In some of the least surprising news in recent memory, word came out Wednesday that RMG Networks is mulling an IPO in which it would raise $250 million in equity financing. The timing is not shocking considering the overheated reaction to the LinkedIn IPO, the warm reception for Pandora and the astronomical valuations contemplated for the arguably fatally flawed Groupon. RMG, which is funded primarily by Silicon Valley VC stalwarts Kleiner Perkins and DAG Ventures, was clearly headed toward a new round of financing to drive growth and take advantage of RMG’s momentum. The last several months have basically been a public speaking road show for CEO Garry McGuire, with the goal of positioning him as the leader of the free world of DOOH, and the company as an unstoppable force. With that PR job nearly complete, why not extract the next round from the public at market bubble valuations? As much as the investors would undoubtedly love to prove The Greater Fool Theory and sell you shares at inflated prices, RMG might not really be ready for that level of scrutiny. McGuire implied as much in an interview yesterday with DailyDOOH’s Gail Chiasson, saying he was “not convinced that (an IPO) is the way to go right now”.
In related news, McGuire confirmed the departure of Suzanne LaForgia, EVP of Advertising Sales and Luke Zalentz, EVP of Business Development. LaForgia was a ballyhooed hire just a year ago, after her stint as the figurehead atop the Bilderberg Group of DOOH, a/k/a the DPAA. Zalentz was a long-timer at RMG. Of note is that neither position was replaced. These departures come on the heels of the April departure of Bob Martin, then RMG’s CMO, to work for SeeSaw Networks. Martin had been at RMG for 18 months. There is no Marketing executive currently listed on the RMG management team web page. Are all these moves just turnover, or a thinning of the top heavy herd in preparation for discussions with potential new investors, either private or public?
McGuire also unveiled a reorganization of the RMG networks into three groups, as reported in the DailyDOOH article:
- Executive Traveler – which includes all the airplane, airports and lounges;
- Fitness and wellness – which includes gyms, health centres and pharmacies;
- RMG Local – which includes taxis, hotels, casinos, and N.Y. Times (coffee bars and casual dining.
This bears an uncanny resemblance to the way RMG described itself two years ago in a Digital SIgnage Today article: “RMG’s three initial audience networks – the Business Traveler network, the Health & Fitness network and the Urban Mobile network.” While this sure sounds a lot more like a renaming than a reorganization, it does seem to confirm the rumored end of RMG’s representation of mtvU, which is a college campus network that still exists in RMG’s online Media Kit (link here), which provides some other clues to the nature of RMG’s business model and potential changes in store.
Let’s look at the pieces of the puzzle. RMG was formed and launched after the Danoo acquisition of IdeaCast in 2009. The legacy Danoo network is now known as the NYTimes.com Today network, and is focused on urban cafes and eateries, with 650 locations according to the RMG Media Kit . Interestingly, press releases at the time of the IdeaCast acquisition claimed 850 locations for the Danoo eatery network, although that may have included some airport shops. In any case, it does not appear to be a growth vehicle based on number of locations. Most people who have observed that network would agree that the screens are generally placed in non-optimal locations within the cafes, that the screens themselves are too busy to be engaging, and that there do not appear to be many advertisers. It is hardly a case study for a world class digital signage network from any perspective. To my limited knowledge, the technology that powers NYTimes.com Today is not leveraged in the RMG portfolio beyond that network. More on that later. IdeaCast brought the In-Flight Entertainment business to the party, which is appears to be the crown jewel of the business. IdeaCast also brought along the Fitness Network, which by some reports is hardly a world beater. The network apparently has lesser ability to target content at the site level due to the nature of its infrastructure, as compared with its key competitors, Zoom Media and Health Club Media Network. A brutally candid view of the Fitness Network appeared here. A 2011 acquisition, Executive Media Networks (since renamed the Executive Travel Network) is deployed in many top airline clubs and lounges, and is reportedly a very good property, and obviously a good fit with the In-Flight business.
RMG’s entry in the Point-of-Care business (now lumped in under Fitness and Wellness) is an acquired company, Pharmacy TV, which went belly-up several years ago after deploying in over 400 Long’s Drug Store locations, later re-emerging with fewer than 100 locations, all far less attractive than Long’s. The media kit also lists two non-owned health-related networks which they claim to represent, although only one of those is also listed on the web site itself. Draw your own conclusions. One might ask where the sales leverage is between the primary businesses of cafes, fitness clubs, in-flight entertainment and VIP lounges and the tightly focused world of pharmacies and doctor offices. Adding to the mix of sales rep agreements are the now-departed mtvU and a casino network based in Caesars, Harrah’s and Horseshoe properties. Finally, there is a Taxi Network in conjunction with Taxi Magic, which appears to be early stage from what I can glean.
All together, there are owned networks that are split between very good and marginal, and a series of ad sales rep agreements that in a perfect world would deliver hefty commissions without the need to make a capex investment. Actual results of the sales rep activity may have varied from the ideal however, especially in light of the executive departures confirmed yesterday. Those executive departures may signal a decisive move away from the third party ad sales rep business, and a reinvestment in owned networks. I believe that the rollup model for networks has some validity, but acquisition diligence will trump opportunism in the end. Kleiner, which backed Danoo/NYTimes from the start, picked up the In-Flight gem with IdeaCast, but also the less attractive Fitness network. The Executive Media Network win was offset by the questionable-at-any-price Pharmacy TV move. The group of networks with which RMG has ad sales rep agreements (or had, based on the conflicts between the media kit and the web site) is a mish-mash of verticals, demographics, technologies and special situations. It does not leverage the strength of the core properties or the time of the sales team. Hence the logic of refocusing on owned properties.
RMG has a defensible top position in an attractive niche in the Business Travel vertical. They are not even close in any other vertical with an owned network. Is this the stuff of an executive summary for a pre-IPO S-1 filing? Decide for yourself.
Yesterday’s news article refers to the desire to raise $250 million for new acquisitions. Potential investors need to ask two questions. First, what percentage of the RMG juggernaut does one get for $250 million? You can bet that private investors, which is probably the path of least resistance, would get a much lower pre-money valuation than public investors. Life is a series of tradeoffs. Second, will the acquisitions leverage strengths or simply be whatever they can find at bargain basement prices? They have not made a game changing acquisition since the relaunch of Danoo-IdeaCast as RMG. The EMN deal was a good niche deal for sure, but they have not been successful in pulling off something bigger, and that is not for lack of trying. It seems clear at this point that RMG has little taste for funding the capex for new networks, having experienced that at Danoo, whose growth stalled, perhaps in an effort to conserve capital. Since McGuire said that he now has three deals in line that would eat the full $250 million, he must not be bottom feeding for the next Pharmacy TV deal. So what could it be? Given the relabeling of the network groups and the size of the potential deals, the candidates for acquisition are relatively small in number. We may never know who the companies are that McGuire is referring to, but I will bet the traditional box of donuts that he knows the executives of at least two of them from DPAA meetings. I have sealed the names of my short list in an empty mayonnaise jar buried in the backyard.
RMG has also struggled to create a consistent technology infrastructure that would deliver operational efficiencies. If they proceed with multiple network acquisitions, that situation is likely to be exacerbated. In fact, one savvy observer told me a year ago that RMG could not successfully go public without making a technology acquisition. The reasoning was twofold. First, running multiple networks on multiple platforms is very costly and inefficient. Rollups need to exploit efficiencies of scale, and infrastructure is a big piece of that. Second, a consolidator like RMG would need to have a captive technology advantage to build and maintain barriers, a story that plays well on IPO road shows. The Danoo legacy platform has not been asked to scale into thousands of sites to date. It is probably not viewed as the answer. If RMG chose to acquire technology, the list of potential candidates for a scalable platform deal is actually fairly short, but it is not clear that it is a current priority. In any case, a harmonization of technology infrastructure will be a costly effort, but will have to make its way on to the pre-IPO to-do list at some point, whether they choose to make or buy.
The tea leaves seem to indicate that RMG is focused on filling its three network buckets with more owned networks, and rationalizing its efforts to sell ads for non-owned networks, which is a very competitive business. A second box of donuts says that they will raise more private money before they consider an IPO, betting that investing in and fixing the model and then hitting some proof points will render a higher valuation down the road. To their credit, RMG was bold and early in the consolidation game. They have learned some tough lessons, and are now at a crossroad where they must choose a path toward the next stage. That path must leverage what has worked and address areas that have not performed as well. As you can see, it is a toll road.
[…] about the tech/money collision that is DS and that’s Ken Goldberg. His latest post here about RMG is fascinating. Read it. My ‘Bifurcation‘ theory requires that DOOH networks […]
Thanks for the kind words and link in your post!
Ken – this is a thorough and poignant take on one of the most prolific companies in the U.S. ad-supported sector.
There is one set of comments where you might have been too generous to this company, as airline media offerings cannot be “owned” by a third party in any way. There is a huge revenue-share (60%, 70%, or even more) due to airlines and airports on every dollar from advertisers.
Your article begins the process of clearing smoke, mirrors away from what is a 7-figure revenue company pretending to be something exponentially more important…
Thanks for the comment and additional insights. I am not privy to their financials, which perhaps you are, but would welcome the chance to see an S-1, which would clear up many misconceptions, I am sure. If the names in my mayonnaise jar are correct, they are about to buy a revenue base, but the legacy and infrastructure challenges will still require investment. It will be fun to watch, and you can bet that every step will be accompanied by the usual breathless PR that so typifies our industry.
Folks, especially ‘Anonymous’ There’s a danger here in seeing RMG as a bad guy. There are plenty of bad guys / idiots / snake oil salesmen in this industry to go after if that’s your style (it isn’t but as peeps will know it is ours over at DailyDOOH) – Ken writes really well on the industry (and passionately).
RMG are a decent enough bunch with a very good CEO and some great backers. The industry needs some winners and it needs some IPOs.
I’d have more faith in ‘anon’ comments if they weren’t well anonymous.
I’m happy to beat up the bad guys and happy to shout at the good guys when they make mistakes but let’s do it above board, be honest who you are, what you do, what stake you have in the game etc.
I don’t think that the post depicts RMG as bad guys. Instead, I think it depicts them as early consolidators with a model that is morphing and some less-than-stellar properties. Your own post on the Fitness Network (http://www.dailydooh.com/archives/28773) supports the latter. They have been very aggressive in positioning themselves as a behemoth and the de facto leader of the industry. No one is obligated to buy in to that just because conference organizers or bloggers do. If their VC-infused cash coffers exceed the revenue line of the income statement, they are just playing an old locker room game, right? So they are fair game for criticism and peeks under the covers, as perhaps was offered by Anonymous. I think I know why Anonymous chose to remain anonymous, but will not betray that person’s choice by saying why, and I will leave it at that.
if RMG wants to respond to that person’s comments, or anything that is in the post, they are welcome to do so.
Typos corrected . . . . . . .
No hiding here – I know the ad supported DOOH and retail media business extremely well. The anonymous comment is spot on. The revenue share for airlines can be extremely high as can be retail and arenas among many others. There is no sustainable competitive advantage there. As long as you can avoid capex and be the sales arm you’ve got something. But not necessarily something scaleable or long term.
RMG is doing the right thing to consolidate the industry. I have no axe to grind and I know that Ken doesn’t. He wrote one of best, balanced, and well thought-out analyses I’ve seen in twelve years in this area.
RMG’s issue is whether the sum of the parts is less than the parts. I think that will be the problem. And how much of the growth that doubled is organic and how much from the acquisitions. S-1’s are not fun and expose more issues (witness Groupon) in your business than positives. Legally that’s just how they work of course. That’s OK with Groupon which still has tremendous buzz to get past the financial concerns. Not so with RMG or anyone in DOOH.
That buzz of course has resulted in dollars are flying to digital and mobile at increasing rates. And traditional TV is showing respectable growth too. I worry that ad-supported DOOH gets squeezed . There will be a few venues that are favored (cinema, airline, etc) – whatever is truly captive and engaged. Rolling these up in value accretive ways is great. Those that are non captive and non engaging, and there are many, will simply die.
RMG is trying hard to push the mobile social buttons with their recent announcements. There is a lot of presumption to scrutinize in these third party relationships for several reasons. NFC is not a near term silver bullet. COunt the number of Nexus S model sold and you have the number of NFC smart devices here to access the new pads. In three years maybe some heft. Text based services have been less than stellar in this area. I’ve seen some results that cast a scary eye on DOOH effectiveness. SImply divide the number of interactions by purported viewership and you will understand the risk. No advertiser will fault the mobile technology, but they will question whether your DOOH vehicle was truly engaging and reached the numbers you asserted. Lastly the highest value goes to the highest engagement in the relationship. Who owns the social/mobile customer once they opt-in. Easy answer.
What I suspect is that Kleiner must want out by now. These VC funds are typically closed end, and this investment has been around for a long time. There has to be a financial event not simply for new acquisition.
Ken – that post rocked. My thoughts here are scattershot in comparison. Keep up the fantastic work. I don’t know how you do it in your spare time.
Thanks for the comment and the kind words. Lots of stuff to ponder here, and you are right about the S-1 process, right about NFC (I am a HUGE fan, but it is extremely early), and right about the double edged sword of mobile and DOOH. I am thrilled that the post generated some good discussion, and hope it keeps going.
My pleasure Ken. I’m a big fan. Seriously.
Thank you for putting together this wonderful article. I’m somewhat new to the DS arena but its nice reading your insight on certain issues and companies in our industry. Keep up the great writing!
[…] is not a failure. Instead, it is a reality check and a reset from the previous shotgun/footprint strategy outlined last year. Since the company is largely owned and controlled by a couple of venture firms, it speaks to a […]