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As an investment bank specializing in the media sector, Palazzo is navigating stormy seas. M&A activity is brisk and there has been no shortage of IPO activity, with both Pinterest and Zoom going public in April. Yet, the constant challenge of building and holding an audience — not to mention generating revenue amid the decline of the advertising model and growing clout of big tech companies like Apple and Google — has pushed bankers beyond their traditional deal-making role into advisory and consulting services.

Peter Cosco spent two decades in media at legacy giants such as Time Inc. and MTV Networks before migrating into financial services, first at the M&A firms Alvarez & Marsal and AlixPartners, then as a managing director at Cognizant, and finally at Palazzo.

He says the appetite among big, well-funded players to scoop up early movers and transformative startups remains strong: “It’s a pretty frothy environment for those businesses.” Cosco spoke with Karma Contributing Editor Michael Moran.

Michael Moran: Peter, as an experienced media veteran now doing deals in that space, tell me a bit about Palazzo and how you work with clients.

Peter Cosco: There isn’t necessarily a bright line between where business advisory ends and transaction advisory picks up, particularly when you are primarily working with small- to mid-sized family-owned and operated businesses, which is our space. Most investment banks will become interested in a prospective client when they are advanced in their business lifecycle continuum – when they are “ready to sell.” That’s not to say others don’t maintain relationships and track target companies. They do. We all do. The different approach we offer stems from our DNA as operators. We jump in with companies a bit earlier, help them assess their current state and offer a read on their market sector as the first step in our approach in coaching them to prepare for a transaction process.

Our founder, other MDs and I all have decades of industry operating experience. Leveraging that real-world experience and tapping into our personal relationships and access to operating executives with strategic buyers sets us apart from a traditional investment bank. The business owners we represent value our council and overall “inside baseball” understanding of the industry.

More to the point, the broad media and marketing services sectors have been in a tempest of change for a number of years now, marked by a sweeping revolution in how media content is consumed, largely enabled by the explosion of new technology. In turn, the media-marketing- advertising ecosystem triangle has been completely fractured. Traditional business models have been turned on their head. Factor in how much overlap now exists with companies that touch the media sector, and we are not surprised that our clients lean on us for a better understanding of the marketplace. Accenture buys Droga5. Publicis Groupe buys Epsilon for $4.4 billion. AT&T Inc. owns Time Warner. Comcast Corporation has owned NBCUniversal for a while now. You tell me. Who is a telco? Who is an ad agency? Who is a consulting firm?

We feel our understanding and personal relationships with the C-suite and senior operating executives of these companies who are making strategic decisions gives us a real advantage in helping our clients position their companies for potential transactions with these very companies.

Michael Moran: How do you handle valuation in the sector these days? It seems that no one, from great names like The New York Times down to fast-moving startups like Vice, escapes turbulence. But that has to be a key part of Palazzo’s job — putting a price on a business in this environment, right?

Cosco: Yes it is, of course. Our clients count on us to have our finger on the pulse, to give them that valuation guidance. Generally, the market is still very strong for M&A in our sector. There is still a fair amount of capital on the sidelines, although there has been some increased scrutiny on earlier-stage growth companies — a little more of a focus [on] business fundamentals that has pushed valuations down a little. That said, we still see a wide range in valuations, depending on the sub-sectors.

I had two meetings just today that speak to the valuation disparity. One company is a three-year-old firm in the predictive analytics space supporting marketers’ ability to target buyers with a spend attribution component. The top line is growing nicely, but EBITDA is still slim. Yet, conversations are in the mid-single-digit multiples on revenue.

Whereas, the other company, a niche specialty magazine publisher which has been in business for decades, has nice cash flow and okay EBITDA, but will likely be in a dialogue with a set of buyers at low- to mid-single-digit multiple on EBITDA. Two totally different discussions.

At the end of the day, your value is only real if a buyer is willing to invest at that number. Sticky, fast-growing, recurring revenue with a tech/SaaS flavor to it will get a lot of looks at great multiples. If you are a tech company and are either disrupting or inventing in a given space, you will get a knock on your door. Unless “old media” companies have a significant digital presence or have established adjacent lines of business with growing revenues, valuations will be challenged.

Michael Moran: What’s your take on revenue models? We’ve seen some pretty big players flailing around with paywalls, no paywalls, microcharges, freemium services, paid content and other twists. What are you seeing out there that seems like a trend?

Cosco: I don’t think anyone has the exact right answer yet. I can tell you what doesn’t work. If customers have enjoyed content for free, for an extended period of time, they don’t react well when the stop sign is raised all of sudden. Many [companies] made this mistake and are mostly licking their wounds now. ESPN has done a great job of offering incremental value for increased or exclusive content. Others have been successful at making customers feel like they have “special access,” which tends to work.

The question of going with a subscription model or an ad-supported content approach — or some combination of the two — is something all of the streaming services are asking themselves, as are all content players. The world is certainly more complex. Consumers have so much choice, given multiple streaming, OTT and direct-to-consumer choices. No, customers don’t want more commercials, but they also don’t want to manage 20 or 25 micro-subscriptions.

Netflix did an interesting study that addressed this dilemma with various demographic groups, asking, “Would you prefer 100% free content, with a commercial load, or would you like to be charged $13.99 or $14.99 for a commercial-free experience?” The younger demographic prefers the subscription model, but also resents paying for content. As the supply-and-demand leverage shifts to content providers, most are suggesting Netflix will ultimately have to go to some form of an ad model to supplement the rising cost of that content.

One company that is very interesting is Mirriad, which has the ability to dynamically insert place-based billboards and other forms of advertising right into the content. It’s authentic, generates revenue and doesn’t interrupt the viewing experience.

The broader answer to your question, though, is that the jury’s still out on what model will win, but I can say for sure, the 30-second commercial will not lead the charge, and technology-backed innovation will be in the mix in a big way.

Michael Moran: How does the Apple News+ proposition play into this? A lot of media companies are unhappy with the deal that’s on offer, and they face a tough cannibalism versus distribution dilemma. How should media companies handle that?

Cosco: A handful of years ago, the magazine world went through Round 1 of this issue with Apple and Facebook. At the time, many of the major publishers were not able to generate substantial enough online audiences on their own. Apple and Facebook were the ticket to the moon, but at what price? Both giants understood their leverage and structured deals where they garnered a significant chunk of the ad revenue, all of the data and insights on the magazine’s customers or subscribers. And they were stingy with information on any new online-first subscribers. Many in the print world felt it was a deal with the devil they needed to make. Generally over time, the deals ended up being quite valuable to the publishers, if nothing else, in re-training their audience on how to consume their content.

Today, as Facebook and Apple themselves have real competition, there is more of a financial equilibrium for partners with iconic brands and great content. Condé Nast is doing very well in this area now, as an example.

Michael Moran: In that model where you allow your content to be distributed but don’t get data back or even subscribers necessarily, how do you avoid being subsumed? How do you avoid what basically happened to every rock-and-roll band and record label when iTunes came out and every song was suddenly 99 cents?

Cosco: What happened with iTunes was more of a consumer shift in taste and tolerance for how they purchase and consume their music, enabled by technology versus the result of a business deal. If you recall, there were companies that distributed music for free — companies like Napster. Ultimately, their free model lost, but I believe this dynamic in the music business is what whet the appetite for millennials’ expectations for free content. They were the first to revolt against paying $18 for an album when all they really wanted was one song. The balance and the solution was supporting the consumer in delivering what they wanted and they were happy to pay.

So, I don’t think it’s a question of avoiding the 99-cent issue for magazine publishers or other content companies. It’s about understanding the market, your current and future consumer and adjusting business models, pricing models and approaches to the new realities. ITunes became the solution. Now, Apple makes money, the artist makes money and the music label makes money, and the consumer pays only for the content they want. Now, getting hundreds and even thousands of micro-transactions per customer and taking a percentage of that is how commerce happens with music. Other content players have to evolve, change and adapt to the new realities of their consumer and find the right blend of what works. The music industry eventually realized the way to survive as an industry was to turn business models on their head. It will be interesting to see how other content genre owners evolve.

The other dimension to all of this is creating new branded content — to monetize video and other content digitally direct to the consumer. Condé Nast has their own studio and just announced a doubling-down on producing more original content. If Condé Nast Traveller is producing a show on the top 10 Caribbean islands to visit, I am more inclined to believe them over a random Google search on “great island vacations.” One authoritative editorial voice still carries credibility and weight. Time Inc. had a similar set up, now under Meredith Corporation. Hearst Communications has its version. The luxury these brands have is they can create spokes off of the brand hub that is some of these venerable titles.

So, adaptation to new business models for the traditional business is key, as is innovation to stretch brand elasticity into new areas, smartly.

Michael Moran: So let’s talk about local news for a second, obviously we’ve got another effort in New York City, [the launch of The City, which promises to cover all the local government and neighborhood news that Gotham’s other dailies apparently miss.] There have been similar efforts launched, often with nonprofit status, in Seattle and Denver and other cities. And there were previous efforts that came and went. Is there a magic bullet for local news? Is there a way to make that work?

Cosco: Ha! I don’t think there is a magic bullet for anything we’ve discussed here today.

I think what I just said applies here too. Local media will have to adjust to the new realities of the market. If you’re a local newspaper, no. National advertising is not coming back. Classifieds will never be the same when there is Craigslist and, and there are plenty of digital news outlets to get world, business and sports news in near real time.

The secret weapon local and regional papers have is access to “the last mile” into the home. This access and brand permission creates ample opportunities to create new adjacent lines of service and business offerings.

A few years ago, Warren Buffett started snapping up a lot of small-town newspapers for this reason. Hard to argue with Buffett on anything. I believe he sees the leverage this medium enjoys — the relationship with a loyal audience. And newspapers are out of favor and a value play right now, which fits his investing strategy.

On the innovation front, I am seeing local media outlets beginning to verticalize their business offerings with local businesses — a doubling down of sorts with their core advertisers. Smart. The play is not to purely sell ads, [but] rather to work as marketing strategists and execution partners, offering website-building services, social media management, creative services, etc.

For all of these reasons, I like local media, whether it’s local papers or niche publishers that own city magazines. They have many of these same opportunities, whether you are New York Media or you service much smaller markets.

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