), Myhabit (by Amazon), Gilt, RueLaLa, Ideeli, HauteLook, and BeyondTheRack.
There is more. Although I am not a morning television variety news watcher,
my sister is and she called me early the other day to have me grab one of the excellent deals offered to their viewers – 50 percent off of a brand name Bluetooth speakerphone. Their web site was so swamped that I attempted to log in and purchase the headset ten times over seven hours trying to buy the darn thing. Unbeknownst to me, I had purchased it on an early attempt and all subsequent failures were because of the one per customer limit. I called my ten year younger self the other day and laughed at him for thinking he knew what consumerism was.
Add to these the coming tsunami of competition from Groupon (estimated market cap of $20-$30 billion!!), livingsocial (estimated market cap of $3 billion), Google Deals and the plethora of wannabes will certainly mean erosion in the usage of the MyPoints program as currently constructed.
Finally, Amex and Foursquare are introducing a geolocal mobile discounts and payments partnership. When your current location is offering a deal, you can have your phone tell you, and even buy it using the phone.
Defining where loyalty marketing ends and daily deals begins is not the point of this detour so much as to point out that the entire field of daily deal / couponing / discounting is morphing and leaving everyone scrambling, including, I suspect, MyPoints.
Thus, the remaining elements of the company are a florist and online nostalgia services. The competitive pressures on these are not insubstantial, either.
At one time, it looked like Classmates had a chance to be the high school social network but, as with another dozen perfectly good companies, Facebook ate their breakfast, lunch and dinner. As a paid subscription service that has been portrayed as competing with the free social media juggernaut, it has at least a perceptional challenge. Many have already written off United Online, if a recent Network World article on social networking is any indication.
Finally, the May 2011 issue of Consumer Reports reviewed national florists (Proflowers, 1-800-Flowers and FTD) and rated FTD slightly lower in terms of quality and reproduction of web site bouquet imagery. This kind of trusted source publicity may mean a hit to growth, or even a decline this quarter.
But isn't United Online profitable, you protest, with a Price Earnings ratio of around 10, and a six and a half percent dividend (!!!) to boot? The two important points on those.
Whereas dial-up has experienced a slow, steady, almost predictable decline, Classmates could face a near instant death if Facebook introduced a reunion class memories application. I suspect this fate lies closer for some companies; the proliferation of the Facebook Social Plugin (see bottom of page) leads me to believe that Disqus, at least as we know it, is not long for this earth. This is one probable reason why United Online is not being valued more highly.
A dividend is great, until you aren't getting it anymore. United Online, like dozens of other companies, wisely cut its dividend during the great recession. Dividends are violabile and you should be assessing them based not just on their size, but also how safe they are going forward. Potential instant death does not say safe to me. Furthermore, if we are to be pricing this company as a social networking company, how many social networking companies do you expect to see issue a dividend in the next five years?
Serious concerns exist about United Online’s Future. Their Memory Lane product, a product with a short history, is largely replacing the steady earnings of their fading dial-up business. Time will tell whether Memory Lane will become just another online memory.