Primedia's Swap Meet - Primedia trades advertising for equity in web sites

The publishing giant buys into young dot.com companies by trading something it has a lot of--advertising or other assets--for equity.

Before currency, people traded goods and services. Now Primedia Inc., the sprawling magazine and information company, is adopting that age-old business model to get what it wants: an ownership stake in promising Internet start-ups.

The $1.7 billion publishing giant, under CEO Tom Rogers, has refocused itself on a strategy of leveraging its enthusiast, mass-circulation and b-to-b brands into complementary media, including the Internet and video.

The Ads for Equity program, Primedia believes, is a perfect manifestation of that strategy. In the program, Primedia swaps print ad space in its approximately 200 magazines for ownership stakes in young pre-IPO Internet companies--companies that are building brand awareness and thus need to advertise, but also are cash poor and can't spend a lot on advertising.

Mike Jeffrey, vice president of new media for Primedia, says the trading allows Primedia to develop strategic partnerships with companies that complement its offline businesses. Over time, Primedia acquires a significant stake in these companies. "There's no way we can build a strong Web community totally on our own," Jeffrey says. "We may not have all the assets and expertise--we don't have enough people to do it, for one thing. But instead of sitting on the sidelines, this is a way to put our assets to work."

At press time, Primedia had worked out 13 deals with online companies since the start of 2000. For example, one deal was struck with CarsDirect.com, a leading automotive e-tailer that puts consumers in control of the total car-buying experience--from research, pricing and customization to financing and delivery. In exchange for equity in CarsDirect.com, Primedia's Automobile Magazine will provide CarsDirect.com advertising space and promotion in addition to licensed content including new car previews and other feature articles, which CarsDirect.com will publish on its site. The agreement also provides for a co-branded car-buying service on automobilemag.com that the companies will jointly develop and host.

Another Ads for Equity deal was struck between Primedia and the Interactive Learning Network, an Internet service that helps students learn math and science interactively. In exchange for equity, Primedia's Channel One Network will provide advertising space and promotion on its daily in-school educational news broadcast and on channelone.com, in addition to licensed content The Interactive Learning Network expands its reach through the partnership.

Jeffrey also says that Primedia offers more than merely ads for swapping. "We can also offer branding, licensed content in the consumer space, and access to subscribers through subscriber lists," he says.

That said, there's no standard ads-for-equity deal. Negotiations are carried out with each individual company. "We work with each one to form a media plan that suits them, whether they're looking to build traffic to their Web site, build brands or whatever," Jeffrey says. "You can't do that by applying a cookie-cutter model to everyone."

Rival publishing companies, meanwhile, generally have not leapt onto the ads-for-equity bandwagon, but they are watching, and they don't discount it as an effective way to do business and gain Internet presence.

"We're on the market right now, but if we weren't, I'd take a hard look at doing it," says Don Pazour, president and CEO of Miller Freeman. "It's an interesting concept--you're buying futures for something at a fixed price. But it might get difficult to administer." Pazour says Miller Freeman does similar bartering with ads for trade-show space, but that's more in what he calls the like-for-like-value vein.

Jason Klein, president of Times Mirror Magazines, says his company has made pure equity investments in the past, but considers ads-for-equity deals from time to time. In fact, Times Mirror is currently looking over some, according to Klein, and sees the business structure as fundamentally viable.

"It depends an awful lot on the pricing involved and are you getting real value for the advertising or is there a 'clutter' factor," Klein says. "The risk is, if a publisher undervalues his advertising, you can give a lot of value away.

Tom Kemp, CEO of Penton Media, points out that magazine publishers have essentially an unlimited inventory of ad space to barter. "I think you'll see an increase in this type of trading," says Kemp. "There's less risk than offering real cash for highly inflated paper. It makes sense in a difficult environment for unprofitable Internet companies."

Primedia's Rogers pioneered ads-for-equity deals four years ago when he was president of NBC Cable. According to Jeffrey, who worked with Rogers, NBC saw tremendous returns on investments. "Back then, these Internet companies had a lot more difficulty coming into cash," he says. "Over time that model became less compelling for broadcast networks. Because we have highly targeted media at Primedia, there's a much more compelling vertical market for dot.coms. If you're NBC, there's not much point in being a strategic partner with a b-to-b exchange."

Although Primedia is wheeling and dealing, Ads for Equity had no impact on revenues through the first quarter of 2000, and will continue to have none in the near term, according to Jeffrey. "The real proof of the pudding is how much our holdings are worth in the future," he says.

That is anyone's guess. Net stocks are volatile, and the specter of bankruptcy always looms over Internet companies. Without expertise in judging Internet models, an old media company can form alliances that end up costly and ultimately unproductive. It's critical to identify the right partners.

"That's a challenge," acknowledges Jeffrey. "There's a lot of noise out there. You have to sift through companies. But we have a great resource in our editors and publishers in the field. They often have the inside track on who are the new start-ups trying to get traction.

"We're trying initially to identify ones [Internet companies] in the later stages, but we'd be remiss if we did not also evaluate start-ups, because of the chance for tremendous returns."

When evaluating ads-for-equity deals, Klein of Times Mirror suggests using the same benchmarks for taking equity as a venture capitalist would in reviewing start-up companies.

Jeffrey admits that Primedia sometimes gets "reflective resistance" from the board members of Internet companies and venture capitalists involved who are wary of noncash deals. But he feels the value his company offers through print-ad placement, licensed content and access to subscribers is significant, as is the Primedia brand. "The more we educate them, the more we can overcome that resistance," he says.

Rogers and Jeffrey are pleased with their results so far and say they have confidence in the program.

"We can't hit a home run every single time," says Jeffrey. "But if we exercise the proper care, there's tremendous potential to build an investment portfolio."

Miller Freeman's Pazour agrees. "I think a year from now, as b-to-b properties, some Internet companies will have nice equity appreciation. If you could have gotten equity in VerticalNet in the early days in exchange for advertising, it would be viewed as a pretty smart thing."

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